COVOL TECHNOLOGIES INC
10-Q, 1998-05-14
BITUMINOUS COAL & LIGNITE MINING
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
(Mark One)

 [x]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 1998

                                       OR

 [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES AND EXCHANGE ACT OF 1934

                For the transition period from _________________

                         Commission file number 0-27803

                            COVOL TECHNOLOGIES, INC.
                            ------------------------
             (Exact name of registrant as specified in its charter)

           DELAWARE                                      87-0547337
           --------                                      ----------
State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization                       Identification No.)

                   3280 North Frontage Road, Lehi, Utah 84043
               (Address of principal executive offices) (Zip Code)

                                 (801) 768-4481
              (Registrant's telephone number, including area code)
 -----------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

            Indicate  the number of shares  outstanding  of each of the issuer's
classes of common stock, as of the latest practicable date.

      Class of Stock                                  Amount Outstanding
      --------------                                  ------------------
$.001 par value Common Stock                10,432,192 Shares of Common Stock
                                                       at May 7, 1998
<PAGE>

                            COVOL TECHNOLOGIES, INC.

                                TABLE OF CONTENTS

                                                                        Page No.

PART I - FINANCIAL INFORMATION

         ITEM 1.  FINANCIAL INFORMATION (Unaudited).......................... 3
                  Consolidated Balance Sheets - As of March 31, 1998 and
                    September 30, 1997
                  Consolidated Statements of Operations - For the three 
                    months ended March 31, 1998 and 1997 and for the 
                    six months ended March 31, 1998 and 1997
                  Consolidated  Statements  of Cash  Flows - For the 
                    six months ended March 31, 1998 and 1997
                  Notes to Financial Statements
         ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS........................16
         ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK.......................................................23

PART II - OTHER INFORMATION

         ITEM 1.  LEGAL PROCEEDINGS..........................................23
         ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS..................24
         ITEM 3.  DEFAULTS UPON SENIOR SECURITIES............................25
         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........25
         ITEM 5.  OTHER INFORMATION..........................................25
         ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K...........................25

EXHIBIT 27.1      FINANCIAL DATA SCHEDULE....................................27




Statements  in this Form  10-Q,  including  those  concerning  the  Registrant's
expectations regarding its business, and certain of the information presented in
this report,  constitute  forward looking  statements  within the meaning of the
Private  Securities  Litigation  Reform Act of 1995. As such, actual results may
vary  materially from such  expectations.  For a discussion of the factors which
could cause actual results to differ from  expectations,  please see the caption
entitled  "Forward  Looking  Statements"  in  ITEM  2  hereof.  There  can be no
assurance  that the  Registrant's  results of  operations  will not be adversely
affected by such factors.

                                        2
<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)



                                                                                     As of              As of
                                                                                   March 31,        September 30,
                                                                                     1998                1997
         ASSETS                                                                 ---------------    ----------------

Current assets:
<S>                                                                             <C>                <C>
   Cash and cash equivalents                                                    $       558,682    $      4,780,301
   Receivables                                                                          396,757              12,595
   Receivable - stock subscriptions                                                           0             577,500
   Inventories                                                                        1,548,083           1,818,991
   Advances on inventories                                                            1,989,772           1,086,964
   Notes receivable - related parties, current                                          346,395             275,516
   Prepaid expenses and other current assets                                            224,433              51,865
                                                                                ---------------    ----------------
Total current assets                                                                  5,064,122           8,603,732
                                                                                ---------------    ----------------
Property, plant and equipment, net of accumulated depreciation                       29,851,003          13,619,271
                                                                                ---------------    ----------------
Other assets:
   Notes receivable                                                                   7,757,290                   0
   Notes receivable - related parties, non-current                                    3,627,129           3,816,604
   Deposits and other assets                                                            605,607             321,207
                                                                                ---------------    ----------------
Total other assets                                                                   11,990,026           4,137,811
                                                                                ---------------    ----------------
Total assets                                                                    $    46,905,151    $     26,360,814
                                                                                ===============    ================
</TABLE>

                     The accompanying notes are an integral
                  part of the consolidated financial statements

                                        3
<PAGE>
<TABLE>
<CAPTION>

                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
                                                    (Unaudited)



                                                                                     As of              As of
                                                                                   March 31,        September 30,
                                                                                     1998                1997
         LIABILITIES AND STOCKHOLDERS' EQUITY                                   ---------------    ----------------

Current liabilities:
<S>                                                                             <C>                <C>
   Accounts payable                                                             $       641,159    $      1,045,147
   Payable for coal briquetting equipment                                             3,121,003           1,967,686
   Due to related party                                                                 454,294           1,038,667
   Accrued liabilities                                                                  521,410           1,023,126
   Accrued contractor liability                                                       1,056,500           1,477,000
   Advance on binder facilities                                                         790,703                   0
   Convertible debentures, current                                                    1,000,000           3,302,422
   Notes payable, current                                                             2,536,679           1,945,104
                                                                                ---------------    ----------------
Total current liabilities                                                            10,121,748          11,799,152
                                                                                ---------------    ----------------
Long-term liabilities:
   Accrued interest                                                                     329,353             204,402
   Notes payable, non-current                                                        15,028,325           2,900,000
   Notes payable - related parties, non-current                                         146,588             489,096
   Deferred revenues from advance licensing fees                                      1,650,000           1,650,000
   Deferred compensation                                                                229,752             223,891
                                                                                ---------------    ----------------
Total long-term liabilities                                                          17,384,018           5,467,389
                                                                                ---------------    ----------------
Total liabilities                                                                    27,505,766          17,266,541
                                                                                ---------------    ----------------
Minority interest in consolidated subsidiaries                                        3,028,118           3,165,996
                                                                                ---------------    ----------------
Commitments and contingencies (Note 10)

Stockholders' equity:
   Preferred stock:  $0.001 par value; authorized 10,000,000 shares,
     issued and outstanding,  315,882 shares at March 31, 1998 and
     303,024 shares at September 30, 1997                                                   316                 303
   Common stock:  $0.001 par value; authorized 25,000,000 shares,
     issued and outstanding, 10,256,175 shares at March 31, 1998 and
     8,627,290 shares at September 30, 1997                                              10,256               8,627
   Common stock to be issued: 63,060 shares at March 31, 1998 and
     462,285 shares at September 30, 1997                                                    63                 462
   Capital in excess of par value - preferred                                         5,184,626           5,094,634
   Capital in excess of par value - common                                           55,104,729          41,818,549
   Capital in excess of par value - common stock to be issued                           417,638           3,291,783
   Accumulated deficit                                                             (32,376,300)        (32,191,556)
   Notes and interest receivable - related parties from issuance of or
       collateralized by common stock (net of allowance)                            (7,701,798)         (7,411,278)
   Deferred compensation from stock options                                         (4,268,263)         (4,683,247)
                                                                                ---------------    ----------------
Total stockholders' equity                                                           16,371,267           5,928,277
                                                                                ---------------    ----------------
Total liabilities and stockholders' equity                                      $    46,905,151    $     26,360,814
                                                                                ===============    ================
</TABLE>

                     The accompanying notes are an integral
                  part of the consolidated financial statements

                                        4
<PAGE>
<TABLE>
<CAPTION>
                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                               -------------------


                                               Three months      Three months       Six months         Six months
                                                 ended             ended              ended              ended
                                               March 31,         March 31,          March 31,          March 31,
                                                 1998               1997               1998               1997
                                            ---------------    --------------     --------------    ---------------
Revenues:
<S>                                         <C>                <C>                <C>               <C>
   License fees                             $     3,586,000    $            0     $    4,586,000    $             0
   Synthetic fuel sales                               4,888            20,194              4,888            124,341
   Binder sales                                      84,602             4,017             91,605              4,017
   Coal fines                                     1,903,553                 0          1,903,553                  0
   Operation and maintenance fees                    31,655                 0             66,277                  0
                                            ---------------    --------------     --------------    ---------------
Total revenues                                    5,610,698            24,211          6,652,323            128,358
                                            ---------------    --------------     --------------    ---------------
Operating costs and expenses:
   Cost of coal briquetting operations              730,252           467,612          1,187,199            832,192
   Cost of coal fines                             1,903,553                 0          1,903,553                  0
   Research and development                          72,202            65,396            227,893            170,463
   Selling, general and administrative            1,150,848           422,523          1,891,402          1,229,837
   Compensation related to stock options
     and issuance of common stock                   238,556           276,239            446,047            589,198
   Loss (gain) on sale of facility                  (78,401)            4,196            (78,401)             4,196
   Write-down (write-up) of note
     receivable - related parties collateralized
     by common stock                               (270,000)          431,250           (562,500)          (293,750)
                                            ---------------    --------------     --------------    ---------------
Total operating costs and expenses                3,747,010         1,667,216          5,015,193          2,532,136
                                            ---------------    --------------     --------------    ---------------
         Operating income (loss)                  1,863,688        (1,643,005)         1,637,130         (2,403,778)
                                            ---------------    --------------     --------------    ---------------
Other income (expense):
   Interest income                                  180,677            50,051            302,680            177,857
   Interest expense                              (1,179,925)       (1,568,592)        (2,292,432)        (1,634,468)
   Minority interest in net losses
     of consolidated subsidiaries                    52,211           342,518            137,878            360,670
   Other income                                      15,000             3,064             30,000              4,453
                                            ---------------    --------------     --------------    ---------------
Total other income (expense)                       (932,037)       (1,172,959)        (1,821,874)        (1,091,488)
                                            ---------------    --------------     --------------    ---------------
Net income (loss)                           $       931,651    $   (2,815,964)    $     (184,744)   $    (3,495,266)
                                            ---------------    --------------     --------------    ---------------
Earnings (loss) per share:
   Basic                                    $          0.09    $        (0.36)    $        (0.03)   $         (0.45)
                                            ===============    ==============     ==============    ===============
   Diluted                                  $          0.08    $        (0.36)    $        (0.03)   $         (0.45)

Weighted average shares outstanding:
   Basic                                          9,573,529         7,854,178          9,381,673          7,785,579
   Diluted                                       12,031,250         7,854,178          9,381,673          7,785,579
</TABLE>


                     The accompanying notes are an integral
                 part of the consolidated financial statements


                                        5

<PAGE>
<TABLE>
<CAPTION>

                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (Unaudited)



                                                                                    Six Months         Six Months
                                                                                       ended             ended
                                                                                  March 31, 1998    March 31, 1997
                                                                                  --------------    ---------------
Cash flows from operating activities:
<S>                                                                               <C>                <C>
   Net loss                                                                       $     (184,744)    $   (3,495,266)
      Adjustments  to reconcile  net loss to net cash used in operating
       activities:
         Depreciation and amortization                                                   177,698            104,345
         Common stock issued for services                                                      0             40,500
         Write-up of note receivable - related parties                                  (562,500)          (293,750)
         Interest expense based upon issuance of convertible debt and warrants
          at a discount                                                                2,265,543          1,428,571
         Amortization of deferred compensation related to stock options                  446,047            548,698
         Interest written off                                                             15,151                  0
         Interest earned on notes receivable - related parties, collateralized by
          common stock                                                                         0            (79,165)
         Loss (gain) on sale of equipment                                                (78,400)             4,196
         Minority interest in net losses of consolidated subsidiaries                   (137,878)          (360,670)
   Increase (decrease) from changes in assets:
      Receivables                                                                       (384,162)            45,660
      Inventories                                                                        270,908           (200,837)
      Advances on inventory                                                             (902,808)          (750,000)
      Prepaid expenses and other current assets                                         (172,568)           (37,802)
      Deposits and other assets                                                          (46,400)           (91,368)
      Accounts payable                                                                  (403,988)           224,512 
      Due to related party, net                                                         (584,373)                 0
      Accrued liabilities                                                               (188,189)           184,681
      Accrued contractor liability                                                      (420,500)                 0
      Accrued interest                                                                   124,951                  0
      Note payable for inventory                                                         768,500                  0
      Deferred compensation                                                                5,861              5,567
      Deferred revenue from advance license fees                                               0          1,400,000
                                                                                  --------------    ---------------
Net cash (used in) provided by operating activities                                        8,149         (1,322,128)
                                                                                  --------------    ---------------
Cash flows from investing activities:
   Cash paid for property, plant and equipment                                       (21,677,713)        (4,514,852)
   Issuance of notes receivable                                                       (1,257,290)           (49,456)
   Equipment Deposit                                                                    (238,000)                 0
   Advances on binder facility                                                           790,703                  0
   Proceeds from notes receivable                                                              0             24,728
   Proceeds from notes receivable - related party                                        118,596             29,876
                                                                                  --------------    ---------------
Net cash used in investing activities                                                (22,263,704)        (4,509,704)
                                                                                  --------------    ---------------
Cash flows from financing activities:
   Proceeds from issuance of limited partnership interests in subsidiaries                     0            350,000
   Distributions to limited partnership interests in subsidiaries                              0           (292,000)
   Proceeds from notes payable                                                        16,338,073          4,710,721
   Proceeds from notes payable - related party                                                 0            109,470
   Payments on notes payable                                                              (2,622)          (260,713)
   Payments on notes payable - related parties                                          (342,508)                 0
   Proceeds from notes receivable - related parties, collateralized by common stock      301,829            103,000
   Proceeds from issuance of preferred stock, (net)                                       90,005                  0
   Proceeds from issuance of common stock (net)                                          873,396            665,501
   Proceeds from issuance of common stock to be issued (net)                             198,263                  0
   Proceeds from receivable - stock subscriptions                                        577,500                  0
                                                                                  --------------    ---------------
Net cash provided by financing activities                                             18,033,936          5,385,979
                                                                                  --------------    ---------------
Net decrease in cash                                                                  (4,221,619)          (445,853)

Total cash and cash equivalents, beginning of period                                   4,780,301            490,106
                                                                                  --------------    ---------------
Total cash and cash equivalents, end of period                                    $      558,682    $        44,253
                                                                                  ==============    ===============
</TABLE>

                     The accompanying notes are an integral
                 part of the consolidated financial statements

                                        6
<PAGE>
<TABLE>
<CAPTION>

                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (Unaudited)

                                                                                    Six Months         Six Months
                                                                                       ended             ended
                                                                                  March 31, 1998    March 31, 1997
                                                                                  --------------    ---------------

Supplemental schedule of noncash investing and financing activities:
<S>                                                                               <C>               <C>
    Payable for briquetting facility                                              $    1,153,317    $     1,402,940
    Common stock issued on conversion of notes payable                                 7,000,000            138,396
    Common stock issued for notes receivable - related party collateralized by
     common stock                                                                         45,000                  0
    Notes receivable issued for sale of briquetting facility                           6,500,000          3,500,000
</TABLE>


                     The accompanying notes are an integral
                 part of the consolidated financial statements

                                        7
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


1.       Management Opinion:

In the opinion of management,  the  accompanying  financial  statements  present
fairly the financial position of Covol Technologies,  Inc. and Subsidiaries (the
"Company")  as of March 31,  1998 and  September  30,  1997,  the results of its
operations  for the three  months and six months  ended March 31, 1998 and March
31,  1997 and its cash flows for the six months  ended  March 31, 1998 and March
31,  1997.  The  results  of  operations  for  the  periods  presented  are  not
necessarily indicative of the results to be expected for the full year.

Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been condensed or omitted. It is suggested that these financial  statements
be read in conjunction  with the Company's  Annual Report  included in Form 10-K
for the year  ended  September  30,  1997  and the  Company's  Quarterly  Report
included on Form 10-Q for the quarter ended December 31, 1997.

2.       Earnings/Loss Per Share Calculation

During fiscal 1998 the Company  adopted SFAS No. 128 "Earnings Per Share." Basic
earnings (loss) per share is computed based upon the weighted  average number of
common shares outstanding.  The computation of diluted earnings per common share
includes contingent issuances of securities that would have a dilutive effect on
earnings per share.  Contingent  issuances were  antidilutive in each period for
which a net loss was  reported;  therefore,  the amounts  reported for basic and
diluted loss per share are the same for those periods. See Note 9.

3.       Inventories and Advances on Inventories

Inventories  and advances on inventories are stated at the lower of average cost
or market, and consist of synthetic fuel, binder materials, and coal fines.

4.       Change in Estimate of Fair Value of Note Receivable

During the three and six months ended March 31, 1998, the Company  decreased the
allowance for impairment on the $5,000,000  face value note  receivable from two
stockholders by $270,000 and $562,500,  respectively,  to an adjusted loan value
of $2,152,500. During the three and six months ended March 31, 1997, the Company
increased and decreased the allowance by $(431,250) and $293,750,  respectively.
The changes in the  allowance  were based on changes in the market  value of the
Company's common stock that collateralizes the note receivable. The allowance is
subject to future fluctuations in the Company's common stock.

5.       Notes Receivable

On November 14, 1997, the Company entered into a financial  agreement with CoBon
Energy,  L.L.C.  (CoBon),  relating to the purchase of equipment for a synthetic
fuel production facility.  The original agreement provided that the Company will
purchase,  on CoBon's behalf, up to $1 million worth of equipment for use in the
facility.  Subsequently,  the maximum  amount of the  financing was increased to
approximately  $1,400,000  to provide for  additional  borrowings  by CoBon.  As
consideration  for the loan, the Company will have the right to receive  certain
royalties from the operations of the facility.  If the facility is not completed
for any reason,  the Company will retain title to the purchased  equipment.  The
Company has paid or incurred  costs  totaling  $812,290  for  equipment  and has
loaned CoBon  $445,000,  bringing the total note  receivable to $1,257,290 as of
March 31, 1998.

                                        8
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


5.       Notes Receivable, continued

On February 20, 1998,  the Company sold the Alabama  briquetting  facilities  to
Birmingham  Synfuel,  L.L.C.,  a  wholly-owned  subsidiary  of  PacifiCorp.  The
purchase price was $6,500,000 and resulted in a gain of  approximately  $78,000.
The purchase  price was paid with a note  receivable  that bears interest at 12%
and shall be repaid in equal  consecutive  quarterly  installments,  subject  to
certain  provision  limitations,  including the net operating cash flow from the
Alabama  facility.  All accrued interest and unpaid principal is due and payable
on February 20, 2003.

6.       Advance on Binder Facilities

During the  quarter  ended March 31,  1998,  the  Company  received  advances of
approximately  $490,000  from A.T.  Massay,  PacifiCorp,  and  CoBon for  binder
facilities under construction,  bringing total advances for binder facilities to
$790,703 as March 31, 1998.

7.       Notes Payable and Convertible Debentures

A.J.G. Financial Services, Inc.

During October 1997, the Company entered into an agreement with A.J.G. Financial
Services, Inc. ("AJG") to provide financing of approximately  $4,300,000 for the
building of a wash plant at an  interest  rate of 6%. In  addition,  the Company
granted warrants in an amount equal to 10% of the amount financed. Half of these
warrants  have a strike price of $10 and half have a strike price of $20.  Based
upon  the  market  price  of the  Company's  common  stock  on the  date  of the
agreement,  $398,222 of interest expense was recognized due to the $10 warrants.
As  of  March  31,  1998,  the  Company  had  borrowed   $4,325,433  under  this
arrangement.  The Company began start-up testing of the wash plant during April,
1998.

During the quarter ended March 31, 1998, the Company  entered into an additional
agreement  with AJG to borrow up to $6.5  million at an interest  rate of 6% per
annum to be used for  construction  of a  briquetting  facility  located in West
Virginia.  As of March 31, 1998 the Company had borrowed  $4,698,880  under this
agreement. The loan is due in full February, 2001.

PacifiCorp Financial Services, Inc.

During  December  1997,  the Company  executed a  Convertible  Loan and Security
Agreement  with  PacifiCorp  Financial  Services,  Inc.  ("PFS").  The agreement
modifies an  agreement  finalized on March 20, 1997 which  provides  funding for
completing  construction  of the Alabama  project,  acquiring coal fines and for
other purposes  related to the project.  The  modification  increased the amount
available from  $5,000,000 to $7,000,000  with a provision that borrowings up to
the lessor of actual  borrowings or $6,000,000 are convertible into common stock
under the same terms as the  original  March 20, 1997  agreement  (at a price of
$7.00 per share). Based upon the December 1997 amendment, an interest expense of
$714,286 was  recognized  during the quarter ended December 31, 1997 because the
conversion price is below the market price.

Effective  March 3, 1998, PFS exercised  their option to convert all outstanding
borrowings under this arrangement. The conversion of the borrowings in excess of
$6,000,000  resulted in an interest charge of $714,285 during the quarter ending
March 31, 1998 because the conversion  price is below the market price. PFS also
asserted  that the Company  sold common stock during 1997 at a price that caused
the  antidilution  provisions of its  conversion  agreement with Covol to become
applicable.  This  resulted in the  issuance of  additional  common stock with a
value of  approximately  $220,000.  This amount was charged to interest  expense
during the quarter ended March 31, 1998.

                                        9
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


7.       Notes Payable and Convertible Debentures, continued

DTE Energy Services, Inc.

In October 1997, the Company entered into a financial  agreement with DTE Energy
Services,  Inc.  ("DTE")  relating to the  purchase of  equipment  for up to two
synthetic fuel production facilities. The agreement allows the Company to borrow
up to $2,000,000  with interest at LIBOR plus 1.0% (LIBOR was 6.69% on March 31,
1998).  The Company has drawn  $1,999,719  under the  agreement  as of March 31,
1998. These borrowings were repaid during May 1998.

Trans Pacific Stores

On March 17, 1998, the Company  entered into a loan agreement with Trans Pacific
Stores,  Ltd.  ("TPS")  wherein TPS agreed to loan the Company up to $4,000,000.
The loan is  collateralized by future earned license fees payable to the Company
from the synthetic  fuel  manufacturing  facilities  constructed  by Pace Carbon
Fuels,  LLC.  Interest on the  outstanding  principal  balance accrues at twelve
percent (12%) per annum. The interest rate is adjusted to thirteen percent (13%)
on September 20, 1998 and to fourteen  percent (14%) on December 20, 1998.  Each
time the interest rate is adjusted, a one percent (1%) renewal fee of $40,000 is
due and payable.  Interest on the unused  portion of the  borrowing  will accrue
interest  at one  percent  (1%) per annum  until  the loan is paid in full.  The
outstanding  principal  and interest is due in full before March 20, 1999. As of
March 31, 1998,  $530,300 had been borrowed under this arrangement.  A member of
the Company's Board of Directors is affiliated with TPS.

Fun Enterprises

On January 29, 1998, the Company entered into a loan and security agreement with
Fun  Enterprises,  Pty Ltd.  ("Fun"),  a current holder of the Company's Class B
preferred  stock,  relating to the  development  and  construction  of a mobile,
skid-mounted synthetic fuel production facility at a coal preparation site of an
eastern  coal  company.  The  agreement  allows  the  Company  to  borrow  up to
$5,800,000.  The interest rate will be 12% per annum until August 31, 1998,  and
15% per annum  thereafter  until  paid in full.  Fun will also have the right to
receive  certain  royalties after the facility is sold. As of March 31, 1998 the
Company has drawn $3,100,000 on the loan. The loan is due in full at the earlier
of the sale of the facility or August 31, 1999.


                                       10
<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


7.       Notes Payable and Convertible Debentures, continued


The following is a table  summarizing  notes payable and convertible  debentures
previously discussed.
                                                                             March 31, 1998        September 30, 1997
                                                                           -------------------   -----------------------
<S>                                                                       <C>                     <C>
Note payable to a corporation, bearing interest at 6% 
collateralized by plant and equipment.                                     $         4,325,433     $           1,057,849

Note payable to a corporation, bearing interest at 6%.  50% of accrued
interest due February 26, 1999 and balance of accrued interest and principal
due February 26, 2001                                                                4,698,880                         -

Note payable to a corporation bearing interest at prime (8.5% at March
31, 1998) plus 2%.  Collateralized by plant and equipment.  Principal
and interest due December 20, 1999                                                   2,813,294                 2,787,255

Convertible  note payable to a corporation,  bearing interest at prime (8.50% at
March 31, 1998) plus 2%. Collateralized by plant, equipment and coal fines. Loan
of $6,686,473 plus accrued interest of $313,527 converted to common stock 
March 20, 1997.                                                                              -                 3,302,422

Note payable to a corporation bearing interest at LIBOR plus 1.0%
(LIBOR was 6.69% on March  31, 1998). Amounts are due at the
earlier of the closing of alternative financing or December 31, 1998.                1,999,719                         -

Note payable to a corporation.  Interest on the  outstanding  principal  balance
accrues at twelve  percent  (12%) per annum.  The  interest  rate is adjusted to
thirteen  percent (13%) on September  20, 1998 and to fourteen  percent (14%) on
December 20, 1998.  Each time the interest rate is adjusted,  a one percent (1%)
renewal fee of $40,000 is due and payable. Interest on the unused portion of the
borrowing  will accrue  interest at one percent (1%) per annum until the loan is
paid in full. The balance and interest is due in full before March 20, 1999.  The
loan is secured by future earned license fees.                                         530,300                         -

Note payable to a corporation bearing interest at 12% per annum until August 31,
1998, and 15% per annum thereafter until paid. The loan
is due in full at the earlier of the sale of the facility or August 31, 1999         3,100,000                         -

Note payable to an individual bearing interest at 9% with monthly
payments.                                                                               97,378                         -

Convertible debenture to two individuals and one trust, bearing interest
at prime (8.5% at March 31, 1998) plus 2%.  Principal and interest due
June 30, 1998.  Convertible at $11.00 per share.                                     1,000,000                 1,000,000
                                                                           -------------------   -----------------------
                                                                                   $18,565,004                $8,147,526
   Less: current portion                                                            (3,536,679)               (5,247,526)
                                                                           -------------------   -----------------------
   Total non-current                                                               $15,028,325                $2,900,000
                                                                           ===================   =======================
</TABLE>

                                       11
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



8.      Stockholders' Equity

The table below  presents the activity in  stockholders'  equity from January 1,
1998 through March 31, 1998.

<TABLE>
<CAPTION>
                                                                                                                Notes and
                                                                                                                 interest
                                                                                                                receivable
                                                                                                                -related
                                                                                                                parties
                                                                                                                  from
                                                                                                                issuance
                                                                                                                 of, or    Deferred
                       Preferred Stock            Common Stock          Common Stock to be  issued               collater-   compen-
                                 Capital in                Capital in                Capital in               alized       sation
                                 excess of                  excess of                excess of  Accumulated  by, common  on stock
                 Shares  Amount  par value  Shares  Amount  par value Shares Amount  par value   Deficit        stock      options
                 ------  ------  ---------  ------  ------  --------- ------ ------  ---------   -------     -----------   -------
<S>           <C>       <C>   <C>        <C>       <C>     <C>        <C>    <C>      <C>    <C>         <C>            <C>
Balance at
January 1,
1998           315,882  $316  $5,184,626 9,210,575 $9,211  $47,058,967      0   $0        $0 ($33,307,951) ($7,701,088) ($4,475,756)

Common stock
issued for
cash from
exercise of
stock options                               12,100     12       31,822

Common stock
to be issued
for cash from
exercise of
stock options                                                          36,060   36   198,290

Conversion of
notes payable                            1,000,000  1,000    6,999,000 27,000   27   219,348

Common stock
issued for
note receivable
- - related
party, collater-
alized by
common stock                                30,000     30       44,970                                         (45,000)

Cash received in
payment on
notes receivable
- - related
parties from
issuance of
common stock                                                                                                   298,829

Compensation
expense
related to
issuance and
conversion of
stock options                                3,500      3       36,310

Amortization of
deferred
compensation on
stock options                                                                                                               207,493

Interest  earned 
on  notes 
receivable  
related  parties  
from  issuance 
of or collater- 
alized by common
stock                                                                                                           15,461

Interest expense
based upon
issuance of
convertible debt
and warrants
at a discount                                                  933,660

Write-up of note
receivable -
related parties                                                                                               (270,000)

Net income for
the quarter
ended March
31, 1998                                                                                          931,651
                -------  ----  ---------- ---------- ------- ----------- ------ --- -------- ------------  ----------  ----------
Balance at
March 31, 1998  315,882  $316  $5,184,626 10,256,175 $10,256 $55,104,729 63,060 $63 $417,638 ($32,376,300)($7,701,798)($4,268,263)
                =======  ====  ========== ========== ======= =========== ====== === ========  ===========  ==========  ==========

</TABLE>
                                       12

<PAGE>
<TABLE>
<CAPTION>


                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                    (Unaudited)


9.       Computation of Earnings (Loss) Per Share (EPS)

For the Three Months Ended March  31, 1998


                                                                         Three months                     Six months
Basic earnings (loss) per share calculation                                 ended                            ended
                                                                        March 31, 1998                   March 31, 1998
- ---------------------------------------------------------------- -----------------------------    ---------------------------
                                                                    Basic           Diluted          Basic           Diluted 
                                                                 ------------    -------------    ------------    ------------ 
<S>                                                              <C>          <C>             <C>         <C>
Net income (loss)                                                $    931,651    $     931,651    $   (184,744)   $   (184,744)
                                                                                 =============                    ============
  Preferred stock dividends accrued                                   (84,413)                         (84,413)
                                                                 ------------                     ------------
Net income (loss) basic EPS                                      $    847,238                     $   (269,157)
                                                                 ============                     ============

Number of common shares outstanding                                10,256,175       10,256,175      10,256,175      10,256,175

Effect of using weighted average common 
 shares outstanding                                                  (682,646)        (682,646)       (874,502)       (874,502)
                                                                 ------------    -------------    ------------    ------------
Weighted average number of common shares                            9,573,529        9,573,529       9,381,673       9,381,673

Dilutive effect:
 Common stock options                                                                1,215,985                              -
 Common stock warrants                                                                 500,283                              -
 Convertible preferred stock                                                           741,453                              -
                                                                                 -------------                    ------------
Dilutive weighted average number of common 
 shares outstanding                                                                 12,122,154                       9,381,673
                                                                                 =============                    ============
</TABLE>

Options to purchase 1,663,500 shares of common stock at prices between $1.50 and
$11.50 per share were  outstanding  during the second quarter of fiscal 1998 and
were included in the computation of diluted EPS. For the quarter ended March 31,
1997,  these  options  were not  included in the  computation  of loss per share
because any effect would have been antidilutive.

Warrants to purchase  1,441,523  shares of common stock at prices  between $7.00
and $10.00 per share were outstanding  during the second  quarter of fiscal 1998
and were  included in the  computation  of diluted EPS.  Additional  warrants to
purchase  638,750 shares of common stock at prices between $15.00 and $30.00 per
share were  outstanding  during the second  quarter of fiscal  1998 and were not
included in the  computation of earnings per share because any effect would have
been  antidilutive.  For the quarter  ended March 31,  1997,  warrants  were not
included in the computation of loss per share because any effect would have been
antidilutive.

Convertible  debt of $1,000,000  was  outstanding  during the second  quarter of
fiscal 1998. The debt is convertible  into 90,909 shares of common stock and was
not included in the computation of diluted earnings per share because the effect
would have been antidiluted.  For the quarter ended March 31, 1997,  convertible
debt was not included in the  computation  of loss per share  because any effect
would have been antidilutive.

                                       13
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Preferred stock  convertible into 741,453 shares of common stock at of $7.00 was
outstanding  during the second  quarter of fiscal  1998 and was  included in the
computation of diluted EPS.

10.     Contingencies

During 1996, the Company or its licensees  entered into thirty contracts for the
construction   of   manufacturing   facilities  that  would  use  the  Company's
proprietary  Briquetting  Technology  in  the  conversion  of  coal  fines  into
synthetic fuel. All of these  construction  contracts  contain  penalties if the
contracting party fails to proceed with the construction of these facilities.

Fifteen of these  construction  contracts were entered into by independent third
parties and Covol  Technologies was not a party.  Accordingly,  no liability for
failing to proceed exists with these contracts. Four contracts were entered into
jointly by Covol and its joint venture partners.  The remaining eleven are Covol
contracts.  Of the contracts  for which Covol has liability or shared  liability
there are two joint venture  facilities  that will not be constructed  and there
are three contracts where the facilities may not be constructed. As of September
30, 1997,  the Company  accrued a liability of  $1,477,000  for these  potential
penalties.  During the first six months ended March 31,  1998,  the Company paid
penalties  in the amount of $102,500 and  reversed  $318,000 for a  construction
contract  where notice to proceed was  subsequently  given.  Accordingly,  as of
March 31, 1998, the remaining accrued contractor liability is $1,056,500.

In December 1996,  the Company  entered into six  indemnification  agreements in
connection with six of the  construction  contracts  entered into by independent
third  parties.  These  contracts  contain  liquidating  damages of $750,000 per
contract if construction of the facilities is not completed by June 1, 1998. The
Company has  indemnified  the contractor for these  potential  liabilities.  The
contracting  party  has  decided  not to  construct  three of these  facilities.
Accordingly,  the Company believes the maximum contingent  liability under these
indemnification  agreements is $2,250,000. As of the date of the current filing,
the  three  facilities  were  under  construction  that are the  subject  of the
indemnificaiton  agreement.  These facilities are  mechancially  complete and on
schedule for completion prior to June 1, 1998. The Company believes that payment
of this liability is unlikely and has,  therefore,  not recorded a liability for
these potential penalties.

The  Company  entered  into a letter  of  intent  with  Innovative  Technologies
("Innovative") in July of 1995 to apply the Company's Briquetting  Technology to
certain  metallic ores supplied by Innovative.  The Company  conducted  numerous
tests of the ore through the fall of 1995,  and concluded  from the results that
the venture was not economically viable. Accordingly, final agreement to process
the ore was never reached. On March 4, 1997,  Innovative Holding Company,  Inc.,
filed a civil  complaint  against the Company  alleging  breach of the letter of
intent in the amount  $500,000 plus damages.  The case is currently in discovery
and the Company believes that it will be successful in defending the suit.

11.      Subsequent Event

During May 1998, the Company obtained financing from two substantial entities to
be used for the completion of construction  and working capital  requirements of
the  Mountaineer  synthetic  fuel  facility.  There is $8,500,000 of total funds
available under this arrangement including $500,000 for an advance licensing fee
for the Company's coal briquetting technology. As of May 7, 1998, $6,250,000 had
been  received  or was  available.  These funds have been used to payoff the DTE
loan totaling  $1,999,719,  pay advance licensing fees, cover construction costs
on the Mountaineer facility incurred to date and to fund necessary  construction
costs  through  June 30,  1998 to be  incurred in  completion  of the  facility.
Additional  funds will be made available as needed.  The lenders have the option
to apply funds advanced towards the purchase of the facility.

On April 21,  1998 the Company  entered  into loan  agreements  with each Carbon
Resources and C.C. Pace Capital, L.L.C. (the "Borrowers"), to lend, in quarterly
installments,  up to an  aggregate  principal  amount not to exceed  $14,250,000
during the period from and including  November 1, 1998 to and including February
1, 2008. The Company has agreed to make the initial  advance on November 1, 1998
in the amount of  $375,000,  or such other  amounts as provided  for in the loan

                                       14
<PAGE>
                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


agreement,  and  thereafter on the first day of each February,  May,  August and
November during the loan period. Interest accrues on the principle amount of the
loan  outstanding at a simple annual rate of six percent (6%).  Repayment of the
loan shall be paid from  amounts,  if any,  distributed  to the Borrowers by the
General  Partner  of  Pace  Carbon  Synfuels,  L.P.,  which  owns  100%  of  the
memberships in the Project Companies discussed below.

The Company also entered into Amended and Restated  License and Binder  Purchase
Agreements  with each PC Virginia  Synthetic Fuel #1,  L.L.C.,  PC West Virginia
Synthetic Fuel #1, L.L.C.,  PC West Virginia  Synthetic Fuel #2, L.L.C., PC West
Virginia Synthetic Fuel #3, L.L.C., (collectively the "Project Companies") as of
February 3, 1998. The Company is entitled to receive  royalties  under the terms
and as described in the Licensing  Agreements.  The Licensing Agreements provide
for a one-time  advance license fee and earned royalty on a quarterly basis at a
prescribed amount multiplied by the MM btu content per ton of each product.

                                       15
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS


Results of Operations

Three months  ended March 31, 1998  compared to the three months ended March 31,
1997

         Revenues.  For  the  quarter  ended  March  31,  1998,  total  revenues
increased by $5,586,487  to $5,610,698  from $24,211 for the quarter ended March
31, 1997.  There were $3,586,000 in advance  license fees recognized  during the
quarter  ended March 31, 1998 while no license fees were  recognized  during the
quarter  ended  March 31,  1997.  Advance  license  fees are  normally  due when
construction  of  the  related  briquetting  facility  begins  or  when  certain
construction  milestones or other  conditions are met.  Advance license fees for
the quarter ended March 31, 1998 related to five briquetting facility contracts.
The Utah  Plant was placed in service in early  1997.  However,  production  and
sales of synthetic fuel were  significantly  curtailed due to the high levels of
ash content in feedstock  used for  production at the Utah Plant.  To remedy the
problem of ash content,  the Company has  constructed  a wash plant for the Utah
Plant  that  is  currently  going  through  start-up  procedures.   Accordingly,
synthetic fuel sales of $4,888 during the quarter ended March 31, 1998 were less
than the sales of $20,194  during the quarter ended March 31, 1997.  The Company
believes that as the wash plant becomes  operational,  it will be able to supply
sufficient  quality  coal  fines to the Utah Plant to allow the plant to operate
profitably at or near  capacity.  The Company has had various  discussions  with
potential end-users of the synthetic fuel product.  However,  there is currently
no contract or obligation  in place for the sale of the synthetic  fuel produced
at the Utah Plant. The Company received revenues from binder sales in the amount
of $84,602 for the  quarter  ended March 31, 1998 as compared to sales of $4,017
that were made in the quarter ended March 31, 1997.  The Company  expects binder
sales to increase  proportionate  to future  synthetic fuel production and sales
increases.  The  Company  received  revenues  from the sale of coal fines in the
amount of $1,903,553  for the quarter ended March 31, 1998 under an agreement to
sell the coal fines at their cost.  The Company had revenues from  operation and
maintenance  fees of $31,655  for the  quarter  ended March 31, 1998 and no such
fees for the corresponding period in 1997.

         Operating Costs and Expenses.  Operating  costs and expenses  increased
$2,079,794  to $3,747,010  for the quarter ended March 31, 1998 from  $1,667,216
for the quarter ended March 31, 1997. Operating costs and expenses  attributable
to the  briquetting  operations  increased  $262,640 to $730,252 for the quarter
ended March 31, 1998 from  $467,612 for the quarter  ended March 31,  1997.  The
costs for briquetting  operations for the quarter ended March 31, 1998 were more
than for the quarter ended March 31, 1997 costs due to material, labor and other
costs for the increased refinement and implementation of the briquetting process
as the Company moves into commercial  production  levels at the Utah and Alabama
facilities.  When Utah Synfuel #1, a Delaware limited partnership ("US #1"), and
the Company sold the Utah facility to Coaltech,  US #1 entered into an agreement
to purchase synthetic fuel produced at the Utah Plant for costs incurred plus $1
per ton. The Utah Plant incurred significant costs for coal fines, labor, binder
materials,  repairs  and  maintenance,  equipment  rental and other  costs as it
worked through various production  issues.  These costs are included in the cost
of  coal  briquetting  operations.  As  the  wash  plant  moves  towards  normal
operational  levels and  efficiencies,  the Company  anticipates  that the costs
incurred per ton of synthetic  fuel produced will be more in line with the sales
value of the synthetic  fuel and will reduce the net operating loss that results
from these operations.  See "ITEM 1.  BUSINESS--Business of Company--Utah Plant"
of the Company's Form 10-K.  During the quarter ended March 31, 1998 the Company
incurred  $1,903,553 in cost of coal fines sold under the arrangement  discussed
in the previous paragraph.

         Research  and  development  costs  increased  $6,806 or 10%  during the
quarter  ended March 31, 1998 from $65,396 for the quarter ended March 31, 1997.
The Company  expects  continued  research and  development  costs in its ongoing
efforts to refine further the Company's synthetic fuels and other technology.

         Selling,  general and administrative expense increased $728,325 or 172%
to $1,150,848 for the quarter ended March 31, 1998 from $422,523 for the quarter
ended March 31, 1997.  The increase  related to necessary  personnel  increases,
increased  outside  professional  services  relative to  facility  construction,
increased travel and transportation expenses incurred to monitor construction at

                                       16
<PAGE>

the numerous facility locations, increased expenses incurred to pursue financing
alternatives  necessary to meet the Company's  needs and general  infrastructure
cost increases as the Company continues to grow and expand.

         For the quarter ended March 31, 1998, increased expenses were partially
offset by a decrease in  compensation  expense  resulting  from the  issuance of
stock and stock  options as compared to the quarter  ended March 31,  1997.  The
decrease of $37,683 is attributable to a reduction in the use of stock and stock
options in compensating  employees and consultants of the Company. The reduction
is also reflective of a general change in the Company  philosophy  regarding the
strike price for options granted.  Generally, stock options that will be granted
by the Company in the future are not expected to be  "in-the-money"  at the date
of grant.

         During the quarter ended March 31, 1998, the Company recorded a gain of
$78,401 on the sale of the Alabama facility as compared to a loss of $4,196 from
facility sales during the quarter ended March 31, 1997.

         In fiscal 1996,  the Company was  required,  under  generally  accepted
accounting principles,  to adjust the $5 Million 6% promissory note (the "Note")
from  the  sale  of  Industrial   Management  and   Engineering,   Inc.,   State
Incorporated,   Central  Industrial  Construction,  Inc.  and  Larson  Limestone
Company,  Inc. (the "Construction  Companies") to the ascertainable value of the
Company's  common stock  collateralizing  the Note.  This  accounting  treatment
resulted in a write-down  of the note  receivable  by $2,699,575 in fiscal 1996.
For the quarter ended March 31, 1998, this adjustment  resulted in a write-up of
the Note by $270,000  compared to a write-down of $431,250 for the quarter ended
March  31,  1997.  The Note is  guaranteed  by the  Buyers  of the  Construction
Companies  and there has been no event of default or past due  payment  occur on
the Note. The Company has no reason to believe that the payments under the terms
of the Note will not be made.

         Total Other Income and Expenses.  For the quarter ended March 31, 1998,
the Company had other income totaling  $247,888 and other expenses of $1,179,925
for net other  expenses of $932,037.  For the quarter ended March 31, 1997,  the
Company had other income totaling  $395,633 and other expenses of $1,568,592 for
net  other  expenses  of  $1,172,959.   This  decrease  of  $240,922   consisted
principally  of a decrease in interest  expense of $388,667  resulting  from the
issuance of less convertible debt where the conversion price was "in-the-money".
The minority interest in the operations of the consolidated subsidiaries changed
by $290,307 as a result of the subsidiaries  incurring smaller losses during the
quarter ended March 31, 1998 compared to the comparable period in 1997.

         The Company has net operating loss  carryforwards that are available to
offset future taxable income.  Because the Company has not generated significant
revenues relating to the Briquetting  Technology with  corresponding net income,
no benefit  has been  recorded  relative  to the future  utilization  of the net
operating loss  carryforwards.  This benefit may be recorded in the near term if
the Company continues to realize net income.

         Net Income.  For the quarter ended March 31, 1998,  the Company had net
income of  $931,651 as compared  with a net loss of  $2,815,964  for the quarter
ended March 31, 1997  resulting in a net increase of  $3,747,615  in net income.
This increase resulted primarily from a significant  increase in total revenues,
and a  significant  decrease  in  interest  expense  offset  by an  increase  in
operating costs and expenses, all as previously discussed.

         Amended Form 10-Q.  All financial information for the quarter ended and
six months  ended  March 31,  1997 and  comparison  between  that period and the
corresponding  period in 1998 are based upon the restarted financial  statements
filed in the Company's  Form 10-Q/A,  Amendment No. 1 for the period ended March
31, 1997.

                                       17
<PAGE>

Results of Operations

Six months ended March 31, 1998 compared to the six months ended March 31, 1997

         Revenues.  For the six months  ended  March 31,  1998,  total  revenues
increased by  $6,523,965  to  $6,652,323  from $128,358 for the six months ended
March 31, 1997.  There were  $4,586,000 in advance  license fees received during
the six months ended March 31, 1998 while no license fees were  received  during
the comparable  period during 1997.  Advance  license fees are normally due when
construction  of  the  related  briquetting  facility  begins  or  when  certain
construction  milestones or other  conditions are met. The Utah Plant was placed
in service in early 1997.  However,  production and sales of synthetic fuel were
significantly  curtailed due to the high levels of ash content in feedstock used
for  production  at the Utah Plant.  To remedy the problem of ash  content,  the
Company has  constructed a wash plant for the Utah Plant that is currently going
through start-up procedures.  Accordingly, synthetic fuel sales of $4,888 during
the six months ended March 31, 1998 were less than the sales of $124,341  during
the corresponding period ended March 31, 1997. The Company believes that, as the
wash plant becomes  operational,  it will be able to supply  sufficient  quality
coal fines to the Utah Plant to allow the plant to operate profitably at or near
capacity.  The Company has had various  discussions with potential  end-users of
the  synthetic  fuel  product.  However,  there  is  currently  no  contract  or
obligation  in place for the sale of the  synthetic  fuel  produced  at the Utah
Plant. The Company received  revenues from binder sales in the amount of $91,605
for the six months ended March 31, 1998 as compared to sales of $4,017 that were
made during the six months  ended March 31,  1997.  The Company  expects  binder
sales to increase  proportionate  to future  synthetic fuel production and sales
increases.  The  Company  received  revenues  from the sale of coal fines in the
amount of $1,903,553  for the six months ended March 31, 1998 under an agreement
to sell the coal fines at their cost. The Company had operation and  maintenance
fees of  $66,277  for the six  months  ended  March  31,  1998 and no such  fees
revenues for the corresponding period in 1997.

         Operating Costs and Expenses.  Operating  costs and expenses  increased
$2,483,057 to $5,015,193 for the six months ended March 31, 1998 from $2,532,136
for  the  six  months  ended  March  31,  1997.  Operating  costs  and  expenses
attributable to the briquetting  operations increased $355,007 to $1,187,199 for
the six months ended March 31, 1998 from $832,192 for the six months ended March
31, 1997.  The costs for  briquetting  operations for the six months ended March
31, 1998  increased  when compared to the six months ended March 31, 1997 due to
material,  labor and other costs for the increased refinement and implementation
of the  briquetting  process as the  Company  moves into  commercial  production
levels at the Utah and Alabama facilities. During the six months ended March 31,
1998 the  Company  incurred  $1,903,553  in costs for coal  fines sold under the
arrangement previously discussed.

         Research and development  costs increased $57,430 or 34% during the six
months  ended March 31, 1998 from  $170,463  for the six months  ended March 31,
1997.  The Company  expects  continued  research  and  development  costs in its
ongoing  efforts  to  refine  further  the  Company's  synthetic  fuels or other
technologies.

         Selling,  general and administrative  expense increased $661,565 or 54%
to $1,891,402  for the six months ended March 31, 1998 from  $1,229,837  for the
six months ended March 31, 1997.  The  increase  related to necessary  personnel
increases,   increased  outside  professional   services  relative  to  facility
construction,  increased travel and transportation  expenses incurred to monitor
construction at the numerous facility locations,  increased expenses incurred to
pursue financing  alternatives necessary to meet the Company's needs and general
infrastructure cost increases as the Company continues to grow and expand.

         For the six months ended March 31, 1998, compensation expense resulting
from the issuance of stock and stock  options  decreased by $143,151 as compared
to the six  months  ended  March 31,  1997.  The  decrease  is  attributable  to
reduction in the use of stock and stock  options in  compensating  employees and
consultants of the Company. The reduction is also reflective of a general change
in the  Company  philosophy  regarding  the strike  price for  options  granted.
Generally,  stock  options that will be granted by the Company in the future are
not expected to be "in-the-money" at the date of grant.

         During the six months  ended March 31, 1998 the  Company  recognized  a
gain of $78,401 on the sale of the  Alabama  facility  as  compared to a loss of
$4,196 from facility sales during the six months ended March 31, 1997.

                                       18
<PAGE>

         For the six months ended March 31, 1998, the adjustment relative to the
note received from the sale of the Construction Companies resulted in a write-up
of the Note by $562,500  compared  to a write-up of $293,750  for the six months
ended March 31, 1997.  The Note is guaranteed by the Buyers of the  Construction
Companies  and there has been no event of  default  or past due  payment  on the
Note.  The Company has no reason to believe that the payments under the terms of
the Note will not be made.

         Total Other  Income and  Expenses.  For the six months  ended March 31,
1997,  the Company had other  income  totaling  $542,980  and other  expenses of
$1,634,468 for net other expenses of $1,091,488.  For the six months ended March
31, 1998, the Company had other income  totaling  $470,558 and other expenses of
$2,292,432 for net other  expenses of  $1,821,874.  This increase in expenses of
$730,386  consisted  principally of an increase in interest  expense of $657,964
resulting from the issuance of convertible  debt where the conversion  price was
"in-the-money".  The minority  interest in the  operations  of the  consolidated
subsidiaries  changed by $222,792 as a result of the subsidiaries having smaller
losses  during the six months  ended March 31, 1998  compared to the  comparable
period in 1997.

         Net Income.  For the six months ended March 31, 1998, the Company had a
net loss of  $184,744  as  compared  with a net loss of  $3,495,266  for the six
months  ended  March  31,  1997  resulting  in a net  decrease  in the  loss  of
$3,310,522.  This decrease  resulted  primarily  from a significant  increase in
total  revenues  and was  offset by smaller  increases  in  operating  costs and
expenses, and an increase in other expenses of $730,386.

Liquidity and Capital Resources

         For the six  months  ended  March 31,  1998,  management  believes  the
Company made significant progress in its movement from continued development and
refinement of the Company's proprietary technology to commercial operations. The
decrease in cash used by the Company in operating  activities from  $(1,322,128)
for the six months ended March 31, 1997 to  $(229,851)  for the six months ended
March 31, 1998 was largely due to the decrease in the net loss of $3,495,266 for
the six months  ended  March 31, 1997  compared  to $184,744  for the six months
ended March 31, 1998. This decrease was offset by $1,400,000 of advanced license
fees that were  received  during the six months  ended  March 31, 1997 that were
deferred.

         The Company made cash  payments for  property,  plant and  equipment of
$21,677,713  during the six months ended March 31, 1998. These additions related
to the wash plant at the Utah  facility,  three  synthetic  fuel  facilities,  a
second line at the Utah  facilities,  binder plants and  briquetting  equipment.
Except for the wash plant,  the Company  plans on selling  these assets to third
parties.  This  investment was funded by cash available at September 30, 1997 of
$4.8 million and proceeds from the issuance of notes  payable of $16.3  million.
The Company  believes  it will be able to meet  future  cash flow needs  through
additional  issuances of notes payable,  issuances of equity securities and from
cash generated by operations.

         During  December  1997,  the  Company  executed  an  amendment  to  the
Convertible Loan and Security Agreement with PacifiCorp Financial Services, Inc.
("PFS").  The  agreement  modifies an agreement  reached on March 20, 1997 which
provides  funding  for  completing  construction  of  the  Alabama  project  and
acquiring  coal  fines  and for  other  purposes  related  to the  project.  The
modification increased the amount available from $5,000,000 to $7,000,000 with a
provision  that  borrowings up to the lessor of actual  borrowings or $6,000,000
are convertible into common stock under the same terms as the original March 20,
1997 agreement (at a price of $7.00 per share). As of March 3, 1998,  PacifiCorp
exercised its option to convert the full amount owing under the loan into shares
of common stock.  The Company had borrowed  $6,686,473  and interest of $313,527
had been accrued.  An agreement was reached  between the Company and  PacifiCorp
which  allowed  them to convert  the full  $7,000,000  owing under the loan into
1,000,000  shares of common stock.  The Company also issued 27,000 shares to PFS
under antidilution provisions of this agreement.

         On March 6, 1998 the Company and Alabama  Synfuel #1 completed the sale
of a synthetic fuel briquetting  plant in Birmingham,  Alabama ("Alabama Plant")
to PacifiCorp under the terms of the Project Purchase  Agreement dated March 20,
1997 and as  subsequently  amended.  The  purchase  price for the  facility  was
$6,500,000  and was paid with a note that bears interest at twelve percent (12%)
per  annum.  The  promissory  note  executed  by  PacifiCorp  to the  Company is
collateralized by the Alabama Plant.

                                       19
<PAGE>

         In  October  1997,  the  Company  entered  into an  agreement  with AJG
Financial  Services,  Inc. ("AJG"),  whereby AJG agreed to provide financing for
the wash plant being  constructed by the Company to provide washed coal fines to
the Utah Plant.  The  financing  consists of a note  bearing  interest at 6% per
annum with  principal  and  interest due and payable two years from the time the
debt is incurred.  As additional  consideration  to AJG for the  financing,  the
Company agreed to grant  warrants to purchase  Company common stock in an amount
equal to 10% of the dollar  amount  financed,  with fifty  percent of the shares
having a purchase  price of $10 per share and fifty percent of the shares having
a purchase price of $20 per share. The warrants are immediately  exercisable and
expire in two years.

         As of March 31,  1998,  the  Company had a working  capital  deficit of
$5,057,626, compared to a working capital deficit of $3,195,420 at September 30,
1997.  This  increase  resulted   primarily  from   construciton   financing  of
briquetting facilities with short-term financing. At March 31, 1998, the Company
owned three facilities that were in various stages of construction.  The Company
expects to sell the majority of these  facilities  and recoup its investment and
retire the related  borrowings.  The Company  believes that additional  advanced
license fees to be received,  and, if  necessary,  available  financing  will be
sufficient  to  fund  the  operations  of the  Company  until  cash  flows  from
operations are sufficient to fund the Company's operations. However, there is no
assurance  that the Company  will be able to obtain the  necessary  financing or
receive sufficient cash flows from operations during fiscal year 1998.

         The Company  anticipates that cash flow from: (i) licensing and royalty
fees from plants utilizing the Briquetting Technology; (ii) the sale of chemical
binder to plants utilizing the Briquetting Technology;  (iii) operating fees for
the  operation of  facilities  owned by third  parties;  (iv)  payments on notes
receivable  and (v) proceeds of equity and debt  offerings will be available and
used to fund working capital and other operating needs through fiscal 1998.

         In the third and fourth  quarters of the fiscal  year ending  September
30, 1998, the Company anticipates payments of advance license fees for each site
utilizing the  Company's  Briquetting  Technology,  except for the Savage Mojave
project.  The  timing  for and  amount  of such fees  varies  and is tied to the
commencement of construction,  the completion of construction, the receipt of an
IRS Private Letter Ruling ("PLR") for a particular  project,  receipt of project
financing  or the sale of a facility.  Since these  conditions  should be met no
later than  September 30, 1998,  all such advance  license fees, if any, will be
earned by the end of the fiscal year ending September 30, 1998.

         The Company  anticipates  license fees from the  production and sale of
synthetic fuel from the Utah Plant,  Alabama Plant and Savage Mojave project, if
any,  after  the  second  quarter  of  fiscal  year  1998.  The  balance  of the
briquetting  facilities licensing the Briquetting  Technology are expected to be
placed into service during the third quarter of 1998.  Accordingly,  the Company
expects that there will be earned license fees payable from production and sales
from  these  plants  beginning  during the third  quarter  of 1998,  but are not
expected to be significant until late 1998 or early 1999.

         Advance license fees and ongoing license fees  attributable to the Utah
Plant and the Alabama  Plant are payable to US #1 and AS #1,  respectively.  The
Company  would  receive  its  share of such  license  fees,  net of  partnership
expenses,  in the form of cash  distributions  in  proportion  to the  Company's
interests in the partnerships, 63% for US #1 and 74% for AS #1.

         The  Company  has  contracted  with its  licensees  to  provide  binder
materials on a cost plus basis.  The Company  expects to have increased sales of
binder materials to the Utah Plant and the Alabama Plant in the third quarter of
fiscal year 1998. As  previously  mentioned,  the balance of the synthetic  fuel
facilities that will be utilizing the Briquetting  Technology are expected to be
placed in service late in the third quarter of the fiscal year ending  September
30, 1998.  The Company  expects to earn the gross profit from the sale of binder
to these other  plants when they  commence  production  and in amounts  that are
proportionate to their production.

         Under  current  contracts,  the only facility for which the Company has
operational responsibility is the Utah Plant. The Company will earn a prescribed
amount per ton for  product at this  facility.  The Company  expects  that there
could be other plants for which the Company will have operational responsibility

                                       20
<PAGE>

and for which it will earn an operation  and  maintenance  fee. The Company does
not expect  that  operation  and  maintenance  fees will  constitute  a material
portion of its revenues in the future.

         The Company intends to seek additional  project specific  financing for
the  completion of  construction  for certain  synthetic fuel  facilities.  That
financing is expected to be in the form of traditional debt financing, debt with
an interest in the cash flow  attributable  to the facility being  financed,  or
financing by a potential  purchaser of the facility.  Facilities  being built by
licensees  of the  Company's  technology  will  generally  be  financed  by such
licensees.  There is no assurance that the Company or its licensees will be able
to obtain the necessary  financing to complete the construction of the synthetic
fuel facilities currently in process.

         Existing Debt Arrangements

         In  November  1996,  the  Company   issued   convertible   subordinated
debentures  in the principal  amounts of $300,000,  $200,000 and $500,000 to Mr.
Douglas M. Kinney,  Mr.  Gordon L. Deane and the Douglas M. Kinney 1999 Retained
Annuity Trust,  respectively.  The convertible  subordinated  debentures  accrue
interest at prime plus two percent (2%) with interest and  principal  payable in
full on June 30,  1998.  All or a portion  of the  unpaid  principal  due on the
debenture is convertible  into Company common stock at $11 per share.  Through a
separate subscription agreement, the Company has granted piggy-back registration
rights to the investors for Company  common stock issued upon  conversion of the
convertible  subordinated  debentures.  The  Company has the right to prepay the
principal of the convertible subordinated debentures.

         In December  1996, the Company  entered into a Debenture  Agreement and
Security Agreement with AJG, whereby the Company borrowed  $1,100,000,  pursuant
to a Convertible  Subordinated  Debenture  accruing interest at 6% per annum and
maturing  three years from its date of issuance (the  "Subordinated  Debenture")
and $2,900,000 pursuant to Senior Debentures accruing interest at prime plus two
percent  (2%) and  maturing  three years from the date of issuance  (the "Senior
Debenture").   The  Subordinated  Debenture  (including  accrued  interest)  was
converted to 140,642  shares of the Company's  common stock on May 5, 1997.  The
Company has granted  piggy-back  and demand  registration  rights to AJG for the
Company  common stock issued on conversion of the  Subordinated  Debenture.  The
Senior Debentures are collateralized by all real and personal property purchased
by the Company  with the proceeds of the Senior  Debenture.  The proceeds of the
Subordinated Debenture and the Senior Debenture were used to satisfy contractual
obligations of the Company,  for working capital and to purchase  equipment used
to construct briquetting  facilities to be managed and/or sold by the Company or
affiliates of the Company.

         The Company is  constructing  a wash plant to provide washed coal fines
to the Utah  Plant for the  manufacture  of  synthetic  fuel.  A portion  of the
construction  is being  financed  through AJG. The total  estimated cost for the
wash plant is approximately $7.7 Million.  As of March 31, 1998, the Company had
borrowed  $4,325,433  under its arrangement with AJG. The financing is evidenced
by a promissory note executed and delivered by the Company to AJG and is secured
by the wash  plant.  The note  currently  bears  interest  at 6% per annum  with
principal  and  interest  due and  payable  two years from the time the debt was
incurred.  As additional  consideration  to AJG for the  financing,  the Company
agreed to grant warrants to purchase  Company common stock in an amount equal to
10% of the dollar  amount  financed,  with fifty  percent of the shares having a
purchase  price of $10 per  share  and  fifty  percent  of the  shares  having a
purchase price of $20 per share.  The warrants are  immediately  exercisable and
expire in two years.

         On March 20,  1997,  the Company  entered into a  Convertible  Loan and
Security Agreement (the "Loan Agreement") with PacifiCorp. On December 12, 1997,
the Company and PacifiCorp  amended the Loan  Agreement.  Under the amended Loan
Agreement  terms, the Company may borrow up to $7,000,000 as evidenced by a draw
down promissory note (the "Promissory Note") payable to PacifiCorp.  As of March
3, 1998 the Company had drawn  $6,686,473  under the Loan Agreement and interest
of $313,527 had accrued.  Principal and accrued  interest on the Promissory Note
are due and payable on August 31, 1998 (the "Due Date"),  unless the  Promissory
Note is converted into Company common stock. Interest due on the Promissory Note
is calculated based on a 360 day year and the actual number of days lapsed,  and
will be compounded  monthly.  The interest rate is a rate per annum equal to the
lesser of (i) the  highest  rate  allowed by law, or (ii) the sum of the rate of
interest publicly  announced by Morgan Guaranty Trust Company of New York in New
York City from time to time plus two percent (2%) per annum. The proceeds of the
loan (the "Loan") may be used by the Company to: (i) complete construction of

                                       21
<PAGE>

the  Alabama  Plant;  (ii)  finance  the  purchase of coal fines for the Alabama
Plant;  (iii) fund the net  working  capital  needs of the Alabama  Plant;  (iv)
finance the development and construction of a wash plant for coal fines; and (v)
other uses  related to the  Alabama  Plant  approved by  PacifiCorp  in its sole
discretion.  The Company's obligation to repay the Loan is secured by a security
interest and lien on certain  property  relating to the Alabama Plant. On May 5,
1997,  PacifiCorp  filed  a  Schedule  13D  with  the  Securities  and  Exchange
Commission  reporting its  beneficial  ownership as being in excess of 5% of the
shares of Company common stock should PacifiCorp  convert the full amount of the
Loan.  On March 3, 1998,  PacifiCorp  exercised  its option to convert  the full
amount of $7,000,000  owing under the loan into 1,000,000 shares of common stock
plus an additional  27,000 shares  pursuant to  anti-dilution  provisions of the
loan agreement. Pursuant to the Registration Rights Agreement, dated as of March
20,  1997,  between the  Company and  PacifiCorp,  PacifiCorp  has been  granted
certain  demand and  piggy-back  registration  rights with  respect to shares of
Company  common  stock that were  acquired  by  PacifiCorp  pursuant to the Loan
Agreement.

         During the quarter  ended March 31, 1998,  the Company  entered into an
interim  construction  financing  agreement  with DTE Energy  Services,  Inc. to
finance up to $2 Million for the Company's  purchase of equipment and payment of
other project development costs relating to certain facilities.  As of May 1998,
approximately  $1,999,720 has been advanced under this financing agreement.  The
Company's  obligation  to repay the amounts  borrowed is  collateralized  by the
assets  purchased  with the proceeds of the financing.  Interest  accrues on the
amount  advanced  at a per annum rate  equal to the LIBOR rate plus 1%  adjusted
monthly.  The principal amount of the financing is payable upon the closing of a
take-out  construction  loan or December 31, 1998,  whichever  occurs first. The
company repaid these borrowings during May 1998. See "ITEM 1. BUSINESS--Business
of Company--Other Construction  Agreements--Major Utility" of the Company's Form
10-K.

         On  March  20,  1998  the  Company  entered  into a loan  and  security
agreement  with Fun  Enterprises,  Pty Ltd.  ("Fun"),  a  current  holder of the
Company's Class B preferred stock,  relating to the development and construction
of  a  mobile,  skid-mounted  synthetic  fuel  production  facility  at  a  coal
preparation site of an eastern coal company. The agreement allows the Company to
borrow up to  $5,800,000.  The interest  rate will be 12% per annum until August
31, 1998, and 15% per annum  thereafter until paid. Fun will also have the right
to receive certain  royalties after the facility is sold. As of the date of this
filing the Company has drawn $5,120,000 under this arrangement.  The loan is due
in full at the earlier of the sale of the  facility or December  31,  1999.  The
Company has entered  into a letter of intent  with the eastern  coal  company to
provide  feedstock for the plant, to operate the plant, and to provide synthetic
fuel sales services. Construction of the facility has commenced.

         On March 17, 1998,  the Company  entered into a loan agreement in which
Trans Pacific Stores,  Ltd. ("TPS") agreed to loan the Company up to $4,000,000.
The loan is  secured  by future  earned  license  fees  payable  to the  Company
resulting from the synthetic fuel manufacturing  facilities  constructed by Pace
Carbon Fuels,  LLC.  Interest on the  outstanding  principal  balance accrues at
twelve  percent  (12%) per annum.  The  interest  rate is  adjusted  to thirteen
percent  (13%) on September  20, 1998 and to fourteen  percent (14%) on December
20, 1998.  Each time the interest  rate is adjusted,  a one percent (1%) renewal
fee of  $40,000  is due and  payable.  Interest  on the  unused  portion  of the
borrowing  will accrue  interest at one percent (1%) per annum until the loan is
paid in full.  The balance and interest is due in full before March 20, 1999. As
of March 31, 1998,  $530,300 had been borrowed under this arrangement.  A member
of the Company's Board of Directors is affiliated with TPS.

                                       22
<PAGE>

Forward Looking Statements


         Statements  regarding the Company's  expectations  as to the financing,
development and construction of facilities utilizing its Briquetting Technology,
the  receipt  of  licensing  fees,  operating  revenues  and  other  information
presented in this Quarterly  Report on Form 10-Q that are not purely  historical
by nature,  including those  statements  regarding the Company's future business
plans, the construction  and estimated  completion of facilities,  the estimated
capacity of facilities, the availability of coal fines, the marketability of the
synthetic fuel and other briquettes and the financial  viability of the proposed
facilities,  constitute  forward  looking  statements  within the meaning of the
Private Securities  Litigation Reform Act of 1995. Although the Company believes
that its expectations are based on reasonable  assumptions  within the bounds of
its  knowledge of its business and  operations,  there can be no assurance  that
actual results will not differ materially from its expectations.  In addition to
matters  affecting  the  Company's  industry or the coal industry or the economy
generally,  factors which could cause actual results to differ from expectations
set forth in the  above-identified  forward looking statements include,  but are
not limited to, the following:

             (i)           The commercial success of the Briquetting Technology.
             (ii)          Procurement of necessary equipment to place
                           facilities into operation.
             (iii)         Securing of necessary  sites,  including  permits and
                           raw materials,  for facilities to be constructed  and
                           operated.
             (iv)          Timely  construction and completion of synthetic fuel
                           facilities,  by the  placed-in-service  date June 30,
                           1998.
             (v)           Ability to obtain needed additional  capital on terms
                           acceptable to the Company.
             (vi)          Changes  in  governmental  regulation  or  failure to
                           comply with existing  regulation  which may result in
                           operational shutdowns of its facilities.
             (vii)         The  availability  of tax credits under Section 29 of
                           the  Internal   Revenue  Code  of  1986,  as  amended
                           ("Section 29").
             (viii)        The  commercial   feasibility   of  the   Briquetting
                           Technology  upon the  expiration  of  Section  29 tax
                           credits.
             (ix)          Ability to meet financial  commitments under existing
                           contractual arrangements.

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

             Not applicable.


                           PART II- OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS

             On June 26, 1997,  Kirby Cochran,  former  President of the Company
during the period  from  September  1995  through  May 1996,  filed a  complaint
against the Company in the Fourth  Judicial  District for Utah County,  State of
Utah (Civil No. 970400507).  The complaint alleged that Mr. Cochran was entitled
to a declaratory judgment awarding him options to purchase 600,000 shares of the
Company's  stock and $50,000 as repayment  of a purported  loan.  The  complaint
further alleged claims of conversion,  fraud,  and breach of contract related to
the stock options and loan. Finally,  the complaint alleged a claim for punitive
damages and other  unspecified  special or general damages.  The Company filed a
petition  to remove  the  action to the  United  States  District  Court for the
District of Utah (Civil No.  2:97CV0587G).  On November  13,  1997,  the parties
entered into a Settlement  Agreement whereby Kirby Cochran agreed to release the
Company  from all claims  made by the  lawsuit in  exchange  for  payment on the
purported loan of $50,000.

             In January 1996, a manager of the Company entered property owned by
NEICO, a subsidiary of Nevada Power Corporation,  in connection with an offer by
the Company to purchase the property,  and with certain  other  employees of the
Company,  removed and contained over a two-day period some asbestos. The manager
allegedly failed to follow federal guidelines governing the handling and removal
of asbestos.  This action was reported to the Division of Environmental  Quality
for the State of Utah. An investigation followed in which the Company was fined

                                       23
<PAGE>

approximately  $11,000 and was required by the State of Utah to properly dispose
of the asbestos using a qualified asbestos removal company. In the fall of 1997,
the Environmental  Protection Agency began a review of the case and is currently
looking into the  advisability  of further  claims or fines  against the manager
and/or against the Company.

             The  Company  entered  into a  letter  of  intent  with  Innovative
Technologies  ("Innovative") in July of 1995 to apply the Company's  Briquetting
Technology  to  certain  metallic  ores  supplied  by  Innovative.  The  Company
conducted numerous tests of the ore through the fall of 1995, and concluded from
the results that the venture was not  economically  viable.  Accordingly,  final
agreement  to process the ore was never  reached.  On March 4, 1997,  Innovative
Holding Company, Inc., a California  corporation,  and ORO Limited, a California
limited partnership, filed a civil complaint against the Company alleging breach
of the letter of intent in the amount of $500,000  plus  damages.  The complaint
was filed in the  Superior  Court of  California,  County  of  Orange  (Case No.
776083).  The case is currently in discovery  and the Comapny  beleives  that it
will be successful in defending the suit.


ITEM 2.      CHANGES IN SECURITIES AND USE OF PROCEEDS

             Recent Sales of Unregistered Securities


             The  following  sets  forth all  securities  issued by the  Company
within the past fiscal quarter  without  registering  the  securities  under the
Securities Act of 1933, as amended.  No underwriters  were involved in any stock
issuances nor were any commissions or similar fees paid in connection therewith.
However, the Company did pay finders fees in the form of cash, stock or warrants
in connection with various securities issued.

             The issuance of qualified options is required to be based on market
value.  Accordingly,  the exercise price is set based on the market price of the
Company's common stock, even though the options convert into restricted stock.

             The Company  believes  that the  following  issuances  of shares of
common stock or securities  for  contingency  issuable  common stock were exempt
from the  registration  requirements  of the Securities Act of 1933, as amended,
pursuant  to the  exemption  set  forth in  section  4(2) or 4(6)  therefor  and
Regulation D and the certificate for each security bears a restricted legend.

             In July 1997, the Company  granted  unqualified  options to acquire
10,000 shares to Don Danks and options to acquire 10,000 to Mike Vanderhoof as a
finders fee in connection with a private placement.  The exercise price is $7.00
per share. The options were actually issued in January of 1998.

             In  September  1997,  the Company  granted  unqualified  options to
acquire  25,000  shares to Don Danks and 25,000  shares to Mike  Vanderhoof as a
finders fee in connection with a private placement.  The exercise price is $9.00
per share. The options were actually issued in January of 1998.

             In February 1998, the Company granted  qualified  options under the
Company's  Stock Option Plan to acquire  20,000 shares each to two key employees
of the company. The exercise price is $11.50 per share.

             In February  1998,  the Company issued 37,500 shares of the Company
common  stock in exercise of options at $1.50 per share to certain  officers and
directors. The consideration was paid in cash.

             In February  1998,  the Company  granted  options to acquire  3,500
shares to a former employee of the Company as compensation  for past services at
$1.50 per share. Said options were exercised in the same month. Accordingly, the
Company  issued  3,500  shares of the  Company  common  stock in exercise of the
options. The consideration was paid in cash.

             In February  1998, a consultant  of the Company  exercised  options
previously  granted at $1.50 per share.  The Company  issued 3,600 shares of the
Company common stock in exercise of these options.  Subsequent to the end of the
quarter an additional  16,400 shares were issued.  The consideration was paid in
cash.

                                       24
<PAGE>

             In  March  1998,  PacifiCorp  exercised  their  option  to  convert
$7,000,000  owing under a convertible loan into shares of common stock. On March
3,  1998,   1,000,000  shares  of  the  Company  common  stock  were  issued  in
satisfaction of this loan.  Subsequent to the end of the quarter,  an additional
27,000  shares of the  Company's  common  stock were issued  pursuant to certain
antidilution provisions of the loan agreement.


             In February  1998,  the Company issued 1,000 shares of common stock
to certain accredited  investors in exercise of warrants at $8.00 per share. The
consideration  was paid in cash.  Subsequent  to the quarters end, an additional
85,117  shares of common  stock were issued to certain  accredited  investors in
exercise of warrants at $8.00. The  consideration was paid in cash. The warrants
were  originally  issued with units  privately  placed on September 30, 1997 and
October 13, 1997.


ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

                  None.

ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                  None.

ITEM 5.      OTHER INFORMATION

                  None.

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K

                 (a)  Exhibits

                    Those  exhibits  previously  filed with the  Securities  and
                    Exchange  Commission  as required by Item 601 of  Regulation
                    S-K, are incorporated herein by reference in accordance with
                    the provisions of Rule 12b-32.

                    10.50.1*   Form of Amended and  Restated  License and Binder
                               Purchase Agreement dated February 3, 1998 between
                               PC Virginia  Synthetic  Fuel #1, PC West Virginia
                               Synthetic  Fuel #1,  PC West  Virginia  Synthetic
                               Fuel #2, PC West Virginia  Synthetic  Fuel #3 and
                               Covol Technologies Inc.

                    10.50.2*   Loan Agreement  between C.C. Pace Capital, L.L.C.
                               and   Carbon    Resources,    Inc.    and   Covol
                               Technologies, Inc. dated April 21, 1998.

                    10.50.3    Security  Agreement  between C.C.  Pace  Capital,
                               L.L.C.  and  Carbon  Resources,  Inc.  and  Covol
                               Technologies, Inc. dated April 21, 1998.

               Exhibit 27.1    Financial Data Schedule

               * Exhibits contain confidential  material which has been  omitted
                 pursuant  to a  Confidential  Treatment  Request.  The  omitted
                 information  has been filed  separately with the Securities and
                 Exchange Commission.

                  (b)  Reports on Form 8-K

                           A report on Form 8-K was filed on March 3, 1998.


                                       25
<PAGE>

                                    SIGNATURE


             Pursuant to the  requirements  of the  Securities  Exchange  Act of
1934,  the  registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.



Date: May 13, 1998


                                 COVOL TECHNOLOGIES, INC.



                                  By: /s/ Brent M. Cook
                                     ------------------------------------------
                                     Brent M. Cook, Chief Executive Officer and
                                     Principal Executive Officer



                                  By: /s/ Stanley M. Kimball
                                     ------------------------------------------
                                     Stanley M. Kimball, Principal Financial
                                     Officer


                                       26




Note:  This  Exhibit  was  executed in  substantially  the same form for PC West
Virginia  Synthetic  Fuel #1, L.L.C.,  PC West Virginia Fuel #2, L.L.C.,  and PC
West Virginia #3, L.L.C., each a Delaware Limited Liability Company.

                          FORM OF AMENDED AND RESTATED
                      LICENSE AND BINDER PURCHASE AGREEMENT

         THIS AMENDED AND RESTATED  LICENSE AND BINDER  PURCHASE  AGREEMENT (the
"Agreement"),  is made and entered into as of February 3, 1998 by and between PC
Virginia  Synthetic Fuel #1, L.L.C., a  Delaware Limited  Liability Company (the
"Licensee"),   and  Covol  Technologies,   Inc.,  a  Delaware  corporation  (the
"Licensor").


         WHEREAS  Licensor has  represented  that it has developed a proprietary
process to produce synthetic coal fuel extrusions,  pellets, and briquettes from
waste coal dust,  coal fines and other coal  derivatives,  and that Licensor has
sufficient  rights to such  proprietary  process  pursuant to which  Licensor is
entitled to license the coal extruding,  pelletizing, and briquetting technology
to Licensee;

         WHEREAS Licensee has entered into a form of agreement (referred to as a
"Facility  Agreement")  between  itself  as  Owner  and  a  Contractor  for  the
construction of one (1)  agglomeration  facility located near Eckman in McDowell
County,  West Virginia and having  production  design capacity of  approximately
600,000  tons  per  year  (referred  to as the  "Project"  or  "Facility"),  the
reference to production  design  capacity not being intended to limit the actual
production capacity of each Project.

         WHEREAS  Licensor and  Licensee  entered into that Amended and Restated
License and Binder  Purchase  Agreement (the "January  Agreement"),  dated as of
January 21, 1998,  pursuant to which Licensor  granted to Licensee a license for
the coal extruding and briquetting technology in connection with the Project and
agreed to sell to Licensee the  Proprietary  Binder  Material (as defined below)
manufactured by Licensor for use in the operation of the Project.


         WHEREAS  Licensor  and  Licensee  now desire to amend and  restate  the
January Agreement.


* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>

         NOW, THEREFORE,  in consideration of the foregoing premises, the mutual
covenants  and  agreements  hereinafter  set forth,  and other good and valuable
consideration,  the receipt and  sufficiency  of which are hereby  acknowledged,
Licensor and Licensee  each agree that from and after date hereof,  the Original
License  Agreement and the January  Agreement are hereby amended and restated in
its entirety as follows:

         Section 1.  Definitions.

                  "Applicable  Percentage"  means the Licensor's  Earned Royalty
rate per MM btu as set forth in Section  3.3 divided by the amount of Section 29
Tax Credit per MM btu.

                  "Coal Briquetting Technology" means all intellectual property,
patents   (including  but  not  limited  to  United  States  Patent  Numbers  *,
trademarks,   inventor  certificates  and  applications  therefor,  printed  and
unprinted  technical  data,  know-how,  trade  secrets,   copyrights  and  other
intellectual  property  rights,  inventions,  discoveries,   techniques,  works,
processes,   methods,   plans,   software,   designs,   drawings,    schematics,
specifications,   communications   protocols,   source  and   object   code  and
modifications,  test procedures, program cards, tapes, disks, algorithms and all
other scientific or technical information in whatever form relating to, embodied
in or used in the proprietary process to produce synthetic coal fuel extrusions,
pellets and briquettes  from waste coal dust,  coal fines and other similar coal
derivatives, including all such information in existence as of December 31, 1996
as well as related information later developed by Licensor;  provided,  however,
that the  defined  term "Coal  Briquetting  Technology"  shall not  include  the
proprietary  process developed by Licensor to produce synthetic coke extrusions,
pellets  and  briquettes  from  coke  breeze,  iron  revert  materials,  or  any
technology  for other than the  processing and production of synthetic coal fuel
extrusions,  pellets,  and briquettes.  Nothing in this Agreement is intended to
grant to Licensee the right to apply the Coal Briquetting  Technology to produce
anything  other than  synthetic coal fuel  extrusions,  pellets,  and briquettes
intended to qualify for Tax Credits  under  Section  29(c)1(C)  of the  Internal
Revenue Code,  but the failure of the synthetic coal fuel  extrusions,  pellets,
and briquettes to so qualify  (including  without  limitation as a result of the
repeal of Section 29) shall not affect the grant of the license hereby.

                  "CoBon" means CoBon Energy, L.L.C.


* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>


                  "Contractor" has the meaning set forth in the preamble.

                  "Developed Technology" means any inventions, or new technology
that  Licensor or  Licensee  may make,  invent,  or suggest  utilizing  the Coal
Briquetting  Technology.  "Developed  Technology"  also means any  "Improvement"
directly  related to the Coal  Briquetting  Technology that Licensor or Licensee
may make, invent or suggest during the term of this Agreement.

                  "Earned Royalty" has the meaning set forth in Section 3.3.

                  "Effective  Date" means the  date of  this Agreement set forth
above.

                  "Facility"  has the  meaning  set forth in the  preamble,  and
includes  any  replacement  facility so long as the facility  being  replaced no
longer produces the Product.

                  "Facility  Agreement"  has  the   meaning  set  forth  in  the
preamble.

                  "Improvement"  means an alteration or addition to an invention
or discovery which enhances,  to some extent,  performance or economics  without
changing or destroying a product's,  device's,  or method's  basic  identity and
essential  character.  An Improvement  may comprise  alterations or additions to
either patented or unpatented inventions,  discoveries,  technology, or devices,
and may or may not be patentable.

                  "Initial Royalty" has the meaning set forth in Section 3.2.

                  "IRS" means the Internal Revenue Service.

                  "Licensee" has the meaning set forth in the preamble. The term
"Licensee"  shall  also apply to any  successor  entity or  permitted  assign of
Licensee.

                  "Licensor" has the meaning set forth in the preamble. The term
"Licensor"  shall  also apply to any  successor  entity or  permitted  assign of
Licensor.

                  "Partnership" means  Pace Carbon Synfuels  Investors,  L.P., a
Delaware limited partnership, which is the parent of Licensee and

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>


is comprised of a general partner and multiple  limited  partners,  individually
"Partner" or collectively the "Partners."

                  "Product"  means  coal-based  synthetic  fuel  produced at the
Facility utilizing the Coal Briquetting Technology.

                  "Project" has the meaning set forth in the preamble.

                  "Proprietary  Binder  Material" means and refers to the binder
compound  necessary  for  the  production,   by  Licensee,   of  synthetic  coal
extrusions,  pellets and briquettes,  which extrusions,  pellets, and briquettes
are reasonably expected to constitute "qualified fuels" pursuant to the terms of
Section  29(c)(1)(C)  of the  Internal  Revenue  Code and with  respect to which
Section 29 is  applicable  pursuant to Section  29(f) and 29(g) of the  Internal
Revenue  Code.  The  binder  material  shall  conform  in  quality to the binder
described  in  Licensor's  Section 29 Tax Credit  Private  Letter  Ruling  dated
September 6, 1995,  subject to any improvement in the binder material that still
satisfies  the  Section 29 Tax Credit  qualification  requirements.  The parties
acknowledge  that the  Proprietary  Binder  Material is not a staple  article of
commerce suitable for substantial non-infringing uses, but rather is an integral
and inseparable part of the Coal Briquetting Technology.

                  "Royalty" means the Initial Royalty and the Earned Royalty.

                  "Tax Credit" means tax credit for federal  income tax purposes
pursuant to Section 29 of the Internal Revenue Code, as amended.

                  "Yearly  Period"  means the twelve month  period  beginning on
October 15th of each calendar year.

         Section 2.  License Grant.

                  2.1.  General.  Subject  to the terms and  conditions  of this
Agreement,  Licensor  hereby  grants to  Licensee,  for the full and entire term
hereof,  a  non-exclusive  license to use the Coal  Briquetting  Technology  for
commercial  exploitation (and not for research development purposes),  including
the  non-exclusive  right to make, have made, or use at the Facility and to sell
or  otherwise  transfer  products  which  have been  manufactured  with the Coal
Briquetting  Technology.  The  license  granted  hereunder  applies  only to the
Facility, but Licensee may use, sell and otherwise transfer

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>


products which have been  manufactured at the Facility with the Coal Briquetting
Technology at any other  facility.  Licensee hereby agrees to make and have made
products using the Coal  Briquetting  Technology at the Facility only under this
License Agreement.  Licensee shall not make or have made products using the Coal
Briquetting Technology except at the Facility. Licensee shall not have the right
to sublicense the Coal Briquetting Technology.  Licensee may propose the general
location for additional facilities to use the Coal Briquetting  Technology,  and
Licensor will then have thirty (30) days to approve or disapprove of the general
area of each such additional facility,  which approval shall not unreasonably be
withheld,  taking into account other facilities in the area utilizing Licensor's
technology,  any noncompetition  agreements, and like factors; provided that the
following  sites are  approved  and not  subject  to the  30-day  review of this
Section 2.1; location near Eckman in McDowell County, West Virginia.

                  2.2.  Know-How and  Assistance.  To enable Licensee to benefit
fully  from the  license  of the Coal  Briquetting  Technology,  Licensor  shall
provide    reasonable   access   to   documentation,    drawings,    engineering
specifications,  operating  facilities under its control,  and other know-how in
its possession  that Licensee  reasonably  requires to carry out the purposes of
this  Agreement;  reasonable  access to its employees or agents who are familiar
with the Coal  Briquetting  Technology and  Improvements to the Coal Briquetting
Technology;  technical advice with regard to the Coal Briquetting  Technology as
is reasonably  requested by Licensee;  and assistance in accumulating  the data,
technical  descriptions,  test results,  etc.,  necessary to apply for a Private
Letter Ruling from the Internal Revenue Service regarding the production for the
Facility  as  qualifying  for  Section  29 Tax  Credit.  Licensor  shall  not be
obligated to provide Licensee with  documentation and other forms of information
Licensor  reasonably  deems  unnecessary  to  carry  out  the  purposes  of this
Agreement.

                  2.3. Developed  Technology.  Licensee shall have the right and
is hereby  granted  a  non-exclusive  license  to use all  Developed  Technology
relating to the Coal  Briquetting  Technology  without payment of any additional
compensation to Licensor,  throughout the term of this Agreement, subject to the
restrictions  and limitations in this Section 2. All Developed  Technology shall
become Licensor's absolute property.  Licensee shall at any time during the term
of this Agreement and thereafter,  at Licensor's reasonable request, execute any
patent papers covering such Developed  Technology as well as any other documents
that Licensor may consider necessary or helpful in the prosecution of

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



applications  for a patent  thereon  or in  connection  with any  litigation  or
controversy related thereto;  provided,  however,  that all expenses incident to
the filing of such  applications and the prosecution  thereof and the conduct of
such litigation shall be borne by Licensor.

                  2.4.  Exclusive  Technology.  Licensee  agrees to use only the
Coal Briquetting  Technology at the Facility and not to use any other technology
for the  production of solid  synthetic fuel intended to qualify for Tax Credits
under  Section  29(c)(1)(C)  of the  Internal  Revenue  Code  at  the  Facility;
provided,  however, that if notwithstanding  Licensee's  commercially reasonable
efforts to use the Coal  Briquetting  Technology  or Developed  Technology,  the
Facility fails to produce qualifying synthetic fuel under Section 29(c)(1)(C) of
the Internal Revenue Code that can be sold to unrelated  parties as set forth in
Licensor's  Private  Letter  Ruling  dated  September  8,  1995 and Pace  Carbon
Synfuels  Investors,  L.P.  Private Letter Ruling dated  November 7, 1997,  then
Licensee may use an alternative technology at the Facility to produce qualifying
synthetic fuel under Section 29. In the event of any federal income tax audit of
the Licensee or its parent, or subsequent contest thereof, the Licensee's parent
will (i) keep the Licensor and, if requested in writing by Licensor, tax counsel
to  Licensor  (whose  expense  shall be borne  solely by  Licensor),  reasonably
informed  as to the  progress of such audit or  contest;  (ii) give  Licensor an
opportunity  to review and  comment in advance on all  written  submissions  and
filings  relevant to issues raised in such audit or contest;  and (iii) consider
in good faith any suggestions  made by Licensor or its counsel about the conduct
of such audit or contest; provided, however, that Licensee's parent shall retain
full control over the conduct of such audit  including  whether and in what form
to contest any proposed adjustment.

                  2.5.  Non-licensed  Technology.  Licensor retains the absolute
right to fully exploit its proprietary  technology and processes,  including but
not  limited  to the  application  of  such  technology  embodied  in  the  Coal
Briquetting  Technology  together  with any  improvements  thereto,  to produce,
market and use synthetic coke  extrusions,  pellets,  and  briquettes  from coke
breeze,  iron revert  materials,  and any other  materials  to which  Licensor's
technology can be applied.

                  2.6.  Confidentiality.  Each of the  parties  hereby  agree to
maintain  the Coal  Briquetting  Technology  confidential  and not to  disclose,
publish,  or disseminate in any manner the Coal Briquetting  Technology,  or any
aspect thereof, or the Improvements,  or any aspect thereof  (collectively,  the
"Confidential

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



Information").  Notwithstanding  the  foregoing,  information  which  (i)  is or
becomes  generally  available  to  the  public  other  than  as a  result  of an
unauthorized  disclosure by the parties or their respective  agents,  employees,
directors  or  representatives,  (ii)  was  available  to  the  party  receiving
disclosure  on a  non-confidential  basis  prior  to  its  receiving  disclosure
hereunder, (iii) lawfully becomes available to the party receiving disclosure on
a non-confidential basis from a third party source (provided that such source is
not known by the party receiving disclosure or its agents, employees,  directors
or representatives to be prohibited from transmitting the information),  or (iv)
is disclosed  under  requirement  of law,  provided  that all  reasonable  legal
remedies  are  pursued  to  maintain  the  confidentiality  of the  Confidential
Information,  shall not be subject to the terms of this  Section 2.6. Any breach
of this Section 2.6 will be subject to all legal remedies, and in addition, this
Section 2.6 is specifically  enforceable by temporary restraining order or other
injunctive  relief.  At the  termination  of this  Agreement,  all copies of any
Confidential Information (including without limitation any reports or memoranda)
shall be returned by the party receiving  disclosure.  Nothing in this Agreement
shall prohibit  Licensee from disclosing the Confidential  Information to others
as may be reasonably  necessary for Licensee to exploit  Licensee's rights under
this Agreement, provided that the recipient of any such Confidential Information
executes a  Confidentiality  Agreement  restricting  further  disclosure  of the
Confidential Information.

         Section 3.  License Fee and Royalty.

                  3.1. License Fee.  Licensee shall pay the Initial Royalty  and
Earned Royalty as a license fee to Licensor.

                  3.2.  Initial  Royalty.  Licensee shall pay a one-time advance
license fee equal to $ * per ton for each ton of annual production capacity or $
* . Payment of the advance  license fee  described  in this Section 3.2 shall be
due and payable on or before December 31, 1997. If the equity  investor  funding
contemplated  by Licensee occurs after that date, the monies due will be paid at
financial closing for such funding, but not later than February 6, 1998.

                  3.3. Earned Royalty.  Licensee shall pay to Licensor quarterly
earned royalty payments ("Earned  Royalty") in an amount equal to the product of
(a)(i) $ * , for each ton of Product  qualifying  for the  Section 29 Tax Credit
that was sold by Licensee during the immediately preceding quarter up to a total
of * tons

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



in the then current Yearly Period,  and (ii) after * tons of Product  qualifying
for the Section 29 Tax Credit have been sold in the then-current  Yearly Period,
$ * for each ton of such Product  qualifying  for the Section 29 Tax Credit that
was sold by Licensee during the immediately preceding quarter, multiplied by (b)
the MM btu content per ton of such  Product.  Beginning on January 1, 1997,  and
each year  thereafter,  the amounts in clause (a) above shall be adjusted by the
percentage increase or decrease in the dollar amount of the inflation adjustment
as provided in Section 29 of the Internal Revenue Code.

                  3.4.  Payment  Terms.  Earned  Royalty  payments  shall be due
within * days after  Licensee  (or its  parent)  receives  its  payment  for the
corresponding  period,  but no later than * days after the end of the quarter to
which payment  relates;  provided,  however,  that such payment shall not be due
until any disputes  among the partners of  Licensee's  parent (or of  Licensee's
parent and Pace Carbon  Synfuels  L.L.C.) have been  resolved as provided in the
agreements  among such parties.  Payments  shall be made by Licensee to Licensor
and shall be deemed to be paid upon receipt by Licensor.  Payments after the due
date shall accrue interest at the rate of one percent per month.

                  3.5 *



         Section 4.  Sales of Binder.

                  4.1. Sale and Purchase.  Licensor shall sell to Licensee,  and
Licensee shall purchase from Licensor,  Licensee's  requirements  of Proprietary
Binder  Material  required to operate the Project.  Licensor  shall  deliver the
Proprietary  Binder  Material at such times and in such  amounts as requested by
Licensee.  Payments for Proprietary Binder Material delivered by Licensor during
any  calendar  month  shall be due and  payable  to  Licensor  on the  fifteenth
Business Day of the immediately  succeeding month. Payments after the applicable
due dates shall accrue interest at the rate of one percent per month.

                  4.2.  Price.  The  price  which  Licensee  shall  pay  for the
Proprietary Binder Material delivered by Licensor during any calendar year shall
be an amount equal to (i) Licensor's  direct and actual costs (direct  material,
labor, and transportation costs) and a percentage of the total overhead costs of
Licensor reasonably

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



reflecting the ratio of the administrative costs incurred in connection with the
manufacture and sale of the Proprietary Binder Material plus (ii) $ * per ton of
synthetic fuel product  (assuming a 2% Proprietary  Binder  Material) or $ * per
ton of  synthetic  fuel product  (assuming a 4%  Proprietary  Binder  Material).
Exclusive  of  transportation  costs  which may vary  because of  distances  and
available  rates,  in no event  shall the amount in clause (i) above  exceed the
costs charged to third parties by Licensor for the Proprietary  Binder Material,
except Savage  Industries.  As of the date first above written,  the total price
based upon the information  known to Licensor is estimated to be $ * per ton for
the 2% Proprietary  Binder  Material and $ * per ton for 4%  Proprietary  Binder
Material produced at the Facility.

                  4.3.  Representations  and  Warranties,  Certain  Covenants of
Licensor.  Licensor represents, warrants and covenants to Licensee as follows:

                  (a)  Licensor  shall  convey  to  Licensee  good  title to all
         Proprietary   Binder  Material  purchased  by  Licensee  from  Licensor
         hereunder, free and clear of any and all liens, claims and encumbrances
         of any type whatsoever.

                  (b) No Proprietary Binder Material shall contain any hazardous
         material in  violation of currently  applicable  laws and  governmental
         regulations.

                  (c) At Licensee's  option,  Licensor shall replace,  or refund
         the purchase of, all non-conforming Proprietary Binder Material.

                  (d) There will be available at the Facility  from time to time
         as  reasonably  requested  by  Licensee  sufficient  quantities  of the
         Proprietary  Binder Material to supply the requirements of the Licensee
         for the  production  of up to * tons of Product  per year from the date
         hereof until at least December 31, 2007.

                  (e) The  Proprietary  Binder  Material  may be  produced  from
         acrylonitrile and polyvinyl alcohol; other monomers, including, but not
         limited  to,  the  ETG-400  mix of  monomers,  may be  substituted  for
         acrylonitrile  and polyvinyl  alcohol,  to produce  Proprietary  Binder
         Material   that  will   achieve  the  same   reaction   and   resulting
         polymerization   pursuant  to  Licensor's   patented  Coal  Briquetting
         Technology, that will achieve the same significant chemical change, and
         that will result in an

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



         end  product   chemically   indistinguishable   other  than  for  trace
         substances  that have an immaterial  effect on the net change,  in each
         case compared to an end product that is produced using the  Proprietary
         Binder  Material  incorporating  acrylonitrile  and polyvinyl  alcohol.
         Prior to and as a condition to substituting  other monomers (except for
         ETG 400) for  acrylonitrile  and polyvinyl  alcohol,  the Licensor will
         provide to the Licensee a written report of Craig N. Eatough, Ph.D., or
         another third party fuels expert reasonably  acceptable to the Licensor
         and  Licensee  to the effect that (in such third  party's  professional
         judgment)  the monomers so to be  substituted  will achieve the results
         set forth in the first sentence of this Section 4.3(e).

                  4.4.  Order  Procedure.  Licensee  shall  deliver all purchase
orders for Proprietary  Binder Materials at least thirty (30) days in advance of
the first day of the month in which delivery of such Proprietary Binder Material
is required under such purchase order,  and all such purchase orders received by
Licensor during the term of this Agreement shall be deemed to have been accepted
by Licensor. (For example,  Licensee shall deliver a purchase order for December
delivery  by no later than  November  1st).  Each such  purchase  order shall be
delivered  either (i) in writing,  or (ii) orally by telephone by an  authorized
agent of  Licensee  (subject to the  condition  that it is followed by a written
purchase order within 24 hours).  Such purchase orders shall be sent to Licensor
at such address as Licensor shall direct.

                  4.5. Delivery and Acceptance.  All Proprietary Binder Material
purchased  hereunder  shall be delivered  F.O.B.  the Facility.  Licensor  shall
arrange for  transportation of the Proprietary  Binder Material to the Facility.
Licensee  shall  bear the  expense  of  unloading  the  trucks.  The  weight  of
Proprietary Binder Material in each delivery shall be determined by a comparison
of the weight, on Licensee's  scales, of the delivery truck immediately prior to
unloading and its weight, on Licensee's scales, immediately following unloading,
as reflected in  customary  weighing  certificates.  At  Licensor's  request and
expense from time to time,  Licensor shall have the right to inspect  Licensee's
scales for  accuracy.  Licensee  shall have a reasonable  opportunity  to sample
Proprietary  Binder  Material  delivered  to it  hereunder  to confirm that such
Proprietary  Binder Material conforms to the terms and requirements  hereof, and
Licensee shall not be deemed or required to accept any such  Proprietary  Binder
Material prior to the completion of such sampling.


* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>

                  4.6.  Binder  Technology  License.  If  Licensor's  ability to
deliver  the  Proprietary  Binder  Material to  Licensee  will or is  reasonably
expected by Licensor to be interrupted  or terminated  for any reason,  Licensor
shall give not less than ninety (90) days notice to Licensee.  Subject to giving
notice of its inability to deliver the  Proprietary  Binder Material to Licensee
(or,  in the  absence  of  such  notice,  the  actual  failure  to  deliver  the
Proprietary  Binder  Material for at least ten days after Licensee gives written
notice of  non-delivery  to  Licensor),  Licensor  hereby  grants to  Licensee a
nonexclusive  license for the term of this  Agreement (or such shorter period as
provided in the proviso  hereto) to use the technology  used to manufacture  the
Proprietary  Binder Material to manufacture  the Proprietary  Binder Material in
sufficient  quantities  to operate  the  Project up to full  capacity,  and such
technology  shall be deemed "Coal  Briquetting  Technology"  for the purposes of
this Agreement;  provided,  however,  that the license granted to Licensee under
this Section shall cease (subject to reinstatement  upon the reoccurrence of the
events  contemplated  above) and sales of Proprietary  Binder Material under the
terms of this Agreement  shall be  reinstated,  in each case, on a date not less
than ninety (90) days after  Licensor  gives notice to Licensee,  together  with
reasonably   satisfactory   evidence  that  Licensor  is  able  to  deliver  the
Proprietary Binder Material in accordance with this Agreement. No additional fee
or royalty shall be payable to Licensor in connection  with the license  granted
pursuant to this Section and Licensee  shall be  responsible  for its own direct
out-of-pocket  operating  costs  incurred in connection  with the  production of
Proprietary Binder Material pursuant to this Section.
 *. Such trustee shall agree to provide the formula to Licensee upon  Licensee's
certifying  to the trustee  that  Licensee has a right of access to such formula
pursuant to this  Section 4.  Licensor and  Licensee  shall  cooperate to put in
place any necessary  agreement  (including without limitation a trust agreement)
to effect the foregoing  safety deposit and trustee  arrangement.  Except to the
extent required by law,  Licensee  covenants to hold the formula delivered to it
by the trustee pursuant to the preceding sentence strictly confidential, and not
to study,  utilize,  remove,  or to access the formula except in accordance with
the license granted to Licensee pursuant to this Agreement.

         Section 5.  Records;  Inspection;  Confidentiality.  Each party  hereto
shall keep accurate  records  containing  all data  reasonably  required for the
computation and verification of the amounts to be paid by the respective parties
under  this  Agreement,  and shall  permit  each other  party or an  independent
accounting  firm  designated  by such other party to inspect  and/or  audit such
records

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>


during normal  business  hours upon  reasonable  advance  notice.  All costs and
expenses  incurred by a party in connection with such inspection  shall be borne
by it.  Each  party  agrees  to hold  confidential  from all third  parties  all
information contained in records examined by or on behalf of it pursuant to this
Section 5.

         Section 6.  Development and Construction of Facilities.

                  6.1. Assistance from Licensor.  Upon the reasonable request of
Licensee,  Licensor  agrees  to  provide  assistance  from  time  to time in the
development and construction of the Facility.

                  6.2.  Reimbursement of Expenses.  Licensee shall reimburse the
travel and other  similar  out-of-pocket  expenses  of  Licensor  in  performing
services requested under Section 6.1 hereof;  provided,  however,  that Licensor
shall  obtain the prior  written  approval of Licensee for any  expenditures  in
excess of $5,000.

         Section 7.  Infringement.  If during the term of this Agreement a third
party has infringed any  intellectual  property rights  associated with the Coal
Briquetting  Technology  or  otherwise   misappropriated  any  Coal  Briquetting
Technology,  Licensor  may, at Licensor's  expense,  institute and conduct legal
actions  against such third party or to enter into such  agreements or accord in
settlement as are deemed  appropriate by Licensor,  in which case Licensor shall
be entitled to any sums recovered from third parties.

         Section 8.  Representations and Warranties.

                  8.1.  Authority.  Each of Licensee and Licensor represents and
warrants that (i) the execution,  delivery and performance of this Agreement and
the  consummation  of  the  transactions  contemplated  hereby  have  been  duly
authorized on its behalf by all requisite action,  corporate or otherwise,  (ii)
it has the full right,  power and authority to enter into this  Agreement and to
carry out the terms of this Agreement,  (iii) it has duly executed and delivered
this Agreement,  and (iv) this Agreement is a valid and binding obligation of it
enforceable in accordance with its terms.

                  8.2. No Consent.  Each of Licensee and Licensor represents and
warrants  that  no  approval,  consent,  authorization,  order,  designation  or
declaration  of any court or regulatory  authority or  governmental  body or any
third-party is required to be obtained by it, nor is any filing or  registration
required to be

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>


made therewith by it for the consummation by it of the transactions contemplated
under this Agreement.

                  8.3. Intellectual  Property Matters.  Licensor warrants to its
best knowledge and good faith belief that (i) Licensor  owns,  free and clear of
all liens and encumbrances,  intellectual  property,  patents (including but not
limited  to  United  States   Patent   Numbers  *  ),   trademarks,   inventor's
certificates,  and applications therefor,  printed and unprinted technical data,
know-how,  trade secrets,  copyrights  and other  intellectual  property  rights
inventions, discoveries, techniques, works, processes, methods, plans, software,
designs, drawings, schematics, specifications,  communications protocols, source
and object code and modifications, test procedures, program cards, tapes, disks,
algorithms  and all other  scientific or technical  information in whatever form
relating to, embodied in or used in the proprietary process to produce synthetic
coal fuel extrusions,  pellets,  and briquettes from waste coal dust, coal fines
and other  similar  coal  derivatives,  and,  the right to freely use,  sell and
exploit  Proprietary  Binder Material used in manufacturing  synthetic coal fuel
extrusions,  pellets,  and briquettes from waste coal dust, coal fines and other
similar  coal  derivatives,  (ii)  Licensor  has the right and power to grant to
Licensee the licenses  granted herein,  (iii) Licensor has not made and will not
make any agreement with another in conflict with the rights granted herein,  and
(iv) the  grant or sale to  Licensee,  and the use by  Licensee  of the  rights,
Proprietary  Binder Material  and/or licenses  granted herein as contemplated by
this Agreement will not infringe any third-party's intellectual property rights.
Licensor  represents  and  warrants  that  valid  technical  information  exists
establishing that the 2% Proprietary Binder Material works successfully with the
Coal Briquetting  Technology using Eastern sub-bituminous coal fines producing a
commercially  acceptable synthetic coal extrusion,  pellet or briquette and that
use of the 2% Proprietary  Binder Material with the Coal Briquetting  Technology
is consistent with the Private Letter Ruling,  dated September 6, 1995, received
by Licensor from the Internal Revenue Service that the production using the Coal
Briquetting Technology qualifies for the Section 29 Tax Credit.

                  8.4. Indemnification.  Each party shall indemnify,  defend and
hold harmless the other and its partners, members, directors,  officers, agents,
representatives,  subsidiaries  and  affiliates  from  and  against  any and all
claims,  demands or suits (by any party,  including  any  governmental  entity),
losses, liabilities, damages, obligations, payments, costs and expenses

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



(including  the costs and  expenses of  defending  any and all  actions,  suits,
proceedings,  demands and assessments which shall include reasonable  attorneys'
fees and court costs)  resulting from,  relating to, arising out of, or incurred
in  connection  with  any  breach  by  the  indemnifying  party  of  any  of the
representations,  warranties  and/or  covenants  contained  in  this  Agreement.
Licensor  shall  take  all  reasonable  action  necessary  to  defend  the  Coal
Briquetting Technology against claims from third parties.

         Section 9. Term. This Agreement and the license granted hereunder shall
be for the primary term from December 31, 1996 to and including January 1, 2008,
or the  corresponding  date under  Section 29 of the Internal  Revenue  Code, as
amended,  in the event of an extension of the Tax Credit available under Section
29 of the Internal Revenue Code, as amended,  whichever is later. Licensee shall
have the right to renew this  Agreement  upon terms that the  Parties  may later
agree.

         Section 10. Waiver. The failure of any party to enforce at any time any
provision of this Agreement shall not be construed as a waiver of such provision
or the right  thereafter to enforce each and every  provision.  No waiver by any
party, either express or implied, of any breach of any of the provisions of this
Agreement  shall be  construed  as a waiver of any other  breach of such term or
condition.

         Section 11.  Severability.  If any provision of this Agreement shall be
held by a court of competent  jurisdiction to be invalid or unenforceable in any
respect for any reason, the validity and enforceability of any such provision in
any other respect and of the remaining provisions of this Agreement shall not be
in any way impaired.

         Section 12.  Notices.  All notices  required or  permitted  to be given
under this Agreement shall be in writing.  Notices may be served by certified or
registered mail, postage paid with return receipt requested; by private courier,
prepaid;  by telex,  facsimile,  or other  telecommunication  device  capable of
transmitting or creating a written record;  or personally.  Mailed notices shall
be deemed  delivered  five days after  mailing,  property  addressed.  Couriered
notices  shall be  deemed  delivered  when  delivered  as  addressed,  or if the
addressee refuses  delivery,  when presented for delivery  notwithstanding  such
refusal.  Telex or  telecommunicated  notices  shall be  deemed  delivered  when
receipt is either confirmed by confirming transmission equipment or acknowledged
by the addressee or its office. Personal delivery

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



shall be  effective  when  accomplished.  Unless a party  changes its address by
giving notice to the other party as provided herein,  notices shall be delivered
to the parties at the following address:


         Licensor:                 Covol Technologies, Inc.
                                   3280 North Frontage Road
                                   Lehi, Utah  84043
                                   Telephone:  (801) 768-4481
                                   Telecopier:  (801) 768-4483
                                   Attn.:  Mr. Brent M. Cook

         With a copy to:           Ballard, Spahr, Andrews & Ingersoll
                                   201 South Main Street, Suite 1200
                                   Salt Lake City, Utah  84111-2215
                                   Telephone:  (801) 531-3000
                                   Telecopier:  (801) 531-3001
                                   Attn.:  Mr. Tom McGimpsey

         Licensee:                 PC West Virginia Synthetic Fuel #3, L.L.C.
                                   4401 Fair Lakes Court
                                   Suite 400
                                   Fairfax, VA  22033
                                   Telephone:  (703) 818-9100
                                   Telecopier:  (703) 818-9108
                                   Attn.:  Mr. James R. Treptow

         Section 13. Remedies Cumulative. Remedies provided under this Agreement
shall be  cumulative  and in  addition to other  remedies  provided by law or in
equity.

         Section 14. Further  Assurances.  Each party agrees,  at the request of
the other party,  at any time and from time to time,  to execute and deliver all
such further documents,  and to take and to forbear from all such action, as may
be reasonably  necessary or appropriate in order to more  effectively  carry out
the provisions of this Agreement.

         Section 15.  Entire Agreement.   This Agreement constitutes  the entire
agreement of the parties  relating to the subject  matter  hereof.  There are no
promises,  terms,  conditions,  obligations,  or  warranties  other  than  those
contained   herein.   This  Agreement   supersedes  all  prior   communications,
representations, or agreements, verbal or written, among the parties relating to
the subject matter hereof, including the January Agreement. This

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



Agreement may not be amended except in writing signed by the parties.

         Section 16.  Governing  Law.  This  Agreement  shall  be  governed   in
accordance with the laws of the State of Utah, exclusive of its conflict of laws
rules.

         Section 17. Assignment. This Agreement may not be assigned, in whole or
in part, by any party without the written  consent of each of the other parties,
which consent will not be unreasonably  withheld except that (i) Licensor and/or
Licensee  shall have the right to assign its rights and  obligations  under this
Agreement to any entity which is controlled by Licensor or Licensee, as the case
may be, and of which Licensor or Licensee, as the case may be, owns, directly or
indirectly,  at  least  fifty  percent  (50%) of each  class of its  outstanding
securities,  provided  that no such  assignment  shall release  Licensor  and/or
Licensee from its obligations hereunder,  and (ii) Licensee shall have the right
to assign its rights and  obligations to Licensor in connection with any sale by
Licensee of substantially all of the assets of the Project.

         Section 18. Counterparts. This Agreement may be executed in two or more
counterparts,  each which shall be deemed an original, but all of which together
shall constitute one and the same agreement.


* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



         Executed by the duly  authorized  representative  of the parties on the
date and year first above written.


LICENSOR                                    WEST VIRGINIA SYNTHETIC FUEL
                                            #3, L.L.C.
                                            by PACE CARBON SYNFUELS, L.L.C.,
                                            a member
                                            by PACE CARBON FUELS, L.L.C.,
                                            its majority member


By:    /s/ Stanley M. Kimball               By: /s/ James R. Treptow
   ----------------------------                ---------------------------
Name:  Stanley M. Kimball                   Name:  James R. Treptow
Title: Chief Financial Officer              Title:    President

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.





Note:  Executed in substantially  the same form between Carbon Resources, Inc. a
Delaware  Corporation (the "Borrower") by Frederick J. Murrell,  President,  and
Covol Technologies, Inc. (the "Secured Party")

                                                                  Execution Copy

                                 LOAN AGREEMENT

                  This LOAN AGREEMENT (this "Agreement"),  dated as of April 21,
1998, is by and between C.C. Pace Capital,  L.L.C., a Delaware limited liability
company ("Pace Capital" or the "Borrower") and Covol Technologies, Inc. ("Covol"
or the
"Lender").


                              W I T N E S S E T H :

                  WHEREAS, each  of Pace  Capital  and  Carbon  Resources,  Inc.
("Carbon  Resources")  is a member of Pace  Carbon  Fuels,  L.L.C.,  a  Delaware
limited  liability  company which is the General Partner of Pace Carbon Synfuels
Investors, L.P., a Delaware limited partnership (the "Partnership"); and

                  WHEREAS,  the Partnership operates pursuant to the terms of an
Amended and Restated  Agreement of Limited  Partnership  dated as of February 5,
1998 (the "Partnership Agreement"); and

                  WHEREAS,  the Partnership owns 100% of the membership interest
in,  among  other  entities,  PC Virginia  Synthetic  Fuel #1,  L.L.C.,  PC West
Virginia  Synthetic Fuel #1, L.L.C., PC West Virginia  Synthetic Fuel #2, L.L.C.
and PC West Virginia  Synthetic Fuel #3, L.L.C.  (each a "Project  Company" and,
collectively, the "Project Companies"); and

                  WHEREAS,  the Lender has entered  into  Amended  and  Restated
License and Binder Purchase Agreements with each Project Company,  each of which
agreements  was made and  entered  into as of February 3, 1998 and each of which
agreements is herein referred to as a "Licensing Agreement;" and

                  WHEREAS, pursuant to each such Licensing Agreement, the Lender
is  entitled  to  receive  royalties  under the terms  and as  described  in the
Licensing Agreement (the "Royalties"); and

                  WHEREAS,  as a condition to the  execution and delivery of the
Licensing  Agreements,  the Lender  agreed to lend funds to the  Borrower and to
Carbon  Resources to enable the  Borrower  and Carbon  Resources to make capital
contributions to the General Partner; and

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

                  WHEREAS, by a Loan Agreement of even date herewith, the Lender
has agreed to lend funds to Carbon  Resources  on terms  identical  to those set
forth herein (the "Carbon Resources Loan Agreement").

<PAGE>


                  NOW,  THEREFORE,  in  consideration  of the  premises  and the
mutual covenants and agreements herein set forth and for other good and valuable
consideration,  the receipt and sufficiency of which is hereby acknowledged, the
Borrower  and the Lender,  intending  to be legally  bound,  do hereby  agree as
follows:

         Section 1.  Definitions and Terms

         1.1  Definitions.  In addition to the terms defined in the preamble and
recitals  above,  the following  capitalized  terms shall have their  respective
meanings as set forth below:

         "Advance" means each loan to the Borrower made by the Lender under this
Agreement.

         "Commitment" means the sum of $ * as provided in Section 2.1 hereof.

         "Escrow  Account" means the escrow account  described in Section 3.6 of
each of the Licensing Agreements.

         "Event of Default" has the meaning set forth in Section 5.1 hereof.

         "General  Partner" means Pace Carbon Fuels,  L.L.C., a Delaware limited
liability company, the general partner of Pace Carbon Synfuels Investors, L.P.

         "GP's Special Reserve" means the "GP's Special Reserve" as described in
Section 5.12 of the Partnership Agreement.

         "Loan" means,  as of any date,  the  aggregate  amount of Advances made
hereunder on or prior to such date less amounts which have been repaid.

         "Loan Advance Date" has the meaning set forth in Section 2.2 hereof.

         "Loan  Commitment Period"  has the  meaning set  forth in  Section  2.1
hereof.

         "Loan Termination Date" means  June 30, 2008.

         "Maximum Available  Advance" has the  meaning set forth in  Section 2.2
hereof.

         "Note" means the promissory note described in Section 2.5 hereof.

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>

         "Received Royalties" means Royalties paid to or at the direction of the
Lender under any one or more of the  Licensing  Agreements  and, with respect to
Royalties  paid into the Escrow  Account,  such  amounts as are  released to the
Lender.

         "Released  Amounts"  shall have the meaning set forth in Section 2.6(a)
hereof.

         "Royalties"  means  any and  all  Royalty  as such  term is used in the
Licensing Agreements.

         1.2  Other Defined Terms; Rules of Interpretation.

                  (a) For  purposes  of this  Agreement,  all other  capitalized
terms used herein and not otherwise  defined shall have the meanings assigned to
them in the Partnership  Agreement (such definitions to be equally applicable to
both the singular and plural forms of the terms defined).

                  (b) Except as otherwise  provided herein,  any term defined by
reference to an agreement,  instrument or other  document shall have the meaning
so assigned to it as such agreement, instrument or other document may be amended
in accordance  with its terms,  whether or not such document is in effect at the
time of  reference  to such  document.  A reference  to any Person  includes its
permitted  successors and permitted  assigns.  The words "hereof,"  "herein" and
"hereunder"  and words of similar import when used in this Agreement shall refer
to this  Agreement  as a  whole  and not to any  particular  provisions  of this
Agreement,  and section,  schedule and exhibit  references are to this Agreement
unless  otherwise  specified.  Except as otherwise  defined or provided  herein,
accounting  terms shall be construed,  and all financial  computations  shall be
made, in accordance with generally accepted accounting  principles  consistently
applied.

         Section 2.  The Loan

         2.1  Agreement  to Lend.  Subject to the terms and  conditions  of this
Agreement, the Lender agrees to lend to the Borrower, in quarterly installments,
an  aggregate  principal  amount  (excluding  capitalized  interest as described
below) not to exceed * dollars ($ * ) (the "Commitment")  during the period from
and  including  November  1, 1998 to and  including  February 1, 2008 (the "Loan
Commitment Period").

         2.2 Advances.  The Lender agrees that it will, subject to the terms and
limitations set forth below,  make an Advance to the Borrower in the amount of $
* (or such  lesser  amount as the  Borrower  shall  request  or, if the  Maximum
Available Advance, as defined below, is greater than $ *, such greater amount as
the  Borrower  may  request)  on  November  1, 1998 and on the first day of each
February,  May, August and November thereafter during the Loan Commitment Period
(each a "Loan Advance Date").


* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>

         The  Lender's  obligation  to make an Advance on any Loan  Advance Date
shall be subject to the following:

         (a) No  Advance  shall be  required  to the  extent  the amount of such
Advance  would cause the amount of all  Advances  made under this  Agreement  to
exceed  the  lesser  of (i) the  Commitment,  and (ii) the  aggregate  amount of
Received Royalties received by the Lender as of such Loan Advance Date; and

         (b) The Borrower shall have  delivered to the Lender a written  request
for such  Advance at least three (3) days prior to the Loan  Advance  Date,  and
such request shall have stated the amount of the Advance thereby requested.

         If, on any Loan Advance Date, the amount  advanced by the Lender to the
Borrower is less than the Maximum  Available  Advance  (as defined  below),  the
difference  between the Maximum Available Advance and the actual Advance made on
such date  shall be  carried  forward  and shall be  available  on the next Loan
Advance Date. The "Maximum Available Advance" on each Loan Advance Date shall be
amount equal to (i) $ * multiplied by the number of Loan Advance Dates occurring
on or  prior to such  date,  less  (ii) the  aggregate  amount  of all  previous
Advances.

         2.3 Purpose.  Subject to the terms hereof, the proceeds of each Advance
shall  be used by the  Borrower  solely  to make  capital  contributions  to the
General Partner.

         2.4 Interest. Interest shall accrue on the principal amount of the Loan
outstanding  from time to time at a simple annual rate equal to six percent (6%)
per annum.  Interest  shall  compound on the first day of each calendar year and
shall be due and  payable  on the date on which the  principal  amount  advanced
hereunder  becomes due and  payable.  The amount of interest  accrued and unpaid
shall not be  considered  principal  for purposes of  determining  the amount of
Advances made hereunder.

         2.5  Note.

                  (a) The Loan shall be evidenced  by a  promissory  note of the
Borrower  substantially  in the  form of  Exhibit  A  hereto,  with  appropriate
insertions as to date and principal  amount,  payable to the order of the Lender
and in a principal  amount equal to the lesser of (i) the  Commitment,  and (ii)
the aggregate unpaid principal amount of all Advances.

                  (b) The  Lender  is  authorized  to  record,  on the  schedule
annexed to and constituting a part of the Note, or on other appropriate  records
of the Lender,  the date and amount of each Advance,  and the date and amount of
each payment or prepayment of principal  thereof,  and any  recordation  thereof
shall  constitute  prima facie  evidence of the accuracy of the  information  so
recorded;  provided, however, that failure by the Lender to make any recordation
or other error therein shall not

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



limit or otherwise  affect the obligations of the Borrower  hereunder.  The Note
shall be dated the date hereof,  be entitled to the benefits of this  Agreement,
be stated to mature on the Loan Termination Date and provide for the accrual and
payment of interest in accordance with Section 2.4 hereof.

         2.6  Repayment of the Loan.

                  (a) Nonrecourse Obligation. The Lender and the Borrower hereby
agree that any and all amounts due  hereunder or under the Note shall be payable
solely from amounts, if any,  distributed to the Borrower by the General Partner
in respect of amounts  released to the  General  Partner  from the GP's  Special
Reserve as provided in the Partnership  Agreement (amounts so distributed to the
Borrower, "Released Amounts"). The Lender's sole recourse for payment of amounts
due  hereunder  shall be to the Released  Amounts,  if any, and the Lender shall
have no right or  recourse  to payment  from any other  source or from any other
assets of the Borrower or any affiliate of the Borrower,  and the Borrower shall
have no obligation to repay amounts  advanced  hereunder or the interest thereon
from any source of funds other than from the Released Amounts,  if any. Borrower
shall  create  and  maintain  in favor of the Lender a first  priority  security
interest in the Released Amounts.

                  (b) Repayment.  The principal  amount of all amounts  advanced
hereunder  (except to the extent  previously  repaid),  together  with  interest
accrued  and  compounded  but  unpaid,  shall be due and payable on the first to
occur of (i) the Loan  Termination Date and (ii) the next business day following
the date on which the Borrower receives the Released Amounts.

                  (c) Optional  Prepayment.  The  Borrower,  at its option,  may
prepay the loan in whole or in part at any time together with accrued but unpaid
interest  on the  portion  being  prepaid  to the date of such  prepayment,  all
without premium or penalty or other charges.

         2.7 Payment Procedures. All Advances made hereunder shall be payable to
the Borrower in United States dollars by wire transfer of immediately  available
funds no later than 2:00 p.m.  prevailing New York City time on the Loan Advance
Date to such  account as the  Borrower  may from time to time,  by notice to the
Lender, direct, and all sums payable to the Lender hereunder shall be payable in
United States dollars by wire transfer of immediately  available  funds no later
than 2:00  p.m.  prevailing  New York City time on the day on which  such sum is
due,  to such  account  as the  Lender  may from time to time,  by notice to the
Borrower, direct.


* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



         Section 3.  Representations and Warranties of the Borrower

         Borrower hereby represents and warrants to the Lender as follows:

                  (a)  Organization;  Qualification.  The  Borrower is a limited
liability  company duly  organized  and validly  existing  under the laws of the
State of Delaware.  The Borrower is duly  qualified  or  authorized  to transact
business and is in good standing under the laws of all jurisdictions in which it
conducts  business or owns property,  except for  jurisdictions  as to which the
failure to be so qualified or  authorized  could not  reasonably  be expected to
have a material  adverse  effect on the  Borrower  or its ability to perform its
obligations hereunder.

                  (b) Authority;  Enforceability. The Borrower has all requisite
power and authority to own its property and assets,  and to conduct its business
as presently conducted, and has full power and authority to execute, deliver and
perform this Agreement and every other agreement and document to be delivered in
connection  herewith  and  to  perform  all  of its  obligations  hereunder  and
thereunder.  This  Agreement  and  all  other  instruments  to be  delivered  in
connection  herewith by the Borrower  constitute,  or, upon execution thereof by
the Borrower and the other parties  thereto (if any),  will  constitute,  valid,
legal and binding obligations of the Borrower,  enforceable against the Borrower
in  accordance  with the  respective  terms  hereof and  thereof,  except as the
enforceability  hereof or  thereof  may be limited  by  bankruptcy,  insolvency,
reorganization,  moratorium  or other  similar laws relating to or affecting the
rights  of  creditors  generally  or by the  application  of  general  equitable
principles.

         Section 4.  Conditions Precedent

         The obligation of the Lender to make each Advance  hereunder is subject
to (a) the  receipt  by the Lender  from the  Borrower  of a written  request as
provided in Section  2.03  hereof,  and (b) there not then  existing an Event of
Default described below.

         Section 5.  Default and Remedies

         5.1 Events of Default.  The occurrence and  continuation of one or more
of the following  events  (whatever the reason for such event) shall be an event
of default hereunder (each, an "Event of Default"):

                           (a) the  Borrower  shall (i) apply for or  consent to
         the  appointment  of,  or the  taking  of  possession  by, a  receiver,
         custodian,  trustee or  liquidator of itself or of all or a substantial
         part of its property, (ii) make a general assignment for the benefit of
         its creditors, (iii) commence a voluntary case under federal bankruptcy
         laws (as now or hereafter in effect), or (iv) file a

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



         petition  seeking  to take  advantage  of any  other  law  relating  to
         bankruptcy, insolvency,  reorganization,  winding-up, or composition or
         readjustment of debts; or

                           (b) a proceeding or case shall be commenced,  without
         the  application  or consent of the  Borrower in any court of competent
         jurisdiction, seeking (i) its liquidation, reorganization,  dissolution
         or winding-up,  or the composition or  readjustment of its debts,  (ii)
         the appointment of a trustee,  receiver,  custodian,  liquidator or the
         like of the Borrower or of all or any substantial part of its assets or
         (iii) similar  relief in respect of the Borrower under any law relating
         to bankruptcy, insolvency,  reorganization,  winding-up, or composition
         or adjustment  of debts,  and such  proceeding  or case shall  continue
         undismissed,  or an order, judgment or decree approving or ordering any
         of the foregoing shall be entered and continue  unstayed and in effect,
         for a period of 60 or more  days;  or an order for relief  against  the
         Borrower  shall  be  entered  in  an  involuntary  case  under  federal
         bankruptcy laws (as now or hereafter in effect); or

                           (c)      all of the Licensing  Agreements  shall have
         been terminated as a result of the default of the Project Companies; or

                           (d) the Borrower does not apply the Released  Amounts
         to repay the Loan and interest thereon.

         5.2      Remedies.

                  (a) If any Event of Default as  described in Section 5.1 above
has  occurred  and is  continuing  the  Lender's  obligation  to  make  Advances
hereunder shall be suspended until such Event of Default is cured.

                  (b) If, at any time,  an Event of Default  shall have occurred
and be continuing, then the Lender may, without accelerating the maturity of the
loan or taking  any  action to  realize  payment  from any  sources  other  than
Released  Amounts,  take such actions and seek such remedies as may be available
at law or in equity to enforce the Borrower's obligations hereunder.

         Section 6.  Certain Covenants.

         6.1 Covenant of  Borrower.  The  Borrower  covenants  that it will not,
without the prior written  consent of the Lender,  permit the General Partner to
agree to amend Section 5.12 of the  Partnership  Agreement if the effect thereof
would be to expand the  purposes to which  amounts in the G P's Special  Reserve
would be applied.

         6.2      Covenant of Lender.  The  Lender  covenants  that  it will not
without the prior written consent of the Borrower, amend the

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



Carbon  Resources  Loan  Agreement or grant any waivers  thereunder  unless this
Agreement is being  amended  contemporaneously  in the same manner or unless the
same waiver is contemporaneously granted hereunder.

         Section 7.  Amendments and Miscellaneous.

         7.1 Amendments in Writing.  The provisions of this Agreement may not be
waived,  altered,  modified,  amended,  supplemented or terminated in any manner
whatsoever except by written instrument signed by the parties hereto.

         7.2 Notices. All notices,  requests,  consents,  approvals,  elections,
demands  and other  communications  required  or  permitted  under the terms and
provisions hereof shall, unless otherwise specified, be in writing, and shall be
given in person or by means of  registered or certified  mail or by courier,  in
each case  addressed to the parties at the following  addresses or at such other
address as each party may  specify in writing to the other  parties  hereto from
time to time:

Borrower:         C.C. Pace Capital, L.L.C.
                  4401 Fair Lakes Court, Suite 400
                  Fairfax, Virginia  22033
                  Telephone: (703) 818-0022
                  Telecopier: (703) 818-2448

Lender:           Covol Technologies, Inc.
                  3280 North Frontage Road
                  Lehi, Utah  84043
                  Telephone:  (801) 768-4481
                  Telecopier: (801) 768-4483

Any such communication shall become effective upon receipt.

         7.3 Entire Agreement.  This Agreement  constitutes the entire agreement
of the parties  hereto with respect to the subject  matter hereof and supersedes
any prior expressions of intent or  understandings  with respect to such subject
matter.  This  Agreement  may not be altered,  amended,  modified  or  otherwise
changed in any manner whatsoever except by a writing duly executed and delivered
by each of the parties hereto.

         7.4  Severability  of Provisions.  Any provision of this Agreement that
may be determined by competent  authority to be prohibited or  unenforceable  in
any jurisdiction shall not invalidate or render  unenforceable such provision in
any other  jurisdiction.  To the extent permitted by Applicable Law, each of the
parties  hereto  hereby  waives any  provision of law that renders any provision
hereof prohibited or unenforceable in any respect.

         7.5 Limitation of Interest.  Notwithstanding anything in this Agreement
to the contrary, the obligation of the Borrower

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



hereunder to pay interest on the Loan shall be subject to the limitation that no
payment of such  interest  shall be required to the extent that  receipt of such
payment would be contrary to applicable usury laws.

         7.6 GOVERNING LAW;  JURISDICTION.  THIS AGREEMENT  SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF VIRGINIA, OTHER
THAN ANY PROVISION  THEREOF THAT WOULD PERMIT OR REQUIRE THE  APPLICATION OF THE
LAWS OF ANY OTHER JURISDICTION.

         THE BORROWER AND THE LENDER EACH HEREBY IRREVOCABLY AND UNCONDITIONALLY
SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR  PROCEEDING  RELATING
TO THIS AGREEMENT, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT
THEREOF, TO THE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF VIRGINIA,  THE
COURTS OF THE UNITED STATES OF AMERICA FOR THE EASTERN DISTRICT OF VIRGINIA, AND
APPELLATE COURTS FROM ANY THEREOF. EACH WAIVES ANY OBJECTION TO THE VENUE OF ANY
SUCH ACTION OR ANY CLAIM IT MAY HAVE TO FORUM NON CONVENIENS.  EACH PARTY HERETO
AGREES  THAT  SERVICE OF PROCESS IN ANY SUCH ACTION MAY BE EFFECTED BY MAILING A
COPY THEREOF,  REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID,  IN THE MANNER SET
FORTH IN SECTION 7.2 HEREOF AND THAT  NOTHING  HEREIN  SHALL AFFECT THE RIGHT OF
EITHER PARTY TO EFFECT  SERVICE OF PROCESS IN ANY OTHER MANNER  PERMITTED BY LAW
OR SHALL LIMIT THE RIGHT OF ANY PARTY TO SUCH IN ANY OTHER JURISDICTION.

         7.7  Successors  and Assigns.  This  Agreement  shall be binding on and
inure  to the  benefit  of each  of the  parties  hereto  and  their  respective
successors and permitted  assigns.  No party hereto may assign any of its rights
or delegate any of its obligations  hereunder  without the prior written consent
of the non-assigning  party,  which consent shall not be unreasonably  withheld,
except that, with notice to but without need for the consent of the other party,
(a) if the Lender assigns all of its rights and obligations  under the Licensing
Agreements,  the Lender shall assign its rights and  obligations  hereunder (and
under the Note) to the entity  that  assumes  all of its rights and  obligations
under the Licensing  Agreements,  and (b) if the Borrower sells or transfers its
membership interest in the General Partner, the Borrower shall assign all of its
rights and obligations  hereunder to the person assuming its membership interest
in the General Partner,  and any such assignee of the Borrower shall (i) execute
and  deliver  to the  Lender a Note in the form of  Exhibit  A hereto  (and upon
receipt  of such Note,  the Lender  shall  cancel the Note of the  Borrower  and
deliver the cancelled Note to the  Borrower),  and (ii) such assignee shall take
such  measures  as may be  necessary  or  appropriate  (or  as  the  Lender  may
reasonably  request)  to  maintain  for the  benefit of the Lender the  security
interest in the Released Amounts.

         7.8  Headings.  The division of this  Agreement  into  sections and the
insertion of headings are for convenience of reference

* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



only and shall not affect the construction or interpretation of this Agreement.

         7.9 Counterpart Execution. This Agreement may be executed in any number
of counterparts and by each of the parties hereto in separate counterparts,  all
such counterparts  together  constituting but one and the same instrument.  This
Agreement shall be effective,  and shall be binding on any party hereto,  on the
date first above written.

         7.10  Limitation of  Liability.  The repayment of the Loan and interest
thereon shall be payable  solely from Released  Amounts and from no other source
and,  in  addition,  in no event  shall  any  member  in the  Borrower,  nor any
Affiliate thereof, nor any officer, director,  employee or agent of any thereof,
nor any holder of any equity interest in the Borrower or any member or Affiliate
thereof,  be personally liable or obligated for such liabilities and obligations
of the Borrower.



                          [REMAINDER OF PAGE IS BLANK]



* This Exhibit contains confidential material which has been omitted pursuant to
a  Confidential  Treatment  Request  and  replaced  by  asterisks.  The  omitted
information  has  been  filed   separately  with  the  Securities  and  Exchange
Commission.

<PAGE>



                  IN  WITNESS  WHEREOF,  each of the  Borrower  and the  Lender,
intending to be legally bound,  has caused this Agreement to be duly executed by
its representative thereunto duly authorized as of the date and year first above
written.


                           C.C. PACE CAPITAL, L.L.C.,
                                                        as Borrower


                                              By:  /s/ James R. Treptow
                                                   -------------------------
                                                   Name:  James R. Treptow
                                                   Title: President



                            COVOL TECHNOLOGIES, INC.,
                                                        as Lender


                                              By: /s/ Alan D. Ayers
                                                 ------------------------- 
                                                 Name:  Alan D. Ayers
                                                 Title: V.P. Administration

<PAGE>



                                                                    EXHIBIT A TO
                                                                  LOAN AGREEMENT

                                 [FORM OF NOTE]

                                 PROMISSORY NOTE


$ *                                                            Fairfax, Virginia
                                                                  April 21, 1998


                  FOR  VALUE  RECEIVED,  the  undersigned,  C.C.  PACE  CAPITAL,
L.L.C.,  a  Delaware  limited  liability   company  (the   "Borrower"),   hereby
unconditionally  promises to pay to the order of COVOL  TECHNOLOGIES,  INC. (the
"Lender"),  located at 3280 North Frontage  Road,  Lehi,  Utah 84043,  in lawful
money of the United States and in  immediately  available  funds,  the principal
amount  of $ *, or,  if less,  the  aggregate  unpaid  principal  amount  of the
Advances in respect of Loan made by the Lender  pursuant  to the Loan  Agreement
(as hereinafter  defined),  which sum shall be due and payable from time to time
in the amounts and on the dates  specified in the Loan  Agreement.  The Borrower
further  agrees to pay  interest  in like money on the unpaid  principal  amount
hereof  from  time  to  time  outstanding  (including  capitalized  interest  as
specified  in  Section  2.6 of the  Loan  Agreement)  as  specified  in the Loan
Agreement.

                  Capitalized  terms used  herein  without  definition  have the
meanings assigned to them in the Loan Agreement.

         The  holder of this  Note is  authorized  to  record,  on the  schedule
annexed hereto and made a part hereof,  or on other  appropriate  records of the
Lender,  the date and amount of each Advance  pursuant to Loan Agreement and the
date and amount of each payment or  prepayment of principal  thereof;  provided,
however,  that  failure by the  Lender to make any  recordation  or other  error
therein  shall not limit or  otherwise  affect the  obligations  of the Borrower
hereunder.

                  This Note is the Note referred to in the Loan Agreement, dated
as of April 21,  1998,  by and between the Lender and the  Borrower (as the same
may  be  amended,  modified  or  supplemented  from  time  to  time,  the  "Loan
Agreement").  This Note is entitled to the benefits of the Loan Agreement.  This
Note is subject to prepayment as provided in the Loan Agreement.

                  The  obligation of the Borrower is absolute and  unconditional
to pay  the  principal  of and  interest  on  this  Note  at the  place,  at the
respective times, and in the currency herein prescribed. The Borrower waives any
and all right to assert any defense (other than performance hereunder), set-off,
counterclaim or crossclaim of any nature whatsoever with respect to this Note or
the obligations of the Borrower hereunder in any action of proceeding brought by
the Lender to collect this Note,  or any portion  hereof.  The  Borrower  waives
presentment,  demand,  notice,  protest  and all other  demands  and  notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Note.

<PAGE>


                  Recourse for the  liabilities  and obligations of the Borrower
under this Note and the Loan Agreement shall be limited to the Released  Amounts
received by Borrower,  and in no event shall any member in the Borrower, nor any
Affiliate thereof, nor any officer, director,  employee or agent of any thereof,
nor any holder of any equity interest in the Borrower or any member or Affiliate
thereof,  be personally liable or obligated for such liabilities and obligations
of the Borrower.

                  THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND  INTERPRETED
IN ACCORDANCE  WITH, THE LAWS OF THE  COMMONWEALTH  OF VIRGINIA,  WITHOUT GIVING
EFFECT TO ANY PROVISIONS  THEREOF THAT PERMIT OR REQUIRE THE  APPLICATION OF THE
LAWS OF ANY OTHER JURISDICTION.

                                      C.C. PACE CAPITAL, L.L.C.



                                       By:
                                          ------------------------ 
                                          Name:  James R. Treptow
                                          Title: President

<PAGE>
                                                                   Scheduel 1 to
                                                                 Promissory Note

                       SCHEDULE OF ADVANCED AND REPAYMENTS

                                    Date of           Amount
Date of         Amount of           Repayment         of               Notations
Advance         Advance Made        of Advances       Repayment        Made by
- -------         ------------        -----------       ---------        -------

- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----
- -------         ------------        -----------       ---------        ---- ----




Note:  Executed in substantially  the same form between Carbon Resources, Inc. a
Delaware Corporation (the "Borrower") by Frederick Murrell, President, and Covol
Technologies, Inc. (the "Secured Party")

                                                                  Execution Copy

                               SECURITY AGREEMENT

         This SECURITY AGREEMENT (this "Agreement"), dated as of April 21, 1998,
by and between C.C. Pace Capital,  L.L.C., a Delaware limited  liability company
(the "Borrower") and Covol Technologies, Inc. (the "Secured Party").

                             W I T N E S S E T H :

         WHEREAS,   each  of  Borrower  and  Carbon  Resources,   Inc.  ("Carbon
Resources")  is a member  of Pace  Carbon  Fuels,  L.L.C.,  a  Delaware  limited
liability  company which is the general partner (the "General  Partner") of Pace
Carbon  Synfuels   Investors,   L.P.,  a  Delaware   limited   partnership  (the
"Partnership"); and

         WHEREAS,  the Partnership  operates pursuant to the terms of an Amended
and Restated Agreement of Limited  Partnership dated as of February 5, 1998 (the
"Partnership Agreement"); and

         WHEREAS,  the Secured Party has agreed, by a loan agreement dated April
21, 1998 between the Secured Party and the Borrower (the "Loan  Agreement"),  to
lend funds to the Borrower,  such loan being evidenced by a promissory note made
pursuant to the Loan Agreement (the "Note"); and

         WHEREAS,  to secure amounts due under the Note, the Borrower has agreed
to create and maintain in favor of the Secured Party a first  priority  security
interest in certain  contingent  distributions  from the General  Partner of the
Partnership to the Borrower as set forth herein; and

         WHEREAS,  on terms  identical to those set forth in the Loan Agreement,
the Secured  Party has agreed to lend funds to Carbon  Resources,  which also is
executing  on even date  herewith a security  agreement  in favor of the Secured
Party on terms identical to those set forth herein.

         NOW,  THEREFORE,  in  consideration  of the  premises  and  the  mutual
covenants  and  agreements  herein  set forth and for  other  good and  valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Borrower and the Secured Party,  intending to be legally bound,  do hereby agree
as follows:

     1.       Grant of Security Interest.  The obligation to pay any amounts due
under the Note, including interest as set forth therein, owing from the Borrower
to the Secured Party is hereinafter referred to as the "Obligation."


<PAGE>

     As security  for payment  of the  Obligation,  the Borrower hereby assigns,
grants,  and sets over to the Secured  Party,  and agrees that the Secured Party
shall have a first priority security interest in, the following  collateral (the
"Collateral"): all of the Borrower's right, title and interest to and in any and
all  amounts,  if any,  distributed  to the  Borrower by the General  Partner in
respect of amounts released to the General Partner from the GP's Special Reserve
(as defined in Section 5.12(a) of the Partnership  Agreement) as provided for in
Section 5.12(d) of the Partnership Agreement, and any and all proceeds thereof.

     2.        Execution of Financing and  Other Statements;  Power of Attorney.
The  Borrower,  at the time of  execution  of this  Agreement,  will execute and
deliver to the Secured Party a Form UCC-1 showing the Borrower as debtor and the
Secured Party as the secured party and the security  interest in the  Collateral
described  above  and,  at any time and from time to time,  upon  request of the
Secured Party, the Borrower will give,  execute,  file and/or record any notice,
financing statement,  continuation statement,  instrument, document or agreement
that the Secured Party may reasonably consider necessary or advisable to create,
preserve,  continue, perfect or validate the security interest granted hereunder
or which the Secured  Party may  reasonably  consider  necessary or advisable to
exercise or enforce its rights hereunder with respect to such security interest.
Without  limiting  the  generality  of  the  foregoing,  the  Secured  Party  is
authorized  to  file  with  respect  to the  Collateral  one or  more  financing
statements,  continuation statements or other documents without the signature of
the Borrower and to name therein the Borrower as debtor and the Secured Party as
secured party or to correct or complete,  or cause to be corrected or completed,
any financing  statements,  continuation  statements or other such  documents as
have been signed by the Borrower;  provided,  however, that upon final discharge
of the  Obligation by the Borrower,  the Secured Party shall  promptly file such
termination  statements  and other  documents  as are  necessary to evidence the
termination of the security interest granted hereunder.

     3.        Rights and Remedies.


                  (a) All  payments  received by the  Borrower in respect of the
Collateral  shall be received  in trust for the  benefit of the  Secured  Party,
shall be  segregated  from other funds of the  Borrower,  and shall be forthwith
paid over to the  Secured  Party by  deposit  to the  account  specified  by the
Secured Party for payments due under the Loan Agreement.

                  (b) If any Event of Default (as defined in the Loan Agreement)
shall have occurred and be continuing,  then the Borrower shall remain liable to
the Secured Party and any permitted transferee or pledgee of this Agreement, but
only to the extent that the  Obligation  may be satisfied or  discharged  by the
Collateral,  and the Secured  Party may avail  itself of all rights and remedies
granted  hereunder or available to a secured party under the Uniform  Commercial
Code as in force in the  Commonwealth  of Virginia  and in any event  including,
without limiting the generality of the foregoing,  the right to sell, assign and
deliver the  Collateral  or any part thereof at public or private sale  wherever

<PAGE>

the Secured  Party may determine in good faith and at such prices as the Secured
Party may deem best. At any such sale, the Secured Party shall have the right to
purchase the Collateral,  or any part thereof.  The Borrower consents to private
sales so made even  though such sales may be at prices and upon other terms less
favorable than if the Collateral  were sold at public sale. The Borrower  agrees
that the Secured Party shall have no obligation to delay sale of the  Collateral
for the  period  of time  necessary  to  permit  the  offering  and  sale of the
Collateral to be registered for public sale under the Securities Act of 1933, as
amended, and applicable state or local securities or blue sky laws. The Borrower
agrees that private sales made under the foregoing  circumstances will be deemed
to have been made in a commercially  reasonable  manner.  The parties agree that
written  notice  mailed to the Borrower ten (10) business days prior to the date
upon which a private sale or any other  disposition  of the  Collateral  will be
made  shall  constitute  reasonable  notice  (all  other  notices,  demands,  or
advertisement of any kind being hereby expressly waived),  but that notice given
in any  other  reasonable  manner  or at any  other  reasonable  time  shall  be
sufficient.  The Borrower  shall be liable for  reasonable  attorneys'  fees and
legal and other  expenses  incurred by the Secured Party in enforcing any of its
rights or remedies  hereunder,  and without  limiting  the rights of the Secured
Party,  the proceeds of such a disposition  of the  Collateral may be applied in
the Secured Party's discretion to payment of such reasonable attorneys' fees and
legal and other expenses.  The Borrower waives the right to trial by jury in any
action  or  proceeding  instituted  against  the  Borrower  in  respect  of  the
Obligations  or the  enforcement  of any  rights  granted to the  Secured  Party
hereunder.  In addition,  the  Borrower  hereby  acknowledges  that the remedies
provided herein in favor of the Secured Party shall not be deemed exclusive, but
shall be cumulative  and shall be in addition to all other  remedies in favor of
the Secured Party now or hereafter existing by statute, at law or in equity.


<PAGE>



     4.        Consent to  Jurisdiction.  The Borrower and  Secured  Party agree
that all actions or  proceedings  arising  directly,  indirectly or otherwise in
connection  with, out of,  related to or from this Agreement  shall be litigated
only in courts  located in the  Commonwealth  of Virginia,  and the Borrower (i)
consents and submits to the personal  jurisdiction of any state or federal court
located  within  said  state  solely  for the  purpose  of any  such  action  or
proceeding  relating  to this  Agreement,  (ii)  waives any right to transfer or
change the venue of litigation  brought  against the Borrower in any such action
or  proceeding  and (iii)  agrees to service  of process by mail,  to the extent
permitted by law.

     5.        Assignability.  The Secured Party acknowledges  that the security
interest  granted  hereby may not be  pledged,  transferred,  or assigned by the
Secured Party without first obtaining the written consent of the Borrower, other
than to a permitted assignee of the Secured Party's rights and obligations under
the Loan Agreement.  Any attempted pledge,  transfer, or assignment in violation
of the preceding sentence shall be void and without effect.

     6.        Notices. Any  notice, demand  or other  communication  which  any
party  hereto may elect or be  required to give to anyone  interested  hereunder
shall be  sufficiently  given if (i)  deposited,  postage  prepaid,  in a United
States mail box, stamped registered or certified mail, return receipt requested,
addressed  to the  address  for  that  person  then in  effect  under  the  Loan
Agreement, or (ii) delivered personally at such address.

     7.        Severability.  Each provision of this Agreement is intended to be
severable  from each other  provision,  and the  validity or  illegality  of any
portion  hereof  shall not affect the  validity  or  legality  of the  remainder
hereof.

<PAGE>

     8.        Applicable Law. This Security  Agreement shall be governed by and
construed in accordance with the laws of the  Commonwealth  of Virginia  without
giving effect to any conflicts of law principles or cases.

     9.        Limited Recourse. Recourse  for the  repayment of  the Obligation
and  Borrower's  obligations  under  this  Agreement  shall  be  limited  to the
Collateral, and the Borrower shall have no personal liability therefor.

     IN WITNESS WHEREOF,  the undersigned have executed this Agreement as of the
date first set forth above.

                                                  C.C. PACE CAPITAL, L.L.C.
                                                  as Borrower



<PAGE>



                                                  /s/ James R. Teptow
                                                  ------------------------
                                                  Name: James R. Teptow
                                                  Title:   President



                                                  COVOL TECHNOLOGIES, INC.
                                                  as Secured Party


                                                  /s/ Alan D. Ayers
                                                  ---------------------------
                                                  Name:    Alan D. Ayers
                                                  Title:   V.P. Administration



<TABLE> <S> <C>


<ARTICLE>                     5
<LEGEND>
THIS  SCHEDULE  CONTAINS  SUMMARY  FINANCIAL   INFORMATION  EXTRACTED  FROM  THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND
UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE QUARTER ENDED March 31, 1998, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                            SEP-30-1998
<PERIOD-END>                                 MAR-31-1998
<CASH>                                           558,682
<SECURITIES>                                           0
<RECEIVABLES>                                    396,757
<ALLOWANCES>                                           0
<INVENTORY>                                    3,537,855
<CURRENT-ASSETS>                               5,064,122
<PP&E>                                        29,851,003
<DEPRECIATION>                                   774,196
<TOTAL-ASSETS>                                46,905,151
<CURRENT-LIABILITIES>                         10,121,748
<BONDS>                                                0
                                  0
                                          316
<COMMON>                                          10,319
<OTHER-SE>                                    16,360,632
<TOTAL-LIABILITY-AND-EQUITY>                  46,905,151
<SALES>                                                0
<TOTAL-REVENUES>                               5,610,698
<CGS>                                            730,252
<TOTAL-COSTS>                                  3,747,101
<OTHER-EXPENSES>                                (932,037)
<LOSS-PROVISION>                                       0
<INTEREST-EXPENSE>                             1,179,925
<INCOME-PRETAX>                                  931,651
<INCOME-TAX>                                           0
<INCOME-CONTINUING>                              931,651
<DISCONTINUED>                                         0
<EXTRAORDINARY>                                        0
<CHANGES>                                              0
<NET-INCOME>                                     931,651
<EPS-PRIMARY>                                      (0.09)
<EPS-DILUTED>                                       0.08
        

</TABLE>


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