COVOL TECHNOLOGIES INC
10-K, 1999-01-13
BITUMINOUS COAL & LIGNITE MINING
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                  For the fiscal year ended September 30, 1998,

                                       or

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

                  For the transition period from _____ to _____

                         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)

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.001 par value

         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 __

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant as of December 17, 1998 was $59,671,125 based upon the closing
price on the Nasdaq National  Market(R) reported for such date. This calculation
does not reflect a determination that persons whose shares are excluded from the
computation are affiliates for any other purpose.

         The number of shares outstanding of the registrant's common stock as of
December 17, 1998 was 12,494,029.
                           ---------------------------

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions  of the  following  document  are  incorporated  herein  by  reference:
Portions  of  the  registrant's  definitive  proxy  statement  to be  issued  in
connection with registrant's annual stockholders' meeting to be held in 1999.


<PAGE>



                                TABLE OF CONTENTS
                                                                            Page
PART I

     ITEM 1.   BUSINESS......................................................  3
     ITEM 2.   PROPERTIES.................................................... 18
     ITEM 3.   LEGAL PROCEEDINGS............................................. 19
     ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 20

               EXECUTIVE OFFICERS OF THE REGISTRANT.......................... 20

PART II

     ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
               STOCKHOLDER MATTERS........................................... 23
     ITEM 6.   SELECTED FINANCIAL DATA....................................... 25
     ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
               AND RESULTS OF OPERATIONS..................................... 26
     ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..... 32
     ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 32
     ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE............................32

PART III

     ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 32
     ITEM 11.  EXECUTIVE COMPENSATION........................................ 32
     ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 
               MANAGEMENT.................................................... 32
     ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 32

PART IV

     ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS 
               ON FORM 8-K................................................... 33
     SIGNATURES.............................................................. 42

Forward-Looking Statements

Statements  in this Form  10-K,  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 that
could cause actual results to differ from  expectations,  please see the caption
entitled  "Forward Looking  Statements" in Item 1 and 7 hereof.  There can be no
assurance  that the  Registrant's  results of  operations  will not be adversely
affected by such  factors.  Registrant  undertakes  no  obligation  to revise or
publicly   release  the  results  of  any  revision  to  these  forward  looking
statements.  Readers are cautioned not to place undue  reliance on these forward
looking  statements,  which  reflect  management's  opinion  only as of the date
hereof.

                                       2
<PAGE>

                                     PART I


ITEM 1.           BUSINESS

The Company

         Covol Technologies Inc. is a technology  development company focused on
"Recycling Yesterday's Waste into Tomorrow's Resources."(TM)

Company History

         Covol was  originally  incorporated  in  Nevada in 1987  under the name
Cynsulo,  Inc.  Subsequently,  the  company  acquired  all  of  the  issued  and
outstanding shares of McParkland  Corporation and changed its name to McParkland
Properties,  Inc. The purchase of McParkland was rescinded in February 1989, and
the  company's  name was changed to  Riverbed  Enterprises,  Inc.  In 1991,  the
company  acquired   technology   consisting  of  binding  agents  used  to  make
briquettes.  From  1991  to  1995  the  company  focused  on  the  research  and
development  of  binding  agents  principally  for  iron,  coal and  coke  waste
particles. The company's name was changed to Enviro-Fuels Technology in 1991, to
Environmental   Technologies   Group   International   in  1994,  and  to  Covol
Technologies,  Inc. in 1995,  at which time the company  was  reincorporated  in
Delaware.

         In  1995,  management  of Covol  recognized  the  applicability  of its
technology to the production of synthetic fuel. Since 1996, the primary focus of
Covol has been on developing and commercializing the synthetic fuel technology.

Background

         As  a  result  of  efforts  by  government   and  business  to  balance
environmental  concerns  with the needs of business  and  recognize  the need to
efficiently use diminishing resources,  the recycling industry has developed and
pursued many  endeavors to recycle,  recover  and/or  enhance the  usefulness of
wastes and by-products. Covol has developed a family of binder technologies used
to form fine materials from wastes and  by-products  into  briquettes to capture
their inherent resource value.

         Coal  mines,  ferrous  and  non-ferrous  metals  producers,  and  other
industries  produce waste and other by-products.  Cost-effective  processes have
not been  implemented  generally  to capture and use many such  wastes,  despite
their potential  usefulness and potential value. Storage and disposal of many of
these by-products is costly and can be environmentally  harmful.  Covol's binder
technologies  are designed to enable the conversion of by-products from the coal
and metals  industries into valuable fuels and resources.  Covol's primary focus
over the past two years has been the commercialization of the application of its
binder technologies to coal fines.

         Covol's binder technologies are being used to transform coal fines into
a usable  fuel.  Coal  fines are small  particles  of coal  produced  as a waste
by-product of coal production. Coal fines can be found throughout coal producing
regions of the United States and the world.  A recent study of the coal industry
estimated  that  there are more than 2 billion  tons of coal fines  residing  in
waste ponds and landfills in the United States alone. Millions of tons are added
to this amount each year.  Although coal fines have  inherent  fuel value,  they
present recovery and handling  challenges that make it difficult to capture that
value. Covol's binder technologies molecularly bond the coal fines into a formed
fuel.  Because  this  process is  accomplished  through a  significant  chemical
reaction, the resulting product has been classified as a "synthetic fuel" within
the meaning of Section 29 of the U.S.  Internal  Revenue Code. Sales of the fuel
therefore  qualify for a  significant  tax credit.  The  resulting  fuel is more
easily  handled and  transported  than are coal fines.  The  composition  of the
resulting  fuel varies in its potential  heat,  ash and sulfur content and other
characteristics, depending primarily upon the composition of the coal fines used
as feedstock,  and secondarily on the processing of the feedstock.  The possible
end markets for the resulting  synthetic  fuel are as diverse as the markets for
coal. Different end users have different requirements for fuel type and quality,

                                       3
<PAGE>

whether  the fuel be  synthetic  or coal.  The  application  of  Covol's  binder
technologies  can be  customized  to address the specific  needs of  prospective
customers.

         The Covol binder  technologies  can also be used to transform coke dust
into formed coke. Coke, which is processed metallurgical coal, is primarily used
in the iron making  process as a reducing  agent and also as an economical  fuel
source.  Coke dust,  also known as "coke  breeze," is a fine residue  by-product
resulting from the production, handling and storage of coke and is marketable in
its "dust" state because of its high carbon and energy content.  In tests, Covol
has  succeeded  in  aggregating  coke  dust  into hard  briquettes  designed  to
withstand  the  weight,  heat and other  environmental  factors  inside of metal
making furnaces,  which appear potentially  marketable at prices above briquette
production costs.

         The Covol  binder  technologies  can also be used to convert  iron rich
wastes into usable iron.  Mill scale,  bag-house  dust,  furnace  sludge,  blast
furnace dust and other iron rich materials, are all waste by-products created by
steel producers.  These by-products present environmental problems for the steel
industry.  Because of their  high iron  content,  they also have high  potential
value. Approximately 775 million tons of finished steel are consumed annually in
the world with the U.S. producing approximately 100 million tons. The capture of
even a fraction of the waste and other  by-products of this steel  production in
the  U.S.  alone  could  provide  millions  of tons of  feedstock  material  for
processing.   On  a  test  basis,  the  Covol  binder   technologies  have  been
demonstrated to be capable of producing  briquettes  from such steel  production
wastes.  Such briquettes can be further  processed in metal reducing furnaces to
form high  grade  pig iron,  a common  form of feed  material  used in the steel
industry.

         Additional  fuel or  resource  by-products  to which the  Covol  binder
technologies  appear  applicable  after  initial  testing  include:  molybdenum,
silicon  carbide,  grinding swarf,  lead dross,  zinc oxide,  titanium  dioxide,
phosphorous,  and  charcoal.  Briquettes  containing  these  by-products  appear
potentially  marketable to ferrous and non-ferrous metals producers and to other
industrial consumers.

         Except for synthetic  fuel  production,  the Covol binder  technologies
listed above have not been commercially  applied. No assurance can be given that
Covol will be able to implement these applications profitably.

Covol Binder Technologies

         The Covol binder  technologies  are  designed to aggregate  and process
wastes and other  by-products that are in a fine  particulate  state into usable
fuels and  resources in the form of  briquettes,  pellets or  extrusions.  These
technologies   also  provide  a  way  to  "engineer"  fuels  or  resources  with
value-added qualities, such as moisture reduction, elimination or neutralization
of pollutants  such as sulfur dioxide and nitric oxide,  improvement of handling
strength,  reduction of impurities,  and formation into uniform shapes and sizes
to maximize efficiencies in combustion or in processing.  The resulting products
manufactured  using the Covol binder  technologies  are broadly  categorized  as
"engineered fuels" and "engineered  resources" and can be marketed to utilities,
ferrous and nonferrous metal producers, and other major industrial users.

         The Covol binder technologies  chemically bond together fines,  sludge,
and dust such as coal fines, iron production wastes and coke dust that up to now
have been considered by-products and waste materials. The process, in simplified
terms,  mixes the  resource-rich  wastes or other  by-products  with a  chemical
formula. The mixed materials are conveyed into a briquetter,  a pelletizer or an
extruder which utilizes  pressure  together with a chemical reaction to bond and
shape the materials into the desired size and density  required for the specific
application.  The  materials may be processed  further to meet  specific  market
requirements.

         Covol has licensed its  technology to other parties to produce and sell
the  products  manufactured  with  the  Covol  binder  technologies.  Covol  has
contracted with Dow Chemical  Company to produce  chemical binder  materials for
the production of synthetic fuel made from coal fines.  Substantially all of the
equipment and machinery used for producing synthetic fuel is considered standard
or  "off-the-shelf"   and  is  commercially   available  both  domestically  and
internationally.

                                       4
<PAGE>

         Covol has been issued seven U.S.  patents and four foreign  patents and
has other U.S. and foreign patents pending. The patented technology  principally
relates to the  application of Covol's binder  technologies  to iron  production
wastes, coke, coal and other carbon based materials.  Covol is in the process of
expanding  the existing  patents and  applying for new patents  related to waste
recovery  applications.  See "ITEM 1. BUSINESS - Proprietary  Protection"  for a
discussion of Covol's patents, trademarks and other intellectual property.

Business Strategy

         The Covol binder  technologies  represent  the  foundation  for Covol's
business  strategy.  Covol believes that its success depends upon its ability to
engineer  industrial  wastes and other  by-products into  value-added  fuels and
resources.  Covol  has  divided  its  strategy  into  four  general  approaches:
engineered fuels,  engineered resources,  licensing and technology transfers and
strategic acquisitions.

         Engineered Fuels.  Engineered fuels include fuels recovered or enhanced
primarily from carbon based materials.  The Covol binder technologies provides a
use for fuel-rich  wastes and by-products by aggregating  them into a solid form
for improved handling and processing, and by making such modifications as may be
required for a given  application of the resulting  fuel,  for example,  reduced
moisture,  increased  hardness or enhanced  energy content.  Covol's  engineered
fuels include the production of fuel from briquetted  coal fines,  coke dust and
silicon carbide.

         For the past two  years  Covol's  business  strategy  has been  focused
almost  exclusively upon synthetic fuel from coal fines.  There are currently 24
synthetic  fuel  facilities  located  in 8  states  that are  utilizing  Covol's
synthetic fuel  technology.  Twenty of the facilities are owned by  unaffiliated
third parties and four are currently owned by Covol.  Two of the four facilities
owned by Covol are under options to sell to licensees  that would be expected to
pay  royalties  to  Covol.  Covol  does  not  expect  one of the  options  to be
exercised.  Covol is actively  pursuing the sale of the four  facilities.  Covol
intends  to sell all or part of each  facility  that  Covol  owns.  Covol has no
current  ability to use the potential tax benefits that Covol's  facilities  can
produce.

         Most of the  synthetic  fuel  facilities  were  initially  placed  into
operation in the second calendar quarter of 1998 and Covol and its licensees are
currently in the process of ramping up production  and entering  into  contracts
for product  sales.  Covol is working  with its  licensees  to secure coal fines
feedstock,  improve production and refine its chemical  formulas.  Covol and its
licensees are also negotiating  sales and marketing  contracts for the synthetic
fuel. Several of the owners of facilities are building or contemplating building
wash plants to wash the coal fines which are then processed into synthetic fuel.
Feedstock  supply,  production  and  product  quality and the  marketing  of the
synthetic  fuel all  directly  affect the amount and timing of  royalties  to be
received by Covol from the synthetic  fuel  facilities.  Accordingly,  assisting
licensees to optimize the production from these facilities is currently  Covol's
highest priority.

         Covol has received  one-time  advance license fees with respect to most
of the synthetic fuel facilities. In the future, most of the revenues related to
such  facilities are expected to come from royalties that are tied to production
and sale of synthetic fuel pursuant to licensing agreements in place. Covol also
expects  to  generate  net  revenues  from the sale of binder  materials  to the
facilities.

         Covol believes that the Covol binder  technologies  may also be applied
profitably  without the benefit of a tax credit.  There are  millions of tons of
coal fines in the U.S. and internationally  that could be washed and briquetted,
and,  in the  opinion  of Covol,  sold at a  reasonable  profit  above the fines
purchase and processing costs.  Additionally,  the Covol binder technologies are
well-adapted  to the  processing  of "ultra  fines," the face powder  sized coal
fines created in preparing coal for industrial use. Ultra fines can be recovered
by equipping  coal  preparation  facilities  with modern float cell  technology.
These  ultra  fines  have  historically  been  slurried  into  waste  ponds and,
depending upon the preparation facility,  might constitute as much as 10% of the
processed  coal.  The Covol binder  technologies  allow for the recovery of such
fines by removing the high levels of moisture they contain and forming them into
a solid product that can be handled and sold.  Finally,  there are certain coals
with high  inherent  moisture  levels,  such as Powder  River Basin  coals.  The
processing  of these  coals with the Covol  binder  technologies  may reduce the
moisture   levels,   thus   increasing   heat  content,   improving   combustion
efficiencies, and

                                       5
<PAGE>

reducing  transportation  costs because of the reduced weight.  Covol intends to
aggressively pursue these and other similar synthetic fuel applications.

         Another  engineered fuel application Covol is pursuing is coke. Coke is
processed metallurgical coal which serves as both a fuel and a reducing agent in
iron and steel  making.  The  production  and  handling  of coke  produces  fine
particles of coke dust. The  aggregation of coke dust into  briquettes  that are
designed to withstand  the rigors of  handling,  heat and weight in metal making
furnaces results in a useable fuel. Covol has patented  technology and is in the
process of  patenting  additional  technology  related to coke dust  processing.
Covol has acquired property where coke and coke dust has been landfilled.  Covol
intends to recover  this coke and to briquette a portion of it for use as a fuel
as described above.

         Silicon carbide is a product  manufactured from a blend of carbon based
materials  and  high  silica  sand.  In  addition  to its  principle  use in the
abrasives industry,  silicon carbide is also used as an alloy and a high-quality
fuel in specialized metal making applications. This application is covered under
existing and applied-for  patents.  Covol has not yet applied the aggregation of
silicon carbide in a full-scale operation.

         Engineered Resources. Steel mills, nonferrous metal producers and other
mineral  industries  produce  wastes  and  other  by-products  that may  contain
valuable  unrecovered   resources.   These  wastes  often  create  environmental
compliance, storage and disposal problems. The Covol binder technologies provide
a way to solve disposal problems,  extract the inherent  resources,  process the
materials  with  current  industrial  methods,  and enhance the  materials  with
qualities that add value and that customize the materials for alternative  uses.
The resulting products are collectively  referred to as "engineered  resources."
Covol  has not  yet  commercially  applied  the  Covol  binder  technologies  in
engineered  resources.  However,  Covol has  devoted  significant  research  and
development  resources to improving  and  perfecting  its  technology  for these
applications, particularly in the processing of iron production wastes.

         During the steel-making process, steel mills produce, among other waste
by-products,   small  particles  of  iron-rich   materials.   The  Covol  binder
technologies  are able to bind  such  particles  into  briquettes  which  can be
further  processed in reducing furnaces to reclaim the iron and other materials.
Covol  believes  that  products  produced  from such wastes could be marketed at
prices which are competitive with other sources of iron and that this technology
will be  attractive in  addressing  the  environmental  issues  surrounding  the
disposal of waste by-products generated in the steel making process.

         Covol will seek to enter into collaborative arrangements with steel and
iron producers to build, equip and operate  briquetting and processing plants at
the producers'  facilities.  Covol believes that such  arrangements will benefit
both Covol and the metal producers because they will:

o        provide Covol  with  an  ongoing  supply of  inexpensive  iron  tailing
         materials while ensuring a ready customer for the briquettes produced;

o        provide the steel producer with an economical means to dispose of waste
         materials  while  providing a ready  source of  briquettes  and/or iron
         feedstock; and

o        minimize transportation costs for waste by-products,  raw materials and
         briquettes,  thereby increasing the economic competitiveness of Covol's
         products.

         Covol has  developed  and  tested  its  technologies  with  other  fine
particulate  wastes  and  other  by-products,  including:  molybdenum,  titanium
dioxide,  grinding swarf, lead dross, zinc oxide and phosphorous.  Covol intends
to continue to evaluate these and other engineered resource applications.

         Licensing and Technology Transfer. Covol believes that the Covol binder
technologies  include  valuable  intangible  properties  in the form of patents,
processes,  formulations and know-how. Covol intends to devote significant human
and capital  resources in the continued  development  and  refinement of various
applications of these technologies.  Covol hopes to augment its own efforts with
technical support from major suppliers of binding

                                       6
<PAGE>

materials.  Covol has entered into licensing  agreements  with third parties for
the use of its  synthetic  fuel  technology.  Covol  intends to actively  pursue
additional  licensing,  joint venture and other collaborative  arrangements with
coal,  coke,  ferrous  and  non-ferrous  metals  producers  and  other  resource
producers to utilize Covol's technologies in recycling,  recovering or enhancing
fuels and resources from wastes and other  by-products,  both  domestically  and
worldwide.

         Strategic Acquisitions. Covol believes that it has a unique opportunity
to  pursue   acquisitions  that  are  synergistic  with  Covol's  financial  and
environmental  objectives and initiatives.  The Covol binder technologies may be
applied to waste streams that are otherwise of little or no value. Covol intends
to pursue possible acquisitions of businesses aligned to the industries in which
the Covol binder technologies may be applied.

         Covol  intends to broaden its position in the  synthetic  fuel industry
and  other  resource   industries   through  the  acquisition  or  licensing  of
technologies that are complementary to the Covol binder technologies.

Subsidiaries

         Covol has organized various special purpose entities to facilitate some
of the transactions  relating to the 24 synthetic fuel facilities.  The entities
are listed with  Covol's  position and interest in the entity as of December 31,
1998 described as follows:

o        Alabama Synfuel #1 Ltd., a Delaware limited  partnership of which Covol
         serves as general partner and owns 98%

o        Utah Synfuel #1 Ltd., a  Delaware limited  partnership of  which  Covol
         serves as general partner and owns 100%

o        Flat Ridge Corporation, a Utah  corporation, a  wholly-owned subsidiary
         of Covol

o        Commonwealth Synfuel, L.L.C., a Utah limited liability company of which
         Covol is managing member and owns 100%

         The following chart illustrates  Covol's corporate  structure.  Covol's
ownership of each subsidiary is 100% unless otherwise indicated.



                      [CHART OMITTED DESCRIBED AS FOLLOWS]

[Chart with box centered containing the word "Covol." A line is drawn proceeding
down from that box which divides into four branches, each of which terminates in
one of four boxes, all aligned horizontally, labeled respectively as follows:

o        Alabama Synfuel #1 Ltd. (98% owned)

o        Utah Synfuel #1 Ltd.

o        Flat Ridge Corporation

o        Commonwealth Synfuel, L.L.C.]


Tax Credits

         Section 29 of the U.S.  Internal Revenue Code provides a credit against
regular  federal  income  tax with  respect  to sales  of  qualified  fuel to an
unrelated  party.  Where  more than one person has an  interest  in a  qualified
facility,  the  Section 29  Credits  generated  by the  facility  are  allocated
pursuant to the proportional interests of such persons in the facility.

                                       7
<PAGE>


         In order to qualify as a solid  synthetic  fuel  produced from coal for
purposes of the Section 29 credit,  the fuel produced must differ  significantly
in  chemical  composition,  as opposed  to  physical  composition,  from the raw
material used to produce it. Covol has received a Private Letter Ruling, or PLR,
from the IRS in which  the IRS,  based on  representations  made to it by Covol,
ruled that the synthetic fuel technology produces a significant  chemical change
compared to coal fines and this  qualifies the end product as a solid  synthetic
fuel. Accordingly the IRS has ruled, based on the facts presented to it, that:

o        Covol, with  the use  of its  patented process,  produces a  "qualified
         fuel" within the meaning of Section 29 of the tax code; and

o        assuming the other  requirements of Section 29 are met, the sale of the
         "qualified  fuel" will entitle  Covol to claim the Section 29 credit in
         the taxable year of sale.

         In its ruling,  the IRS noted that no  temporary  or final  regulations
pertaining  to one or more of the issues  addressed in the PLR have been adopted
and that the PLR would be modified or revoked by the  adoption of  temporary  or
final  regulations  to the  extent the  regulations  are  inconsistent  with any
conclusions  in the PLR.  The IRS notes,  however,  that a PLR is not revoked or
modified retroactively, except in rare and unusual circumstances, provided that:

o        there has been no misstatement or omission of material facts,

o        the facts at the time  of the transaction are  not materially different
         from the facts on which the PLR was based,

o        there has been no change in the applicable law,

o        the PLR was originally issued for a proposed transaction and

o        the  taxpayer  directly  involved  in the PLR  acted  in good  faith in
         relying on the PLR, and revoking the PLR retroactively  would be to the
         taxpayer's detriment.

         Covol  received  its PLR in  September  1995.  At least six other  PLRs
covering  twelve of the synthetic  fuel  facilities  have been obtained by third
parties in  connection  with  licenses  of Covol's  synthetic  fuel  technology.
However,  all  PLRs are only  binding  with  respect  to the  specific  projects
addressed  in the PLR and may only be relied on by the party  that has  obtained
the PLR.  The  Section  29 credit is subject to the  passive  activity  rules of
Section 469, and therefore may not be available to individuals  and closely held
corporations.

         The Section 29 credit is equal to  approximately  $6.10 in 1997 dollars
for each oil barrel  equivalent of the qualifying  fuel produced and sold.  This
equates to  approximately  $20.00-$28.00  per ton of synthetic fuel  briquettes,
depending  upon the  recoverable  heat  content.  The oil barrel  equivalent  is
defined  generally as an amount of fuel having a recoverable heat content of 5.8
million  Btu's.  The  Section 29 credit  allowed  may not exceed the  taxpayer's
regular tax  liability  reduced by certain other  credits.  The credit cannot be
utilized to offset the Alternative Minimum Tax.

         The Section 29 credit was designed to provide protection for qualifying
fuels against market price declines,  and it is therefore subject to a phase out
after the  unregulated  oil price  reaches  specified  levels  under an annually
adjusted  formula.  In 1997  dollars,  the credit  would have phased out had the
reference  price for oil exceeded  $47.78 per barrel,  but the  reference  price
determined for 1997 was $18.92 and no phase out occurred.  There presently is no
reference  price for 1998.  However,  the average  price of oil in the U.S.  was
lower in 1998 than 1997.  The credit is also subject to reduction  insofar as an
otherwise  qualifying  facility  benefits  from grants or  subsidized  financing
provided  by  federal,  state  or local  governments,  or from  tax-exempt  bond
financing.

                                       8
<PAGE>

         Section 29 of the tax code  contains  no  provision  for  carryback  or
carryforward of Section 29 credits.  Once earned, the credits are not subject to
subsequent  recapture.  By virtue of the various  limitations  and other factors
described  above,  there  can be no  assurances  that any  particular  amount of
Section 29 credit will be allowable and usable.

         During 1996,  certain of the time periods  applicable to the Section 29
credit  were  extended.  The  Section 29 credit  will,  under  present  law,  be
available for sales of qualified  fuels  completed  before  January 1, 2008. The
qualified  fuels sold must be produced at  facilities  placed in service by June
30, 1998. The synthetic fuel facilities must have been constructed pursuant to a
binding written contract in effect as of December 31, 1996.

Synthetic Fuel Manufacturing Facilities

         The  following  table  represents  a summary of the 24  synthetic  fuel
manufacturing  facilities  constructed  and placed in operation  before June 30,
1998 by Covol and its licensees.
<TABLE>
<CAPTION>

                                               SYNTHETIC FUEL MANUFACTURING FACILITIES


                         No. of                                                                                Annual Rated
  Name of Facility       Plants1    Location           Owner/Licensee2          Operator                      Capacity (tons)3
  ----------------       -------    --------           ---------------          --------                      ----------------
<S>                       <C>      <C>                 <C>                      <C>                              <C>    
Utah Synfuel #1             1      Price, Utah          Coaltech No. 1          Company                            360,000
                                                        L.P.4
Carbon Synfuel              1      Price, Utah          Company5                Company                            360,000
Mohave Synfuels             1      Laughlin,            Savage Industries       Flyash Haulers,                    280,000
                                   Nevada               Inc.                    Inc.
Birmingport                 1      Mulga,               Birmingham Syn          Birmingham Syn                     360,000
                                   Alabama              Fuel, L.L.C.7           Fuel, L.L.C.
Brookwood                   1      Brookwood,           PacifiCorp Syn          PacifiCorp Syn                     360,000
                                   Alabama              Fuel, L.L.C8            Fuel, L.L.C.
Pumpkin Center              2      Flat Creek,          PacifiCorp Syn          PacifiCorp Syn                     720,000
 #1 & #2                           Alabama              Fuel, L.L.C.            Fuel, L.L.C.
Norton                      1      Norton,              PC Virginia             Constellation                      600,000
                                   Virginia             Synthetic Fuel #1,
                                                        L.L.C.
Chelyan                     1      Chelyan, West        PC West Virginia        Constellation                      600,000
                                   Virginia             Synthetic Fuel #1,
                                                        L.L.C.
Muddlety                    1      Muddlety, West       PC West Virginia        Constellation                      600,000
                                   Virginia             Synthetic Fuel #2,
                                                        L.L.C.
Eckman                      1      Eckman, West         PC West Virginia        Constellation                      600,000
                                   Virginia             Synthetic Fuel #3,
                                                        L.L.C.
Appalachian                 2      Peccus, West         Appalachian             AT Massey                          720,000
 Synfuel                           Virginia             Synfuel, L.L.C.
Mountaineer                 1      Tallmansville,       Company6                Savage                             360,000
 Synfuel                           West Virginia                                Industries Inc.
Pocahontas                  1      North Fork,          Company                 Company                            360,000
 Synfuel                           West Virginia


                                       9
<PAGE>

Ginger Hill                 1      Ginger Hill,         Ginger Hill             Maple Creek                        300,000
                                   Pennsylvania         Synfuels, L.L.C.        Mining
Robena                      1      Paisley,             Robena, L.L.C.          Consolidation                      580,000
                                   Pennsylvania                                 Coal
Commonwealth                1      Karthaus,            Company                 River Hill Coal                    360,000
 Synfuel                           Pennsylvania
Pennsylvania                1      Somerset,            Somerset Fuels,         Somerset Fuels,                    600,000
 Synfuel Project                   Pennsylvania         L.L.C.                  L.L.C.
USA Coal, #1,               4      Pawnee, Illinois     A.J.G. Financial        USA Coal                         1,440,000
#2, #3, & #4                                            Services, Inc.
Pleasant Ridge              1      Alledonia, Ohio      Pleasant Ridge          Ohio Valley                        340,000
                           ---                                                                                  ----------
                                                        Synfuels, L.L.C.        Coal
Total                      24                                                                                    9,900,000
                          ====                                                                                   =========
</TABLE>


1    A plant is a finished  synthetic fuel  manufacturing  facility  constructed
     pursuant  to a binding  construction  agreement  entered  into on or before
     December 31, 1996.

2    Most  owners/licensees are special purpose  entities owned by  one or  more
     other companies.

3    This is an amount as engineered and determined by equipment  manufacturers.
     Most  facilities  are not yet  operating  at  rated  capacity.  There is no
     assurance that the facilities will operate at rated capacity in the future.

4    Coaltech  No.  1  L.P.  consists  of  AJG  Financial   Services,   Inc.,  a
     wholly-owned subsidiary of Arthur J. Gallagher & Co., and Square D Company,
     a wholly-owned  subsidiary of Groupe Schneider,  as limited  partners,  and
     Covol as 1% general partner.  Covol has entered into an operating agreement
     with Coaltech to operate the Utah Synfuel #1 facility.

5    Covol granted  Coaltech an option  to purchase the  facility, but  does not
     expect the option to be exercised.

6    Covol  granted  Mountaineer  Synfuel,  L.L.C.  an  option to  purchase  the
     facility,  which  option  expires  in January  1999.  The  purchase  option
     transaction  for  the  Mountaineer  facility  provides  that  Covol  is the
     managing member of Mountaineer Synfuel, L.L.C.

7    Birmingham  Syn  Fuel, L.L.C.  is  an  affiliate  of  PacifiCorp  Financial
     Services, Inc.

8    PacifiCorp  Syn  Fuel, L.L.C.  is  an  affiliate  of  PacifiCorp  Financial
     Services, Inc.


     Covol Contracts.  Consistent with the requirements for obtaining Section 29
tax  credits,   in  December  1996  Covol  entered  into  fourteen   design  and
construction  agreements for the design and  construction  of new synthetic fuel
manufacturing  facilities each having capacity of approximately 360,000 tons per
year.  Depending  upon the specific  agreement,  the  contractor was either TIC,
CEntry Constructors & Engineers,  PICOR or Centerline  Engineering  Corporation.
The PICOR  contracts  were part of a joint venture with Savage  Industries.  The
construction agreements,  among other things, required that the plants be placed
in service no later than June 30, 1998.

     Covol obtained financing and successfully  constructed five facilities from
its construction  agreements.  Of these, one was built by TIC for Covol and sold
to Birmingham  Syn Fuel,  L.L.C.,  a special  purpose entity owned by PacifiCorp
Financial  Services,  Inc., two were built for Covol by Centerline and are under
option for sale to Mountaineer  Synfuel,  L.L.C. and to Coaltech No. 1 L.P., and
two were built by TIC and are held for sale by Covol.

                                       10
<PAGE>


     Covol  assigned four other  construction  agreements to licensees and those
licensees successfully constructed four facilities as follows:

     Fluor  Corporation.   Covol  assigned  two  of  its  fourteen  construction
agreements to Appalachian  Synfuel  L.L.C.,  a wholly owned  subsidiary of Fluor
Corporation.  The  facilities  were built at A.T.  Massey Coal  Company,  Inc.'s
Marfork  Prep  Plant  Site near  Peccus,  in Boone  County,  West  Virginia.  In
conjunction  with the  assignment  of the two  contracts,  Covol  entered into a
license agreement with Appalachian for the use of the Covol binder technologies.
Under the agreement,  Covol was paid an advance license fee. A quarterly license
fee is also to be paid based upon the Btu of product  produced  and sold up to a
prescribed  amount of production per year.  Covol also granted  Appalachian  the
right to pay a lump sum payment for the facilities, in lieu of quarterly license
fees over the term of the  agreement.  Covol will provide binder to the facility
on a cost plus basis.

     Pelletco  Corporation.  Covol assigned two of its  construction  agreements
with Centerline to affiliates of Pelletco Corporation. One contract was assigned
to Pleasant Ridge Synfuels,  L.L.C.  which  constructed a facility in Alledonia,
Ohio.  One  contract  was  assigned  to  Ginger  Hill  Synfuels,   L.L.C.  which
constructed a facility at Ginger Hill,  Pennsylvania.  In connection  with these
two facilities,  Covol entered into technology  license and agreements to supply
Covol's  chemical  binder,  providing  Covol  with  advanced  license  fees  and
quarterly  license fees equal to 50% of the licensees' net cash flow. Covol will
provide binder to the two facilities on a cost plus basis.

     Unused Contracts. Covol did not build facilities under five of its fourteen
construction  agreements,  including the two PICOR  contracts as part of a joint
venture  with  Savage  Industries.  The  construction  agreements  provided  for
penalties  if the  construction  was not pursued by Covol.  Covol  accrued  this
liability  during  the  fiscal  year  ended  September  30,  1997,  of which the
remaining  liability at  September  30, 1998 is $755,000.  Covol  believes  that
construction under any of the five unused contracts is not likely.

     Additional  Licensed  Facilities.   In  addition  to  the  nine  facilities
constructed under Covol's construction agreements, Covol licensed its technology
to eight licensees for use at fifteen facilities constructed by these licensees.

     In total,  Covol has licensed or constructed  plants using the Covol binder
technologies at 24 synthetic fuel facilities that operate at 18 locations in the
Rocky  Mountain  region,  Southern  Appalachia,  Central  Appalachia,  Northeast
Appalachia,  Northwest Appalachia, and the Illinois Basin, which are the primary
coal supply regions of the United States.

     A facility  generally  consists of a  conditioner  and binder  additive and
mixing system,  briquetting or aggregating equipment, a product dryer, and other
supporting  systems.  However,  each facility was  individually  engineered  and
constructed,   including  systems  and  components  specially  selected  by  the
respective  owners,  so that there is  variation  in features  from  facility to
facility.  Covol has manufactured and sold binder mixing plants for installation
at synthetic fuel  manufacturing  facilities.  Six such plants were manufactured
and sold in 1998.

     License and Binder  Supply  Agreements.  All  non-Covol  entities that have
constructed or own facilities using the Covol binder  technologies  have entered
into a technology  license and binder supply agreement with Covol.  Most license
agreements  provide  for an  advance  license  fee of  $1.39  per  ton of  rated
capacity,  payable upon reaching project milestones.  Covol has received most of
the advance license fees related to these facilities.  In addition,  pursuant to
the license  agreement,  the licensee pays a quarterly  earned  license fee at a
prescribed dollar amount multiplied by the recoverable heat denominated in Btu's
in the product  produced and sold during the calendar  quarter.  The  prescribed
dollar  amount is subject to  adjustment  based upon the  "inflation  adjustment
factor" as set forth in Section 29 of the tax code. In some cases, the amount to
be paid is subject to adjustment to the extent that licensees incur an operating
loss on the  production  and sale of  synthetic  fuel,  exclusive  of the amount
licensees  pay as a  license  fee for the use of the  technology.  Some  license
agreements  also provide for a goal fee based on time  schedules and  production
amounts. The license agreements generally have a term until the later of January
1, 2008 or the corresponding  date after which tax credits may not be claimed or
are not otherwise available under Section 29 of the tax code.

                                       11
<PAGE>

     Covol also agreed,  pursuant to the binder  supply  agreements,  to provide
binder  material to licensees for the  manufacture  and  production of synthetic
fuel. The price for the binder sold to the licensees falls into two categories:

o    a fixed price, or

o    an amount equal to Covol's cost plus a prescribed mark-up.

     In some cases, the mark-up may be reduced to the extent the licensee incurs
a loss on the production and sale of synthetic  fuel, but not below Covol's cost
for such binder materials.  The binder is currently manufactured by Dow Chemical
Corporation for Covol  utilizing  Covol's  patented and proprietary  technology.
Covol arranges with Dow for shipping of the binder directly to the facilities.

     Pace Loan. In December of 1996 Covol entered into license  agreements  with
affiliates of Pace Carbon Fuels, L.L.C. (collectively "Pace") for the use of the
Covol binder technologies at four synthetic fuel manufacturing  facilities owned
by Pace. In 1998 Pace requested a reduction in the license fees payable to Covol
under the license  agreements.  Upon  condition of immediate  payment by Pace of
advance  license fees,  Covol agreed to a reduction in future license fees. This
reduction was accomplished by a ten year loan agreement whereby Covol would loan
to Pace up to $750,000 each quarter beginning in November 1998.  Covol's loan to
Pace will be repaid at the end of the ten years only if the Pace  projects  have
accumulated  sufficient  prescribed  earnings.  Pace  has  requested  a loan  of
$750,000 for the November  1998  quarter.  Covol  believes that its current loan
obligation  to Pace is limited to the earned  license  fees payable to Covol for
the quarter  ended  September  30, 1998,  which is believed to be  approximately
$300,000.  Pace and  Covol  are  negotiating  in an  attempt  to  resolve  their
differences.

Covol Synthetic Fuel Facility Operations

     Covol is the operator at three facilities: Utah Synfuel #1, Carbon Synfuel,
and Pocahontas  Synfuel.  Of these  facilities,  Utah Synfuel #1 is not owned by
Covol, and Covol operates the facility under agreement with the owner, Coaltech.
The operating agreement provides that Covol will act as operator of the facility
for a quarterly  fee based upon the amount of synthetic  fuel  produced and sold
per year. Covol cannot predict with any certainty the amount of fees that may be
generated under its operating agreement.

     Covol  has  contracts  with   independent   operators  to  operate  Covol's
Commonwealth Synfuel and Mountaineer Synfuel facilities. River Hill Coal Company
operates the  Commonwealth  facility  and Savage  Industries  Inc.  operates the
Mountaineer  facility.  Both operating contracts  compensate the operator with a
prescribed fee plus reimbursement of costs.

Supply of Raw Materials

     The synthetic fuel  manufacturing  facilities use coal fines as the primary
feedstock  to produce  synthetic  fuel.  Accordingly,  a supply of coal fines is
essential to the feasibility of a synthetic fuel manufacturing facility.

     Historically,  lower quality coal and mining  refuse and fine  particles of
coal were discarded into refuse piles or impoundments.  Today,  coal preparation
and  material  handling  technologies  have  reduced  the amount of coal that is
discarded,  but coal fines  generated by coal mining and  preparation  are still
problematic for the industry.  With some variation,  most consumers of coal only
purchase  coal with an ash  content  of 12% or less.  Discarded  coal  fines are
typically  too  high  in ash  content  to be used  as-is  in  making  marketable
synthetic fuel. To make use of fine coal refuse, owners of synthetic fuel plants
must either  blend the refuse with "clean" coal in  appropriate  proportions  to
yield an acceptable ash content, and/or clean the coal refuse itself. Clean coal
can be  purchased  from  traditional  coal  marketers  and is  available  to all
synthetic  fuel  facility  owners that have a clean  coal/coal  refuse  blending
strategy. Covol's strategy at all of the facilities it owns or operates includes
clean coal/coal refuse blending.

      Coal  fines  cleaning  is  a  distinct  technology  and  to  implement  it
successfully  requires  analysis  of the  particular  coal  refuse to  determine
appropriate  plant design and to determine whether feedstock can be economically
produced.  Capital requirements for coal cleaning or preparation plants adequate
to supply a synthetic fuel plant can

                                       12
<PAGE>

be in excess of $4 million.  Coal cleaning  plants require six months or more to
design and  construct.  A  feasibility  analysis  must be performed to determine
whether  the  savings  achieved  by the  plant  justify  the  capital  costs  of
construction   together  with   operational   costs,   which  can  vary  between
approximately  $5-10 per ton. The costs of a cleaning  plant are compared to the
alternative of purchasing  clean coal for blending.  The decision to construct a
coal cleaning  plant does not delay delivery of synthetic fuel to market because
in all cases clean  blending  coal is  available  to  purchase  as an  immediate
alternative.  The decision to construct a coal cleaning  plant is based on how a
facility most  economically  obtains clean feedstock.  Covol  constructed a coal
cleaning plant to supply Utah Synfuel #1 and Carbon Synfuel and is reviewing the
feasibility of coal cleaning plants at two other synthetic fuel facilities.

     In facilities owned and operated by licensees, the licensee secures its own
supply of coal fines.  Licensees that are also coal producers  utilize their own
feedstock sources. Nonproducer licensees secure deposits of coal fines to supply
their  facilities.  Covol has  arranged  for the  supply  of coal  fines for the
following facilities it owns or operates:

     Utah Synfuel #1 and Carbon Synfuel.  In February 1997, Covol entered into a
contract  with a  non-affiliated  party,  Earthco,  to acquire coal fines and to
lease  property  to conduct  fines  recovery  and  preparation  activities  at a
location near Wellington,  Utah,  approximately  six miles from the Utah Synfuel
plant site.  Covol paid an initial amount to Earthco upon execution of the lease
agreement to acquire the fines and lease the  associated  land and will continue
to make quarterly  payments  through May 2000.  Covol  constructed a preparation
plant at the site  which  became  operational  in May  1998 and  which  produces
feedstock from the acquired raw fines for the Utah Synfuel #1 and Carbon Synfuel
facilities.  The estimated quantity of coal fines at this site is in excess of 2
million tons although the recoverable amount may be less.  Additional fines will
be required to supply the longer term requirements of Utah Synfuel #1 and Carbon
Synfuel.

     Pocahontas  Synfuel.  In May 1997,  Covol entered into a joint venture with
Black Diamond Enterprises,  Inc. under which Black Diamond has certain rights to
market the  synthetic  fuel  produced at the facility and to a percentage of the
net proceeds received by Covol from the project.  In addition,  Black Diamond is
to provide coal fines to the Pocahontas Synfuel facility. Black Diamond owns the
land in McDowell  County,  West Virginia upon which the  Pocahontas  facility is
located and which land includes a fines pond and other coal refuse containing an
estimated 1.2 million tons of recoverable  clean fines.  Black Diamond and Covol
plan to construct a preparation  plant to clean the raw Black Diamond fines.  To
date,  neither Covol nor Black Diamond have begun  construction of a preparation
plant.  In addition to the fines at the  Pocahontas  site, an affiliate of Black
Diamond operates a waste coal recovery  operation with an estimated 350,000 tons
of  recoverable  clean fines.  Covol has also acquired waste coal on a site near
the project with an estimated  500,000 tons of  recoverable  clean fines.  After
cleaning,  the coal fines from these reserves are high in recoverable  heat, low
in ash, and low in sulfur. Until a preparation plant can be permitted,  financed
and constructed at Pocahontas, Covol is purchasing coal fines from local sources
for processing at the facility.

     Commonwealth.  The  Commonwealth  Synfuel  facility  is located on property
owned by River Hill Coal Company,  Inc. River Hill has  approximately  6 million
tons of leased and permitted coal reserves which it actively  mines.  River Hill
has agreed to provide up to 400,000  tons per year of coal fines from its mining
and preparation plant operations to the Commonwealth facility.  Covol intends to
assign this supply agreement to the entity that acquires this facility, which is
currently being offered for sale.

     Mountaineer.  The Mountaineer Synfuel facility is located on property owned
by Upshur Property,  Inc., an affiliate of Anker Energy  Corporation.  Anker has
agreed to provide the feedstock  requirements of Mountaineer Synfuel, L.C. for a
period of ten years, up to 480,000 tons of feedstock per year. Anker will supply
the feedstock  from various  sources  owned or  controlled  by Anker,  including
preparation plant operations and fines ponds. The price for the feedstock varies
based  upon the  source of the coal  fines and the costs of  recovery.  The site
contains a fines refuse pond which is serving as a partial  source for feedstock
and a  preparation  plant is  planned  to  increase  the  quality  and amount of
feedstock  coming from the site refuse pond.  Covol does not yet have  financing
for the preparation plant. If Mountaineer Synfuel,  L.L.C.  exercises its option
to  purchase  the  Mountaineer  facility,  Covol  proposes to assign this supply
agreement to Mountaineer.

                                       13
<PAGE>

     Alabama Inventory.  In March of 1997 Covol entered into a coal fines supply
agreement (the Supply  Agreement")  with K-Lee  Processing Inc. and Concord Coal
Recovery Limited Partnership  (collectively "K-Lee"). Covol purchased coal fines
under the Supply Agreement through February of 1998 at which time Covol sold its
inventory  of coal fines and assigned the Supply  Agreement  to  Birmingham  Syn
Fuel,  L.L.C.  Birmingham Syn Fuel removed the coal fines inventory and asserted
that the  inventory was  approximately  11,000 tons less than K-Lee had invoiced
and received payment from Covol.  Covol is currently in negotiations  attempting
to resolve the dispute.

     Supply of Binder.  Covol purchases its patented and proprietary binder from
Dow  Chemical  Company  under a ten year  agreement  under  which  Covol  pays a
prescribed  price per pound of binder.  Covol arranges with Dow for the delivery
of the binder  from Dow's  manufacturing  plants to each of the  synthetic  fuel
facilities owned, operated, or licensed by Covol.

Sale of Facilities

     Covol and its affiliates  have developed and sold or have granted an option
to sell four  synthetic  fuel  facilities.  The  following  is a summary of each
option or sale:

     Utah  Synfuel  #1. On March 10,  1997,  Utah  Synfuel  #1 Ltd.,  a Delaware
limited  partnership  in which  Covol was at the time a 64%  owner  and  general
partner,  sold the Utah synthetic fuel facility for $3.5 million, in the form of
a nonrecourse  promissory note bearing interest at 9.6552% per annum and payable
in 44 equal  quarterly  installments,  all in  accordance  with the Utah Project
Purchase  Agreement,  dated as of March 7, 1997,  between Covol, Utah Synfuel #1
and  Coaltech  No. 1 L.P.  The sale of the Utah  facility  resulted in a loss of
approximately $581,000 to Utah Synfuel #1. The promissory note is collateralized
by a security interest in the Utah facility, and in the event of a default under
the  promissory  note,  Covol's and Utah  Synfuel #1's sole right to recovery is
limited to the Utah facility without recourse against Coaltech.

     Covol  granted  Coaltech a put option to require Covol to purchase the Utah
facility from Coaltech if:

     1.       all of the Coaltech limited  partners are  unable to  utilize  the
              federal income tax credits under Section 29 of the tax code,

     2.       the economic  benefits  accruing to or  experienced  by all of the
              Coaltech  limited  partners  differ  significantly  from  what was
              initially projected, or

     3.       there  is  a   permanent  force  majeure  or  material  damage  or
              destruction of the Utah facility.

     If the put option is exercised prior to the third  anniversary  date of the
facility  sale,  the option  price will be equal to the fair market value of the
limited partnership  interests of the optionees on a going concern basis, but in
no event will the option price exceed 50% of the capital  contributions  made by
the optionees to fund payments due under the  promissory  note, the Utah License
Agreement  and broker fees. If the put option is exercised on or after the third
anniversary  date,  the option price will be $10 and the  optionees  will not be
entitled to any other payments.

     As part of the sale of the Utah facility, Covol and Utah Synfuel #1 entered
into a Supply and Purchase Agreement with Coaltech.  Under the agreement,  Covol
agreed to provide coal fines to the Utah facility for processing  into synthetic
fuel at an amount equal to Covol's per ton costs, including any wash costs. Utah
Synfuel #1 also agreed to purchase from Coaltech the synthetic  fuel produced at
Coaltech's  cost plus one dollar per ton.  Coaltech  has the right to market its
synthetic  fuel to a third  party,  with Utah Synfuel #1 having a right of first
refusal to purchase such synthetic fuel.  Covol has incurred a loss each quarter
in  connection  with this  agreement and expects that these losses will continue
into the foreseeable future.

     Carbon  Synfuel.  In connection with the Utah Project  Purchase  Agreement,
dated March 10, 1997 Covol  entered into an option  agreement  with  Coaltech to
sell a second  facility,  identified  as Carbon  Synfuel and located at the Utah
Synfuel #1  facility.  If Coaltech  exercises  its  option,  Covol will sell the
second line of synthetic fuel  manufacturing  equipment  including the building,
binder plant, and other equipment that were not part of the Utah

                                       14
<PAGE>

Synfuel #1 facility  sale.  The terms of the option  provide that Coaltech would
purchase Carbon Synfuel on the same terms as Coaltech's purchase of Utah Synfuel
#1 facility. Covol does not expect the option to be exercised. Covol is actively
seeking an alternative buyer for the Carbon Synfuel  facility,  however there is
no assurance that a sale will be completed.

     Since the Utah Synfuel #1 facility and Carbon  Synfuel  facility were first
placed in service they have experienced several problems,  including  inadequate
clean coal fines as feedstock, inadequate end product strength, and inability to
market to end-consumers  the synthetic fuel product produced from the feedstock.
Covol  continues to improve the synthetic fuel product quality and believes that
the improvements  will achieve the results  necessary for successful  marketing.
Covol also has begun to see some success in marketing the product from these two
facilities to a power plant and an industrial  manufacturer.  Covol is seeking a
long term purchase commitment from these consumers.

     The Utah Synfuel #1 and Carbon Synfuel facility are currently  operating at
well below their rated capacity.  Covol and its licensee have incurred a loss on
the  production  of  synthetic  fuel at the Utah  Synfuel #1 and Carbon  Synfuel
facilities.

         In order to provide coal fines to the Utah  Synfuel #1 facility,  Covol
entered into a purchase agreement with Earthco to acquire the coal fines located
at Wellington,  Utah. The estimated  amount of coal fines at the Wellington site
is in excess of 2 million tons. The Wellington fines require washing.  Covol has
constructed  a wash plant at the  Wellington  site which  supplies coal fines to
Utah Synfuel #1 and Carbon Synfuel.  The cost for the plant was approximately $8
million.  The financing for the  construction  of the wash plant was provided in
part by AJG Financial  Services,  Inc., and is evidenced by a debenture of Covol
to AJG which is  collateralized  by the wash plant assets.  The debenture  bears
interest at 6% per annum with  principal  and interest  being due and payable in
October 1999. As additional  consideration  to AJG for financing the wash plant,
Covol,   in  October  1997,   agreed  to  grant  to  AJG  warrants  to  purchase
approximately  430,000  shares of Covol common stock,  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  expire two years from
issuance.

     Birmingham  Syn  Fuel.   Alabama  Synfuel  #1  Ltd.,  a  Delaware   limited
partnership in which Covol was at the time a 74% owner and general partner, sold
the Birmingham Syn  Fuel/Birmingport  facility to Birmingham Syn Fuel, L.L.C., a
wholly-owned  subsidiary of  PacifiCorp  Financial  Services,  Inc., on March 6,
1998. The purchase price for the Birmingport  facility was $6,500,000 payable in
the form of a nonrecourse  promissory note collateralized by certain portions of
the Birmingport facility.

     Mountaineer Synfuel. On May 5, 1998 Covol entered into a purchase agreement
to sell the Mountaineer synthetic fuel facility to Mountaineer Synfuel,  L.L.C.,
a Delaware  limited  liability  company.  The  agreement  is subject to numerous
conditions,  including  but not limited to, the obtaining of a PLR from the IRS,
and the  production  of  product  meeting  certain  specifications.  There is no
assurance that Mountaineer will exercise its option with respect to the purchase
of this facility. Covol also entered into a financing agreement with Mountaineer
to finance up to $9.75 million for project  construction and operations  working
capital.  Covol's  obligation to repay the  financing  will be  extinguished  if
Mountaineer exercises its purchase option; otherwise,  Covol will be required to
repay the loan with ten  percent  interest in monthly  installments  of interest
only payments for the months January through June 1999 and monthly  installments
thereafter  of  $350,000  and a  balloon  payment  on  June  30,  2000.  Covol's
obligation to repay the amounts borrowed is  collateralized by the assets of the
project,  and income streams from the Ginger Hill and Pleasant Ridge facilities.
Under  a  license  agreement,  Covol  will  provide  use of its  technology  and
Mountaineer  will pay a  quarterly  license  fee based upon the  synthetic  fuel
product  produced  and sold during the  quarter.  Covol will also supply  binder
material to the project on a cost plus basis.

     In addition to the four facilities discussed above, Covol owns and operates
two  synthetic  fuel  manufacturing  facilities  that  Covol has for  sale.  One
facility  is  referred  to  as  Commonwealth  Synfuel,  located  near  Karthaus,
Pennsylvania.  The  other  Covol-owned  facility  for  sale  is  referred  to as
Pocahontas Synfuel located near North Fork, West Virginia. Several entities have
expressed interest in purchasing the facilities and Covol expects the facilities
to be sold in early 1999.  However,  Covol  cannot give  assurance  that it will
successfully sell either or both facilities.

                                       15
<PAGE>

Research and Development

     Covol has devoted and  continues  to commit  significant  human and capital
resources to the  development,  refinement  and  commercialization  of the Covol
binder technologies in the engineered fuel and engineered resource applications.
Covol is currently focusing its research and development  efforts principally on
the synthetic fuel technology, including refinements to the chemical formula and
process, enhancements to the base binder formulations to address product quality
issues,  and continued testing and development of other binder materials for the
production of synthetic fuel.  Covol is also currently  conducting  research and
development  related to  application  of the Covol binder  technologies  to iron
tailing  materials,  coke  breeze,  silicon  carbide and other waste  product or
resource materials.

     Covol's  intellectual  property  base  consists  of  seven  U.S.  and  four
international  patents  relating to the Covol binder  technologies as applied to
coal, iron tailings, coke and other carbon based materials. Covol's research and
development  efforts will be directed  toward  perfecting  and  expanding  these
technologies  and the filing for patents  for  proprietary  intangible  property
developed.  See "ITEM 1. BUSINESS - Proprietary  Protection" for a discussion of
Covol's patents, trademarks and other intellectual property.

Proprietary Protection

     Covol has the following trade names and patents covering certain aspects of
Covol's technology:

     Trade names:

     Covol  Technologies,  Inc.,  Alabama Synfuel #1 Ltd., Utah Synfuel #1 Ltd.,
     Flat Ridge Corporation and Engineered Fuel Technologies, Inc.

              Trademarks and Service Marks:

              United States Trademark  Registration No. 2,038,742 for  licensing
     services   identified   by  "Covol",   "Recycling  Yesterday's  Waste  Into
     Tomorrow's Resources."

     United States Patents:

         United States Patent No. 5,453,103, which issued 26 September 1995.

         United States Patent No. 5,487,764, which issued 30 January 1996.

         United States Patent No. 5,589,118, which issued 31 December 1996.

         United States Patent No. 5,599,361, which issued 4 February 1997.

         United States Patent No. 5,738,694, which issued 14 April 1998.

         United States Patent No. 5,752,993, which issued 19 May 1998.

         United States Patent No. 5,807,420, which issued 15 September 1998.

     Foreign Patents:

         European Patent Office # 96905442.8-2307 filed May 1, 1998.

         Australian  #686624 filed on January 21, 1994;  filed with U.S.  Patent
Office as No. 184099 on May 28, 1998.

         New  Zealand  #266060  filed on April 7, 1994;  filed with U.S.  Patent
Office on February 20, 1998.

         Republic  of  Trinidad  and  Tobago  #960038  filed on July 1, 1996 and
#970147 filed under PCT/US96/01798 on February 8, 1996.

         Other United  States,  Patent  Cooperative  Treaty,  and Foreign Patent
Applications are pending.

                                       16
<PAGE>

     Covol's U.S. and foreign  patents expire on January 21, 2014.  There can be
no assurance as to the scope of protection afforded by the patents. In addition,
there are other  industrial  waste recycling  technologies in use and others may
subsequently be developed,  which do not, or will not utilize  processes covered
by the patents or pending  patents.  There can be no  assurance  that any patent
issued will not be infringed or challenged by other parties, infringe on patents
held by other  parties  or that  Covol will have the  resources  to enforce  any
proprietary  protection afforded by the patent or defend against an infringement
claim.

     In  addition  to patent  protection,  Covol also  relies on trade  secrets,
know-how   and   confidentiality   agreements   to  protect  the  Covol   binder
technologies. However, such methods may not afford complete protection and there
can be no assurance that others will not independently  develop such know-how or
obtain access to Covol's know-how, concepts, ideas, and documentation.

     Since Covol's proprietary information is important to its business, failure
to protect ownership of its proprietary information would likely have a material
adverse  effect on Covol.  Covol's  current and expected  revenues are dependent
upon license agreements by which licensees use the Covol binder  technologies to
manufacture  synthetic  fuel and then pay license fees to Covol.  Covol  expects
that  revenues will  continue to be tied to future  licensing  agreements in the
application  of Covol binder  technologies  to iron rich wastes,  coke dust, and
other  potentially  useful  wastes  and  by-products.  Covol  believes  that its
patents, trade secrets, know-how and confidential information are the basis upon
which Covol is able to obtain licensing agreements.

Confidentiality Provisions

     As part of its business,  Covol typically enters into agreements concerning
its projects which contain  confidentiality  provisions.  Covol is, on occasion,
required to disclose such  agreements to the Securities and Exchange  Commission
as part of its ongoing reporting  requirements under the Securities Exchange Act
of  1934.  In  addition,  disclosure  of  such  agreements  may be  required  in
connection with Covol's private placement of securities.  Some of the agreements
do not contain the standard  exceptions for the disclosure of information  which
is required to be disclosed under law. Consequently,  no assurances can be given
that Covol has not  inadvertently  disclosed  information  regarding its various
projects in violation of confidentiality covenants entered into by Covol.

Government Regulation

     Covol's  and its  licensees'  synthetic  fuel  operations  are  subject  to
federal,  state and local  environmental  regulations that impose limitations on
the discharge of pollutants  into the air and water and establish  standards for
the treatment, storage and disposal of waste products. In order to establish and
operate the  synthetic  fuel plants,  Covol and its licensees  obtained  various
state and local  permits.  Covol believes that it or its licensees have obtained
all required  permits to construct and operate  synthetic fuel  facilities,  and
that they are in substantial  compliance  with all relevant laws and regulations
governing the synthetic  fuel  operations.  However,  Covol's and its licensees'
synthetic fuel operations  entail risk of environmental  damage and Covol or its
licensees  may incur  liabilities  in the future  arising from the  discharge of
pollutants into the environment or from waste disposal practices.

     Failure by Covol or its licensees to maintain  necessary permits to operate
synthetic  fuel  plants  and to comply  with  permit  requirements  could have a
material adverse effect on Covol or its licensees.  Other developments,  such as
the  enactment  of more  stringent  environmental  laws and  regulations,  could
require Covol or its licensees to incur  significant  capital  expenditures.  If
Covol or its  licensees  do not have the  financial  resources  or is  otherwise
unable to comply with such laws and regulations,  such failure could also have a
material adverse effect on Covol.

     Covol's goal is to establish  itself as the provider of  technologies  that
will  assist  others in the  processing  and  reclamation  of their  wastes  and
by-products,  and Covol  seeks for itself and its  licensees  to avoid  creating
waste streams or compounding  environmental  reclamation problems. Covol has not
assumed responsibility for environmental reclamation of coal refuse impoundments
from which Covol or its licensees obtain refuse for feedstock.  Such liabilities
are and remain the responsibility of the impoundment owners or operators. In the
manufacture   of  synthetic   fuel  from  coal  refuse  using   Covol's   binder
technologies,  the synthetic fuel produced  effectively  completely consumes the
refuse.  The  synthetic  fuel  manufacturing  process  does  not  contribute  to
environmental  reclamation liabilities with respect to the coal refuse. However,
the  synthetic  fuel  manufacturing  process  using  Covol  binder  technologies
typically uses dilute acids.  Covol and its licensees must comply with hazardous
material handling and storage  regulations  related to acid solutions and stored
concentrates.

     Covol's and its licensees'  synthetic  fuel  operations are also subject to
federal and state safety and health  standards.  Covol is committed to providing
effective management of worker safety and health protection.  Covol periodically
contracts with independent  safety and industrial hygiene inspectors in order to
measure a facility's regulatory compliance.  In addition,  Covol has developed a
safety policy designed to raise and maintain a high level of safety awareness by
both  management  and  employees.  Compliance  to  applicable  safety and health
standards is verified  through  periodic  inspections  by  regulatory  agencies.
Failure to comply with safety and health standards could have a material adverse
affect on Covol, for example,  a regulatory  inspector could close the operation
until Covol meets the required standards.

                                       17
<PAGE>

Competition

     Products  made  using the Covol  binder  technologies  compete  with  other
synthetic products as well as traditional source materials.  Competitive factors
include  price,  quality,  delivery  cost and waste  handling  costs.  Covol may
experience  competition  from other  alternative  fuel technology  companies and
their licensees,  particularly those companies with technologies to produce coal
based solid synthetic  fuels.  Competition may come in the form of the licensing
of the competing  technologies  to process coal fines or in the marketing of end
products  qualifying  as  synthetic  fuel.  Competition  includes,  for example,
Carbontec,  Krystal Bond, KFx Inc. and Startec Inc.  Covol will also  experience
competition  from  traditional  coal and fuel  suppliers  and  natural  resource
producers in addition to those  companies  that  specialize  in the disposal and
recycling of waste products  generated by coal,  coke,  steel and other resource
production. Many of these companies have greater financial, management and other
resources than Covol. Covol believes that it will be able to compete effectively
although there can be no assurance that it will do so successfully.

Employees

     Covol currently employs  approximately 80 persons full-time.  Approximately
30  of  such  persons  are  in  corporate   administration  including  research,
development  and  marketing,  and 50 are in  synthetic  fuel  and  coal  washing
operations.  None of these  employees  are  covered by a  collective  bargaining
agreement.

Forward Looking Statements

     Statements regarding Covol's expectations as to the financing, development,
construction   and   operation  of   facilities   utilizing   the  Covol  binder
technologies, the marketing of products, the receipt of licensing fees and other
information  presented  in this  Annual  Report on Form 10-K that are not purely
historical  by nature,  including  those  statements  regarding  Covol's  future
business  plans,  the  operation  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 Covol 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  Covol's  industry  or the coal  industry  or the  economy  generally,
factors which could cause actual results to differ from  expectations  stated in
these forward looking statements include, among others, the following:


     (1)      The commercial success of the Covol binder technologies.
     (2)      Procurement   of   necessary  equipment  to  maintain  facilities'
              operations.
     (3)      Securing of necessary sites,  including permits and raw materials,
              for facilities to be constructed and operated.
     (4)      Completion  of  facilities,   in  particular  the  synthetic  fuel
              manufacturing facilities, by the placed in service date.
     (5)      Ability to obtain  needed  additional  capital on terms acceptable
              to Covol.
     (6)      Changes in  governmental  regulations  or  failure to comply  with
              existing regulations which may result in operational  shutdowns of
              Covol or licensee facilities.
     (7)      The availability of tax credits under Section 29 of the tax code.
     (8)      The commercial  feasibility of the Covol  binder technologies upon
              the expiration of Section 29 tax credits.
     (9)      Ability  to meet  financial commitments under existing contractual
              arrangements.  
    (10)      Ability to  commercialize  the  non-synthetic  fuel  related Covol
              binder technologies which have only been tested in the  laboratory
              and not in full-scale operations.
    (11)      Dependence on licensees to  successfully  implement  Covol  binder
              technologies.
    (12)      The market acceptance of products  manufactured with  Covol binder
              technologies in the face of competition from traditional products.
    (13)      Ability to produce  products with Covol binder  technologies  with
              acceptable hardness, moisture level, and other characteristics.
    (14)      Success in the face of competition by others  producing  synthetic
              fuel and other  recycled  products.  
    (15)      Sufficiency of  intellectual  property protections.


ITEM 2.       PROPERTIES

     Covol leases an  approximately  5,000  square-foot  building in Lehi, Utah,
which houses its executive offices ("Corporate  Headquarters").  In August 1997,
Covol  entered into a triple-net  lease dated August 1, 1997 (the  "Headquarters
Lease"). The Headquarters Lease provides for a monthly rent of $5,000 during the
initial term which expires on July 31, 2000. Thereafter,  the Headquarters Lease
will automatically  extend  indefinitely for successive  one-year periods at the
sole option of Covol, and the monthly rent will increase by 5% per year.

                                       18
<PAGE>

     In October  1997,  Covol  purchased  an 8,000  square-foot  site located in
Price,  Utah,  on which  Covol's  prototype  briquetting  plant is located,  for
$150,000.  Included in the purchase was a 1,400 square-foot office and warehouse
building which houses  equipment.  The property is subject to a 10-year $100,000
mortgage  held by the seller.  The equity in the property was pledged as part of
the  collateral  for a $2.9 million loan to Covol from AJG  Financial  Services,
Inc.

     In May 1995,  Covol  entered into a lease with Geneva  Steel  Company for a
9,000 square foot building in Vineyard,  Utah.  Covol pays no cash rent on these
facilities. Subsequent to the execution of the Geneva Agreements, the lease with
Geneva expired resulting in a tenancy-at-will between the parties. Covol may use
the Geneva  briquetting  facility in the  manufacture  of synthetic  fuel or for
testing purposes at the Geneva site or some other location.

     In June 1996,  Covol entered into a land lease of approximately 12 acres in
Price,  Utah with a non-affiliated  party at a monthly rental of $600. The lease
term  commenced  on June 20, 1996 and  expires on  December  31, 2007 but may be
extended.  In 1996 Covol constructed a 22,000 square-foot  building to house the
Utah Synfuel #1 and Carbon Synfuel facilities.  In March 1997, this building was
subleased  by Covol to  Coaltech  as part of the  sale of the  Utah  Synfuel  #1
facility.  However, Covol retained responsibility for operations of the property
pursuant to an Operations and Maintenance  Agreement between Covol and Coaltech.
Covol has constructed an ancillary  building,  a 1,650 square-foot binder plant.
Coaltech  has  an  option  to  purchase  the  Carbon  Synfuel  facility,  and if
exercised, Coaltech will take ownership of the buildings.

     In February 1997, Covol entered into a lease agreement with Earthco for two
contiguous parcels located in Wellington,  Utah  (approximately 6 miles from the
Utah Synfuel #1 site). The first parcel covers  approximately 30 acres and has a
lease term of 15 years. On this parcel,  Covol  constructed a 3,400  square-foot
wash plant.  The second  parcel covers  approximately  357 acres and has a lease
term of 5 years. On this parcel, Covol conducts fines recovery operations. Covol
has  the  option  to  extend  or  purchase  either  or  both  parcels  upon  the
satisfaction of certain  conditions.  Total obligations to lease the parcels and
acquire the associated fines are approximately  $5.5 million,  of which $700,000
was paid at the time of lease  execution  and Covol has and will make payments 4
times each year until May of 2002 for the balance.

     In  1997,  Covol  entered  into a 5 year,  $850  per  month  sublease  with
Combustion Resources, Inc. for approximately 2,400 square feet of building space
in Provo, Utah.

     In 1997,  Covol entered into a one year,  $9,000 lease with Stephen Mallory
for  approximately  2,000 square feet of office and residential space in Dunbar,
West Virginia. This property serves as Covol's Eastern Region office.

     In 1998, Covol entered into a one year,  $1,500 per month lease with Mobile
Auto & Storage for  approximately  4,000 square feet of building  space in Lehi,
Utah.  This  property  provides  office and  laboratory  facilities  for some of
Covol's research and development personnel.

     In May 1998,  Covol  entered  into a 10 year,  $1,000  per year  lease with
Upshur Property,  Inc., for approximately 10 acres of property in Tallmansville,
Upshur  County,  West  Virginia.  The  property  is the site of the  Mountaineer
Synfuel  facility.  The lease is assignable to Mountaineer  Synfuel,  L.L.C., in
connection with its facility purchase option.

     In May 1998, Covol purchased approximately 80 acres of undeveloped property
near  Sunnyside,  Utah for  $100,000.  In June of 1998 Covol entered into a five
year lease with an option to purchase  approximately  40 acres of property  with
office and  warehouse  improvements.  The lease  payments  are $2,000 per month,
escalating to $3,500 per month over time. The leased property is adjacent to the
purchased property. Covol plans to conduct some operations on the two properties
in the future.

     None of Covol's subsidiaries have interests in real property.

ITEM 3.       LEGAL PROCEEDINGS

     Asbestos  Investigation.  In  January  1996,  a  manager  of Covol  entered
property owned by Nevada  Electric  Investment  Company,  a subsidiary of Nevada
Power  Corporation,  in  connection  with an  offer by  Covol  to  purchase  the
property,  and with certain other employees of Covol, removed some asbestos over
a two-day period.  In May of 1996 Covol received a notice of violation and order
for  compliance  from the State of Utah,  Division of Air Quality  alleging that
asbestos was improperly handled,  removed,  and disposed of. Covol complied with
the order and in September of 1996 entered into a settlement  agreement with the
State of Utah and paid a fine in the  amount of  $11,000.  In late 1997 the U.S.
Environmental  Protection  Agency  began its own  investigation,  referring  the
matter to the U.S.  Attorney's office which proceeded with a grand jury inquiry.
Covol was served in September 1998 with a grand jury subpoena for records,  with
which  Covol has  complied.  Covol  does not know the  results of the grand jury
inquiry or whether the  inquiry is  completed.  Covol does not believe  that its
resolution will have a material adverse effect on Covol.

                                       19
<PAGE>

     Indemnification  to Centerline.  In December  1996,  Covol entered into six
indemnification  agreements  with  Centerline  whereby Covol agreed to indemnify
Centerline  should it be required to pay liquidated  damages to PacifiCorp under
various design and  construction  agreements for six synthetic fuel  facilities.
Under the original terms of the various design and construction  agreements,  if
the  facilities  were not  completed by June 1, 1998 then $750,000 in liquidated
damages  for  each  facility  would  be  due  and  payable  by  Centerline.  The
indemnification  agreement only applied if PacifiCorp  actually decided to build
the facilities with Centerline as the design/builder.  PacifiCorp elected to not
build three of the projects,  and therefore the indemnity agreement with respect
to those  facilities  no longer  applies.  Accordingly,  the  maximum  amount of
contingent liability to Covol under the indemnification agreements is $2,250,000
($750,000 per design and  construction  agreement).  Counsel for  Centerline has
notified Covol that a dispute exists between Centerline and PacifiCorp which may
require  indemnification  by Covol.  Covol has been  advised that the dispute is
proceeding to arbitration.


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

     Covol held its Annual  Meeting of  Stockholders  on August 27, 1998. At the
meeting, the following actions were approved by the stockholders:

     James A.  Herickhoff  was elected a director of Covol for a three year term
to expire in 2001, by a vote of 7,703,272 in favor and 50,992 against.

     John P. Hill was  elected  a  director  of Covol  for a three  year term to
expire in 2001, by a vote of 7,694,872 in favor and 58,992 against.

     Selection  by the  Board  of  Directors  of  PricewaterhouseCoopers  LLP as
independent auditors of Covol for the 1998 fiscal year was ratified by a vote of
7,690,463 in favor, 15,610 opposed and 43,938 abstaining.

EXECUTIVE OFFICERS OF THE REGISTRANT


   NAME                 AGE                           POSITION

Brent M. Cook            38               Chief Executive Officer and Director

Stanley M. Kimball       44               President and Director

Steven G. Stewart        50               Chief Financial Officer

George W. Ford, Jr.      53               Principal Scientist and Vice President
                                          of Science and Technology

Steven R. Brown          40               Senior Vice President of Engineering
                                          and Development

Max E. Sorenson          49               Senior Vice President of Engineered
                                          Resources

Dee J. ("D.J.") Priano   53               Senior Vice President of Synfuel
                                          Engineered Fuels

Asael T. Sorensen, Jr.   44               Secretary and Corporate Counsel

Harlan M. Hatfield       38               Vice President and General Counsel

Kenneth R. Frailey       45               Vice President of Operations

Stephanie R. Black       36               Vice President of Research and
                                          Development

                                       20
<PAGE>


Brent M. Cook has served as Chief Executive  Officer and Director since November
1996,  as  President  from  October  1996 until  July 1998,  and served as Chief
Financial  Officer from June 1996 until  December  1996. Mr. Cook is a Certified
Public  Accountant.  Prior to joining Covol,  Mr. Cook was Director of Strategic
Accounts-Utah   Operations,   for   PacifiCorp,    Inc.   ("PacifiCorp").    His
responsibilities  included  the  management  of revenues of  approximately  $128
million per year, and seeking out and evaluating  strategic growth opportunities
for PacifiCorp,  including joint ventures and other transactions. Mr. Cook spent
more than 12 years with PacifiCorp.

Stanley M. Kimball was appointed  President in July 1998 and has been a Director
since January 1997.  He served as Chief  Financial  Officer from January 1997 to
July 1998.  Prior to  joining  Covol,  Mr.  Kimball  was  employed  by  Huntsman
Corporation  ("HC"). From 1989 to early 1995, Mr. Kimball served as the Director
of Tax for Huntsman Chemical  Corporation  ("HCC"). In May 1995, Mr. Kimball was
appointed as an officer of HCC,  serving as Vice  President,  Tax. In July 1995,
Mr.  Kimball was  appointed as Vice  President,  Administration  for HC. In this
position,  he had  numerous  responsibilities,  both  for HC and for Mr.  Jon M.
Huntsman  personally,  which  included  financial  accounting,  tax  and  estate
planning, and cash and investment management. In this position, Mr. Kimball also
served as Mr.  Huntsman's Chief of Staff. In 1980, Mr. Kimball received a Master
of Accountancy,  with emphasis in taxation, from Brigham Young University and is
a Certified Public Accountant.  Between 1980 and 1989, he was employed by Arthur
Andersen & Co., and was serving as a Senior Tax Manager prior to his  employment
with HCC.

Steven G. Stewart was appointed Chief  Financial  Officer of Covol in July 1998,
and served as Vice  President of Finance and  Treasurer  from April 1998 through
July 1998. Prior to joining Covol, Mr. Stewart was a partner for 11 years with a
"Big Five" accounting firm, an audit partner with Ernst & Young (formerly Arthur
Young)  and was the Salt  Lake  City  office  Director  of High  Technology  and
Entrepreneurial  Services. From January 1994 through September 1996, Mr. Stewart
was self-employed and provided consulting services to high technology companies,
established  strategic  alliances,  advised  companies on alternative  valuation
methods  applicable  to  acquisition  targets  and  negotiated  acquisition/sale
transactions.  From October 1996 through March 1998,  Mr. Stewart was a business
assurance  partner at  PricewaterhouseCoopers,  LLP (formerly  Coopers & Lybrand
LLP), with primary  responsibility  for public  companies  operating in the high
technology,  mining and extractive industries. Mr. Stewart is a Certified Public
Accountant.

George W. Ford, Jr. has served as Vice President of Research and  Development of
Covol since August 1993. From August 1993 to February 1997, Mr. Ford served as a
Director of Covol.  From 1982 to 1993, Mr. Ford was employed at Ballard  Medical
Products, Inc. in research and development, principally in the biomedical field.
Mr. Ford holds 17 national and international  patents covering a wide variety of
technologies.  Mr. Ford has functioned as an independent  consultant  working on
projects in computer  programming,  medical  product  device  design and process
polymer  chemistry design for the energy  industry.  Mr. Ford is a member of the
American  Association  for the  Advancement  of  Science  and the Iron and Steel
Society.

Steven  R.  Brown  was  appointed  Senior  Vice  President  of  Engineering  and
Development  in  December  1998.  Since July 1998 he served as Vice  President -
Synfuel  Operations.  Previously he served as Vice President of Engineering  and
Construction  of Covol since  February  1995.  Mr. Brown served as a Director of
Covol  from  September  1995 to March  1997.  From 1993 to 1995,  Mr.  Brown was
President  of  Construction  Management  Service,  Inc.  Mr. Brown is a licensed
professional engineer and a licensed general contractor.

Max E. Sorenson was appointed  Senior Vice President of Engineered  Resources in
December 1998. He served as Vice  President of Covol since April 1997.  Prior to
Mr. Sorenson's  employment with Covol, Mr. Sorenson was Senior Vice President of
Operations,  Engineering  and Technology of Geneva Steel Company.  Mr.  Sorenson
began his  employment  with Geneva  Steel  Company in October  1989.  During his
employment with Geneva Steel Company,  Mr. Sorenson also had  responsibility for
raw materials,  transportation contracts and information systems and also served
as Chief Engineer of Coke,  Iron and Steel,  and Vice President of  Engineering.
Prior to joining  Geneva Steel  Company,  Mr.  Sorenson  worked for 16 years for
Inland Steel,  Inc.,  one of the largest steel  companies in the United  States,
where he served in various  operational and technology  management  positions in
ironmaking and steelmaking. Mr. Sorenson obtained a B.S. degree in Metallurgical
Engineering  from the  University of Utah in 1973 and a Master of Science degree
in Industrial Management from Purdue University in 1978.

                                       21
<PAGE>

Dee J. "DJ" Priano was  appointed  Senior Vice  President of Synfuel  Engineered
Fuels in December  1998.  Prior  thereto,  he served as Vice  President of Covol
since August 1997.  Mr.  Priano had been employed by Kennecott  Corporation  for
more than 32 years prior to that time.  Mr. Priano  worked in several  different
positions at Kennecott  including  Principal  Planning  Engineer for Kennecott's
Bingham Canyon mine, Manager of Operations  Analysis,  Controller of Kennecott's
Bingham  Canyon  mine  as well  as the  Controller  of  Kennecott's  U.S.  Mines
Division.  In addition to managing  general  accounting and financial  reporting
activities,  he was responsible for the  administration  of purchasing,  MIS and
land and water management functions.  Mr. Priano received a BS degree and Master
of Business Administration from the University of Utah.

Asael T. Sorensen,  Jr. joined Covol as its legal Counsel in September  1995. He
has also served as Corporate  Secretary  since June 1996. From 1982 to 1995, Mr.
Sorensen was an in-house  attorney for the Church of Jesus Christ of  Latter-Day
Saints  in Salt Lake  City,  Utah and  practiced  law  primarily  in the area of
contract  negotiations and  administration.  Mr. Sorensen graduated from Brigham
Young   University   with  a  joint   Juris   Doctor  and  Master  of   Business
Administration. He is admitted to practice law in the State of Utah.

Harlan M. Hatfield has served as Vice  President and General  Counsel since July
1998 and Corporate Counsel since October 1996. His primary activities with Covol
have been the  development  of synthetic  fuel  projects,  including  licensing,
financing,  permitting,  construction,  feedstocks,  site  selection,  and other
aspects of project  development.  As General Counsel he oversees the legal staff
and outside legal counsel, litigation, regulatory disputes, contracts, and other
legal matters. Prior to his employment with Covol, he was in private practice at
the Seattle law firm of Oles, Morrison and Rinker for more than nine years where
he was a partner.

Kenneth R.  Frailey  joined  Covol in August  1998,  and in December  1998,  was
appointed  Vice  President of  Operations.  Until August 1998,  Mr.  Frailey was
employed  by  Kennecott   Corporation  and  General  Electric  for  a  total  of
approximately 20 years. Mr. Frailey's Kennecott experience related to mining and
electrical power generation,  and particularly  managerial  assignments in plant
operations and engineering.

Stephanie  E. Black  joined  Covol in March of 1998 as Director of Research  and
Development,  and in December 1998, was appointed Vice President of Research and
Development.  She was employed as a Strategic  Account  Manager with  PacifiCorp
from June of 1995 until joining Covol.  For the  approximately 11 years prior to
June 1995, Ms. Black was employed with Hercules, Inc. (now Alliant Techsystems).
While with  Hercules,  Ms. Black acted at various  times as  engineer,  analyst,
supervisor, and subcontract manager.

     Covol's  Executive  Officers are elected annually by the Board of Directors
and serve at the discretion of the Board.

                                       22
<PAGE>


                                     PART II

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
              MATTERS

     The shares of common stock of Covol trade on The Nasdaq  National(R) Market
under the symbol "CVOL".

     The following table sets forth, for the periods presented, the high and low
trading prices of Covol's common stock as reported by Nasdaq from April 1998, to
September  1998,  and bid quotations as reported by National  Quotation  Bureau,
Inc.  from  October  1996  through  March 1998.  The  quotations  do not reflect
adjustments  for  retail  mark-ups,   mark-downs  or  commissions  and  may  not
necessarily  represent  actual  transactions.  Since  Covol has  several  market
makers,  the bid prices among the different  market makers will generally  vary.
Accordingly,  the bid price may not be  representative  of  actual  trades.  The
following prices may not be considered valid  indications of market value due to
the limited and sporadic trading in the shares of common stock.


                                                     Low         High

Fiscal 1997

Quarter ended December 31, 1996                    $7.50       $14.38
Quarter ended March 31, 1997                        7.88        15.75
Quarter ended June 30, 1997                         6.75         8.88
Quarter ended September 30, 1997                    6.25        10.13

Fiscal 1998

Quarter ended December 31, 1997                    $8.88       $13.94
Quarter ended March 31, 1998                       10.50        14.06
Quarter ended June 30, 1998                        12.25        17.44
Quarter ended September 30, 1998                    9.00        17.25



         As of December 17, 1998, there were  approximately  625 shareholders of
record of Covol's common stock.

         Covol has not paid  dividends  on its common stock to date and does not
intend to pay  dividends on its common stock in the  foreseeable  future.  Covol
intends to retain earnings,  if any, to finance the development and expansion of
its business and to pay debt service and dividends on preferred  stock.  Payment
of common stock  dividends in the future will depend,  among other things,  upon
Covol's  ability to  generate  earnings,  its need for  capital  and its overall
financial condition.

Recent Sales of Unregistered Securities

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

         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
Covol's common stock, even though the options convert into restricted stock.

         Covol believes that the following  issuances of shares of common stock,
notes,  debentures  and  other  securities  were  exempt  from the  registration
requirements  of the  Securities  Act  of  1933,  as  amended,  pursuant  to the
exemption set forth in Section 4(2) thereof. Each security was issued subject to
transfer  restrictions.  Each  certificate  for each security bears a restricted
legend.  Each investor made  representations  to Covol that it was accredited as
that term is defined in  Regulation  D and that the  security  was  acquired for
investment purposes.

         In September and October 1997,  Covol  accepted  subscriptions  from 49
accredited investors for the purchase of 119,557 units (the "Units") pursuant to
a  Confidential  Private  Placement  Memorandum,  dated  August  28,  1997  (the
"Memorandum"),  at a price of $35.00 per Unit, with an aggregate  purchase price
of approximately

                                       23
<PAGE>

$4,200,000. Each Unit consisted of five shares of common stock of Covol together
with a warrant to purchase one additional  share of common stock at the price of
$8.00,  expiring April 30, 1998. Pursuant to the terms of the Memorandum,  Covol
granted to purchasers of the Units piggyback  registration  rights on the shares
of common stock  included in the Units and the shares of common stock which were
issuable upon the exercise of the warrants.  A total of 597,850 shares of common
stock and 119,557 warrants were issued in the offering.  Of the 119,557 warrants
issued to investors,  96,357 were  exercised and 23,300  expired.  In connection
with  the  sale of the  Units  under  the  Memorandum,  Covol  issued  to  three
accredited investors finder fees in the form of warrants to acquire an aggregate
of up to 199,262 shares of Covol's common stock at a purchase price of $8.00 per
share at any time prior to October 31, 1999, none of which had been exercised as
of September 30, 1998.

         On November 25,  1997,  Covol issued 1,500 shares of Covol common stock
to a single investor upon exercise of warrants at $8.00 per share, paid in cash.
The warrants were originally issued with Units privately placed in September and
October 1997.

         On December 8, 1997, Covol issued 1,500 shares of Covol common stock to
a single  investor upon  exercise of warrants at $8.00 per share,  paid in cash.
The warrants were originally issued with Units privately placed in September and
October 1997.

         On January 9, 1998 Covol issued  warrants  for 216,272  shares of Covol
common stock at a per share exercise price of $10.00 to AJG Financial  Services,
Inc. ("AJG").  Also, on January 9, 1998 Covol issued warrants for 216,272 shares
of Covol  common  stock at a per share  exercise  price of $20.00 to AJG.  Covol
issued  these  warrants  as  partial  consideration  for AJG's  loan to Covol of
$4,367,351 under Covol's debenture to AJG dated January 9, 1998.

         On March 4, 1998 Covol issued 1,000,000 shares of Covol common stock to
PacifiCorp  Financial  Services,   Inc.,  pursuant  to  PacifiCorp   Financial's
conversion of its Convertible  Loan and Security  Agreement dated March 20, 1997
("Agreement").  On April 7, 1998 Covol  issued an  additional  27,000  shares of
Covol common stock to PacifiCorp  Financial as  satisfaction  of the  adjustment
provisions of the Agreement.

         In 1996, Covol formed two limited partnerships, Alabama Synfuel #1 Ltd.
and Utah Synfuel #1 Ltd.,  to assist with the financing of  construction  at two
synthetic fuel manufacturing facilities. These two facilities have been sold and
are now  owned by  Birmingham  Syn  Fuel,  L.L.C.  and  Coaltech  No. 1 L.P.  On
September  9, 1998 Covol  offered  the limited  partners in Utah  Synfuel #1 and
Alabama  Synfuel  #1 an  exchange  of  Covol's  common  stock for their  limited
partnership  interests.  The exchange  ratio was based in part on an independent
valuation of the limited  partnership's  assets and other factors  including but
not limited to current and future  expected  cash flow of the  partnerships  and
current market values of Covol's common stock as quoted on NASDAQ.  The exchange
ratio for Utah  Synfuel #1 was 112.828  shares of common  stock per each limited
partnership  unit  and  125.97  shares  for  each  Alabama  Synfuel  #1  limited
partnership unit. The limited partnership's units originally sold for $1,000 per
unit.

         As of November 10, 1998, all of the limited partners in Utah Synfuel #1
and all but one of the  limited  partners  in  Alabama  Synfuel #1 had agreed to
exchange their limited partnership interests for shares of Covol's Common Stock,
and  accordingly  Utah Synfuel #1 became a wholly-owned  subsidiary of Covol and
Alabama Synfuel #1 became a 98%-owned subsidiary of Covol.

         During  September 1998 Covol  completed a financing of $1,500,000  that
consisted of the sale of 55,555 units at $27.00 per unit to an investor.  A unit
consisted of three shares of  restricted  common stock of Covol plus one warrant
to  purchase  one share of  restricted  common  stock at a price of $12.00.  The
warrants expire September 16, 2000 if not exercised.

         During  November 1998,  Covol  completed a financing  transaction  that
consisted of $400,000 of debt and  approximately  $3,500,000 of equity issued to
28 investors.  The debt had a term of twelve  months,  bears interest at 15% per
annum,  with an interest  only payment due in six months and with the balance of
interest and principal due at maturity.  The debt is  collateralized  by certain
assets of Covol and is due prior to maturity upon the placement of

                                       24
<PAGE>

long-term financing by Covol. The equity transaction  consisted of the sale of a
unit at a price of $5.00.  A unit  consisted of one share of  restricted  common
stock of Covol plus a warrant to purchase  one  additional  share of  restricted
common stock at an exercise price of $7.50. The warrants expire in twelve months
if not exercised. The stock and shares issuable pursuant to the related warrants
bear "piggyback" registration rights.

ITEM 6.           SELECTED FINANCIAL DATA

         The following selected financial data are derived from the consolidated
financial  statements of Covol.  This information  should be read in conjunction
with the consolidated  financial  statements,  related notes and other financial
information  included  herein.  As  more  fully  described  in  Note  15 to  the
consolidated financial statements,  Covol sold its construction  subsidiaries in
1996. All construction - related  operations have been reflected as discontinued
operations in the 1996,  1995 and 1994 financial  statements.  The  construction
subsidiaries  include one business  which was acquired on September 30, 1994 and
therefore is included in discontinued operations in 1996 and 1995 only. The note
receivable received by Covol as consideration for the sale is "marked to market"
each quarter based on the market value of Covol's stock held as collateral,  and
the resulting adjustments are reflected in Covol's statement of operations.  The
selected  financial data as of and for the nine months ended September 30, 1994,
as of and for the year ended September 30, 1995 and as of September 30, 1996 are
derived from audited  financial  statements  not included  herein.  The selected
financial  data for the year ended  September  30,  1996,  and as of and for the
years  ended  September  30,  1997  and 1998  were  derived  from the  financial
statements  of Covol  which  have been  audited  by  PricewaterhouseCoopers  LLP
included elsewhere herein.
<TABLE>
<CAPTION>

                                                                                                        Nine Months
                                                                                                           Ended
                                                             Year Ended September 30,                  September 30,
                                                ---------------------------------------------------


(thousands of dollars, except per-share data)       1998          1997            1996            1995            1994
- ----------------------------------------------- ------------ --------------- --------------- --------------  -------------
OPERATING DATA:
<S>                                                  <C>         <C>             <C>              <C>              <C>    
     Total revenues                                  $12,699     $       251     $       295      $     129        $    20
     Loss from continuing operations                  (3,986)        (10,995)        (12,955)        (4,524)          (498)
     Net loss                                         (3,986)        (10,995)        (13,836)        (5,654)          (143)
     Basic and diluted net income (loss) 
      per common share:
         Loss per share from continuing
              operations                                (.43)          (1.38)          (1.86)         (1.00)          (.13)
         Net income (loss) per share                    (.43)          (1.38)          (1.99)         (1.25)          0.04
     Purchase of property, plant and
          equipment and facilities
          held for sale                               36,963           7,194           5,055            694            100
<CAPTION>

                                                                              September 30,
                                                 ------------------------------------------------------------------------
(thousands of dollars)                              1998          1997            1996            1995           1994
- ------------------------------------------------ ----------- --------------- --------------- --------------  ------------
BALANCE SHEET DATA:
<S>                                                 <C>            <C>             <C>           <C>           <C>      
     Working capital                                $  8,549        $  4,960         $(3,482)      $   (480)     $   (620)
     Net property, plant and equipment                14,902           5,464           7,125          1,330           748
     Total assets                                     66,897          26,361           8,772          2,660         4,853
     Long-term obligations                            16,279           5,467             364            177           852
     Total stockholders' equity (deficit)             21,571           5,929            (233)         1,183         2,990
</TABLE>

                                       25
<PAGE>

ITEM 7.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS

         The following  discussion  and analysis  should be read in  conjunction
with the  information  set forth under the caption  entitled  "ITEM 6.  SELECTED
FINANCIAL  DATA"  and the  financial  statements  and  notes  thereto  for Covol
included elsewhere herein.



Year Ended September 30, 1998 Compared to Year Ended September 30, 1997

         The information set forth below compares Covol's  operating results for
1998 with its operating results for 1997.

         Revenues.  Total  revenues  for  the  year  ended  September  30,  1998
increased by $12,448,000 to $12,699,000 as compared to $251,000 for 1997. During
1998 Covol  recognized  license fees totaling  $7,942,000  while no license fees
were recognized  during 1997.  These fees consisted of one-time  advance license
fees of  $7,736,000  and earned  license  fees or royalty  payments of $206,000.
Advance license fees are normally due when construction of the related synthetic
fuel  facility  begins,   when  construction  is  completed,   or  when  certain
construction  milestones or other  conditions  are met. Covol expects to receive
approximately $4,000,000 of additional advance license fees during 1999 upon the
sale of certain synthetic fuel facilities  currently owned by Covol and upon the
achievement  of  certain   production  levels  at  one  of  the  synthetic  fuel
facilities. Earned license fees or royalty payments are due quarterly based upon
synthetic  fuel produced and sold as reported to Covol by its  licensees.  Covol
had sales of binder  and coal  fines to a related  party  during  1998  totaling
$2,543,000  compared to $209,000 during 1997. These revenues resulted  primarily
from coal fines that were sold to the related  party at Covol's cost as provided
for under the binder and license agreement with this party. Substantially all of
the fines  purchased  by Covol have now been sold so sales of coal fines are not
expected to be material  during  1999.  Covol sold six binder  mixing  plants to
licensees  during 1998 for  $1,088,000,  generating  a gross profit of $200,000.
Covol does not expect sales of binder mixing plants during 1999.  Covol provides
binder material to its licensees either at a fixed price or at Covol's cost plus
a contracted  markup.  Covol  purchases the binder  materials  under a long-term
contract  with a large  chemical  company.  Total  binder sales during 1998 were
$994,000 with a corresponding direct cost to Covol of $642,000.  Covol expects a
significant  increase  during  1999  of  production  of  synthetic  fuel  by its
licensees as licensees move toward full  production  levels with a corresponding
increase  in  earned  license  fees or  royalty  payments  and  sales of  binder
products.  However,  Covol  cannot  assure  increases in license  fees,  royalty
payments,  and binder sales because Covol  licensees  must  successfully  obtain
adequate  feedstock coal fines,  process fines into synthetic  fuel, and develop
markets for  synthetic  fuel,  now and in the future.  Covol  believes  that its
licensees have made significant  progress in these areas, but continued  success
cannot be assured.

         Operating Costs and Expenses. Operating costs and expenses increased by
$4,205,000 or 38% to $15,310,000  during 1998 from $11,105,000 during 1997. Cost
of coal briquetting  operations increased $4,492,000 from $4,803,000 during 1997
to $9,295,000  during 1998. This increase  included  $4,121,000  relating to the
costs  associated  with binder plant sales,  binder sales and coal fine sales as
discussed above.  During 1997, Covol recorded an expense for $1,477,000 relating
to construction  penalties for failure to proceed under several  contracts Covol
had entered into.  There was no similar  expense in 1998.  However,  during 1998
Covol incurred  significantly  higher operating  expenses in connection with the
continued  refinement and  implementation  of the briquetting  process,  and the
commercialization of this process in connection with the 24 facilities placed in
service during 1998,  including the four facilities held for sale. Covol expects
to continue  incurring  losses into 1999 until these  facilities are sold. Covol
expects to realize a gain when the facilities are sold.  These expenses  related
in part to the  construction  and operation of four  synthetic  fuel  facilities
built by Covol that are  currently  held for sale,  costs  incurred in providing
assistance  to Covol's  licensees  during the  ramp-up of their  synthetic  fuel
facilities,   and  increased   personnel  costs.  These  increases  during  1998
effectively offset the 1997 construction penalty expenses. Covol operates one of
the synthetic fuel facilities for Coaltech, a partnership for which Covol is the
general  partner.  Under  this  operating  agreement,   Covol  is  contractually
obligated to purchase  all of the  synthetic  fuel  produced at cost plus $1 per
ton.  Production  of  synthetic  fuel from  this  facility  during  1998 was not
significant and accordingly,  the cost per ton is significantly in excess of the
current  market  value.  These costs and the  corresponding  write-down  of this
inventory

                                       26
<PAGE>

to its market value are included in the cost of coal briquetting operations. The
write-down was approximately  $1,400,000 during 1998 and $1,548,000 during 1997.
Covol expects the excess cost per ton to decrease in 1999 as production  volumes
increase.

         Research and  development  costs  decreased  during 1998 as a result of
Covol's  continued  focus  on  the   commercialization  of  the  synthetic  fuel
technology and the utilization of certain research and development  resources in
this endeavor.  Covol expects that research and development  costs will increase
in 1999 as Covol  focuses  resources  on further  refinement  of its  technology
relative  to the  synthetic  fuel / coal  industry  and the  application  of the
technology into other areas.

         Selling,  general and administrative  expenses increased  $1,438,000 or
48% to $4,436,000 during 1998 from $2,998,000 for 1997.  Approximately  $500,000
of this increase  related to a substantial  increase in travel and related costs
as Covol's  employees spent a significantly  greater amount of time at Covol and
licensee-owned facilities.  Covol believes that travel and related expenses will
decrease during 1999, but will continue to run at levels higher than 1997 due to
the ongoing activities that will be required at the 24 synthetic fuel facilities
utilizing Covol's patented  technology.  The balance of the increase in expenses
relates to approximately $250,000 of commissions incurred in connection with the
placement  of  synthetic   fuel  license   agreements,   $175,000  in  increased
professional  fees  and a  $500,000  increase  in  payroll  and  related  costs,
resulting from additional employees hired.

         Compensation expense on stock options,  stock warrants,  or issuance of
common stock  decreased  $1,119,000 or 54% to $939,000 for 1998 from  $2,058,000
for 1997.  This  decrease  is  attributable  to a change in policy to only grant
stock options at strike prices that are not  "in-the-money",  for the purpose of
providing  an incentive  to the  recipient of the options to create  shareholder
value.  The  majority of the 1998  expense  relates to options  granted in prior
years  that vest over  several  years and the  compensation  value that is being
recognized as an expense over the vesting period.

         In 1998,  Covol sold the facility owned by Alabama  Synfuel #1 Ltd. for
$6,500,000,  in exchange  for a note  receivable  due  February  2003. A loss of
$218,000 was incurred from the sale of this facility.  In 1997,  Utah Synfuel #1
sold its facility to Coaltech  for  $3,500,000,  evidenced by a promissory  note
payable in 44 quarterly  installments  of $130,000  starting March 31, 1997. The
actual  cost  to  construct  the  Utah  Synfuel  #1  facility  was   $4,082,000.
Accordingly,  a loss was incurred  from the sale of the Utah Synfuel #1 facility
in the amount of $582,000.

         During 1996, Covol sold certain construction  companies and received as
consideration a $5,000,000 note receivable  ("Note") with interest at 6% payable
over five years.  It was  determined  that the Note should be  discounted  to an
appropriate  market  rate and  accordingly,  the Note was  discounted  at 10.25%
resulting in a discount of $1,281,000.  The Note is  collateralized by stock and
stock options of Covol and is reflected in the balance  sheet at the  underlying
value of the  collateral.  Accordingly,  the Note is  "marked  to  market"  each
quarter  based upon the market value of Covol's  common stock.  This  adjustment
resulted  in income of $19,000  being  recognized  during  1998,  compared to an
expense of $60,000  recognized  during 1997. The Note is guaranteed by the buyer
of the construction companies and there has been no event of default or past due
payment on the Note.  Covol is  scheduled  to receive a $515,000  payment on the
Note in January  1999.  Covol does not  accrue  interest  on this Note and as of
September  30,  1998 the Note has a  carrying  value of  $1,609,000  in  Covol's
balance sheet.

         Other Income and Expense.  During 1998, Covol had net other expenses of
$1,375,000  compared to $141,000 for 1997.  This increase of $1,234,000  relates
primarily to an increase of $487,000 in net  interest  expense and a decrease of
$853,000 in minority  interest  in the net losses of  consolidated  subsidiaries
(Utah Synfuel #1 and Alabama Synfuel #1).  Interest  expense in 1999 is expected
to decrease  after the  repayment of debt related to  facilities  held for sale.
During September 1998, Covol offered the limited partners of Utah Synfuel #1 and
Alabama Synfuel #1 an exchange of their limited partnership interests for common
stock of Covol.  These exchanges,  most of which were accounted for in September
1998, were substantially  completed in November 1998, at which time Utah Synfuel
#1 became a  wholly-owned  subsidiary  of Covol and Alabama  Synfuel #1 became a
98%-owned  subsidiary of Covol. Covol believes the combined  operations of these
partnerships  will result in operating losses in the near-term future which will
be included in Covol's statement of operations.

                                       27
<PAGE>

         Loss from  Continuing  Operations.  For 1998, the loss from  continuing
operations decreased by $7,009,000 from $10,995,000 for 1997 to $3,986,000.  The
decrease is primarily due to the significant  increase in total revenues,  which
was  partially  offset  by  increased  operating  costs and  other  expenses  as
discussed previously.  Covol did not recognize any income tax benefit in 1998 or
1997 since the realization of its deferred tax assets,  consisting  primarily of
net  operating  loss  carryforwards,  depends on  generation  of future  taxable
income.

Year Ended September 30, 1997 Compared to Year Ended September 30, 1996

         The information set forth below compares Covol's  operating results for
1997 with its operating results for 1996.

Continuing Operations

         Revenues.  For 1997,  total  revenues  decreased by $44,000 to $251,000
from  $295,000  for 1996.  There  were no  license  fees  recognized  in 1997 as
compared to $100,000  recognized  in 1996.  Covol  received  payment for related
party license fees in fiscal 1997 which were  attributable to a one-time advance
license  fee paid by  Coaltech,  a  partnership  for which  Covol  serves as the
general  partner,  upon the sale of the Utah  Synfuel  #1  facility.  Covol also
received a $250,000  payment in fiscal  1997 of a one-time  advance  license fee
from Birmingham Syn Fuel, L.L.C. upon the issuance of a private letter ruling to
Birmingham Syn Fuel by the Internal Revenue Service.  Because Covol is obligated
to render  future  services to Coaltech  and  Birmingham  Syn Fuel,  the advance
license fees are recorded as deferred  revenue and will be  recognized as income
in future  periods when its  obligations  are met. Net proceeds from the sale of
briquettes  decreased  in 1997 by  $153,000  to $42,000  from  $195,000 in 1996.
Notwithstanding  the Utah  Synfuel #1 facility  having been placed in service in
early  1997,  its  production  and sales of  synthetic  fuel were  significantly
curtailed due to the lack of adequate  quality feed stock for production.  Covol
did produce  approximately  18,000 tons of synthetic fuel during 1997;  however,
due to high levels of ash in the  feedstock  and hence in the end  product,  the
synthetic  fuel was  difficult to market.  Covol  received  revenues from binder
sales in the amount of $209,000 in 1997. No sales of binder were made in 1996.

         Operating Costs and Expenses.  Operating  costs and expenses  increased
$532,000 to $11,105,000 for 1997 from $10,573,000 for 1996.  Operating costs and
expenses   attributable  to  briquetting   operations  increased  $3,943,000  to
$4,803,000  for 1997 from  $860,000  for 1996.  On or before  December 31, 1996,
Covol entered into several contracts to construct synthetic fuel facilities.  In
order for the contracts to be binding for purposes of qualification  for Section
29 treatment, Covol agreed to pay a penalty of 6% of the expected contract price
for the facilities if Covol did not proceed with  construction.  As of September
30, 1997, there were several contracts that were not expected to be completed by
June 30, 1998.  Accordingly,  Covol  recorded the  liability for the penalty for
these facilities in 1997 in the amount of $1,477,000.  Covol also incurred costs
of $1,548,000 which were  attributable to the start-up and operation of the Utah
Synfuel #1 facility for Coaltech,  a partnership  for which Covol is the general
partner.  When Utah  Synfuel #1 and Covol sold the Utah  Synfuel #1  facility to
Coaltech,  Utah Synfuel #1 entered into an agreement to purchase  synthetic fuel
produced at the Utah Synfuel #1 facility for costs incurred plus $1 per ton. The
Utah  Synfuel #1 facility  incurred  significant  costs for coal  fines,  labor,
binder materials,  repairs and maintenance,  equipment rental and other costs to
work  through  various  operational  issues.  These  costs are  included  in the
synthetic  fuel  purchase  commitment  and therefore are included in the cost of
coal briquetting  operations.  The remaining costs for briquetting operations in
1997 were more than in 1996 due to material  and labor costs for the  continuing
refinement and  implementation  of the briquetting  process and is reflective of
the phase of  commercialization  and operation Covol was in for 1997 as compared
to 1996.

         Research and development  costs  decreased  $380,000 or 36% during 1997
from $1,044,000 for 1996. This decrease is due to Covol's focus of resources and
efforts on the  commercialization  of its synthetic fuel technology through: the
construction and start-up of its first full scale  briquetting  facilities,  the
Utah and  Birmingport  plants;  the licensing of the  Briquetting  Technology to
other  licensees;  and the  development  of other projects that will utilize the
Briquetting  Technology in the manufacture of synthetic  fuels.  The majority of
the 1997 costs were principally attributable to research and development efforts
related to Covol's synthetic fuels technology.

                                       28
<PAGE>

         Selling,  general and administrative  expense decreased $798,000 or 21%
to  $2,998,000  for  1997  from  $3,796,000  for  1996.  The  decrease   related
principally   to  reductions  in  costs  for   administrative   labor,   outside
professional  services and travel  expenses.  The reduction in these expenses is
due to Covol's use of personnel,  resources and efforts on the commercialization
of the Covol binder technologies.

         Compensation  expense on stock options,  stock warrants and issuance of
common stock decreased  $2,815,000 or 58% to $2,058,000 for 1997 from $4,873,000
for 1996. The decrease is  attributable to reduction in the use of stock options
in  compensating  employees  and  consultants  of Covol.  The  reduction is also
reflective of a general  change in Covol  philosophy  regarding the strike price
for options granted.  Generally,  fewer stock options granted by Covol have been
"in-the-money",  thus serving as an incentive to the recipient of the options to
add value to Covol.

         In 1997,  Utah Synfuel #1 sold its facility to Coaltech for $3,500,000,
evidenced by a promissory note payable in 44 quarterly  installments of $130,000
starting  March 31, 1997.  The actual cost of Utah  Synfuel #1 to construct  the
facility was $4,082,000.  Accordingly,  a loss was incurred from the sale of the
Utah Synfuel #1 facility in the amount of $582,000.

         Other  Income  and  Expense.  In 1996,  Covol had net other  expense of
$2,654,000  and in 1997 had net other  expense of $141,000 for a net decrease in
other  expense of  $2,513,000.  In 1996,  Covol was  required,  under  generally
accepted  accounting  principles,  to write down the  discounted  $5,000,000  6%
promissory note (the "Note") from the sale of the construction  companies to the
ascertainable  value of the property  collateralizing  the Note. This accounting
treatment  resulted  in a  write-down  of  $2,700,000  in 1996.  The  additional
write-down  in 1997 of  $60,000  resulted  from the  change  in the value of the
property  collateralizing  the Note.  The Note is guaranteed by the buyer of the
construction  companies  and  there  has been no event  of  default  or past due
payment on the Note.  The  remaining  difference in net other expense is made up
principally of interest expense of $1,645,000, of which $1,438,000 was booked as
a result of the  transaction  Covol entered into with PacifiCorp with respect to
the $5,000,000  convertible debt instrument (see discussion below). This expense
is partially  offset by the net change in the addback for  minority  interest in
net losses of consolidated  subsidiaries of $1,241,000  ($4,000 in 1996 compared
to $1,245,000 in 1997). The increase is attributable to the minority interest in
the loss incurred by Utah Synfuel #1 in 1997. The current period  represents the
first full year of  operations  of Utah  Synfuel  #1.  Utah  Synfuel #1 incurred
losses in 1997 due to:  the sale of the Utah  Synfuel #1  facility  at an amount
less than its cost (after  adjustment  for the  installation  of the new dryer),
start-up  costs for the facility,  expense  incurred for license  fees,  and the
obligation to purchase synthetic fuels produced at a price equal to cost plus $1
per ton.

         In July 1996, Covol negotiated with PacifiCorp the general terms of the
sale of the Birmingport facility,  including an arrangement for convertible debt
in the amount of up to $5,000,000 to fund working capital and construction costs
needed to complete the Birmingport  facility. At the time of these negotiations,
Covol agreed to a conversion price of $7 per share, the trading price of Covol's
stock  at the  time the deal was  initially  negotiated.  The  actual  documents
completing this agreement were not finalized until March 20, 1997, at which time
the bid price of the  common  stock of Covol  was  approximately  $9 per  share.
Notwithstanding  the  fact  that at the  time  Covol  initially  negotiated  the
conversion  price there was no discount,  because there was a discount as of the
date the  documents for the  transaction  were  completed and signed,  Covol was
required  to reflect  as  interest  expense  the deemed  discounted  value,  the
difference at the date of issue of the  convertible  debt  security  between the
conversion  price and the fair market  value of the common  stock into which the
security  is  convertible,  multiplied  by the  number of shares  into which the
security is convertible.  The expense did not require an actual cash payment nor
did it impact the net equity of Covol.  This accounting  treatment is consistent
with guidance issued by the Securities and Exchange Commission and with guidance
issued as of March  13,  1997 by the  Emerging  Issues  Task  Force of the AICPA
(Statement EITF D-60: Accounting for the Issuance of Convertible Preferred Stock
and Debt Securities with a Nondetachable Conversion Feature).

         Loss from Continuing Operations.  For 1997, Covol had a net decrease of
$1,960,000 in loss from continuing  operations.  The decrease is principally due
to:  reductions  in research  and  development  costs and  selling,  general and
administrative costs; reductions in expenses for compensation expense from stock
options,  stock  warrants and  issuance of common  stock;  and  reduction in the
write-down of notes receivable. These reductions

                                       29
<PAGE>

were  partially  offset  by:  increases  in costs  for  briquetting  operations,
including losses  attributable to the Utah Synfuel #1 facility and penalties for
failure to proceed with construction  contracts;  loss from the sale of the Utah
Synfuel #1 facility,  and interest expense booked on the PacifiCorp  convertible
debt.  Covol did not recognize any income tax benefit in 1997 or 1996 related to
net  operating  loss  carryforwards  since the  realization  of the deferred tax
assets depends on generation of future taxable income.

Discontinued Operations

         For 1996,  Covol incurred  losses from  discontinued  operations in the
total amount of $881,000.  No additional  losses were recorded from discontinued
operations in subsequent years.

Liquidity and Capital Resources

         Liquidity.   During  1998,  Covol  and  its  licensees   completed  the
construction  of and began  operations at 24 synthetic  fuel  facilities.  Covol
currently owns four facilities which it constructed that are either under option
to  purchase  or are being  offered for sale.  Covol  anticipates  sale of these
facilities  during the year ending September 30, 1999. The majority of the funds
received  from sale of these  facilities  will be used to  retire  debt that was
incurred  principally in connection with the construction and operation of these
facilities and activities relative to the completion of the other synthetic fuel
facilities.  Net cash used in  operating  activities  increased  by  $840,000 to
$5,042,000  during 1998 from $4,202,000  during 1997. Covol was able to fund its
operating  activities,  including the continued refinement and commercialization
of it patented  briquetting  technology,  through the incurrence of debt and the
issuance of convertible  preferred stock,  common stock and related common stock
warrants.

         Capital  Resources.  During 1998,  Covol used net cash in its investing
activities  totaling  $38,388,000  compared to $7,181,000  for 1997.  These uses
consisted  principally of purchases of property,  plant and  equipment,  a major
portion of which related to the four facilities  currently held for sale. During
1998,  proceeds  from the issuance of notes payable and  convertible  debentures
totaled  $35,454,000  and issuance of common  stock  totaled  $3,257,000.  Covol
believes that funds required for investing activities will be significantly less
during 1999 because the  construction of facilities that produce  synthetic fuel
that  qualifies for federal  income tax credits under Section 29 of the IRC were
completed during 1998.

         Covol  anticipates  that  earned  license  fees or  royalties  from the
production  and sale of synthetic  fuel will  continue to increase  during 1999.
Covol believes that most of the synthetic fuel facilities will reach  production
levels  approaching  capacity by the end of 1999. As production levels increase,
sales of the binder materials by Covol to its licensees are expected to increase
proportionately.  Covol also anticipates  receiving the final amounts of advance
license fees totaling approximately $4,000,000 during 1999. While funds received
by Covol  from these  activities  are not  expected  to be  sufficient  to cover
Covol's operating costs and expenses until the third quarter of 1999, Covol does
expect that these operating activities will be producing  significant  operating
cash flow by the end of 1999.

         To  provide   funding  for  Covol's   operations   and  debt  repayment
requirements during early 1999, Covol will utilize proceeds from the issuance of
debt and equity  securities  and excess  proceeds  from the sale of  facilities.
During  November  1998,  Covol issued common stock and common stock warrants for
total proceeds of approximately  $3,500,000 and incurred debt totaling $400,000.
Covol has received term sheets for the sale of up to  $10,000,000 of convertible
preferred stock.  This financing is expected to close in January 1999. Covol has
received correspondence from the lender holding notes payable due March 1999 and
June 1999  indicating  a  willingness  to extend the due dates for 90 days if so
requested by the Company.  If such a request is made,  Covol has agreed to issue
warrants for the purchase of common stock to the lender as consideration for the
extension.  Covol believes the funds raised in this financing will be sufficient
to fund Covol's  operations and debt repayment  requirements until its operating
activities begin producing positive cash flow.

                                       30
<PAGE>

Forward Looking Statements

         Statements  in this Item 7  regarding  Covol's  expectations  as to the
financing,  development and construction of facilities  utilizing Covol's binder
technologies,  the receipt of licensing and royalty fees, revenues,  the receipt
of  operation  and  maintenance  fees,  the  receipt  of fees for sale of binder
materials, and other information presented herein that are not purely historical
by nature,  constitute  forward  looking  statements  within the  meaning of the
Private Securities  Litigation Reform Act of 1995.  Although Covol 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  Covol'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  in  part,  the
following:

o        the ability of licensees to produce and sell  synthetic fuel at or near
         the rated capacity of the synthetic fuel facilities;
o        ability to  obtain needed  additional capital  on terms  acceptable  to
         Covol;
o        changes in governmental  regulation or failure to comply  with existing
         regulation which may result in operational shutdowns of its facilities;
         and
o        the availability of tax credits under Section 29 of the tax code.

         See "ITEM 1. BUSINESS--Forward Looking Statements" for a description of
additional factors which could cause actual results to differ from expectations.

Year 2000 Issues

         The year 2000 issue  results  from  computer  programs  and  electronic
circuitry that do not differentiate  between the year 1900 and year 2000 because
they are written  using  two-digit  rather than  four-digit  dates to define the
applicable  year. Many computer  applications and  date-sensitive  devices could
fail or produce erroneous results when processing data after December 31, 1999.

         Covol does not have any  computer  applications  that it  believes  are
mission critical to the operation of synthetic fuel facilities that it operates.
While Covol has not formally  verified Year 2000  compliance with licensees that
utilize Covol's  technology in their synthetic fuel  facilities,  it is believed
that the computer  applications  used in the operations of these  facilities are
not mission critical. Accordingly, it is believed that Year 2000 issues will not
be significant  to these computer  applications  and  accordingly,  upgrading or
modifications to these applications to make them Year 2000 compliant will not be
significant.

         During 1998 Covol  upgraded its network  operating  system and believes
that system is Year 2000  compliant  and that any  additional  upgrading to that
system will not be  significant.  Covol utilizes  computer  applications  in the
finance and accounting  departments  and in the corporate  office that utilize a
two-digit date that will need to be upgraded in order to be Year 2000 compliant.
Covol has contacted the providers of this software and they have  indicated that
Year 2000 compliant software will be available in early 1999. Covol believes the
cost  to  purchase  this  upgraded   software  and  to  convert  the  applicable
applications to this new software will be less than $50,000.  Covol  anticipates
that this  conversion  will be completed by June 30,  1999.  The costs  incurred
during 1998 to upgrade the network operating  systems was approximately  $25,000
and is included in selling, general and administrative expenses.

                                       31
<PAGE>

Impact of Inflation

         During 1998,  cost increases to Covol were not  materially  impacted by
inflation.

Other Items

         Covol has reviewed all recently issued, but not yet adopted, accounting
standards  in order to  determine  their  effects,  if any,  on the  results  of
operations or financial position of Covol. Based on that review,  Covol believes
that none of these  pronouncements  will have any significant effects on current
or future financial position or results of operations.

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         None.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial  statements and supplementary  financial data required by
this Item 8 are set forth in Item 14 of this Form 10-K.  All  information  which
has been omitted is either inapplicable or not required.

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

         There are no changes in or disagreements with Accountants on accounting
or financial statement disclosure.


                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information to be set forth under the caption "Item 1: Election of
Directors" in Covol's Proxy  Statement  dated on or about January 25, 1999,  for
the Annual  Meeting of  Shareholders  to be held on or about March 18, 1999 (the
"Proxy  Statement"),  and the  information  to be set forth  under  the  caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement
are incorporated herein by reference. The information set forth under "Executive
Officers of Covol" in Part I hereof is also incorporated herein by reference.

ITEM 11.          EXECUTIVE COMPENSATION

         The   information  to  be  set  forth  under  the  caption   "Executive
Compensation"  in the Proxy  Statement  is  incorporated  herein  by  reference;
provided,  however,  that Covol specifically excludes from such incorporation by
reference any information set forth under the captions  "Compensation  Committee
Report on Executive  Compensation"  and "Stock Price  Performance  Graph" in the
Proxy Statement.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Security  ownership of certain  beneficial  owners and management to be
set forth under the caption  "Security  Ownership  of  Directors,  Nominees  and
Principal  Stockholders"  in the  Proxy  Statement  is  incorporated  herein  by
reference.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  to be set forth under the caption  "Transaction  with
Related Parties" in the Proxy Statement is incorporated herein by reference.

                                       32
<PAGE>


                                     PART IV

ITEM 14.          EXHIBITS,  FINANCIAL  STATEMENT SCHEDULES, AND REPORTS ON FORM
                  8-K

(a)      1.       Financial Statements


Consolidated Financial Statements of Covol Technologies, Inc.

Report of Independent Accountants......................................    F-1

Consolidated Balance Sheets as of September 30, 1998 and 1997..........    F-2

Consolidated Statements of Operations
         for the years ended September 30, 1998, 1997 and 1996.........    F-4

Consolidated Statements of Changes in Stockholders' Equity
         for the years ended September 30, 1998, 1997 and 1996.........    F-5

Consolidated Statements of Cash Flows
         for the years ended September 30, 1998, 1997 and 1996.........    F-9

Notes to Consolidated Financial Statements.............................   F-11

         2.       Financial Statement Schedules

         All financial  statement  schedules for which  provision is made in the
applicable accounting  regulations of the Securities and Exchange Commission are
not required under the related  instructions or are inapplicable,  and therefore
have been omitted.

         3.       Listing of Exhibits

         Certain  other  instruments  which  would  otherwise  be required to be
listed below have not been so listed  because such  instruments do not authorize
securities  in an amount which  exceeds 10% of the total assets of Covol and its
subsidiaries  on a consolidated  basis and Covol agrees to furnish a copy of any
such instrument to the Commission upon request.

         There is  included a Restated  Financial  Data  Schedule  for the years
ended September 30, 1997 and 1996.

                                       33
<PAGE>


Exhibit No.                      Description                            Location

2.1              Agreement and Plan of Reorganization, dated July 1,      (1)
                 1993 between Covol and the            
                 Stockholders of R1001

2.2              Agreement and Plan of Merger dated August 14, 
                 1995 between Covol and Covol                             (1)
                 Technologies, Inc., a Delaware corporation

2.3              Stock Purchase Agreement, dated July 1, 1993,            (1)
                 among Covol, Lloyd C. McEwan, Michael McEwan, 
                 Dale F. Minnig and Ted C. Strong regarding the 
                 purchase of Industrial Management & Engineering, 
                 Inc. and Central Industrial Construction, Inc.

2.4              Stock Sale Transaction Documentation, effective          (1)
                 as of September 30, 1994, between Covol and 
                 Farrell F. Larson regarding Larson Limestone 
                 Company, Inc.

2.5              Stock Purchase Agreement dated February 1, 1996          (1)
                 by and among Covol, Michael McEwan and Gerald 
                 Larson regarding the sale of State, Inc., 
                 Industrial Engineering & Management, Inc., 
                 Central Industrial Construction, Inc., and 
                 Larson Limestone Company, Inc.

2.5.1            Amendment to Share Purchase Agreement regarding          (1)
                 the sale of the Construction  Companies

2.5.2            Amendment No. 2 to Share Purchase Agreement              (2)
                 regarding the sale of the Construction Companies

3.1              Certificate of Incorporation of Covol                    (1)

3.1.1            Certificate of Amendment of the Certificate of           (1)
                 Incorporation of Covol dated January 22, 1996

3.1.2            Certificate of Amendment of the Certificate of           (6)
                 Incorporation dated June 25, 1997          

3.1.3            Certificate of Designation, Number, Voting Powers,       (7)
                 Preferences and Rights of Covol's Series A 6%
                 Convertible Preferred Stock (Originally designated 
                 as Exhibit No. 3.1.2)

3.1.4            Certificate of Designation,  Number, Voting Powers,      (8)
                 Preferences and Rights of  Covol's Series B 
                 Convertible  Preferred Stock (Originally designated
                 as Exhibit No. 3.1.3)

3.2              By-Laws of Covol                                         (1)

3.2.1            Certificate of Amendment to Bylaws of Covol dated 
                 January 31, 1996                                         (1)

3.2.2            Certificate of Amendment to the Bylaws dated May         (6)
                 20, 1997 (Originally designated as Exhibit No. 3.2.1)

3.2.3            Certificate of Amendment to the Bylaws dated June 25,    (6)
                 1997 (Originally designated as Exhibit No. 3.2.2)

4.1              Promissory Note between Covol and Mountaineer           (12)
                 Synfuel, L.L.C. dated May 5, 1998 (filed as 
                 Exhibit 10.52.2 hereto)

                                       34
<PAGE>

Exhibit No.                       Description                          Location

4.2              Promissory Note dated December 8, 1998 of Covol to       *
                 Mountaineer Synfuel, L.L.C.(filed as Exhibit 
                 10.52.4 hereto)

4.3              Security Agreement dated December 8, 1998 between        *   
                 Mountaineer Synfuel, L.L.C. and Covol (filed as 
                 Exhibit 10.52.5 hereto)

9.1              Special Powers of Attorney Coupled With an Interest     (1)
                 dated February 1, 1996 between Covol, Gerald Larson
                 and Michael McEwan

10.1             License Agreement, dated June 30, 1995, between         (1)
                 Covol and Greystone Environmental Technologies, 
                 relating to the Greystone Joint Venture

10.1.1           First Amendment dated January 3, 1996 to the            (1)
                 License Agreement dated June 30, 1995 between 
                 Covol and Greystone Environment Technologies

10.2             Briquetting Services Agreement, dated May 5, 1995,      (1)
                 between Geneva Steel Company and Covol

10.2.1           Amended and Restated Briquetting Service                (3)
                 Agreement, dated May 14, 1996,  between Covol 
                 and Geneva Steel Company

10.3             Lease Agreement, dated May 5, 1995 between              (1)
                 Geneva Steel Company, as landlord, and Covol,
                 as tenant

10.3.1           First Amendment to Lease Agreement, dated May           (3)
                 14, 1996 between Geneva Steel Company, as 
                 landlord, and Covol, as tenant

10.4             Master Equipment Lease Agreement, dated May             (1)
                 4, 1995, between Keycorp Leasing Ltd. and Covol

10.5             1995 Stock Option Plan                                  (1)

10.5.1           First Amendment to the 1995 Stock Option Plan           (1)

10.6             Employment Agreement, dated January 1, 1992, with       (1)
                 Kenneth M. Young                        

10.7             Employment Agreement, dated July 1, 1992, with          (1)
                 Russell Madsen                             

10.8             Lease Agreement, dated May 31, 1994, between            (1)
                 Covol and Byrleen Hanson regarding Carbon
                 County, Utah

10.9             Standard Form of Agreement between Owner and            (1)
                 Design Builder dated December 28, 1995 between 
                 Covol and Lockwood Greene Engineers, Inc.

10.9.1           Notice to Proceed from Covol to Lockwood Greene         (1)
                 Engineers, Inc. dated January 14, 1996

10.9.2           Letter Agreement with Lockwood Greene Engineers,        (1)
                 Inc. to extend notice dates.           

10.9.3           Letter dated July 26, 1996 from Lockwood Greene         (3)
                 Engineers, Inc. and the Memorandum of Understanding 
                 between Covol Technology, Inc. and Lockwood
                 Greene Engineers, Inc. dated August 28, 1996

                                       35
<PAGE>

Exhibit No.                    Description                            Location

10.9.4           Amendment to Standard Form of Agreement between         (3)
                 Owner and Design/Builder dated December 28, 1995,
                 dated September 16, 1996, between Covol and
                 Lockwood Greene Engineers, Inc.

10.10            Engagement Letter dated December 18, 1995 by and        (1)
                 between Covol and Smith Barney

10.10.1          Termination Letter, dated July 8, 1996, from            (3)
                 Smith Barney                                 

10.11            Letter of Understanding dated January 30, 1996          (1)
                 between Covol and CoBon Energy, LLC

10.11.1          Modification of Letter of Understanding dated           (3)
                 August 20, 1996 between Covol and CoBon Energy, LLC

10.11.2          License Agreement dated September 10, 1996, between     (3)
                 Covol and CoBon Energy, LLC

10.11.3**        Project Development Agreement, dated December 30,       (9)
                 1996, between Covol and CoBon Energy LLC

10.11.4**        Modification of Project Development Agreement,          (9)
                 dated December 31, 1996, between Covol and CoBon 
                 Energy, LLC

10.12            [Intentionally Omitted]

10.13            Promissory Note dated February 15, 1996 in favor        (1)
                 of Covol from Michael McEwan and Gerald Larson

10.14            [Intentionally Omitted]
 
10.15            Agreement between Alabama Power Company and             (3)
                 Covol for the Sale and Purchase of Coal, dated 
                 April 16, 1996, between Covol and the Alabama 
                 Power Company

10.16            Employment Agreement, dated June 1, 1996 with           (3)
                 Brent M. Cook                               

10.16.1          Stock Option Agreement dated June 1, 1996 with          (3)
                 Brent M. Cook                             

10.18            Letter dated July 19, 1996 from Covol canceling         (3)
                 the Site Identification Agreement        

10.19            Term Sheet, dated August 22, 1996, from Covol           (3)
                 common stock to Byrleen Hanson regarding purchase 
                 of Price, Utah office building


10.20            Primary Agreement, dated November 6, 1996, between      (3)
                 Covol and Savage Industries Inc.

10.20.1          Mojave Agreement, dated November 6, 1996, between       (3)
                 Covol and Savage Industries Inc.

10.21            Release to all claims, dated September 13, 1996,        (3)
                 executed by Maynard Moe                  

                                       36
<PAGE>

Exhibit No.                       Description                          Location

10.22            Letter of Understanding, dated September 13, 1996,      (3)
                 between Covol and E.J. Hodder & Associates, Inc. 
                 regarding the sale of the Port Hodder facility
                 to Covol

10.23            Sublease, dated September 9, 1996, between Covol        (3)
                 and Parker Towing Company, Inc. regarding the 
                 lease of approximately 16 acres located in 
                 Tuscaloosa County, Alabama

10.24            Supply Agreement, dated September 11, 1996,             (3)
                 among Covol, K-Lee Processing, Inc. and Concord 
                 Coal Recovery Limited Partnership

10.25            PacifiCorp Financial Services, Inc. Letter of           (3)
                 Intent (Covol Technologies) dated September 12, 1996

10.26            Exclusive Financial Advisor Agreement, dated            (3)
                 September 16, 1996, between Covol and Coalco 
                 Corporation

10.27            Settlement Agreement, dated September 17, 1996,         (3)
                 among   Covol,   Environmental   Technologies   Group
                 International,  Inc., Larson Limestone Company, Inc.,
                 Michael M. Midgley,  Mark Hardman,  Kenneth M. Young,
                 Irene Larson,  Farrell  Larson,  Gary  Burningham and
                 Burningham Enterprises, Inc.

10.28            Debenture Agreement and Security Agreement, dated       (3)
                 December 20, 1996,  between AJG  Financial  Services,
                 Inc. and Covol

10.29            Arthur J. Gallagher & Co. Letter of Intent, dated       (3)
                 November 13, 1996

10.30            Lease Agreement, dated December 12, 1996, between       (3)
                 Covol  and  UPC,  Inc.  regarding  Price  City,  Utah
                 property

10.31            1996 Standard Form of Agreement between Owner and       (3)
                 Design/Contractor

10.32            Form of Limited Partnership Agreements for Alabama      (3)
                 Synfuel #1, Ltd.  ("AS #1") and Utah Synfuel #1, Ltd.
                 ("US #1")

10.33            Utah Project Purchase Agreement, dated as of            (4)
                 March 7, 1997, by and among Covol,  US #1, a Delaware
                 limited  partnership,  and  Coaltech  No. 1, L.P.,  a
                 Delaware limited partnership ("Coaltech")

10.34            License and Binder Purchase Agreement, dated as of      (4)
                 March 7, 1997, by and among Covol, US #1 and Coaltech

10.35            Operation and Maintenance Agreement, dated as of        (4)
                 March 7, 1997, by and between Covol and Coaltech

10.36            Purchase and Supply Agreement, dated as of March        (4)
                 7, 1997, by and among Covol, US #1 and Coaltech

10.37            Abandonment Option Agreement, dated as of March 7,      (4)
                 1997, by and among Covol and the limited  partners of
                 Coaltech

10.38            Convertible Loan and Security Agreement, dated as       (5)
                 of  March  20,  1997,   by  and  between   Covol  and
                 PacifiCorp Financial Services, Inc. ("PacifiCorp")

                                       37
<PAGE>

Exhibit No.                    Description                             Location

10.38.1          Amendment to Convertible Loan and Security              (9)
                 Agreement,  dated  December  12,  1997 by and between
                 Covol and PacifiCorp

10.39            Alabama Project Purchase Agreement ("Alabama            (5)
                 Agreement")  dated as of March 20, 1997, by and among
                 Covol, AS #1 and Birmingham Syn Fuel, L.L.C.

10.39.1          Letter Amendment, dated June 27, 1997, to               (9)
                 Alabama Agreement.                              

10.39.2 **       Letter Amendment, dated July 7, 1997, to                (9)
                 Alabama Agreement.                               

10.39.3          Letter Amendment, dated August 28, 1997, to             (9)
                 Alabama Agreement.                            

10.39.4          Letter Amendment, dated December 12, 1997, to           (9)
                 Alabama Agreement.                          

10.39.5 **       Amended and Restated License Agreement, and Binder      (9)
                 Purchase dated December 12, 1997, by and among Covol,
                 AS #1 and Birmingham Syn Fuel.

10.39.6**        Letter Amendment dated February 20, 1998, to the       (10)
                 Alabama Project Purchase  Agreement dated as of March
                 20, 1997, by and among Covol,  AS #1, and  Birmingham
                 Syn Fuel.

10.39.7          Call Option Agreement date February 20, 1998,          (10)
                 between Birmingham Syn Fuel and Covol.

10.39.8**        Letter Amendment dated February 20, 1998, to the       (10)
                 Amended  and  Restated  License  and Binder  Purchase
                 Agreement dated as of December 12, 1997, by and among
                 Covol. AS #1 and Birmingham Syn Fuel.

10.39.9**        Non-negotiable Promissory Note dated February 20,      (10)
                 1998, in favor of AS #1,  executed by Birmingham  Syn
                 Fuel as debtor.

10.39.10         Security Agreement dated February 20, 1998, by and     (10)
                 among Covol, AS #1 and Birmingham Syn Fuel.

10.40            Conditional Option Agreement, dated as of March 20,     (5)
                 1997,  by and  among  Birmingham  Syn  Fuel I,  Inc.,
                 Birmingham Syn Fuel II, Inc.,  PacifiCorp,  AS #1 and
                 Covol

10.41            Registration Rights Agreement, dated as of March 20,    (5)
                 1997, by and between Covol and PacifiCorp

10.42**          Amended and Restated Agreement Concerning               (9)
                 Additional  Facilities,  dated  December 12, 1997, by
                 and between PacifiCorp., Birmingham Syn Fuel, LLC and
                 Covol

10.43            Lease Agreement between Industrial Management           (9)
                 Engineering, Inc. and Covol

10.44            Employment Agreement, dated January 1, 1997             (9)
                 with Stanley M. Kimball

10.45**          License and Binder Purchase Agreement, dated            (9)
                 December 14, 1997, between Appalachian  Synfuel,  LLC
                 and Covol

                                       38
<PAGE>

Exhibit No.                  Description                               Location
10.46**          Financing Agreement, dated November 14, 1997,           (9)
                 between Covol and CoBon Energy, L.L.C.

10.47**          License Agreement, dated as of August 5, 1997,          (9)
                 by and between Pelletco Corporation and Covol

10.48**          Preparation Plant and Find Ponds Lease                  (9)
                 (Wellington,  Utah), dated February 21, 1997, between
                 Earthco and Covol

10.49**          Agreement Concerning Additional Facilities,             (9)
                 dated  December  27,  1996,   between  AJG  Financial
                 Services, Inc. and Covol

10.50**          Form of Agreement for Technology Licensing of           (9)
                 Facilitation,  dated  December 31,  1996,  between PC
                 West Virginia Synthetic Fuel #1, LLC and Covol

10.50.1**        Form of Amended and Restated License and Binder        (11)
                 Purchase Agreement dated February 3, 1998, between PC
                 Virginia   Synthetic   Fuel  #1,  PC  West   Virginia
                 synthetic Fuel #2, PC West Virginia Synthetic Fuel #3
                 and Covol.

10.50.2**        Loan Agreement between C.C. Pace Capital, L.L.C. and   (11)
                 Carbon  Resources,  Inc.  and Covol  dated  April 21,
                 1998.

10.50.3          Security Agreement between C.C. Pace Capital, L.L.C.   (11)
                 and Carbon Resources,  Inc. and Covol dated April 21,
                 1998.

10.51            Employment Agreement, dated March 20, 1997 with         (9)
                 Max E. Sorenson

10.52**          Technology License and Binder Purchase Agreement       (12)
                 between Mountaineer Synfuel,  L.L.C.,  Licensee,  and
                 Covol, Licensor

10.52.1          Asset Purchase Agreement between Mountaineer Synfuel,  (12)
                 L.L.C.  as Purchase  and Covol as Seller dated May 5,
                 1998

10.52.2          Promissory Note between Covol and Mountaineer          (12)
                 Synfuel, L.L.C. dated May 5, 1998

10.52.3          Deed of Ground Lease between Upshur Property,          (12)
                 Inc. and Covol dated May 5, 1998

10.52.4          Promissory Note dated December 8, 1998 of Covol         *
                 Technologies, Inc. to Mountaineer Synfuel, L.L.C.

10.52.5          Security Agreement dated December 8, 1998 between       *
                 Mountaineer  Synfuel,  L.L.C. and Covol Technologies,
                 Inc.

10.52.6          Leasehold Credit Line Deed of Trust and Security        *
                 Agreement   dated   December   8,   1998   by   Covol
                 Technologies, Inc. for Mountaineer Synfuel, L.L.C. as
                 Beneficiary.

10.52.7          Amendment No. 1 to Deed of Ground Lease dated           *
                 December 8, 1998 between  Upshur  Property,  Inc. and
                 Covol Technologies, Inc.

10.53.1          Debenture  Agreement and Security Agreement             *
                 dated as of January 9,  1998,  between  Covol and AJG
                 Financial Services, Inc.

                                       39
<PAGE>

Exhibit No.                   Description                              Location

10.53.2          Debenture dated as of January 9, 1998 between           *
                 Covol and AJG Financial Services, Inc.

10.53.3          Warrant A dated as of January 9, 1998, issued by        *
                 Covol in favor of AJG Financial Services, Inc.

10.53.4          Warrant B dated as of January 9, 1998, issued by        *
                 Covol in favor of AJG Financial Services, Inc.

10.53.5          Registration Rights Agreement dated as of January       *  
                 9, 1998,  between Covol and AJG  Financial  Services, 
                 Inc.

10.54            Employment Agreement effective May 1, 1998 with         *
                 Steven G. Stewart

10.55            Employment Agreement effective August 1, 1997           *
                 with Dee J. Priano

16.1             Letter to Securities and Exchange Commission,          (1)
                 dated March 24,  1995,  from Jones,  Jensen & Orton &
                 Company, certified public accountants

21.1             List of Subsidiaries of Covol                           *

23.1             Consent of PricewaterhouseCoopers LLP                   *

27.1             Financial Data Schedule for the fiscal year 
                 ended September 30, 1998                                *

27.2             Restated Financial Data Schedule for the fiscal         *
                 years ended September 30, 1997 and 1996

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

*        Filed herewith.

**       Confidential  treatment  has been  granted to certain  portions of this
         exhibit, which portions have been deleted and filed separately with the
         Securities and Exchange Commission.

Unless another exhibit number is indicated as the exhibit number for the exhibit
as "originally filed," the exhibit number in the filing in which any exhibit was
originally  filed  and to  which  reference  is made  hereby  is the same as the
exhibit number assigned herein to the exhibit.

(1)      Incorporated by reference to the indicated  exhibit filed with  Covol's
         Registration Statement on Form 10, filed February 26, 1996.

(2)      Incorporated  by reference to the indicated  exhibit filed with Covol's
         Registration  Statement on Form 10/A,  Amendment No. 2, dated April 24,
         1996.

(3)      Incorporated by reference to the indicated  exhibit filed  with Covol's
         Annual  Report on Form 10-K for the  fiscal  year ended  September  30,
         1996.

(4)      Incorporated by reference  to the indicated exhibit  filed with Covol's
         Current Report on Form 8-K, dated March 10, 1997.

(5)      Incorporated by reference to the  indicated exhibit filed with  Covol's
         Quarterly Report on Form 10-Q, for the quarterly period ended March 31,
         1997.

(6)      Incorporated by reference to the indicated  exhibit filed with  Covol's
         Quarterly  Report on Form 10-Q, for the quarterly period ended June 30,
         1997.

                                       40
<PAGE>


(7)      Incorporated by reference to the  indicated exhibit  filed with Covol's
         Current Report on Form 8-K, dated August 19, 1997.

(8)      Incorporated  by reference to the indicated  exhibit filed with Covol's
         Current Report on Form 8-K, for event dated  September 18, 1997,  filed
         October 28, 1997.

(9)      Incorporated by reference to the indicated  exhibit filed  with Covol's
         Annual  Report on Form 10-K for the  fiscal  year ended  September  30,
         1997.

(10)     Incorporated  by reference to the indicated  exhibit filed with Covol's
         Current Report on Form 8-K, for event dated March 3, 1998,  filed March
         23, 1998.

(11)     Incorporated by  reference to the indicated exhibit  filed with Covol's
         Quarterly Report on Form 10-Q, for the quarterly period ended March 31,
         1998.

(12)     Incorporated by reference to the  indicated exhibit  filed with Covol's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.

Reports on Form 8-K

         No reports on Form 8-K were filed  during the quarter  ended  September
30, 1998.

Exhibits

         The  response  to this  portion of Item 14 is  submitted  as a separate
section of this report. See Item 14 (a) (3) above.

Financial Statement Schedules

         The  response  to this  portion of Item 14 is  submitted  as a separate
section of this report. See Item 14 (a) (2) above.



                                       41
<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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.


                               COVOL TECHNOLOGIES, INC.


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


                               By:/s/ Steven G. Stewart   
                                  Steven G. Stewart, Principal Financial Officer

                               Date: January 13, 1999

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.


   SIGNATURE                      TITLE                              DATE

/s/ Brent M. Cook            Chief Executive Officer           January 13, 1999
- -----------------------  Principal Executive Officer) and      
Brent M. Cook                       Director

/s/ Steven G. Stewart   Chief Financial Officer (principal     January 13, 1999
- -----------------------      Financial and Accounting          
Steven G. Stewart                    Officer)

/s/ Stanley M. Kimball        President and Director           January 13, 1999
- -------------------------
Stanley M. Kimball

/s/ DeLance W. Squire                Director                  January 13, 1999
- -------------------------
DeLance W. Squire

/s/ James A. Herickhoff              Director                  January 13, 1999
- -------------------------
James A. Herickhoff

/s/ Raymond J. Weller                Director                  January 13, 1999
- -------------------------
Raymond J. Weller

/s/ John P. Hill, Jr.                Director                  January 13, 1999
- -------------------------
John P. Hill, Jr.

                                       42
<PAGE>

                    
                        Report of Independent Accountants


To the Board of Directors
Covol Technologies, Inc. and Subsidiaries

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of  operations,  stockholders'  equity,  and cash flows
present fairly, in all material respects, the consolidated financial position of
Covol  Technologies,  Inc. and Subsidiaries  (the "Company") as of September 30,
1998 and 1997, and the  consolidated  results of their operations and their cash
flows for the years ended  September 30, 1998, 1997 and 1996, in conformity with
generally accepted  accounting  principles.  These financial  statements are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.




PRICEWATERHOUSECOOPERS LLP


Salt Lake City, Utah
December 22, 1998

                                      F-1
<PAGE>
<TABLE>
<CAPTION>





                                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                           CONSOLIDATED BALANCE SHEETS


                                                                                         As of September 30,
(thousands of dollars)                                                                  1998            1997
- ----------------------------------------------------------------------------------- -------------- ----------------

ASSETS

Current assets:
<S>                                                                                         <C>             <C>   
     Cash and cash equivalents                                                              $ 727           $4,780
     Receivables                                                                            2,879               13
     Receivable - stock subscriptions                                                         ---              577
     Due from related party                                                                 1,012              509
     Inventories                                                                            1,645            1,819
     Advances on inventories                                                                2,522            1,087
     Notes receivable - related parties, current                                              229              276
     Facilities held for sale                                                              28,405            8,155
     Prepaid expenses and other current assets                                                682               52
                                                                                    -------------- ----------------
            Total current assets                                                           38,101           17,268
                                                                                    -------------- ----------------

Property, plant and equipment, net of accumulated depreciation                             14,902            5,464
                                                                                    -------------- ----------------

Other assets:
     Restricted investments                                                                   748              ---
     Note and accrued interest receivable, non-current                                      6,986              ---
     Notes receivable - related parties, non-current                                        2,869            3,817
     Investment in licensee facility                                                        1,000              ---
     Intangible assets                                                                      3,118              ---
     Deposits and other assets                                                                185              321
                                                                                    -------------- ----------------
            Total other assets                                                             14,906            4,138
                                                                                    -------------- ----------------

            Total assets                                                                  $67,909          $26,870
                                                                                    ============== ================
</TABLE>

                                    continued






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

                                      F-2
<PAGE>
<TABLE>
<CAPTION>



                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                      CONSOLIDATED BALANCE SHEETS, continued

                                                                                          As of September 30,
(thousands of dollars and shares)                                                        1998            1997
- ------------------------------------------------------------------------------------ -------------- ----------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
<S>                                                                                         <C>              <C>   
     Accounts payable                                                                       $3,036           $3,013
     Due to related party                                                                    1,609            1,548
     Accrued liabilities                                                                     2,858            2,500
     Notes payable and convertible debentures, current                                      22,049            5,247
                                                                                     -------------- ----------------
            Total current liabilities                                                       29,552           12,308
                                                                                     -------------- ----------------

Long-term liabilities:
     Notes payable and convertible debentures, non-current                                  13,930            2,900
     Notes payable - related parties, non-current                                              147              489
     Accrued interest payable, non-current                                                     566              204
     Deferred revenues from advance license fees                                             1,400            1,650
     Deferred compensation                                                                     236              224
                                                                                     -------------- ----------------
            Total long-term liabilities                                                     16,279            5,467
                                                                                     -------------- ----------------
            Total liabilities                                                               45,831           17,775
                                                                                     -------------- ----------------

Minority interest in consolidated subsidiaries                                                 507            3,166
                                                                                     -------------- ----------------

Commitments and contingencies

Stockholders' equity:
     Convertible  preferred stock,  $0.001 par value;  authorized 10,000 shares,
      issued and  outstanding 316 shares at September 30, 1998 and 303 shares at
      September 30, 1997 (aggregate liquidation preference of $5,465
      at September 30, 1998)                                                                     1                1
     Common stock, $0.001 par value; authorized 25,000 shares, issued and
      outstanding 11,272 shares at September 30, 1998 and 8,627 shares at
      September 30, 1997                                                                        11                9
     Common stock to be issued, 0 shares at September 30, 1998 and 462 shares at
      September 30, 1997                                                                       ---                1
     Capital in excess of par value - preferred                                              5,184            5,094
     Capital in excess of par value - common                                                64,100           41,818
     Capital in excess of par value - common stock to be issued                                ---            3,291
     Accumulated deficit                                                                   (36,177)         (32,191)
     Notes and interest receivable -- related parties, from issuance of, or
    collateralized      by, common stock, net of allowance                                  (7,773)          (7,411)
     Deferred compensation from stock options                                               (3,775)          (4,683)
                                                                                     -------------- ----------------
            Total stockholders' equity                                                      21,571            5,929
                                                                                     -------------- ----------------

            Total liabilities and stockholders' equity                                     $67,909          $26,870
                                                                                     ============== ================
</TABLE>

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

                                      F-3

<PAGE>
<TABLE>
<CAPTION>


                                         COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                     Year ended September 30,
(thousands of dollars and shares, except per-share data)                    1998              1997               1996
- --------------------------------------------------------------------- ----------------- ------------------ ------------------
Revenues:
<S>                                                                             <C>                <C>                <C>   
     License fees                                                               $7,942             $  ---             $  100
     Binder and coal fine sales - related party                                  2,543                209                ---
     Binder sales                                                                  994                ---                ---
     Binder plant sales                                                          1,088                ---                ---
     Synthetic fuel sales, net                                                      32                 42                195
     Other                                                                         100                ---                ---
                                                                      ----------------- ------------------ ------------------
               Total revenues                                                   12,699                251                295
                                                                      ----------------- ------------------ ------------------

Operating costs and expenses:
     Cost of coal briquetting operations                                         9,295              4,803                860
     Selling, general and administrative                                         4,436              2,998              3,796
     Research and development                                                      422                664              1,044
     Compensation expense on stock options, stock warrants and
          issuance of common stock                                                 939              2,058              4,873
     Loss on sale of facility                                                      218                582                ---
                                                                      ----------------- ------------------ ------------------
        Total operating costs and expenses                                      15,310             11,105             10,573
                                                                      ----------------- ------------------ ------------------
Operating loss                                                                  (2,611)           (10,854)           (10,278)
                                                                      ----------------- ------------------ ------------------

Other income (expense):
     Interest income                                                               899                286                302
     Interest expense                                                           (2,745)            (1,645)               (94)
     Minority interest in net losses of consolidated subsidiaries                  392              1,245                  4
   Write-up (write-down) of notes receivable - related parties,
        collateralized by common stock                                              19                (60)            (2,700)
     Other                                                                          60                 33               (166)
                                                                      ----------------- ------------------ ------------------
          Total other income (expense)                                          (1,375)              (141)            (2,654)
                                                                      ----------------- ------------------ ------------------
Loss from continuing operations before income taxes                             (3,986)           (10,995)           (12,932)

Income tax provision                                                               ---                ---                (23)
                                                                      ----------------- ------------------ ------------------
Loss from continuing operations                                                 (3,986)           (10,995)           (12,955)
                                                                      ----------------- ------------------ ------------------

Discontinued operations (Note 15):
     Loss from discontinued operations                                             ---                ---               (590)
     Loss on disposal of discontinued operations                                   ---                ---               (291)
                                                                      ----------------- ------------------ ------------------
        Loss from discontinued operations                                          ---                ---               (881)
                                                                      ================= ================== ==================
Net loss                                                                       $(3,986)          $(10,995)          $(13,836)
                                                                      ================= ================== ==================

Basic and diluted net loss per common share:
   Loss per share from continuing operations                                     $(.43)            $(1.38)            $(1.86)
     Loss per share from discontinued operations                                   ---                ---               (.13)
                                                                      ----------------- ------------------ ------------------
Basic and diluted net loss per common share                                      $(.43)            $(1.38)            $(1.99)
                                                                      ================= ================== ==================
</TABLE>


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

                                      F-4
<PAGE>
<TABLE>
<CAPTION>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                                                                                               Notes and   
                                                                                                                interest  
                                                                                                               receivable  
                                                                                                                -related   
                                                                                                                parties,   
                                                                                                                  from     
                                                                                                                issuance   
                     Convertible Preferred Stock        Common Stock        Common Stock to be Issued            of, or    Deferred
                     ---------------------------- ------------------------  -------------------------           collater-   compen-
                                       Capital in                Capital in                Capital in  Accum-    alized     sation
(thousands of                          excess of                 excess of                 excess of   lated  by, common  from stock
dollars and shares)   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>     
Balances 
at 
October 1, 1995        ---     $---     $---    5,260     $6     $9,617      119     $1      $582     $(7,360)   $(240)    $(1,422)

Common stock 
issued for 
services                                          114     ---       769      (50)    ---     (322)

Common stock 
issued for 
notes receivable
from related 
parties, 
including 
exercise of 
stock options                                   1,010      1      6,283                                         (6,284)

Common stock 
issued for 
cash, including
exercise of 
stock options
and warrants                                    1,226      1      7,479      (69)    ---   (260)

Common stock 
to be issued 
for cash 
received                                                                      44     ---    350

Common stock
to be issued 
for property 
acquired                                                                      60     ---    585

Payment on 
notes receivable 
- - related                                                                                                          171
parties

Issuance of notes 
receivable - 
related parties,  
collateralized  
by common stock
(net of $2,700 
write-down and
$650 imputed                                                                                                    (1,650)
interest)

Services received 
in lieu of 
payments on
notes receivable 
- - related parties                                                                                                  688

Compensation 
expense related 
to the
issuance of 
stock options 
at below 
market value                                                      3,863
value

Deferred  
compensation  
related to the 
issuance of 
stock options 
at below market
value to officers, 
directors, 
employees and 
consultants, net of
cancellations                                                     4,668                                                     (4,668)
</TABLE>



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

                                      F-5
<PAGE>
<TABLE>
<CAPTION>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, continued
                                                                                                               Notes and 
                                                                                                                interest 
                                                                                                               receivable
                                                                                                                -related 
                                                                                                                parties, 
                                                                                                                  from   
                                                                                                                issuance 
                     Convertible Preferred Stock        Common Stock        Common Stock to be Issued            of, or    Deferred
                     ---------------------------- ------------------------  -------------------------           collater-   compen-
                                       Capital in                Capital in                Capital in  Accum-    alized     sation
(thousands of                          excess of                 excess of                 excess of   lated  by, common  from stock
dollars and shares)   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>     
Amortization of 
deferred 
compensation from
stock options                                                                                                                  910

Interest earned 
on notes receivable 
- - related parties                                                                                                 (265)


Compensation 
expense related 
to the issuance 
of stock for 
services at below
market value                                                        101


Net loss for 
the year ended 
September 30, 1996                                                                                    (13,836)
- -------------------  -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------

Balances at 
September 30, 1996     ---      ---      ---    7,610      8     32,780      104      1       935     (21,196)  (7,580)     (5,180)
- -------------------  -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------

Common stock 
issued for cash 
received in
the prior period                                  104    ---        935     (104)    (1)     (935)

Common stock 
issued for cash, 
including
exercise of stock 
options and warrants                              603      1      2,773

Deferred compensation 
related to the
issuance of stock 
options at below 
market value to 
officers, directors 
and employees                                                     1,178                                                     (1,178)

Common stock 
issued for services                                98    ---        789

Inducement related 
to conversion of notes
payable into common stock                                           323

Common stock issued 
to repay note payable 
- - related parties                                  21    ---        136
</TABLE>



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

                                      F-6

<PAGE>
<TABLE>
<CAPTION>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, continued
                                                                                                               Notes and  
                                                                                                                interest  
                                                                                                               receivable 
                                                                                                                -related  
                                                                                                                parties,  
                                                                                                                  from    
                                                                                                                issuance  
                     Convertible Preferred Stock        Common Stock        Common Stock to be Issued            of, or    Deferred
                     ---------------------------- ------------------------  -------------------------           collater-   compen-
                                       Capital in                Capital in                Capital in  Accum-    alized     sation
(thousands of                          excess of                 excess of                 excess of   lated  by, common  from stock
dollars and shares)   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>     
Common stock issued 
on conversion of note                             141    ---      1,125
payable

Common stock issued 
under a subscription                               50    ---        350
agreement for cash 
received in 
October 1997

Common stock to be 
issued for cash 
received
in the current 
period, including 
exercise                                                                     400      1     2,798

Common stock to 
be issued for 
distribution                                                                  30     --       266
rights

Common stock to 
be issued under
subscription 
agreements for 
cash received                                                                 32    ---       227
in October 1997

Amortization of 
deferred 
compensation from                                                                                                            1,675
stock options

Interest expense 
related to issuance 
of convertible 
debt at a discount                                                1,429

Payment on notes 
receivable - related                                                                                               109
parties

Write-down of notes 
receivable - related                                                                                                60
parties

Preferred stock 
issued for cash, net 
of offering costs      303        1    5,094

Net loss for the 
year ended 
September 30, 1997                                                                                    (10,995)
- -------------------  -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------

Balances at 
September 30, 1997     303        1    5,094    8,627      9     41,818      462      1     3,291     (32,191)  (7,411)     (4,683)
- -------------------  -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------

Common stock issued 
for cash received in
the previous period                                                          462     --     3,291        (462)      (1)     (3,291)

Common stock issued 
to purchase minority
interests in subsidiaries                                                    540      1     5,383
</TABLE>


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

                                      F-7

<PAGE>
<TABLE>
<CAPTION>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, continued
                                                                                                               Notes and  
                                                                                                                interest  
                                                                                                               receivable 
                                                                                                                -related  
                                                                                                                parties,  
                                                                                                                  from    
                                                                                                                issuance  
                     Convertible Preferred Stock        Common Stock        Common Stock to be Issued            of, or    Deferred
                     ---------------------------- ------------------------  -------------------------           collater-   compen-
                                       Capital in                Capital in                Capital in  Accum-    alized     sation
(thousands of                          excess of                 excess of                 excess of   lated  by, common  from stock
dollars and shares)   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>     
Common stock issued 
for cash, including
exercise of stock 
options                                           533    ---      3,257

Preferred stock 
issued for cash, 
net of offering 
costs                   13      ---       90

Common stock 
issued on 
conversion of 
notes payable 
and accrued 
interest to 
common stock                                    1,107      1      8,178

Interest expense 
related to 
issuance of
convertible debt 
at a discount                                                     2,046

Payment received 
on notes receivable --                                                                                             329
related parties

Amortization of 
deferred 
compensation from
stock options                                                                                                                  908

Write-up of 
notes receivable 
- -- related                                                                                                         (19)
parties

Compensation expense 
related to issuance 
of stock options 
for services                                        3     --        127

Reclassification 
of notes receivable 
- - related parties                                                                                                 (672)

Net loss for the 
year ended 
September 30, 1998                                                                                     (3,986)
                     -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------

Balances at 
September 30, 1998     316       $1   $5,184   11,272    $11    $64,100        0     $0        $0    $(36,177)  (7,773)    $(3,775)
                     =======  ======  ======== ======   =====   ========  ======   =====   ========  ========  =======   ==========
                    
</TABLE>


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

                                      F-8
<PAGE>
<TABLE>
<CAPTION>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                                     Year ended September 30,
(thousands of dollars)                                                                            1998        1997         1996
- ---------------------------------------------------------------------------------------------- ----------- ------------ ------------
Cash flows from operating activities:
<S>                                                                                               <C>         <C>          <C>      
Net loss                                                                                          $(3,986)    $(10,995)    $(13,836)
     Adjustments to reconcile net loss to net cash used in operating activities:
          Depreciation and amortization                                                               607          193          187
          Losses applicable to minority interests in subsidiaries                                    (392)      (1,245)          (4)
          Loss on disposal of discontinued operations                                                 ---          ---          291
          Deferred income taxes                                                                       ---          ---           23
          Loss on sale of facility                                                                    218          582          ---
          Interest expense related to issuance of convertible debt at a discount                    2,046        1,429          ---
          Amortization of deferred compensation and compensation expense on stock options             908        1,675        4,773
          Common stock issued or to be issued for services and distribution rights, and
            compensation expense related to stock options                                             127        1,055          547
          Write-down (write-up) of notes receivable - related parties                                 (19)          60        2,700
          Inducement expense related to conversion of notes payable into common stock                 ---          323          ---
          Services received in lieu of payments on notes receivable issued for common stock           ---          ---          687
          Interest earned on notes receivable - related parties                                       ---          ---         (265)
          Notes payable issued for services                                                           ---          ---          160

     Increase (decrease) from changes in assets and liabilities,  net of effects
     from investing and financing activities:
           Receivables                                                                             (2,866)          65          (55)
           Due from related party                                                                    (503)        (509)         ---
           Inventories                                                                                174          (61)        (162)
           Advances on inventories                                                                 (1,435)      (1,087)         ---
           Prepaid expenses and other current assets                                                 (630)          (7)         (32)
           Accrued interest receivable - non-current                                                 (486)         ---          ---
           Deposits and other assets                                                                  136         (121)          24
           Accounts payable                                                                            23       (1,138)       1,436
           Due to related party                                                                        61        1,548          ---
           Accrued liabilities                                                                        851        2,166           47
           Accrued interest payable, non-current                                                      362          204          ---
           Deferred revenues from advance license fees                                               (250)       1,650          ---
           Deferred compensation                                                                       12           11           10
           Discontinued operations non-cash charges and working capital changes                       ---          ---          894
                                                                                               ----------- ------------ ------------
                Net cash used in operating activities                                             (5,042)       (4,202)      (2,575)
                                                                                               ----------- ------------ ------------

     Cash flows from investing activities:
          Purchase of property, plant and equipment and facilities held for sale                  (36,963)      (7,194)      (5,055)
          Investment in licensee facility                                                          (1,000)         ---          ---
          Increase in restricted investments                                                         (748)         ---          ---
          Issuance of notes receivable -- related parties                                             ---          ---         (704)
          Proceeds from notes receivable - related parties                                            323           45          ---
          Increase in cash surrender value of life insurance                                          ---          (32)         (13)
                                                                                               ----------- ------------ ------------
               Net cash used in investing activities                                              (38,388)      (7,181)      (5,772)
                                                                                               ----------- ------------ ------------
</TABLE>

                                    continued

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

                                      F-9

<PAGE>
<TABLE>
<CAPTION>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

                                                                                                  Year ended September 30,
(thousands of dollars)                                                                          1998        1997        1996
- -------------------------------------------------------------------------------------------- ----------- ----------- ------------

     Cash flows from financing activities:
<S>                                                                                             <C>          <C>           <C>  
        Proceeds from issuance of notes payable and convertible debentures                      $35,454      $6,070        $ 700
        Payment on notes payable                                                                   (330)     (1,109)        (159)
        Proceeds from issuance of notes payable -- related parties                                  ---         595          ---
        Payment on notes payable -- related parties                                                 ---        (756)      (3,539)
        Proceeds from receivable -- stock subscriptions                                             577         ---          ---
        Proceeds from issuance of common stock, net                                               3,257       5,573        7,570
        Proceeds from issuance of preferred stock, net                                               90       5,095          ---
        Proceeds from notes receivable -- related parties, from issuance of, or
          collateralized by common stock                                                            329         109          171
        Proceeds from issuance of minority interests in subsidiaries                                ---         302        4,385
        Allocation to minority interest limited partners                                            ---        (206)         ---
        Financing activities of discontinued operations                                             ---         ---       (1,582)
                                                                                             ----------- ----------- ------------
         Net cash provided by financing activities                                               39,377      15,673        7,546
                                                                                             ----------- ----------- ------------

     Net increase (decrease) in cash and cash equivalents                                        (4,053)      4,290         (801)

     Cash and cash equivalents, beginning of year                                                 4,780         490        1,291
                                                                                             ----------- ----------- ------------

     Cash and cash equivalents, end of year                                                       $ 727     $ 4,780        $ 490
                                                                                             =========== =========== ============

     Supplemental schedule of non-cash investing and financing activities:
        Common stock issued on conversion of notes payable and accrued interest                  $8,179       $ ---        $ ---
        Note receivable issued for sale of facility                                               6,500       3,500          ---
        Common stock issued for purchase of minority interests in subsidiaries                    5,384         ---          ---
        Note payable issued for inventory                                                           ---       1,595          ---
        Accounts payable for facilities held for sale                                               588       1,968          ---
        Common stock issued for notes receivable                                                    ---         577        6,284
        Common stock issued to repay notes payable and accrued interest -- related party            ---       1,261          ---
        Note payable issued for equipment                                                           ---       1,607          ---
        Distribution to minority limited partners offset against note receivable                    ---          66          ---
        Obligations assumed in connection with sale of subsidiaries                                 ---         ---        4,636
        Note receivable received for subsidiaries (net of imputed interest)                         ---         ---        4,350
        Note payable issued and common stock to be issued to acquire land                           ---         ---          927
        Note payable issued for services                                                            ---         ---          160

     Supplemental  disclosure of cash flow information:  
       Cash paid for interest, net of amounts capitalized:
        Continuing operations                                                                       $49        $208         $111
        Discontinued operations                                                                     ---         ---           98
</TABLE>

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

                                      F-10
<PAGE>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                   ----------


1. Summary of Significant Accounting Policies

   Business Organization and Nature of Operations

   Covol Technologies,  Inc. (the Company) was originally incorporated in Nevada
   in 1987 and was  reincorporated  in Delaware  in August  1995.  In 1991,  the
   Company   acquired   a  coal   briquetting   technology   (the   "Briquetting
   Technology").  In 1992, the Company  constructed a pilot briquetting plant in
   Price,  Utah.  During 1993,  the Company  refined the technology to briquette
   waste  by-products  of the steel  manufacturing  industry.  In June 1996, the
   Company formed Utah Synfuel #1 Ltd.  ("Utah Synfuel #1") and Alabama  Synfuel
   #1  Ltd.  ("Alabama  Synfuel  #1"),  each  a  Delaware  limited   partnership
   (collectively  the  "Partnerships").  The Company is both the general partner
   and a limited partner in the Partnerships (see Note 14).

   The Company's primary business is to commercialize the Briquetting Technology
   used to recycle waste  by-products  from the coal and steel industries into a
   marketable  source of fuel and revert  materials.  Through June 30, 1998, the
   Company's  focus was on the  construction  of facilities and the licensing of
   its  Briquetting  Technology to companies that  constructed  facilities  that
   convert coal fines into synthetic fuel briquettes. At September 30, 1998, the
   Company and its  licensees  were  operating 24 of these  facilities  in eight
   states at various levels of production. The four Company-owned facilities are
   expected to be sold in 1999.  The Company has no current  plans to  construct
   additional synthetic fuel facilities.

   The  Company  anticipates  that earned  license  fees or  royalties  from the
   production and sale of synthetic fuel will continue to increase  during 1999.
   The Company  believes that most of the synthetic fuel  facilities  will reach
   production  levels  approaching  capacity by the end of 1999.  As  production
   levels  increase,  sales  of  the  binder  materials  by the  Company  to its
   licensees  are  expected  to  increase  proportionately.   The  Company  also
   anticipates  receiving  the final  amounts of advance  license fees  totaling
   approximately  $4,000,000  during 1999.  While funds  received by the Company
   from  these  activities  are not  expected  to be  sufficient  to  cover  the
   Company's  operating  costs and expenses until the third quarter of 1999, the
   Company  does  expect  that  these  operating  activities  will be  producing
   significant operating cash flow by the end of 1999.

   To  provide   funding  for  the  Company's   operations  and  debt  repayment
   requirements  during early 1999,  the Company will utilize  proceeds from the
   issuance of debt and equity  securities and excess  proceeds from the sale of
   facilities.  During November 1998, the Company issued common stock and common
   stock  warrants for total proceeds of  approximately  $3,500,000 and incurred
   debt totaling $400,000.  The Company has received term sheets for the sale of
   up to $10,000,000 of convertible  preferred stock. This financing is expected
   to close in January 1999.  The Company has received  correspondence  from the
   lender  holding  notes  payable  due March  1999 and June 1999  indicating  a
   willingness  to  extend  the due  dates  for 90 days if so  requested  by the
   Company.  If such a request is made, the Company has agreed to issue warrants
   for the  purchase  of common  stock to the  lender as  consideration  for the
   extension.  The Company  believes the funds raised in this  financing will be
   sufficient to fund the Company's  operations and debt repayment  requirements
   until its operating activities begin producing positive cash flow.

   Construction Businesses

   In 1993 and 1994,  the  Company  acquired  four  construction  companies.  In
   September  1995,  the  Company's  Board  of  Directors  approved  a  plan  to
   discontinue the Company's construction businesses,  which were sold effective
   February 1, 1996. (See Note 15, "Discontinued Operations").

   Principles of Consolidation

   The 1996  consolidated  financial  statements  include  the  accounts  of the
   Company and its 100% owned construction company subsidiaries,  until the time
   of their sale in February 1996. The consolidated financial statements for all
   years  presented  include the  accounts  of the Company and its two  majority
   owned  subsidiaries,  Utah  Synfuel #1 and  Alabama  Synfuel  #1,  from their
   inception in 1996. All significant intercompany transactions and accounts are
   eliminated in consolidation.


                                      F-11

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------


1. Summary of Significant Accounting Policies, continued

   Principles of Consolidation, continued

   During 1997, the Company  became a 1% general  partner of Coaltech No. 1 L.P.
   ("Coaltech"),  a  Delaware  limited  partnership,  for  $10.  Based  upon the
   Company's lack of effective  control over Coaltech and the limited  partners'
   financial  responsibility  for its  operations,  the Company's  investment in
   Coaltech  is  accounted  for  using the  equity  method  of  accounting  with
   proportional elimination of intercompany revenues and expenses.

   Stock Split 

   The Company implemented a two-for-one stock split effective January 23, 1996.
   All  information  set forth  herein has been  adjusted to give effect to this
   stock split.

   Revenue and Cost Recognition  

   Revenues from the licensing of the Company's technology are recognized in the
   period when earned.  Advance  license fees are earned when certain  synthetic
   fuel facility  construction  milestones  are met or when the  facilities  are
   certified  operational  for their  intended  use.  Advance  license fees that
   require  the  Company  to render  services  in the future  are  deferred  and
   recognized  when its  obligations  are met.  Earned  license  fees or royalty
   payments are recognized in the period  synthetic fuel is produced and sold by
   licensees. $3,336,000 of license fees in 1998 were from a single licensee and
   $1,500,000  were  from a  second  licensee.  Revenues  from  the sale of coal
   briquettes are  recognized as product is shipped.  Collateral is not required
   for receivables and allowances are provided for uncollectible accounts.

   Cash and Cash Equivalents 

   The Company  considers  all highly liquid debt  instruments  with an original
   maturity  of  three  months  or less to be cash  equivalents.  Cash  and cash
   equivalents are deposited with financial institutions located in Utah.

   Restricted Investments

   Restricted  investments  consist  primarily of highly liquid interest bearing
   deposits held as collateral for certain Company obligations.

   Inventories 

   Inventories  are stated at the lower of cost or market  with cost  determined
   using an average cost method, and consist primarily of coal fines,  available
   for sale.  Covol has a lease  arrangement  that provides for the purchase and
   removal  of coal  fines  which are used as  feedstock  for a  synthetic  fuel
   facility.  Payments made under the lease  arrangement prior to removal of the
   coal fines are recorded as advances on inventories (see Note 2).

   Facilities Held for Sale

   Facilities held for sale consist of four synthetic fuel  facilities,  and are
   stated at the lower of cost or estimated net realizable value. The facilities
   were  constructed  to be sold to licensees of the Company's  technology at or
   slightly  above their cost.  Two of the four  facilities are under option for
   purchase by the  licensees of those  facilities,  and the Company is actively
   pursuing the sale of all four facilities.  The Company anticipates completing
   the sale of these  facilities in 1999. The Company  recognizes a gain or loss
   on facilities  held for sale when the sale is  consummated.  The gain or loss
   represents the difference  between the carrying value and the sales price and
   is reflected as a component of operating costs and expenses.

                                      F-12

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------



1. Summary of Significant Accounting Policies, continued

   Property, Plant and Equipment

   Property,  plant and  equipment  is recorded at cost,  including  interest on
   funds borrowed during the construction  period,  and is depreciated using the
   straight-line method over its estimated useful life. Maintenance, repairs and
   minor  replacements  are  charged to expense  as  incurred.  Upon the sale or
   retirement of property,  plant and equipment, any gain or loss on disposition
   is reflected in the  statement of  operations  and the related asset cost and
   accumulated depreciation are removed from the respective accounts.

   Intangible Assets

   Intangible  assets  consist of the  excess of the value of the  consideration
   paid for the purchase of certain limited partners'  interests in subsidiaries
   over the fair values of the related  assets,  which fair values  approximated
   their  carrying  cost  (see  Note  14).  They  are  being  amortized  on  the
   straight-line method over approximately ten years.

   Valuation of Long-Lived Assets 

   The Company  periodically  evaluates the carrying value of long-lived assets,
   including  intangible  assets,  when events and circumstances  warrant such a
   review. The carrying value of a long-lived asset is considered  impaired when
   the  anticipated  cumulative  undiscounted  cash flow from that asset is less
   than its carrying  value.  In that event,  a loss is recognized  based on the
   amount by which the  carrying  value  exceeds  the fair  market  value of the
   long-lived  asset. No  impairment-related  losses have been recognized in the
   Company's financial statements for any period presented.

   Common Stock Issued for Services

   Common stock issued for services is accounted for using the fair value of the
   shares of common stock, determined at the time the shares are issued.

   Loss per Share Calculation 

   In 1998, the Company adopted Statement of Financial  Accounting Standards No.
   128 "Earnings per Share" ("SFAS 128").  SFAS 128 replaced the  calculation of
   primary and fully diluted  earnings per share with basic and diluted earnings
   per share.  Unlike  primary  earnings  per share,  basic  earnings  per share
   excludes  any  dilutive   effects  of  options,   warrants  and   convertible
   securities.  Diluted  earnings  per share is  similar to the  previous  fully
   diluted earnings per share.  Loss per share amounts for all periods presented
   conform to SFAS 128 requirements and no restatements were necessary (see Note
   9).

   For all periods presented,  options,  warrants and convertible securities (as
   disclosed in Notes 7 and 13) were not included in the calculation of loss per
   share because the effect would have been antidilutive.

   Use of Estimates

   The preparation of financial statements in conformity with generally accepted
   accounting  principles  requires management to make estimates and assumptions
   that affect the reported amounts of assets and liabilities, the disclosure of
   contingent  assets and  liabilities at the date of the financial  statements,
   and the  reported  amounts of  revenues  and  expenses  during the  reporting
   periods. Actual results could differ from those estimates.

                                      F-13

<PAGE>


                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

1. Summary of Significant Accounting Policies, continued

   Reclassifications

   Certain prior year amounts have been reclassified to conform with the current
   year's  presentation.  These  reclassifications  had no effect on net loss or
   total assets.

2. Advances on Inventories

   During 1997, the Company entered into an agreement to purchase coal fines and
   made  payments  totaling  approximately  $1,146,000,  of  which  $59,000  was
   transferred to cost of coal briquetting  operations.  During 1998, additional
   payments totaling  approximately  $1,583,000 were made, of which $148,000 was
   transferred to cost of coal briquetting  operations.  The net amount paid has
   been recorded as advances on inventories.  The Company expects to utilize the
   majority  of these coal fines  during  1999,  at which time the costs will be
   expensed.

   Under the  agreement,  the Company is obligated to pay a total of  $5,500,000
   between  February 1997 and May 2000 for the removal of 2 million tons of coal
   fines (a price of $2.75 per ton) from the  property.  Quarterly  payments  of
   approximately  $396,000 are required under the agreement.  The agreement also
   provides  for  removal of an  additional  500,000  tons at $2.75 per ton.  No
   payment is  required  for  removal of any coal fines in excess of 2.5 million
   tons.

3.  Due From/To Related Party

   Due from  related  party  consists of amounts  receivable  from  Coaltech for
   operating  expenses in 1998 and for operating  expenses and interest in 1997.
   Due to related party  represents  amounts due to Coaltech for the purchase of
   synthetic fuel briquettes.

4.   Notes Receivable
<TABLE>
<CAPTION>

   Notes receivable consist of the following at September 30:

   (thousands of dollars)                                                                             1998           1997
   ---------------------------------------------------------------------------------------------- -------------- --------------

   Notes and Accrued Interest Receivable, non-current

<S>                                                                                               <C>           <C>
   Note receivable from a corporation,  bearing interest at 12%,  principal  and
   interest due February 2003,  collateralized by a synthetic  fuel facility  in
   Alabama, which was sold by the Company.                                                               $6,500           $---
   

   Accrued interest receivable                                                                              486            ---
                                                                                                  -------------- --------------
      Note and interest receivable                                                                       $6,986           $---
                                                                                                  ============== ==============

   Notes Receivable - Related Parties

   Note  receivable  from  Coaltech,  bearing  interest at 9.7%,  principal  and
   interest payments of $130 due quarterly through December 2007, collateralized
   by a synthetic fuel facility in  Utah, which was sold by the Company.                                 $3,098         $3,421

   Notes  receivable  from seven  officers of the Company,  bearing  interest at
   prime (8.5% at September 30, 1997) plus 2%, principal and interest due August
   2000,  originally  collateralized by interests in Utah Synfuel #1 and Alabama
   Synfuel #1. Reclassified  in  1998  as  notes receivable -  related  parties,
   collateralized by  common stock.  No interest income  was recognized  in 1998
   or 1997.                                                                                                ---             672
   
                                                                                                  -------------- --------------
                                                                                                          3,098          4,093
   Less current portion                                                                                     229            276
                                                                                                  -------------- --------------
      Notes receivable - related parties                                                                 $2,869         $3,817
                                                                                                  ============== ==============
</TABLE>

                                      F-14
<PAGE>
<TABLE>
<CAPTION>


                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

5. Property, Plant and Equipment

   Property, plant and equipment consists of the following at September 30:

  (thousands of dollars)                                            Range of estimated useful         1998           1997
                                                                              lives
  --------------------------------------------------------------- ------------------------------- -------------- --------------
<S>                                                                      <C>                                 <C>            <C>  
  Land                                                                                                    $ 153          $ ---
  Buildings and improvements                                              10 - 20 years                  11,154            260
  Machinery and equipment                                                  5 - 10 years                   4,749          2,102
  Construction in progress                                                                                  ---          3,698
                                                                                                  -------------- --------------
                                                                                                         16,056          6,060
   Less accumulated depreciation                                                                          1,154            596
                                                                                                  ============== ==============
   Net property, plant and equipment                                                                    $14,902         $5,464
                                                                                                  ============== ==============
</TABLE>

   Depreciation  expense was $557,000 in 1998,  $193,000 in 1997 and $187,000 in
1996.

6.  Investment in Licensee Facility

   Investment in licensee facility represents payments made to the licensee of a
   synthetic  fuel  facility  located  in  Pennsylvania  in  exchange  for a 10%
   interest in the net cash flows from operation of the facility. The investment
   is being  accounted  for at cost.  Cash received by the Company will first be
   applied as a reduction of the carrying amount of the investment.

7. Long-term Liabilities
<TABLE>
<CAPTION>

   Notes Payable and Convertible Debentures

   Notes  payable  and  convertible  debentures  consist  of  the  following  at
   September 30:

  (thousands of dollars, except per-share data)                                                         1998          1997
  ------------------------------------------------------------------------------------------------- ------------- -------------

<S>                                                                                                    <C>           <C>
  Note payable to a corporation bearing interest at prime  (8.25% at September 30, 1998) plus 2%,
  collateralized by plant and equipment, principal and interest due December                             $ 2,900       $ 2,900
  1999.

  Note payable to a corporation bearing interest at 6%, principal and interest due October 1999,
  collateralized by a coal wash plant in Utah.                                                             4,263           945

  Note payable to a limited liability company issued in conjunction with funds advanced for the
  construction of a synthetic fuel facility in West Virginia, held for sale.  As of September 30,
  1998, the loan was collateralized by the facility, bore no interest and was originally due at
  the earlier of the sale of the facility or January 1999. Subsequent to September 30, 1998, this
  entity modified the terms of the note and agreed to loan to the Company additional amounts up
  to $1,500.  This entity has an option to purchase the facility.  If it is not purchased, the
  Company has agreed to pay interest on all outstanding amounts at a rate of 10%, payable monthly
  beginning January 1999 through June 1999.  Beginning July 1999 through May 2000, monthly
  payments of $350 will be required, with all unpaid principal and interest due June 2000.  Also,
  subsequent to September 30, 1998 the Company granted additional collateral to the corporation            8,242            --
  in the form of certain license fees receivable by the Company from other synthetic fuel
  facilities.

  Notes payable to a corporation, bearing interest at 6%.  50% of accrued interest due February
  1999 and balance of accrued interest and principal due February 2001.  Collateralized by a
  synthetic fuel facility in West Virginia, held for sale.                                                 6,680           ---
</TABLE>

                                      F-15
<PAGE>
<TABLE>
<CAPTION>


                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

7. Long-term Liabilities, continued

  (thousands of dollars, except per-share data)                                                         1998          1997
  ------------------------------------------------------------------------------------------------- ------------- -------------

<S>                                                                                                  <C>            <C>
  Note payable to a corporation, bearing interest at 15%, collateralized by a synthetic fuel
  facility in Pennsylvania, held for sale, and due at the earlier of the sale of the facility or           5,800           ---
  August 1999.

  Note payable to a corporation  bearing  interest at 18% until October 1998, at
  which time it increased to 22%, due June 1999,  collateralized by a promissory
  note  receivable and by certain future license fees receivable by the Company.
  Warrants to purchase  100,000  shares of common  stock were granted in October
  1998 based on the outstanding principal balance. A member of the
  Company's Board of Directors is affiliated with this corporation.                                        4,000           ---

  Note payable to a corporation, bearing interest at 13% until December 1998, at
  which time it increases to 14%. Principal and accrued interest due March 1999,
  collateralized  by certain  future license fees  receivable  by  the  Company.
  A member of  the  Company's  Board  of  Directors  is  affiliated   with  this
  corporation.                                                                                             4,000           ---
  

  Convertible note payable to a  corporation bearing  interest at prime plus 2%.  Principal of
  $6,686 plus accrued interest of $314 was converted to common stock at $7.00 per share in March             ---         3,302
  1998.

  Convertible debenture payable to two individuals and one trust bearing interest at prime plus
  2%.  Converted to common stock at $11.00 per share in June 1998.                                           ---         1,000

  Other                                                                                                       94           ---
                                                                                                    ------------- -------------
                                                                                                          35,979         8,147
       Less: current portion                                                                              22,049         5,247
                                                                                                    ============= =============
       Total non-current                                                                                 $13,930        $2,900
                                                                                                    ============= =============
</TABLE>

   Substantially  all  of  the  Company's  property,  plant  and  equipment  and
   facilities  held for sale are collateral for the notes payable.  The weighted
   average interest rate on notes payable and convertible debentures was 8.5% at
   September  30, 1998 and 10.5% at September  30, 1997.  Future  maturities  of
   notes payable at September 30, 1998 are as follows:
<TABLE>
<CAPTION>

                                                              Year ending September 30,      (thousands of
                                                                                                dollars)
                                                              --------------------------- ---------------------
<S>                                                                      <C>                           <C>    
                                                                         1999                          $22,049
                                                                         2000                            7,173
                                                                         2001                            6,757
                                                                                          =====================
                                                                        Total                          $35,979
                                                                                          =====================
</TABLE>

   Notes Payable - Related Parties, Non-current

   Notes  payable - related  parties  represents  unsecured  amounts  due to two
   officers of the Company  which bear interest at prime (8.25% at September 30,
   1998) plus 2%. Principal and interest are due November 2002.

   Deferred Compensation

   In 1993, the Company assumed a liability to pay a current  stockholder of the
   Company $40,000 per year for seven years beginning February 1999. The present
   value of this  liability,  discounted  at  approximately  5%, is reflected as
   deferred compensation in the consolidated balance sheet.

                                      F-16
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

7. Long-term Liabilities, continued

   Interest Costs  

   During 1998,  the Company  incurred  total  interest  costs of  approximately
   $4,266,000 (including  approximately  $2,046,000 of non-cash interest expense
   resulting  from  issuance  of  convertible  debt  at a  discount),  of  which
   approximately  $1,521,000 was capitalized.  During 1997, the Company incurred
   total interest costs of  approximately  $2,023,000  (including  approximately
   $1,429,000  of  non-cash   interest   expense   resulting  from  issuance  of
   convertible  debt  at  a  discount),  of  which  approximately  $378,000  was
   capitalized.  During  1996,  the Company  incurred  total  interest  costs of
   approximately $94,000, of which approximately $33,000 was capitalized.

8. Income Taxes

   The Company accounts for income taxes using the asset and liability  approach
   in accordance  with Statement of Financial  Accounting  Standards  (SFAS) No.
   109,  "Accounting  for Income Taxes".  The Company files a  consolidated  tax
   return  with  its  100%  owned  subsidiaries.   Both  majority-owned  limited
   partnerships file separate tax returns, as required.

   As of September 30, 1998, the Company has net operating loss carryforwards of
   approximately  $21,400,000 which can be used to offset future taxable income.
   The net operating  loss  carryforwards  expire from 2005 to 2018. The Company
   also has  approximately  $190,000  in  research  and  development  tax credit
   carryforwards  which can be used to offset  future tax  liabilities.  The tax
   credit  carryforwards  expire  from 2007 to 2013.  The  utilization  of these
   carryforwards  against  future taxable income may become subject to an annual
   limitation due to changes in ownership of the Company's common stock.

   The provision for income taxes from continuing operations for the years ended
   September 30, 1998,  1997 and 1996, all of which  represents  deferred income
   taxes,  differs  from  the  statutory  federal  income  tax  rate  due to the
   following:
<TABLE>
<CAPTION>

  (thousands of dollars)                                                           1998            1997           1996
  --------------------------------------------------------------------------- --------------- --------------- --------------
<S>                                                                                   <C>            <C>             <C>   
  Tax benefit at statutory rates                                                      $1,355         $ 3,738         $3,810
  Change in valuation allowance                                                       (1,377)         (3,840)        (4,007)
  State income taxes, net of federal tax effect                                           39             101            363
  Other, including redetermination of prior years' tax estimates                         (17)              1           (189)
                                                                              --------------- --------------- --------------
     Deferred federal income tax provision                                              $  0            $  0         $  (23)
                                                                              =============== =============== ==============
<CAPTION>

   The  components  of the net deferred  tax asset as of September  30, 1998 and
1997 are as follows:

  (thousands of dollars)                                                                          1998            1997
  ------------------------------------------------------------------------------------------- -------------- ---------------

  Deferred tax assets (liabilities):
<S>                                                                                                  <C>            <C>    
     Net operating loss carryforwards                                                                $7,995         $ 6,282
     Research and development tax credit carryforwards                                                  189             189
     Compensation expense related to common stock options                                             2,084           2,003
     License fee revenue recognition                                                                    315             104
     Write-down of notes receivable                                                                     304             712
     Estimated liabilities                                                                              356             551
     Depreciation                                                                                       (88)           (111)
     Other                                                                                               40              88
                                                                                              -------------- ---------------
          Total deferred tax assets                                                                  11,195           9,818
     Valuation allowance                                                                            (11,195)         (9,818)
                                                                                              -------------- ---------------
          Net deferred tax asset                                                                      $   0           $   0
                                                                                              ============== ===============
</TABLE>

                                      F-17

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

8. Income Taxes, continued

   The valuation allowance increased by $1,377,000 during 1998, representing the
   additional amount of deferred tax assets at September 30, 1998 not considered
   recoverable  through the reversal of taxable  temporary  differences,  or the
   generation of future taxable  income.  The valuation  allowance  increased by
   $3,840,000  during 1997 and by $4,007,000  during 1996. SFAS No. 109 requires
   that a  valuation  allowance  be  provided if it is more likely than not that
   some  portion  or all of a  deferred  tax  asset  will not be  realized.  The
   Company's  ability to realize  the  benefit of its  deferred  tax assets will
   depend on the  generation of future  taxable  income  through its  continuing
   operations  or  through  the sale of  assets.  Because  the  Company  has not
   generated   significant   revenues  to  date  relating  to  the   Briquetting
   Technology,  the Company  believes that a valuation  allowance of $11,195,000
   should be provided as of September 30, 1998.  This estimate may change in the
   near term depending on the level of earned license fees received in 1999.

9. Basic and Diluted Loss per Share
<TABLE>
<CAPTION>

  (thousands of dollars and shares, except per-share data)                         1998             1997            1996
  --------------------------------------------------------------------------- ---------------- --------------- ---------------
  Numerator:
<S>                                                                                  <C>            <C>             <C>      
     Loss from continuing operations                                                 $(3,986)       $(10,995)       $(12,955)
     Loss from discontinued operations                                                    ---             ---           (881)
                                                                              ---------------- --------------- ---------------
     Net loss                                                                         (3,986)        (10,995)        (13,836)
     Preferred stock dividends                                                          (337)           (189)             ---
                                                                              ================ =============== ===============
     Net loss attributable to common stockholders                                    $(4,323)       $(11,184)       $(13,836)
                                                                              ================ =============== ===============

  Denominator - weighted average shares outstanding                                     9,969           8,080           6,941
                                                                              ================ =============== ===============

  Loss per share from continuing operations                                            $(.43)         $(1.38)         $(1.86)
  Loss per share from discontinued operations                                             ---             ---           (.13)
                                                                              ================ =============== ===============
  Basic and diluted net loss per share                                                 $(.43)         $(1.38)         $(1.99)
                                                                              ================ =============== ===============
<CAPTION>

   For 1998 and 1997, the Company's  loss per common share was determined  after
   taking into  account  undeclared  cumulative  preferred  stock  dividends  of
   $337,000 and $24,000,  respectively  and, in 1997  approximately  $165,000 of
   preferred  stock  dividends  imputed  based  upon the price of the  Company's
   common stock at the date the convertible preferred shares were issued.

10. Notes and Interest Receivable -- Related Parties, Collateralized by Common Stock
    --------------------------------------------------------------------------------

   Notes and interest  receivable -- related parties,  collateralized  by common
   stock, consist of the following at September 30:

   (thousands of dollars and shares)                                                                  1998          1997
   ---------------------------------------------------------------------------------------------- ------------- --------------
<S>                                                                                               <C>             <C>
   Note receivable from a shareholder,  $5,000 face amount,  bearing interest at
   6%  renegotiated  in November  1997,  principal  and  interest of $515 due in
   annual  installments  beginning  January  1999  through  January  2004,  with
   remaining  balance  due  January  2005,  collateralized  by 130 shares of the
   Company's common stock held by the Company,  options expiring in January 2006
   to  acquire  50  shares  of  the  Company's  common  stock  committed  by the
   shareholder  to be provided to the Company,  and a personal  guarantee of the
   shareholder.  The carrying value is equal to the fair value of the 130 shares
   and  options to acquire 50 shares and is net of  unamortized  discount  after
   renegotiation  of  $1,281  based  upon  an  imputed  rate of  10.25%,  and an
   allowance for impairment of $2,110 in 1998 ($2,129 in 1997). No interest
   income was recognized during 1998, 1997 or 1996.                                                  $1,609         $1,590
</TABLE>


                                      F-18
<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------


10. Notes and Interest  Receivable -- Related Parties, Collateralized by  Common
    Stock, continued
    ----------------------------------------------------------------------------


<S>                                                                                                  <C>           <C>          
   Notes and  interest  receivable  from 16  current  and  former  officers  and
   employees,  issued upon  exercise of options to purchase 450 shares of common
   stock at $5.31 to $8.38 per share,  bearing  interest at 5.7%,  principal and
   interest due in December 2000, collateralized by 900 shares of the Company's
   common stock.  No interest income was recognized during 1998 or 1997.                                 5,492          5,805

   Notes  receivable  from seven  officers of the Company,  bearing  interest at
   prime  (8.25% at  September  30,  1998) plus 2%,  principal  and interest due
   August 2000,  originally  collateralized by partnership  interests which were
   subsequently  exchanged for 79 shares of the Company's common stock (see Note
   14). Reclassified from notes receivable - related
   parties in 1998.  No interest income has been recognized for any period.                                672            ---

   Other                                                                                                   ---             16
                                                                                                  ------------- --------------
                                                                                                        $7,773         $7,411
                                                                                                  ============= ==============
</TABLE>

11. Fair Value of Financial Instruments

   SFAS No.  107  requires  that  the fair  market  value of  certain  financial
   instruments  be disclosed in the  financial  statements.  The Company has the
   following  financial  instruments  that are subject to the provisions of SFAS
   No. 107:

*        Cash and cash  equivalents
*        Receivables
*        Notes receivable
*        Notes receivable - related parties  
*        Notes payable and convertible debentures 
*        Notes payable - related parties
*        Notes receivable - related parties, from issuance of, or collateralized
         by, common stock

   A  substantial  portion  of  the  Company's  financial  instruments  are of a
   short-term  nature.  Accordingly,  while  the  fair  values  of  some  of the
   individual  financial  instruments  vary somewhat from their carrying values,
   the  aggregate  carrying  values as  reflected  in the  financial  statements
   approximate fair value.

12. Preferred and Common Stock

   Preferred Series A - Non-Voting

   As of September  30, 1998,  there were 3,000 shares of Series A shares issued
   and  outstanding.  The Series A preferred  shares are non-voting and have the
   following rights and privileges:

   1.       The holders of the shares are  entitled to  cumulative  dividends at
            the  rate of 6% per year of the  liquidation  value  of  $1,000  per
            share. These dividends accrue whether or not they have been declared
            or whether the Company has any profits.  Additional shares of Series
            A  preferred  stock  may be  issued  in lieu of cash to pay  accrued
            dividends on these shares.

   2.       Upon the  liquidation  of the  Company,  the holders of the Series A
            preferred shares are entitled to receive $1,000 per share,  together
            with all accrued and unpaid dividends, if any.

   3.       Each  share of  Series A  preferred  stock  includes  a  warrant  to
            purchase  28.571 shares of common stock or a total of 85,713 shares,
            at a price of $8.00 per share.  These warrants  expire on August 31,
            1999.

                                      F-19
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

12. Preferred and Common Stock, continued

   Preferred Series A - Non-Voting, continued

   4.       The holders of the shares are  entitled to convert  their  shares to
            common  shares  at any  time.  The  number  of  common  shares to be
            received upon  conversion is determined by multiplying the number of
            preferred  shares by $1,000 and dividing by the conversion  price of
            $7.00 per share.  At any time after August 31, 1999, the Company has
            the right to require any holder of the Series A preferred  shares to
            convert their shares into common stock.

   5.       No  dividends  have  been  declared  through   September  30,  1998.
            Dividends  in arrears at September  30, 1998  totaled  approximately
            $200,000, or $67 per share.

    Preferred Series B - Non-Voting

   As of September 30, 1998, there were 312,882 shares of Series B shares issued
   and  outstanding.  The Series B preferred  shares are non-voting and have the
   following rights and privileges:

   1.       The holders of the shares are  entitled to  cumulative  dividends at
            the rate of approximately 7% per year of the liquidation value of $7
            per  share.  These  dividends  accrue  whether or not they have been
            declared or whether the Company has any profits.  Additional  shares
            of  Series B  preferred  stock  may be issued in lieu of cash to pay
            accrued dividends on these shares.

   2.       Upon the  liquidation  of the  Company,  the holders of the Series B
            preferred shares are entitled to receive $7 per share, together with
            all accrued and unpaid dividends, if any.

   3.       Each unit (comprising 3 shares) of Series B preferred stock includes
            a warrant to purchase  one share of common stock at a price of $8.00
            per share. These warrants expire on September 30, 1999.

   4.       The holders of the shares are  entitled to convert  their  shares to
            the same  number of shares of common  stock at any time,  subject to
            adjustment for dilution.  Accrued  dividends may be converted by the
            Company  into  common  stock at the  conversion  price of $7.00  per
            share.

   5.       No  dividends  have  been  declared  through   September  30,  1998.
            Dividends  in arrears at September  30, 1998  totaled  approximately
            $162,000,  or $.52 per share.  Based upon the  conversion  price per
            share at the date of issuance,  a non-cash dividend of approximately
            $165,000 was imputed upon issuance.

13. Stock Options and Warrants

   Stock Options

   At  September  30,  1998,  the Company had one stock option plan (the "Option
   Plan") under which 2,400,000 shares of common stock are reserved for ultimate
   issuance. A committee of the Company's Board of Directors, or in its absence,
   the Board (the "Committee")  administers and interprets the Option Plan. This
   Committee  is  authorized  to grant  options and other  awards both under the
   terms of the Option Plan and  outside the Option Plan to eligible  employees,
   officers, directors, and consultants of the Company. The Option Plan provides
   for the granting of both  incentive  stock  options and  non-statutory  stock
   options.  Terms of options granted under the Option Plan,  including  vesting
   requirements,  are  determined by the  Committee.  Options  granted under the
   Option Plan vest over periods  ranging from 0 to ten years,  expire ten years
   from the date of grant and are not transferable  other than by will or by the
   laws of descent and distribution. Incentive stock option grants must meet the
   requirements of the Internal Revenue Code.

                                      F-20
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------


13. Stock Options and Warrants, continued

   Stock Options, continued

   The Company has elected to  continue  to apply  Accounting  Principles  Board
   Opinion No. 25,  "Accounting  for Stock Issued to Employees"  ("APB 25"), and
   related  interpretations  in accounting for its Option Plan. The  alternative
   fair value method of accounting  prescribed by SFAS No. 123,  "Accounting for
   Stock-Based  Compensation" ("SFAS 123"), requires the use of option valuation
   models that were not developed for use in valuing employee stock options,  as
   discussed below. Accordingly,  under APB 25, no compensation expense has been
   recognized for stock option grants to employees,  officers and directors when
   the exercise price of stock options equals or exceeds the market price of the
   Company's common stock on the date of grant.

   When  options  are issued  with terms  considered  compensatory,  the related
   compensation  expense is  amortized  to expense  over the  specified  vesting
   period on a straight-line  basis.  Deferred  compensation  related to options
   issued in 1998,  1997 and 1996 that  vest  over  time was  approximately  $0,
   $1,178,000 and $4,668,000,  respectively.  The amortized compensation expense
   related to these options was approximately $908,000,  $1,572,000 and $910,000
   for 1998,  1997 and  1996,  respectively.  Compensation  expense  related  to
   options that vested  immediately  was  approximately  $127,000,  $103,000 and
   $3,863,000 for 1998, 1997, and 1996, respectively.

   If the Company had elected to account for options  granted in 1998,  1997 and
   1996 based on their fair value,  as  prescribed by SFAS 123, net loss and net
   loss per share would have been  increased to the pro forma  amounts  shown in
   the table below.
<TABLE>
<CAPTION>

  (thousands of dollars, except per-share data)                                    1998             1997            1996
  --------------------------------------------------------------------------- ---------------- --------------- ---------------

<S>                                                                                  <C>            <C>             <C>      
  Net loss attributed to common stockholders -- reported                             $(4,323)       $(11,184)       $(13,836)
                                             -- pro forma                             (7,245)        (11,799)        (14,530)
  Basic and diluted net loss per share - reported                                       (.43)          (1.38)          (1.99)
                                       --pro forma                                      (.73)          (1.46)          (2.09)
</TABLE>

   The  fair  value  of  each  stock  option  grant  was  determined  using  the
   Black-Scholes  option pricing model and the following  assumptions:  expected
   stock price  volatility  of .67 to .70,  risk-free  interest  rate of 4.4% to
   7.8%,  weighted  average expected option lives of 10 years, and no dividends.
   The Black-Scholes  option valuation model was developed for use in estimating
   the fair value of traded options which have no vesting  restrictions  and are
   fully transferable. In addition, option valuation models require the input of
   highly  subjective  assumptions  including  expected stock price  volatility.
   Because  the  Company's  stock  options  have  characteristics  significantly
   different from those of traded options, and because changes in the subjective
   input  assumptions  can  materially  affect the fair value,  in  management's
   opinion the  existing  models do not  necessarily  provide a reliable  single
   measure of the fair value of stock options.

                                      F-21
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

13. Stock Options and Warrants, continued

   Stock Options, continued


   The following  table is a summary of activity for all of the Company's  stock
   options for the years ended September 30:
<TABLE>
<CAPTION>

                                                         1998                       1997                      1996
                                                              Weighted                  Weighted                   Weighted
                                                              Average                    Average                   Average
                                                              Exercise                  Exercise                   Exercise
  (thousands of shares)                          Shares        Price        Shares        Price        Shares       Price
  ------------------------------------------- ------------- ------------- ------------ ------------ ------------ -------------
<S>                                                  <C>           <C>          <C>          <C>          <C>           <C>  
  Outstanding at beginning of year                   1,614         $2.85        1,367        $1.62        2,030         $2.37
     Granted                                           850         12.34          445         6.08        1,612          3.51
     Exercised                                        (94)          1.93         (73)         1.84      (1,085)          5.92
     Canceled                                          ---           ---        (125)         1.50      (1,190)          1.54
                                              ============= ============= ============ ============ ============ =============
  Outstanding at end of the year                     2,370         $6.29        1,614        $2.85        1,367         $1.62
                                              ============= ============= ============ ============ ============ =============

  Exercisable at end of year                         1,038         $5.23          712        $2.04          463
                                              ============= ============= ============ ============ ============ =============

  Weighted average fair value of options
  granted during the year below market                            $10.21                     $9.53                     $12.66

  Weighted average fair value of options
  granted during the year at market                                $9.91                     $5.57                         $0

<CAPTION>

   The  following  table   summarizes   information   about  all  stock  options
   outstanding at September 30, 1998:

   (thousands of shares)                        Options Outstanding                               Options Exercisable
   ------------------------ ------------------------------------------------------------- ------------------------------------
                                                        Weighted
                                   Number               Average            Weighted            Number            Weighted
                               Outstanding at          Remaining            Average        Exercisable at        Average
      Range of Exercise         September 30,       Contractual Life       Exercise         September 30,        Exercise
           Prices                   1998                in Years             Price              1998              Price
   ------------------------ ---------------------- ------------------- ------------------ ------------------ -----------------
<S>         <C>                             <C>                   <C>              <C>                  <C>             <C>  
   $1.50 to $3.50                           1,221                 7.3              $1.58                602             $1.66
   $7.00 to $9.00                             397                 8.5               8.22                257              8.20
   $11.00 to $13.56                           752                 9.0              12.92                179             13.02
                            ----------------------                                        ------------------
                                            2,370                                                     1,038
                            ======================                                        ==================
</TABLE>

   Stock Warrants

   As of September 30, 1998, there were warrants outstanding for the purchase of
   approximately  2,033,000  shares of common stock at prices ranging from $7.00
   to $30.00 per share and with expiration  dates from October 1998 to September
   2000. All of these warrants were issued in connection with private placements
   of common and preferred  stock or notes payable during the years 1996 through
   1998.

   In October  1998,  the Company  issued  warrants  for the purchase of 100,000
   shares of common  stock in  accordance  with the terms of a note payable to a
   corporation (see Note 7).

                                      F-22
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------



14. Purchase of Limited Partners' Interests in Subsidiaries

   In September 1998, the Company  formally  offered the limited partners in its
   two  consolidated  subsidiaries,  Utah Synfuel #1, and Alabama Synfuel #1, an
   exchange  of  the  Company's  common  stock  for  their  limited  partnership
   interests.  The exchange ratio was based in part on an independent  valuation
   of the  limited  partnerships'  assets and other  factors  including  but not
   limited to current and future expected cash flows of the partnerships and the
   market value of the  Company's  common stock at the date of the offer,  $9.00
   per  share.  As of  September  30,  1998,  substantially  all of the  limited
   partners had elected to exchange  their  limited  partnership  interests  for
   shares of the Company's  common stock.  During October and November 1998, all
   but one of the other  limited  partners  exchanged  their  interests and Utah
   Synfuel  #1 became a  wholly-owned  subsidiary  of the  Company  and  Alabama
   Synfuel #1 became a 98%-owned subsidiary of the Company. The Company recorded
   this exchange  using the market  values of the Company's  common stock on the
   dates the limited partners tendered  acceptance of the Company's offer. These
   market values ranged from $6.75 to $11.13 per share.

15.  Discontinued Operations

   In  1995,  the  Company  made a  strategic  decision  to  focus  its  efforts
   exclusively  on  commercializing  the  Briquetting  Technology  and to divest
   itself of its  construction  subsidiaries.  In September  1995,  the Board of
   Directors approved a plan to dispose of the  construction-related  operations
   and in February 1996 entered into a stock  purchase  agreement to sell all of
   the common shares of the  subsidiaries for a $5,000,000 face value promissory
   note. The terms of the original agreement were clarified in November 1997 and
   the financial effect is included in the change in the allowance to reduce the
   promissory  note to  collateral  value  (discussed  below).  Because the note
   includes a favorable  interest rate for the buyer, the Company has calculated
   the present  value of the note using a market rate of 10.25% over the term of
   the note. The effect of discounting the note at 10.25% was to reduce the note
   to  approximately  $3,719,000  as of the  renegotiation  date.  The  original
   discount  on the note was  included  in the  estimated  loss on  disposal  of
   discontinued operations in 1996.

   Because the note is  collateralized  by the  Company's  common  stock,  it is
   reflected  in  the  consolidated  financial  statements  as  a  reduction  of
   stockholders'  equity.   Additionally,   the  note  is  adjusted  to  reflect
   subsequent  increases or decreases in the fair value of the  Company's  stock
   and stock options held as collateral.  Subsequent changes in the value of the
   collateral  will  be  reflected  in the  statement  of  operations  and as an
   increase or decrease to the carrying value of the note.

   Under the terms of the  agreement,  the Company  agreed to pay  $3,500,000 of
   accounts  payable  and  lines  of  credit  outstanding  in the  subsidiaries.
   Subsequently,  the buyer also  received  reimbursement  from the  Company for
   approximately  $650,000 of additional  expenses  related to the  discontinued
   operations  during the  wind-down  period  which were paid by the buyer.  The
   Company  has  reflected  those   obligations  in  the  loss  on  discontinued
   operations   in  1996.   Revenues  of  the   discontinued   operations   were
   approximately $1,397,000 for the four months ended February 1, 1996, the date
   of sale.

                                      F-23
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------


16.  Commitments and Contingencies

   Commitments  and  contingencies  as  of  September  30,  1998  not  disclosed
   elsewhere, are as follows:

   Leases

   Rental expense was approximately  $473,000,  $318,000, and $330,000 for 1998,
   1997 and 1996, respectively. The Company has a noncancellable operating lease
   for  equipment  through  the year 2000 and other  operating  leases  for real
   estate.  At  September  30,  1998,  minimum  rental  payments due under these
   leases, are as follows:

               Year ending September 30:    (thousands of dollars)
              ----------------------------- -----------------------
                          1999                                $664
                          2000                                 496
                          2001                                 314
                          2002                                 113
                          2003                                  36
                                            =======================
                                                            $1,623
                                            =======================

   Letters of Credit

   During 1998, the Company  entered into letter of credit  arrangements  with a
   bank that  provide  for the  issuance  of  letters of credit  totaling  up to
   $938,000.  These  arrangements are  collateralized by certificates of deposit
   totaling  $588,000  that  are  included  in  restricted  investments  in  the
   accompanying balance sheet. As of September 30, 1998, there was approximately
   $560,000 of liabilities covered by these arrangements.

   Legal or Contractual Matters

   Included in accrued  liabilities is $755,000  ($1,477,000 in 1997) related to
   construction  contracts  that  contained  a "failure  to  proceed"  liability
   clause.

   In December  1996,  the Company  entered into  indemnification  agreements in
   connection with construction  contracts for certain synthetic fuel facilities
   entered  into  by  independent  third  parties.   These  contracts  call  for
   liquidated damages of $750,000 per contract if construction of the facilities
   is not completed by June 1, 1998. The Company  indemnified the contractor for
   these potential liabilities. The contracting party did not construct three of
   the facilities.  Accordingly,  the maximum  contingent  liability under these
   indemnification  agreements would be $2,250,000. The contractor and the owner
   have initiated  arbitration  claims against each other including owner claims
   for liquidated  damages.  The Company is closely monitoring the situation and
   believes that payment of a material amount by the Company is unlikely.

   In June 1997,  the Company sold the Utah Synfuel #1 facility to Coaltech.  In
   connection  with this sale, Utah Synfuel #1 sold to Coaltech a license to use
   the Company's Briquetting Technology for an advance license fee of $1,400,000
   and an  earned  license  fee that is  payable  quarterly  and is  based  upon
   briquettes manufactured and sold at the Utah Synfuel #1 facility. The Company
   contracted  with  Coaltech  to operate the  facility  for which it receives a
   quarterly fee which is also based upon briquettes produced and sold. Coaltech
   has an option  wherein they can require the Company to purchase this facility
   under certain  conditions.  The purchase price is equal to fair market value,
   not to exceed 50% of the amounts paid to Covol by Coaltech.

   Additionally,  the  Company  entered  into a supply  and  purchase  agreement
   wherein the Company  agreed to provide coal fines to Coaltech for  processing
   into  synthetic  fuel at a price  equal to its cost.  The  Company  agreed to
   purchase from Coaltech the  synthetic  fuel produced at Coaltech's  cost plus
   one dollar per ton. Based upon expected  manufacturing costs and current coal
   prices,  the Company  expects to incur a loss under this supply and  purchase
   agreement  which will reduce the earned  license fees  received.  The Company
   believes the earned  license fees will exceed the losses  incurred  under the
   supply and purchase agreement. Because of the expected loss under this supply
   and purchase  agreement,  revenue  recognition of the advance license fee has
   been deferred as of September 30, 1998 and 1997.

                                      F-24
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------


16. Commitments and Contingencies, continued

   Legal or Contractual Matters, continued

   In June 1996, the Company formed Alabama  Synfuel #1 to construct a synthetic
   fuel facility.  In connection  with the  construction  of this facility,  the
   Company  entered  into a supply  agreement  for coal  fines to be used at the
   facility,  under  which the Company  was  obligated  to purchase a minimum of
   20,000  tons of coal  fines per month  through  December  2001.  The  Company
   assigned this agreement to the purchaser of the facility and accordingly, has
   no ongoing  obligation.  The Company has a dispute  with the provider of coal
   fines,  the resolution of which is not expected to have a material  impact on
   the Company.

   In May 1995, the Company  entered into an agreement with Geneva Steel Company
   to build and operate a commercial iron revert briquetting plant. The facility
   never reached  commercial  productivity  levels and is not  operational.  The
   Company may use this  equipment for the  production of synthetic  fuel or for
   testing purposes.

   The  Company  entered  into a letter of intent with  Innovative  Technologies
   ("Innovative") in July 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. In March 1997, Innovative Holding Company,
   Inc.,  filed a civil  complaint  against the Company  alleging  breach of the
   letter of intent and damages in excess of $500,000.  The Company successfully
   defended this action which was dismissed with prejudice.

   In December 1996, the Company entered into license agreements with affiliates
   of Pace Carbon  Fuels,  L.L.C.  (collectively  "Pace") for the use of Company
   technologies at four synthetic fuel  manufacturing  facilities owned by Pace.
   In 1998 Pace requested a reduction in the license fees payable to the Company
   under the license agreements.  Upon condition of immediate payment by Pace of
   advance  license  fees,  the Company  agreed to a reduction in future  earned
   license fees.  This reduction was  accomplished  by a ten-year loan agreement
   whereby the Company would loan to Pace up to $750,000 each quarter  beginning
   in November 1998. The Company's loan to Pace will be repaid at the end of the
   ten years only if the Pace projects have  accumulated  sufficient  prescribed
   earnings. Revenues from earned license fees will be recognized by the Company
   only to the  extent  that  amounts  exceed  the  loan  commitment.  Pace  has
   requested a loan of  $750,000  for the  November  1998  quarter.  The Company
   believes  that its current loan  obligation  to Pace is limited to the earned
   license fee  receivable  by the Company for the quarter  ended  September 30,
   1998, which is believed to be approximately $300,000.

   In January 1996, a manager of the Company  entered  property  owned by Nevada
   Electric  Investment  Company, 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 some asbestos over a two-day
   period. In May 1996, the Company received a notice of violation and order for
   compliance  from the State of Utah,  Division  of Air Quality  alleging  that
   asbestos  was  improperly  handled,  removed,  and  disposed  of. The Company
   complied  with the order and in  September  1996  entered  into a  settlement
   agreement with the State of Utah and paid a fine in the amount of $11,000. In
   late  1997,  the  U.S.   Environmental   Protection   Agency  began  its  own
   investigation,  referring  the  matter to the U.S.  Attorney's  office  which
   proceeded with a grand jury inquiry. The Company does not know the results of
   the grand jury inquiry or whether the inquiry is completed.  The Company does
   not believe that the  resolution of this matter will have a material  adverse
   effect on the Company.

   As of  September  30,  1998,  the Company  has  recorded  liabilities  to The
   Industrial Company ("TIC") totaling approximately $735,000. In November 1998,
   the Company was served with liens from TIC in amounts totaling  approximately
   $1,150,000 for  construction  payments TIC claims are due for certain synfuel
   facilities.  The  Company  is  negotiating  with TIC for the  settlement  and
   release of the liens and believes  that payment of a material  amount  beyond
   what has been accrued by the Company is unlikely.

                                      F-25
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

16. Commitments and Contingencies, continued

   Legal or Contractual Matters, continued

   The Company is also  involved in several legal  proceedings  that have arisen
   out of the normal course of business. The Company believes that many of these
   claims are without merit and in all cases intends to vigorously  defend their
   position.  Management  does not believe that the outcome of these  activities
   will have a significant  effect upon the operations or the financial position
   of the Company.

   Employment Contracts

   The Company has entered into  employment  agreements with the Chief Executive
   Officer,  President,  Chief Financial  Officer and two vice  presidents.  The
   agreements,  which are  renewable  by the Company,  generally  have a term of
   approximately  three  years and  provide  for annual  salaries  and  benefits
   ranging from  approximately  $80,000 to $190,000  annually  per officer,  and
   currently totaling approximately $600,000 for all five officers combined. All
   agreements provide for termination benefits under specific conditions ranging
   up to 200% of the then current annual salaries.

17. Events Subsequent to September 30, 1998

   Subsequent to September 30, 1998, a total of approximately  308,000 shares of
   the Company's common stock were issued on conversion of approximately 285,000
   shares of Series B preferred stock and related  accrued but unpaid  dividends
   in arrears.

   During   November  and  December  1998,  the  Company   completed   financing
   transactions that consisted of $400,000 of debt and approximately  $3,500,000
   of equity. The debt has a term of twelve months,  bears interest at 15%, with
   an interest  only  payment due in six months and with the balance of interest
   and principal due at maturity.  The debt is  collateralized by certain assets
   of the Company and is due prior to maturity  upon the  placement of long-term
   financing by the  Company.  The equity  transaction  consisted of the sale of
   units  at a price  of  $5.00  per  unit.  A unit  consists  of one  share  of
   restricted  common stock plus a warrant to purchase one  additional  share of
   restricted common stock at an exercise price of $7.50. The warrants expire in
   twelve months if not  exercised.  The  restricted  stock and shares  issuable
   pursuant to the related  warrants have been provided  piggyback  registration
   rights.

   The Company has  received  term sheets for the sale of up to  $10,000,000  of
   convertible  preferred stock.  This financing is expected to close in January
   1999.

                                      F-26





                                 PROMISSORY NOTE


$9,750,000                                                      December 8, 1998


         FOR VALUE RECEIVED,  COVOL TECHNOLOGIES,  INC., a Delaware  corporation
("Maker"),  hereby  unconditionally  promises to pay to the order of MOUNTAINEER
SYNFUEL,  L.L.C., a Delaware limited liability company ("Payee"),  at such place
as Payee may from time to time designate in writing to Maker,  the principal sum
of $9,750,000,  or, if less, the sum of (i) $8,250,000  plus (ii) any additional
amounts  ("Additional  Amounts") loaned on the date hereof or hereafter by or on
behalf  of Payee  to  Maker up to a  maximum  additional  amount  of  $1,500,000
pursuant to the letter  agreement  of even date  herewith  among  Maker,  Payee,
Fannie  Mae and MSDW  Synfuels  II,  Inc.,  together  with all  unpaid  interest
thereon,  on June 30,  2000  (the  "Maturity  Date"),  or  sooner  as  hereafter
provided.

         1. Notation of Additional  Amounts.  Payee is authorized to record,  on
the  schedule  annexed  hereto and made a part hereof,  or on other  appropriate
records of Payee, the date and amount of each Additional  Amount loaned by Payee
to Maker,  provided,  however,  that failure by Payee to make any recordation or
other error therein shall not limit or otherwise affect the obligations of Maker
hereunder.

         2. Interest.  The unpaid principal  balance of this promissory note (as
amended,  modified or supplemented  from time to time, this "Note") from time to
time  outstanding  shall bear  interest at a per annum rate equal to ten percent
(10%),  but in no  event  higher  than  the  maximum  lawful  rate  that  may be
contracted for, charged, taken, reserved or received by Payee in accordance with
applicable law.  Interest hereon shall be computed on the basis of a year of 365
or 366 days, as applicable, for the actual number of days elapsed.

         3.  Manner of Payment  and  Application  of Funds.  The  principal  and
accrued interest on this Note shall be due and payable as follows:

                  (a) Unless this Note has been accelerated  pursuant to Section
         6 hereof, commencing on January 31, 1999 and continuing on the last day
         of each month  thereafter  through June 30,  1999,  the Maker shall pay
         accrued interest on the outstanding principal amount hereof;

                  (b) Unless this Note has been accelerated  pursuant to Section
         6 hereof,  commencing  July 31, 1999 and  continuing on the last day of
         each month  thereafter  through May 31,  2000,  the Maker shall pay the
         amount of $350,000,  such payment being applied first to the payment of
         accrued but unpaid interest and then to principal; and

                  (c) All unpaid  principal  and  accrued  interest on this Note
         shall  be due  and  payable  on the  earlier  of the  Maturity  Date or
         acceleration pursuant to Section 6 hereof.

                                       -1-

<PAGE>



All  sums  payable  hereunder  will be  payable  by  Maker  to  Payee  in  funds
constituting  lawful  money of the United  States of America and in  immediately
available funds.  Maker's  obligation to make payments hereunder is absolute and
unconditional  and shall not be subject  to any  defense,  claim,  counterclaim,
setoff,  recoupment,  abatement  or other right that Maker may now or  hereafter
have against Payee or any other person or entity.

         4.  Prepayment  of Principal.  From and after  January 29, 1999,  Maker
shall be entitled to prepay at any time(s)  the  outstanding  principal  balance
hereof,  in whole or in part, plus accrued  interest  thereon without premium or
penalty.  All prepayments  shall be applied first to accrued but unpaid interest
and then to  principal.  This Note shall not be  prepayable  in whole or in part
prior to January 15, 1999.

         5. Security Agreement. This Note is secured by a Security Agreement (as
amended,  modified or supplemented from time to time, the "Security  Agreement")
and by a  Leasehold  Credit  Line  Deed of Trust  and  Security  Agreement  (the
"Leasehold  Deed of Trust and Security  Agreement"),  each of even date herewith
executed by Maker in favor of Payee,  to which reference is made for a statement
of the rights and obligations of Maker and Payee in relation thereto.

         6.  Events of Default.  Maker shall be in default  under this Note upon
the occurrence of any of the following events or conditions  (each, an "Event of
Default"):

                  (a)  Maker  fails  to pay any  principal,  interest  or  other
         amounts payable under this Note when due;

                  (b) Maker  commences or becomes the subject of any proceedings
         under  any   bankruptcy,   reorganization,   compromise,   arrangement,
         insolvency,   readjustment  of  debts,   conservatorship,   moratorium,
         dissolution,   liquidation,  or  similar  debtor  relief  laws  of  any
         jurisdiction,  whether now or hereafter in effect,  and, in the case of
         involuntary   proceedings,   such   proceedings   are  not   dismissed,
         discharged,  stayed or  restrained  within 60 days of the  commencement
         thereof,  or makes an assignment for the benefit of its  creditors,  or
         fails to pay its debts generally as they become due;

                  (c) Maker  liquidates  or  dissolves  itself (or  suffers  any
         liquidation  or  dissolution)  or otherwise  winds up or terminates its
         existence;

                  (d) An "Event of  Default"  as  specified  and  defined in the
         Security  Agreement  or  the  Leasehold  Deed  of  Trust  and  Security
         Agreement shall have occurred.

         7.       Acceleration and Other Remedies.

                  (a) If an Event of Default  described  in  Section  6(b) above
         occurs,  the  aggregate  unpaid  principal  balance of and any  accrued
         interest  on  this  Note  shall   thereupon   become  due  and  payable
         concurrently  therewith,  without any action by Payee or any subsequent
         holder  of this  Note,  and  without  diligence,  presentment,  demand,
         protest,  notice of protest or intent to  accelerate,  or notice of any
         other kind,  all of which are hereby  expressly  waived  (except to the
         extent waiver of the foregoing is not permitted by applicable  law). If
         any other  Event of  Default  occurs,  Payee or any  subsequent  holder
         hereof may,  upon written  notice to Payee of such Event of Default (i)
         declare the unpaid principal balance of and any accrued interest

                                       -2-

<PAGE>



         on this Note immediately due and payable,  whereupon it will be due and
         payable without  diligence,  presentment,  demand,  or protest,  all of
         which are hereby  expressly  waived (except to the extent waiver of the
         foregoing is not  permitted by applicable  law),  and (ii) exercise all
         other rights and remedies available by agreement, at law or in equity.

                  (b) Failure to exercise any of the foregoing  options will not
         constitute  a waiver  of the  right to  exercise  the same or any other
         option  at any  subsequent  time in  respect  to any other  event.  The
         acceptance by Payee of any payment  hereunder that is less than payment
         in full of all amounts due and payable at the time of such payment will
         not  constitute a waiver of the right to exercise any of the  foregoing
         options at that time or at any  subsequent  time or  nullify  any prior
         exercise of any such option  without  the  express  written  consent of
         Payee.

         8. Waivers.  Maker and any  endorsers,  sureties or  guarantors  hereof
severally  waive  presentment  and  demand  for  payment,  notice  of  intent to
accelerate maturity,  notice of acceleration of maturity,  protest and notice of
protest  and  non-payment,  other  notice  of any  kind,  bringing  of suit  and
diligence  in taking  any  action to  collect  any sums  owing  hereunder  or in
proceeding  against any of the rights and properties  securing  payment  hereof.
Maker and any endorsers,  sureties or guarantors hereof also severally waive any
notice of or defense on account of any extensions, renewals, partial payments or
changes in any manner of or in this Note or in any of its terms,  provisions and
covenants,  or any delay,  indulgence  or other act of any trustee or any holder
hereof, whether before or after maturity.

         9. Legal Interest  Limitations.  It is the intent of Maker and Payee to
conform  strictly to all applicable state and federal usury laws. All agreements
between Maker and Payee,  whether now existing or hereafter  arising and whether
written or oral, are hereby expressly limited so that in no contingency or event
whatsoever,  whether  by  reason  of  acceleration  of the  maturity  hereof  or
otherwise, shall the amount contracted for, charged or received by Payee for the
use, forbearance, or detention of the money to be loaned hereunder or otherwise,
or for the payment or performance of any covenant or obligation contained herein
or in any other document evidencing, securing, or pertaining to the indebtedness
evidenced  hereby which may be legally deemed to be for the use,  forbearance or
detention of money, exceed the maximum amount which Payee is legally entitled to
contract for, charge or collect under  applicable  state or federal law. If from
any circumstance whatsoever fulfillment of any provision hereon or of such other
documents,   at  the  time  performance  of  such  provision  is  due,  involves
transcending the limit of validity  prescribed by law, then the obligation to be
fulfilled shall be automatically  reduced to the limit of such validity,  and if
from any such  circumstance  Payee ever  receives as interest  or  otherwise  an
amount in excess of the maximum that can be legally collected,  then such amount
which  would be  excessive  interest  shall be applied to the  reduction  of the
principal  indebtedness  hereof  and any  other  amounts  due  under  any  other
instrument  evidencing,  securing or  pertaining to the  indebtedness  evidenced
hereby,  but not to the payment of  interest;  and if such amount which would be
excessive  interest exceeds the unpaid balance of principal hereof and all other
non-interest  indebtedness  described above, then such additional amount will be
refunded  to  Maker.  All sums  paid or  agreed to be paid by Maker for the use,
forbearance  or detention of the  indebtedness  of Maker to Payee shall,  to the
extent  permitted by applicable  law, be  amortized,  prorated,  allocated,  and
spread  throughout the full term of such  indebtedness  until payment in full so
that  the  amount  of  interest  on  account  of such  indebtedness  is  uniform
throughout  the term  thereof  and does not  exceed  the  maximum  permitted  by
applicable law.

                                       -3-

<PAGE>



The terms and  provisions of this  paragraph  shall control and supersede  every
other provision of all agreements between Maker and the Payee.

         10.  Severability.  If any  provision  of  this  Note  or  any  related
documents  is held to be  illegal,  invalid or  unenforceable  under  present or
future laws or regulations, that provision will be fully severable. The affected
instrument,  document or  agreement  shall be  construed  and enforced as if the
severed  provision had never been a part thereof,  and the remaining  provisions
shall  remain in full force and effect and shall not be  affected by the severed
provision or by its severance therefrom. In lieu of the severed provision, there
shall be added automatically as a part of the affected  instrument,  document or
agreement a provision that is legal,  valid and  enforceable,  and as similar in
terms to the severed provision as may be possible.

         11.  Notices.  All  notices,  requests  or  communications  required or
permitted to be given  hereunder shall be in writing and shall be deemed to have
been properly  given if (a) mailed by  first-class  United States mail,  postage
prepaid, registered or certified with return receipt requested, (b) delivered by
a nationally  recognized overnight delivery service with written confirmation of
delivery,  (c)  delivered  in person to the intended  addressee,  or (d) sent by
facsimile transmission with confirmation of delivery. Any notice mailed as above
provided  will be effective  upon its deposit in the custody of the U.S.  Postal
Service; all other notices will be effective upon receipt. All notices hereunder
shall be given at the following addresses:

         if to Maker:               Covol Technologies, Inc.
                                    3280 North Frontage Road
                                    Lehi, Utah  84043
                                    Facsimile: (801) 768-4483
                                    Attention:  Stanley M. Kimball

         if to Payee:               Mountaineer Synfuel, L.L.C.
                                    3280 North Frontage Road
                                    Lehi, Utah  84043
                                    Facsimile:  (801) 766-1979
                                    Attention:  Harlan M. Hatfield

         with copies to:            MSDW Synfuels II, Inc.
                                    1221 Avenue of the Americas
                                    23rd Floor
                                    New York, New York  10020
                                    Facsimile:  (212) 762-6912
                                    Attention:  Debra M. Aaron

                                    and

                                    Fannie Mae
                                    3900 Wisconsin Avenue, N.W.
                                    Washington, D.C.  20016-2892
                                    Facsimile:  (201) 752-6088
                                    Attention:  William E. Einstein

                                       -4-

<PAGE>


Any such  entity may  change  its  address  for  notice  hereunder  to any other
location  within the  continental  United  States by giving 30 days prior notice
thereof to each other such entity in accordance with this paragraph.

         12.  Assignment.  This Note,  the rights,  powers and interests held by
Payee hereunder and under the Security Agreement may be transferred and assigned
by Payee,  in whole or in part,  at such  time and upon such  terms as Payee may
deem advisable,  without the consent of Maker.  Maker will not assign any of its
rights,  powers or  interests  hereunder  without the prior  written  consent of
Payee.

         13.  Amendment/Modification/Consent.  This  Note  may  not be  amended,
supplemented or otherwise  modified,  except by express written consent of Maker
and Payee. No consent of Payee  hereunder shall be effective  unless approved in
writing by MSDW Synfuels II, Inc. and Fannie Mae.

         14.  Governing  Law.  This Note shall be governed by and  construed and
enforced in accordance  with the laws of the State of New York,  without  giving
effect to the principles of conflict of law of New York.

         15. ENTIRE  AGREEMENT.  THIS WRITTEN  AGREEMENT AND THE OTHER DOCUMENTS
REFERENCED  HEREIN OR CONTEMPLATED  HEREBY REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL  AGREEMENTS OF THE PARTIES  HERETO.  THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES.


                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                       -5-

<PAGE>



         IN WITNESS  WHEREOF,  Maker hereby executes this Note on the date first
above written.

                                               COVOL TECHNOLOGIES, INC.
                                               a Delaware corporation



                                               By: /Stanley M. Kimball/
                                                  ------------------------------
                                               Printed Name: Stanley M. Kimball
                                               Its: President


                                       -6-

<PAGE>


                         Schedule of Additional Amounts
                            Under Promissory Note of
                            Covol Technologies, Inc.
                             Dated December 8, 1998


 Date of Additional Amount Loan                Amount of Additional Amount Loan











                               SECURITY AGREEMENT


         THIS SECURITY AGREEMENT (as amended, modified or supplemented from time
to time,  this "Security  Agreement") is made and entered into as of December 8,
1998, by and between MOUNTAINEER  SYNFUEL,  L.L.C., a Delaware limited liability
company ("Secured Party"),  and COVOL TECHNOLOGIES,  INC, a Delaware corporation
("Debtor").

         1.  Indebtedness.  The Security  Interest (as defined  below) is herein
created to secure payment and  performance of that certain  promissory  note (as
amended,  modified or  supplemented  from time to time, the "Note") of even date
herewith  executed  by Debtor and  payable to the order of Secured  Party in the
original  principal sum of NINE MILLION SEVEN HUNDRED FIFTY  THOUSAND and No/100
Dollars ($9,750,000), all renewals and extensions thereof (the "Indebtedness").

         2.  Collateral.  For value  received,  Debtor  hereby grants to Secured
Party a security  interest  ("Security  Interest") in all of Debtor's  rights to
receivables  and payments in respect of the "Maple Creek  Mining,  Inc.,  Ginger
Hill,  P.A." project and the "Ohio Valley Coal Company,  Alledonia,  OH" project
under the Amended and Restated License and Binder Purchaser Agreement,  made and
entered  into  as of  April  15,  1998,  by  and  between  Pelletco  Corporation
("Pelletco")  and Debtor,  as the same may be amended from time to time together
with the related  Assignment of License  Agreement,  made and entered into as of
April 15, 1998 between Pelletco and Ginger Hill Synfuels,  L.L.C. and Assignment
of License Agreement made and entered into as of April 15, 1998 between Pelletco
and Pleasant Ridge Synfuels,  L.L.C.  (collectively,  the "License  Agreement"),
including,  but not limited to, (i) all substitutions and replacements  therefor
and (ii) all proceeds,  products and increases  thereof (other than  receivables
and payments  arising under Section  4.2(i) of such License and Binder  Purchase
Agreement) (the "Collateral").  Notwithstanding such grant, the Secured Party is
not assuming any liability or obligation under the License  Agreement and Debtor
shall remain solely  responsible for performance of its obligations  thereunder.
Debtor  from time to time may  propose  substitute  collateral  to  replace  and
release the security  interest  created hereby in the Collateral.  Secured Party
will in good faith evaluate the proposed substitute collateral.

         3.       Debtor's Warranties, Covenants and Further Agreements.

                  A.  Organization  and Authority.  Debtor is a corporation duly
         organized,  validly existing and in good standing under the laws of the
         State of  Delaware.  Debtor has the  corporate  power and  authority to
         execute,  deliver and perform the Note and this Security Agreement, and
         the execution,  delivery and  performance of the Note and this Security
         Agreement  by  Debtor  have  been  duly  authorized  by  all  necessary
         corporate  action on the part of Debtor and do not and will not violate
         any law, rule or  regulation or the  certificate  of  incorporation  or
         bylaws of Debtor  and do not and will not  conflict  with,  result in a
         breach  of,  or  constitute  a default  under,  the  provisions  of any
         indenture,  loan agreement,  security  agreement or other instrument or
         agreement pursuant to which Debtor or any of its property is bound.

                                       -1-

<PAGE>



                  B.  Enforceable   Obligation.   The  Note  and  this  Security
         Agreement have been duly executed and delivered by Debtor and, assuming
         the due execution  and delivery of this  Security  Agreement by Secured
         Party, each constitutes a legal, valid and binding obligation of Debtor
         enforceable  in accordance  with its terms.  The License  Agreement has
         been duly executed and delivered by the parties thereto and constitutes
         a  legal,   valid  and  binding   obligation  of  the  parties  thereto
         enforceable in accordance with its terms.

                  C. Consent,  Approval or Other Action. No consent, approval or
         other  action by,  notice to or filing  with any  governmental  body or
         other  person  or entity  is  required  for the  grant,  perfection  or
         exercise  by  Secured  Party of its  rights  hereunder,  except for the
         filing of the financing statement(s) being made in connection with this
         Security Agreement.

                  D.  Title.  Debtor has title to the  Collateral  free from any
         lien,  security interest,  encumbrance or claim and Debtor will, during
         the  term of this  Security  Agreement,  at  Debtor's  cost,  keep  the
         Collateral free from other liens,  security interests,  encumbrances or
         claims, and defend any action which may affect the Security Interest or
         Debtor's  title to the  Collateral.  This  Security  Agreement  and any
         account,  instrument or document which is, or shall be, included in the
         Collateral is and shall be,  genuine and legally  enforceable  and free
         from any set off, counterclaim or defense.

                  E. Perfection.  No financing statement covering the Collateral
         or any part or proceeds thereof is on file in any public office and, at
         Secured  Party's  request,  Debtor will join in executing all financing
         statements and other  instruments  deemed necessary by Secured Party to
         perfect the Security  Interest  under the laws of the United  States or
         any  State  thereunder.  This  Security  Agreement  and  the  financing
         statements  filed in connection  herewith  create a valid and perfected
         first  priority  security  interest  in  the  Collateral  securing  the
         Indebtedness.

                  F.  Disposition  of  Collateral.   Notwithstanding  any  other
         provision  hereof,   Debtor  will  not  amend,  modify,  sell,  assign,
         transfer, pledge or otherwise dispose of all or part of the Collateral,
         whether  voluntarily  or by  operation  of law,  except  with the prior
         written consent of the Secured Party.

                  G.  Principal  Place  of  Business.  The  principal  place  of
         business  and chief  executive  office of Debtor,  and the office where
         Debtor keeps its books and records,  including  records relating to the
         Collateral,  is located at the  address of Debtor  listed in Section 10
         below.

                  H. Further Assurances. At any time and from time to time, upon
         the request of Secured Party, and at the sole expense of Debtor, Debtor
         shall  promptly  execute and deliver all such further  instruments  and
         documents  and take  such  further  action  as  Secured  Party may deem
         necessary or desirable to preserve and perfect its Security Interest in
         the  Collateral  and  carry out the  provisions  and  purposes  of this
         Security Agreement,  including,  without limitation,  the execution and
         filing of such  financing  statements as Secured  Party may require.  A
         carbon, photographic, or other

                                       -2-

<PAGE>



         reproduction of this Security  Agreement or of any financing  statement
         covering the  Collateral  or any part thereof  shall be sufficient as a
         financing statement and may be filed as a financing statement.

                  I. Obligations.  Debtor  shall  duly  and  punctually  pay and
         perform the obligations of Debtor under the Note, the License Agreement
         and this Security Agreement.

                  J. Notification. Debtor shall promptly notify Secured Party of
         (i)  any  lien,  security  interest,  encumbrance,  or  claim  made  or
         threatened  against the  Collateral,  (ii) any  material  change in the
         Collateral, including, without limitation, any breaches by any party to
         the License  Agreement,  and (iii) the  occurrence  or existence of any
         Event of Default (as defined  below) or the  occurrence or existence of
         any condition or event that, with the giving of notice or lapse of time
         or both, would constitute an Event of Default.

                  K.  Corporate  Changes.  Debtor  shall  not  change  its name,
         identity, or corporate structure in any manner unless Debtor shall have
         given Secured Party thirty (30) days prior written  notice  thereof and
         shall have taken all action  deemed  necessary  or desirable by Secured
         Party to make each financing  statement  filed in connection  with this
         Security  Agreement not seriously  misleading.  Debtor shall not change
         its  principal  place  of  business,  chief  executive  office  or  the
         location(s)  of the  Collateral  and/or the records  pertaining  to the
         Collateral  (as  described  above)  unless it shall have given  Secured
         Party  thirty  (30) days prior  written  notice  thereof and shall have
         taken all action  deemed  necessary or  desirable  by Secured  Party to
         cause its security  interest in the Collateral to be perfected with the
         priority required by this Security Agreement.

                  L. Books and Records; Information.  Debtor shall keep accurate
         and complete books and records of the Collateral including all payments
         and  payables in respect  thereof and Debtor's  business and  financial
         condition in accordance with generally accepted  accounting  principles
         consistently applied.  Debtor shall from time to time at the request of
         Secured Party deliver to Secured Party such  information  regarding the
         Collateral and Debtor as Secured Party may request, including,  without
         limitation,  payments  and  payables  in  respect  thereof,  lists  and
         descriptions  of  the  Collateral  and  evidence  of the  identity  and
         existence of the Collateral. Debtor shall mark its books and records to
         reflect  the  security  interest of Secured  Party under this  Security
         Agreement.

                  M.  Compliance  with  Agreements.  Debtor  shall comply in all
         material respects with all mortgages, deeds of trust, instruments,  and
         other agreements binding on it or affecting its properties or business.

                  N.  Compliance  with  Laws.   Debtor  shall  comply  with  all
         applicable  laws,  rules,  regulations,  and  orders  of any  court  or
         governmental authority.

         4. Rights of Secured  Party.  Debtor hereby  appoints  Secured Party as
Debtor's  attorney-in-fact  to do any act  which  Debtor  is  obligated  by this
Security Agreement to do, to exercise

                                       -3-

<PAGE>



all rights of Debtor in the Collateral and to do all things deemed  necessary by
Secured Party to perfect the Security  Interest and preserve,  collect,  enforce
and protect the  Collateral,  all at Debtor's cost and without any obligation on
Secured  Party so to act.  Secured  Party  shall  not be  liable  for any act or
omission on the part of Secured Party, its officers, agents or employees, except
willful  misconduct nor shall Secured Party be responsible  for  depreciation in
value of the Collateral or for preservation of rights against prior parties. The
foregoing  rights and powers of Secured  Party may be exercised  before or after
default and shall be in addition to, and not a limitation  upon,  any rights and
powers of Secured Party given herein or by law,  custom or otherwise,  except as
otherwise expressly provided herein.

         5. Events of Default.  Debtor shall be in default  under this  Security
Agreement upon the occurrence and continuation of any of the following events or
conditions (each, an "Event of Default"):

                  (a)  Default  in the  timely  payment  or  performance  of any
         obligation,  covenant or agreement contained herein,  secured hereby or
         otherwise made or owed to Secured Party;

                  (b)  A  material  breach  of  or  default  under  the  License
         Agreement by any party thereto;

                  (c) Any party to the License  Agreement  commences  or becomes
         the subject of any proceedings  under any  bankruptcy,  reorganization,
         comprise,    arrangement,    insolvency,    readjustment    of   debts,
         conservatorship,   moratorium,  dissolution,  liquidation,  or  similar
         debtor  relief laws of any  jurisdiction,  whether now or  hereafter in
         effect, and, in the case of involuntary  proceedings,  such proceedings
         are not dismissed,  discharged,  stayed or restrained within 60 days of
         the commencement  thereof,  shall make an assignment for the benefit of
         its creditors,  or shall fail to pay its debts generally as they become
         due;

                  (d) Any warranty,  representation or statement made to Secured
         Party by or in  behalf  of  Debtor  proves  to have  been  false in any
         material respect when made;

                  (e) Any material  default in the payment or performance of any
         obligation of Debtor to others under any loan, indenture,  agreement or
         undertaking in respect of borrowed money;

                  (f)   Sale,   loss,   theft,   destruction,   encumbrance   or
         unauthorized transfer of any of the Collateral;

                  (g) Levy or seizure, or attachment of any of the Collateral;

                  (h) Judgment  against Debtor in an amount greater than $50,000
         which  remains  unpaid for thirty  (30) days unless  execution  on such
         judgment is subject to a stay pending appeal; and

                  (i) Any Event of Default as specified and defined in the Note.

                                       -4-

<PAGE>



         6.  Remedies of Secured  Party upon  Default.  When an Event of Default
occurs,  and at any time thereafter,  Secured Party may declare all or a part of
the Indebtedness  immediately due and payable and may proceed to enforce payment
of same and to exercise any and all of the rights and  remedies  provided by the
Uniform  Commercial  Code ("Code") and any other  applicable law, as well as all
other  rights and  remedies  possessed  by  Secured  Party  under this  Security
Agreement  or  otherwise  at law or in equity,  including,  but not  limited to,
notifying the account  debtor on the  Collateral to make any and all payments in
respect  thereof to the Secured Party.  Secured Party may also require Debtor to
assemble the  Collateral  and make it available to Secured Party at any place to
be designated  by Secured Party which is reasonably  convenient to both parties.
For purposes of the notice  requirements  of the Code,  Secured Party and Debtor
agree that  notice  given at least five (5)  calendar  days prior to the related
action  hereunder is  reasonable.  Secured  Party shall be entitled to immediate
possession of the Collateral and all books and records evidencing same and shall
have  authority  to enter  upon any  premises,  upon  which  said  items  may be
situated, and remove same therefrom.  Expenses of retaking,  holding,  preparing
for sale,  selling,  or the like,  shall include,  without  limitation,  Secured
Party's  reasonable  attorneys' fees and all such expenses shall be recovered by
Secured  Party  before  applying  the  proceeds  from  the  disposition  of  the
Collateral toward the Indebtedness.  To the extent allowed by the Code,  Secured
Party may use its discretion in applying the proceeds of any  disposition of the
Collateral  and Debtor shall remain liable for any  deficiency  remaining  after
such  disposition.  All  rights and  remedies  of Secured  Party  hereunder  are
cumulative  and may be  exercised  singly or  concurrently.  The exercise of any
right or remedy shall not be a waiver of any other.

         7.  Waiver by Secured  Party.  No waiver by Secured  Party of any right
hereunder  or of any Event of Default by Debtor  shall be binding  upon  Secured
Party unless provided in a written consent executed by Secured Party. Failure or
delay by Secured Party to exercise any right hereunder or waiver of any Event of
Default of Debtor  shall not  operate as a waiver of any other  right of further
exercise of such right, or of any further default.

         8. Parties Bound. Subject to Section 17 hereof, this Security Agreement
shall be binding  upon and inure to the benefit of the parties  hereto and their
respective heirs, executors, administrators, legal representatives,  successors,
receivers, trustees and assigns.

         9.  Governing  Law.  This Security  Agreement  shall be governed by and
construed and enforced in  accordance  with the Code (the  definitions  of which
apply herein) and other  applicable laws of the State of New York without giving
effect to the principles of conflict of law of New York.

         10.  Notices.  All  notices,  requests  or  communications  required or
permitted to be given  hereunder shall be in writing and shall be deemed to have
been properly  given if (a) mailed by  first-class  United States mail,  postage
prepaid, registered or certified with return receipt requested, (b) delivered by
a nationally  recognized overnight delivery service with written confirmation of
delivery,  (c)  delivered  in person to the intended  addressee,  or (d) sent by
facsimile transmission with confirmation of delivery. Any notice mailed as above
provided  will be effective  upon its deposit in the custody of the U.S.  Postal
Service; all other notices will be effective upon receipt. All notices hereunder
shall be given at the following addresses:

                                       -5-

<PAGE>



         if to Debtor:              Covol Technologies, Inc.
                                    3280 North Frontage Road
                                    Lehi, Utah  84043
                                    Facsimile: (801) 768-4483
                                    Attention:  Stanley M. Kimball

         if to Secured Party:       Mountaineer Synfuel, L.L.C.
                                    3280 North Frontage Road
                                    Lehi, Utah  84043
                                    Facsimile:  (801) 766-1979
                                    Attention:  Harlen M. Hatfield

         with copies to:            MSDW Synfuels II, Inc.
                                    1221 Avenue of the Americas
                                    23rd Floor
                                    New York, New York  10020
                                    Facsimile:  (212) 762-6912
                                    Attention:  Debra M. Aaron

                                    and

                                    Fannie Mae
                                    3900 Wisconsin Avenue, N.W.
                                    Washington, D.C.  20016-2892
                                    Facsimile:  (201) 752-6088
                                    Attention:  William E. Einstein

Any such  entity may  change  its  address  for  notice  hereunder  to any other
location  within the  continental  United  States by giving 30 days prior notice
thereof to each other such entity in accordance with this Section 10.

         11. Cumulative  Rights. All rights of Secured Party under this Security
Agreement and all related  documents  are  cumulative of each other and of every
other right which Secured Party may otherwise  have at law or in equity or under
any other contract or other writing for the enforcement of the security interest
herein or the collection of the Indebtedness. The exercise of one or more rights
shall not prejudice or impair the  concurrent  or  subsequent  exercise of other
rights.

         12. Continuing Security Interest;  Obligations Absolute.  This Security
Agreement  constitutes a continuing  security  interest in the  Collateral,  and
shall remain in full force and effect until performance and indefeasible payment
in full of the  Indebtedness.  The  obligations  of Debtor  under this  Security
Agreement  shall be  absolute  and  unconditional  and  shall  not be  released,
discharged,  reduced  or in any way  impaired  by any  circumstance  whatsoever,
including without limitation any amendment,  modification,  extension or renewal
of this  Security  Agreement,  the  Indebtedness  or any document or  instrument
evidencing,  securing or otherwise relating to the Indebtedness,  or any release
or subordination of collateral, or any waiver, consent,  extension,  indulgence,
compromise,  settlement  or other action or inaction in respect of this Security
Agreement,  the Indebtedness or any document or instrument evidencing,  securing
or otherwise relating to the

                                       -6-

<PAGE>



Indebtedness or any exercise or failure to exercise any right,  remedy, power or
privilege in respect of the Indebtedness.

         13.  Amendment/Modification/Consent.  This Security Agreement shall not
be amended,  supplemented,  or  otherwise  modified,  except by written  consent
signed by Secured Party and Debtor.  No consent of Secured Party hereunder shall
be  effective  unless  approved in writing by MSDW  Synfuels II, Inc. and Fannie
Mae.

         14.  Severability.  If any provision of this Security  Agreement or any
related documents is held to be illegal,  invalid or unenforceable under present
or future laws or  regulations,  that  provision  will be fully  severable.  The
affected instrument, document or agreement shall be construed and enforced as if
any the  severed  provision  had never been a part  thereof,  and the  remaining
provisions  shall  remain in full force and effect and shall not be  affected by
the severed  provision  or by its  severance  therefrom.  In lieu of the severed
provision,  there  shall  be  added  automatically  as a part  of  the  affected
instrument,  document  or  agreement  a  provision  that  is  legal,  valid  and
enforceable,  and as  similar  in  terms  to  the  severed  provision  as may be
possible.

         15.  Construction.  If there is any  conflict  between  the  provisions
hereof and the provisions of the  Indebtedness,  the latter shall  control.  The
captions  herein are for convenience of reference only and not for definition or
interpretation.

         16. Waiver of Debtor. Debtor hereby waives presentment,  demand, notice
of dishonor,  protest, and notice of protest, and all other notices with respect
to collection, or acceleration of maturity, of the Collateral and Indebtedness.

         17.  Assignment.  This  Security  Agreement,  the  rights,  powers  and
interests  held by Secured Party  hereunder may be  transferred  and assigned by
Secured Party,  in whole or in part, at such time and upon such terms as Secured
Party may deem advisable,  without the consent of Debtor. Debtor will not assign
any of its rights,  powers or  interests  hereunder  without  the prior  written
consent of Secured Party.

         18. ENTIRE  AGREEMENT.  THIS WRITTEN  AGREEMENT AND THE OTHER DOCUMENTS
REFERENCED  HEREIN OR CONTEMPLATED  HEREBY REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL  AGREEMENTS OF THE PARTIES  HERETO.  THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES.


                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                       -7-

<PAGE>


         IN WITNESS WHEREOF,  the parties hereby execute this Security Agreement
effective as of the date first above written.


DEBTOR:

COVOL TECHNOLOGIES, INC.,
a Delaware corporation



By:/Stanley M. Kimball/
   ----------------------------------
Printed Name: Stanley M. Kimball
Its: President



SECURED PARTY:

MOUNTAINEER SYNFUEL, L.L.C.,
a Delaware limited liability company



By: /Harlan M. Hatfield/
   ----------------------------------
Printed Name: Harlan M. Hatfield
Its: Vice President


                                       -8-



Prepared by, and after recording return to:
Michael S. Kosmas, Esquire
Jones, Day, Reavis & Pogue
1450 G Street, N.W., Suite 600
Washington, D.C. 20005



                              LEASEHOLD CREDIT LINE
                                  DEED OF TRUST
                             AND SECURITY AGREEMENT

                  THIS  LEASEHOLD   CREDIT  LINE  DEED  OF  TRUST  AND  SECURITY
AGREEMENT  (this "Deed of Trust"),  dated as of the 8th day of  December,  1998,
from COVOL TECHNOLOGIES, INC., a Delaware corporation, having an address at 3280
North Frontage Road, Lehi, Utah 84043 (the "Borrower"),  to ________________ and
________________,  each a  resident  of West  Virginia,  having  an  address  at
_____________________________________________________________     (collectively,
together with their successors in such capacity, the "Trustee"), for the benefit
of MOUNTAINEER SYNFUEL,  L.L.C., a Delaware limited liability company, having an
address at 3280 North Frontage Road, Lehi, Utah 84043 (the "Beneficiary").


                                   WITNESSETH:

                  WHEREAS, pursuant to a Deed of Ground Lease dated as of May 5,
1998 between Upshur Property,  Inc. and the Borrower (the "Ground  Lease"),  the
Borrower has acquired a leasehold  estate in certain  real  property  located in
Upshur County, West Virginia,  described on Exhibit A attached hereto (the "Real
Property"). A Memorandum of Lease setting forth certain information with respect
to the Ground Lease is recorded immediately prior hereto.

                  WHEREAS,  pursuant  to a  Promissory  Note  dated of even date
herewith in an original maximum aggregate principal amount of NINE MILLION SEVEN
HUNDRED FIFTY THOUSAND  DOLLARS  ($9,750,000.00)  (the "Note"),  the Borrower is
indebted to the  Beneficiary  as more fully set forth  therein.  The amounts due
from the Borrower to the Beneficiary pursuant to the Note are sometimes referred
to hereinafter as the "Obligations".



                THIS IS A CREDIT LINE DEED OF TRUST SECURING THE
            PAYMENT OF THE MAXIMUM PRINCIPAL AMOUNT OF $9,750,000.00



WA:  1043170v4
197770-600002
Printed:  12-23-98 12:53

                                       1
<PAGE>


                  NOW,  THEREFORE,  for good  and  valuable  consideration,  the
receipt and sufficiency of which are hereby acknowledged, and FOR THE PURPOSE OF
SECURING the Obligations (the original maximum  aggregate amount of principal to
be secured at any one time by this Deed of Trust being  $9,750,000.00),  and the
full  and  punctual  performance  and  observance  by the  Borrower  of all  the
covenants,  agreements, terms and conditions set forth herein, the Borrower does
hereby irrevocably grant, sell,  release,  convey,  warrant,  assign,  transfer,
mortgage,  pledge,  set over and confirm unto the Trustee,  its  successors  and
assigns,  IN TRUST,  WITH POWER OF SALE,  for the  benefit  and  security of the
Beneficiary,  under and  subject  to the terms and  conditions  hereinafter  set
forth, the following described property, to wit:

                  All of the right, title and interest of the Borrower under the
Ground Lease and in and to the Real Property (collectively, the "Property");

                  TOGETHER WITH all interests,  estates or other claims, both in
law and in equity,  which the Borrower now has or may  hereafter  acquire in (i)
the Property,  (ii) all easements,  rights-of-way  and rights used in connection
therewith  or  as  a  means  of  access   thereto,   and  (iii)  all  tenements,
hereditaments and  appurtenances in any way belonging,  relating or appertaining
thereto;

                  TOGETHER  WITH all estate,  right,  title and  interest of the
Borrower  now owned or hereafter  acquired,  in and to any land lying within the
right-of-way of any street, open or proposed, adjoining to the Property, and any
and all  sidewalks,  alleys,  strips  of land and gores  adjacent  to or used in
connection therewith;

                  TOGETHER  WITH all estate,  right,  title and  interest of the
Borrower,  now owned or hereafter acquired,  in and to any and all buildings and
other improvements now or hereafter erected on the Property  (collectively,  the
"Improvements");

                  TOGETHER  WITH all estate,  right,  title and  interest of the
Borrower now owned or hereafter  acquired,  in and to all inventory,  machinery,
apparatus,   equipment,  materials,  supplies,  goods,  fittings,  fixtures  and
articles of personal  property now or hereafter located on or at the Property or
used in connection  therewith  (including in connection  with the  construction,
renovation,  or improvement thereof) and all additions,  and accessions thereto,
replacements  therefor  and  proceeds  and profits  thereof  (collectively,  the
"Personal Property");

                  TOGETHER WITH all estate,  claim, demand, right (including all
rights to  possession  and use, all options and other  rights to give  consents,
modify, amend, extend, renew, terminate or purchase or sell), title and interest
of the Borrower under all contracts, agreements, understandings or arrangements,
whether written or oral, now or hereafter in effect relating to the development,
construction,  reconstruction,  repair,  alteration,  addition to,  improvement,
replacement,  use,  operation  or  management  of the  Property and as lessee or
lessor  under any leases or  occupancy  arrangements  relating to the  Property,
whether  oral or written,  now or  hereafter  in effect  (all of the  foregoing,
collectively, the "Agreements"), provided that any of the

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Agreements  that by their  terms  or by  operation  of law  would  become  void,
voidable  or  revocable  if  mortgaged,  pledged or assigned  hereunder  or if a
security  interest  therein were granted  hereunder are  expressly  excepted and
excluded from the lien of this Deed of Trust;

                  TOGETHER WITH all right, claim,  demand, title and interest of
the Borrower in, to and under all permits, approvals,  certificates,  variances,
orders, exemptions and other authorizations,  including any condominium permits,
approvals, certificates, variances, orders, assumptions and other authorizations
now or  hereafter  issued,  made or granted  with  respect  to the  development,
construction,   reconstruction,   repair,  alteration,   addition,  improvement,
replacement,  use,  operation or management of the Property  (collectively,  the
"Permits"), provided that any of the Permits that by their terms or by operation
of law would  become  void,  voidable  or  revocable  if  mortgaged,  pledged or
assigned  hereunder or if a security interest therein were granted hereunder are
expressly excepted and excluded from the lien of this Deed of Trust;

                  TOGETHER  WITH  all  reversion  or  reversions,  remainder  or
remainders,  rents, revenues,  proceeds, issues, profits,  royalties, income and
other benefits of the Property, the Improvements,  the Personal Property and the
Agreements,  and the Beneficiary is hereby authorized to collect and receive the
same, to give proper receipts and acquittances therefor and to apply the same to
the payment of the Obligations,  notwithstanding  the fact that the same may not
then be due and payable;

                  TOGETHER WITH all right, title and interest of the Borrower in
and to (i) all proceeds of the insurance required to be maintained under section
1.04 of this Deed of Trust and (ii) all awards  heretofore or hereafter  made to
the Borrower with respect to any part of the  Property,  the  Improvements,  the
Agreements,  or the Personal Property as the result of the exercise of the power
of eminent domain, including any awards for changes of the grades of streets, or
as the result of any other damage to any part of the Property, the Improvements,
the Agreements or the Personal Property for which compensation shall be given by
any  governmental  authority  (a  "Condemnation"),  and the  Trustee  is  hereby
authorized  to collect  and receive  the  proceeds  thereof to the extent of the
right,  title  and  interest  of the  Borrower,  to  give  proper  receipts  and
acquittances  therefor,  and, at the direction of the Beneficiary,  to apply the
same to the payment of the Obligations,  notwithstanding  the fact that the same
may not then be due and payable;

                  TOGETHER  WITH  any and all air  rights,  development  rights,
zoning  rights  or other  similar  rights  or  interests  which  benefit  or are
appurtenant to the Property or the Improvements or both and any proceeds arising
therefrom;

                  Permitting  the said  Borrower to use and occupy the  Property
and the  Improvements,  until an Event of  Default  shall have  occurred  and be
continuing;

                  All of the foregoing  property is sometimes herein referred to
as the "Trust Estate".


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                  TO HAVE AND TO HOLD the Trust Estate,  with all privileges and
appurtenances  thereunto  belonging,  to the Trustee and its successors in trust
and, for the benefit of the Beneficiary and its successors and assigns forever.

                  PROVIDED  ALWAYS,  if the  Obligations  shall  be paid in full
according to the terms and provisions  hereof and of the Note, then this Deed of
Trust and the lien and estate hereby granted shall cease, determine and be void.

                  TO PROTECT THE  SECURITY OF THIS DEED OF TRUST,  THE  BORROWER
HEREBY COVENANTS AND AGREES AS FOLLOWS:


                                    ARTICLE I

                            Particular Covenants and
                           Agreements of the Borrower

                  Section  1.01.  Payment of the  Obligations;  Title,  etc. The
Borrower  shall pay the  Obligations  according  to the  terms of the Note.  The
Borrower warrants and represents that the Borrower (i) is lawfully  possessed of
a leasehold  estate in the  Property  and is lawfully  possessed  of a fee title
estate in and to the Improvements and the Personal Property, subject to no liens
or encumbrances, and (ii) has full power and lawful authority to grant, bargain,
sell, release, convey, warrant, assign, transfer, mortgage, pledge, set over and
confirm unto the Trustee and  Beneficiary  all right,  title and interest of the
Borrower in and to the Trust Estate.  The Borrower also warrants and  represents
that this Deed of Trust is given to secure  indebtedness  incurred in connection
with the  carrying on of a commercial  enterprise.  Subject to the rights of the
Borrower  under this Deed of Trust,  the Borrower shall forever defend the title
to the  Trustee  in and to the Trust  Estate  and the  validity  of the lien and
estate hereof against the claims and demands of all persons whomsoever.

                  Section 1.02. Further Assurances.

                  (a) The Borrower shall execute,  acknowledge and deliver, from
time to time,  such further  instruments as the Trustee or the  Beneficiary  may
reasonably require to accomplish the purposes of this Deed of Trust.

                  (b) The Borrower,  immediately upon the execution and delivery
of this Deed of Trust,  and thereafter from time to time,  shall cause this Deed
of Trust,  each supplement and amendment hereof  (collectively,  the "Recordable
Document"),  to be filed,  registered or recorded and refiled,  re-registered or
re-recorded  in such manner and in such places as may be required by any present
or future law in order to publish  notice of and  perfect the lien and estate of
this Deed of Trust upon the Trust Estate. The Borrower shall, from time to time,
perform  or cause to be  performed  any other act as  required  by law and shall
execute or cause to be executed any and all

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further instruments (including financing statements, continuation statements and
similar statements with respect to any Recordable Document) (collectively,  "UCC
Documents")  reasonably  requested  by the Trustee or the  Beneficiary  for such
purposes. Without limiting the foregoing, not more than six months nor less than
three months prior to the date on which any continuation statements are required
to be filed with respect to any Recordable Document, the Borrower shall file all
such  continuation  statements  and send  copies  evidencing  such filing to the
Trustee  and the  Beneficiary.  If the  Borrower  shall fail to execute  any UCC
Document  by  the  date  three  (3)  months  prior  to the  date  on  which  any
continuation  statement is required to be filed, the Beneficiary shall be and is
hereby irrevocably  appointed the agent and  attorney-in-fact of the Borrower to
execute such UCC Document.

                  (c) The  Borrower  shall  pay  all  filing,  registration  and
recording fees, all refiling,  re-registration  and  re-recording  fees, and all
expenses  incident  to  the  execution,   acknowledgment  and  delivery  of  the
Recordable Documents,  and all Federal,  State, county and municipal stamp taxes
and other taxes, duties,  imposts,  assessments and charges arising out of or in
connection  with the  execution,  acknowledgment  and delivery of the Recordable
Documents.

                  (d) The Borrower has not caused,  accepted or  permitted,  and
shall not cause, accept or knowingly permit, the disposal, release or threatened
release on the Property of any hazardous  substance,  as that term is defined in
the  Comprehensive  Environmental  Response,  Compensation  and Liability Act of
1980, 42 U.S.C.  ss. 9601, et seq., and to Borrower's  knowledge no other owner,
user or  operator of the  Property,  past or  present,  has caused,  accepted or
permitted the disposal, release or threatened release of any hazardous substance
on the Property.

                  Section 1.03. Compliance with Legal Requirements. The Borrower
shall comply with all laws, ordinances,  regulations,  covenants, conditions and
restrictions  now or  hereafter  affecting  the Trust Estate or any part thereof
(collectively,  "Legal Requirements");  provided,  however, that if the Borrower
contests  in  good  faith  and  by  appropriate   proceedings  the  validity  or
applicability of any Legal Requirement so that the enforcement thereof is stayed
or provides the Beneficiary with security in such amount and in such form as the
Beneficiary  may require,  in its  reasonable  discretion,  then, in either such
case,  compliance  with the Legal  Requirement  in question  shall be  suspended
during the pendency of such contest.

                  Section 1.04.  Required  Insurance.  The Borrower shall at all
times (i) keep the Trust Property insured for the benefit of Beneficiary, as its
interests may appear,  in an amount not less than one hundred  percent (100%) of
the full  replacement  cost of such Trust  Property,  (ii) carry and maintain or
cause others to carry and maintain such liability and indemnity insurance as may
be required from time to time by the  Beneficiary,  and (iii) carry and maintain
or cause  others to carry and  maintain  workers'  compensation  and  disability
insurance  to  the  fullest  extent   required  by  law.  Upon  request  of  the
Beneficiary,  the originals of all such policies and renewals thereof,  together
with receipts satisfactory to the Beneficiary  evidencing payment thereof, shall
be delivered to and held by the Beneficiary.


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                  Section 1.05.  Insurance Proceeds.  (a) After the happening of
any casualty to the Property,  the Improvements or the Personal  Property or any
part thereof,  the Borrower shall give prompt notice thereof to the  Beneficiary
and the Trustee.

                  (b) Any insurance  proceeds shall be paid over promptly to the
Beneficiary,  and the Beneficiary,  at its sole discretion, may apply such sums,
in whole or in part, to the repair, restoration and replacement of the Property,
the Improvements or the Personal Property, or to the payment of the indebtedness
secured by this Deed of Trust in such order of priority as the Beneficiary shall
determine.

                  Section 1.06. Assignments of Policies Upon Foreclosure. In the
event  of  foreclosure  of this  Deed of Trust  or  other  transfer  of title or
assignment  of the Trust Estate in  extinguishment,  in whole or in part, of the
Obligations,  to the extent  permitted by the Borrower's  policies of insurance,
all  right,  title  and  interest  of the  Borrower  in and to all  policies  of
insurance  shall inure to the benefit of and pass to the  successors in interest
to the  Borrower  or the  purchaser  or grantee of the Trust  Estate or any part
thereof.

                  Section 1.07.  Indemnification;  Waiver of Offset.  (a) If the
Trustee  or  the  Beneficiary  is  made a  party  defendant  to  any  litigation
concerning  this  Deed of Trust or the  Trust  Estate  or any  part  thereof  or
interest therein, or concerning the occupancy thereof by the Borrower,  and such
litigation  did not  arise  as a  result  of the  gross  negligence  or  willful
misconduct  of the  Trustee  or the  Beneficiary,  as the case may be,  then the
Borrower shall indemnify, defend and hold the Trustee or the Beneficiary, as the
case  may be,  harmless  from  and  against  all  liability  by  reason  of said
litigation,  including  reasonable  attorneys'  fees  and  expenses  in any such
litigation, whether or not any such litigation is prosecuted to judgment. If the
Trustee  or the  Beneficiary  in good  faith  commences  an action  against  the
Borrower  to  enforce  any of the terms  hereof or  because of the breach by the
Borrower  of  any  of the  terms  hereof,  or  for  the  recovery  of any of the
Obligations, then the Borrower shall, to the extent permitted by law, pay to the
Trustee or the Beneficiary,  as the case may be, its reasonable  attorneys' fees
and expenses, and the right to such attorneys' fees and expenses shall be deemed
to have accrued on the  commencement  of such action,  and shall be  enforceable
whether or not such action is prosecuted to judgment, provided that the Borrower
shall not be liable for any amounts to be paid in settlement unless Borrower has
consented in writing to such settlement, which consent shall not be unreasonably
withheld.  If a  Default  shall  occur and be  continuing,  the  Trustee  or the
Beneficiary may employ an attorney or attorneys to protect its rights hereunder,
and in the event of such employment  following any Default by the Borrower,  the
Borrower  shall, to the extent  permitted by law, pay the reasonable  attorneys'
fees and expenses  incurred by the Trustee or the  Beneficiary,  as the case may
be,  whether or not an action is  actually  commenced  against  the  Borrower by
reason of such  Default.  The  Borrower  will  assume the  defense of any action
against the Trustee or the Beneficiary  covered by the indemnification set forth
in this Section, including the retaining of counsel selected by Borrower and the
payment by the Borrower of reasonable  counsel's  fees and expenses  relating to
such  defense  and of the  aggregate  amount  to be  paid at  settlement  of any
litigation if such settlement is effected with the written consent of the

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Borrower.  The  Trustee  and the  Beneficiary  shall  have the  right to  retain
separate  counsel in any such action and to participate in the defense  thereof,
but the fees and expenses of such counsel shall be at the expense of the Trustee
and/or  the   Beneficiary   unless  the  retaining  of  such  counsel  has  been
specifically  authorized in writing by the Borrower or the use of counsel chosen
by the Borrower to represent the Trustee  and/or the  Beneficiary  would present
such counsel with a conflict of interest.

                  (b) The Borrower  hereby  waives any and all right to claim or
recover against the Trustee or the Beneficiary,  or their  respective  officers,
employees,  agents and  representatives,  for loss of or damage to the Borrower,
the Trust  Estate,  the property of the Borrower or the property of others under
the control of the  Borrower  from any cause  insured  against or required to be
insured  against  under  this  Deed of  Trust  unless  arising  from  the  gross
negligence or willful misconduct of the Trustee or the Beneficiary.

                  Section 1.08. Impositions. The Borrower shall pay, or, where a
third party is  responsible  for  payment,  cause the payment by third  parties,
before  any  fine,  penalty,  interest  or cost  attaches  thereto,  all  taxes,
assessments,  water and sewer rates,  utility charges and all other governmental
or nongovernmental charges or levies now or hereafter assessed or levied against
the Property,  the Improvements,  the Personal Property or any other part of the
Trust  Estate  or upon the lien or  estate  of the  Trustee  or the  Beneficiary
therein  (collectively,  "Impositions"),  as  well  as  all  claims  for  labor,
materials  or  supplies  which,  if  unpaid,  might by law  become a prior  lien
thereon, and as soon as possible after request by the Trustee or the Beneficiary
shall cause  receipts  showing  payment of any of the foregoing to be exhibited;
provided,  however,  that if by law any Imposition  may be paid in  installments
(whether- or not  interest  shall accrue on the unpaid  balance  thereof),  such
Imposition may be paid in  installments  (together with accrued  interest on the
unpaid balance  thereof) as the same  respectively  become due, before any fine,
penalty  or  cost  attaches  thereto;  provided  further,  however,  that if the
Borrower or other party  responsible  for payment  contests in good faith and by
appropriate  proceedings  the validity or  applicability  of any  Imposition  or
claims for labor, materials or supplies and provides to the Beneficiary security
in such amount and in such form as the Beneficiary may reasonably require, then,
in either such case, compliance with the Imposition in question may be suspended
during the pendency of such contest.

                  Section 1.09.  Limitations of Use.  Without the consent of the
Beneficiary,  the Borrower shall not initiate,  join in or consent to any change
in any private restrictive covenant, zoning ordinance or other public or private
restrictions limiting or defining the uses which may be made of the Property and
the Improvements or any part thereof.

                  Section 1.10.  Encumbrances.  The Borrower shall discharge all
existing liens and encumbrances on the Property.

                  Section 1.11. Estoppel  Certificates.  The Borrower shall upon
request by the  Beneficiary,  but not more often than twice per  calendar  year,
within twenty (20) days of such

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request furnish to the Beneficiary a written statement,  duly  acknowledged,  of
the unpaid amount of the  Obligations  and whether any offsets or defenses exist
against the Obligations.

                  Section 1.12. Actions by Trustee and/or Beneficiary to Protect
Trust Estate.  If the Borrower  shall fail to (i) perform and observe any of the
terms,  covenants or conditions required to be performed or observed by it; (ii)
cause the  insurance  required by section  1.04 to be  effected;  (iii) make (or
cause to be made) the payments  required by section  1.02(c) or section 1.08; or
(iv)  perform or observe any other  covenants or  agreements  to be performed or
observed by the Borrower hereunder,  the Trustee or the Beneficiary may, without
obligation  so to do, at any time  after ten (10)  days'  written  notice to the
Borrower  (except  in any  emergency)  and for so long  as such  failure  by the
Borrower  continues,  effect,  pay,  perform  or  observe  the  same.  Each sum,
including reasonable  attorneys' fees, so expended by the Trustee or Beneficiary
or  expended  to  sustain  the  lien  and  estate  of this  Deed of Trust or its
priority,  or to  protect or  enforce  any of the  rights of the  Trustee or the
Beneficiary under this Deed of Trust, shall (together with interest thereon from
and including the date of  expenditure  of such sum until the same shall be paid
in full at the rate of ten percent  (10%) per annum (the  "Default  Rate")) be a
lien on the Trust Estate, be deemed to be added to the Obligations,  and be paid
by the  Borrower  within ten (10) days after demand  therefor.  In any action or
proceeding  to  enforce  this  Deed  of  Trust  or to  recover  or  collect  the
Obligations,   the   provisions  of  law   respecting  the  recovery  of  costs,
disbursements and allowances shall prevail unaffected by this covenant.

                  Section  1.13.   Condemnation.   (a)  If  the  Property,   the
Improvements or the Personal  Property or any part thereof or interest  therein,
are taken or damaged by reason of any Condemnation,  or if the Borrower receives
any notice or other  information  regarding such proceeding,  the Borrower shall
give prompt notice thereof to the Beneficiary and the Trustee.

                  (b)  Subject  to the rights of the  landlord  under the Ground
Lease with respect to  compensation in connection with any taking of all or part
of the Property,  all  compensation,  awards and other payments or relief in any
condemnation (collectively, "Condemnation Proceeds") shall, at the option of the
Beneficiary,  be  distributed  first to the  Beneficiary  to be  applied  to the
payment  of the  indebtedness  secured  by this  Deed of Trust in such  order of
priority as the Beneficiary  shall determine.  The Beneficiary shall be entitled
at its option to participate in any compromise or settlement in connection  with
such  Condemnation,  and the Borrower  shall within ten (10) Business Days after
request  therefor,  reimburse the  Beneficiary  for all  out-of-pocket  expenses
(including reasonable attorneys' fees) incurred by the Beneficiary in connection
with  such  participation.  The  Borrower  shall  not  make  any  compromise  or
settlement  in  connection  with any  Condemnation  without the  approval of the
Beneficiary.

                  Section 1.14.  Additional Security.  If the Beneficiary at any
time holds additional  security for the Obligations,  and if an Event of Default
shall have  occurred and be  continuing,  the  Beneficiary  may enforce the sale
thereof or otherwise  realize  upon the same,  at its option,  either  before or
concurrently herewith or after a sale is made hereunder.


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                  Section 1. 15.  Disposition  of Trust Estate.  Notwithstanding
any other provision hereof,  and except with respect to the sale of inventory in
the ordinary course of business, the Borrower shall not sell, assign,  transfer,
pledge or otherwise  transfer or encumber or dispose of all or part of the Trust
Estate,  whether voluntary or by operation of law, except with the prior written
consent of the Beneficiary.

                  Section 1.16. Subordination of Leases. All leases or subleases
entered into by the Borrower (or any other entity  representing  the Borrower or
succeeding  to the  Borrower's  position)  in respect of the  Property  shall be
subordinate  to and subject to this Deed of Trust and shall  contain a clause to
that effect.

                  Section 1.17. Hazardous Materials; Contamination.

                  (a) The Borrower  represents,  warrants and covenants that (i)
the Trust Estate and the business  operations  occurring thereon comply with all
applicable  federal,  state and local environmental and hazardous waste laws and
regulations;  (ii) no enforcement  actions are pending or threatened against the
Trust  Estate;  (iii) to the best of its  knowledge,  during  the  period of its
ownership of the Trust Estate, there has been no disposal, release or threatened
release  of  hazardous   substances,   wastes  or  materials  or   environmental
contaminants  on, from or under the Trust  Estate;  (iv) it has no  knowledge of
(and has no reason to have  knowledge  of) any  presence,  disposal,  release or
threatened  release  of  any  hazardous  substances,   wastes  or  materials  or
environmental  contaminants  on,  from or under the Trust  Estate  that may have
occurred prior to the Borrower's  acquisition of title to the Trust Estate;  (v)
neither  it nor to the best of its  knowledge  any  lessee  under  any lease has
received  any  notice  from  any  governmental  agency  of a  violation  of  any
environmental  or hazardous  waste law or  regulation;  (vi) it has not used and
does not intend to use or to allow the Trust Estate to be used in a manner which
would violate  applicable  federal,  state and local  environmental or hazardous
waste laws or regulations; (vii) during the period of its ownership of the Trust
Estate there has been no litigation  or  administrative  enforcement  actions or
proceedings brought or, to its knowledge,  threatened to be brought, nor has the
Borrower  reached any settlements  with anyone alleging the presence,  disposal,
release or threatened  release of any hazardous waste,  substance or material or
any  environmental  contaminant on, from or under the Trust Estate and (viii) it
shall keep or cause the Trust  Estate to be kept free of hazardous  wastes.  The
terms  "disposal",  "release",  "threatened  release",  "hazardous  substances",
"hazardous wastes" "hazardous  materials" and "environmental  contaminants" mean
and include any hazardous,  toxic or dangerous waste, substance, or material, or
any disposal,  discharge, release, or threatened release, or any term defined as
such in (or for purposes of) the federal Comprehensive  Environmental  Response,
Compensation,  and Liability  Act, as amended,  the Resources  Conservation  and
Recovery Act, as amended,  the Federal Clean Water Act, as amended,  the Federal
Clean Air Act, as amended,  the Emergency  Planning and Community  Right to Know
Act, as amended, or any other federal,  state or local statute,  law, ordinance,
code, rule,  regulation,  order or decree  regulating,  relating to, or imposing
liability or standards of conduct concerning,  any hazardous, toxic or dangerous
waste, substance or material, as now or at any time hereafter may be in effect.

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                  (b) The  Borrower  shall  comply  with all  laws,  ordinances,
orders,  rules and  regulations  of all  federal,  state,  county and  municipal
governments  and  appropriate  departments,  commissions,  boards  and  officers
thereof which now are or at any time in the future may be (i)  applicable to the
Trust  Estate or (ii)  related to  asbestos,  radon,  environmental  conditions,
environmental contaminants, toxic wastes, hazardous wastes, hazardous materials,
solid  wastes or  similar  matters  (collectively,  "Legal  Requirements").  The
Borrower shall  indemnify and hold harmless the Trustee or the  Beneficiary  and
their affiliates from and against all loss, cost,  liability and expense. (x) in
any manner  arising out of or related to any  violation  of or failure to comply
with any Legal Requirement,  (y) imposed upon the Trustee or the Beneficiary, an
affiliate  of the  Trustee  or the  Beneficiary  or the  Borrower  by any  Legal
Requirement or (z) in any manner arising out of or related to the presence, use,
storage,  disposal or transport  of any  hazardous  materials  or  environmental
contaminants  found in, on or under, or affixed to, or emanating from, the Trust
Estate (including, without limitation, (i) all foreseeable and all unforeseeable
damages,  directly or indirectly arising out of the use, generation,  storage or
disposal of hazardous materials or environmental  contaminant by the Borrower or
any  prior  owner or  operator  of the Trust  Estate,  and (ii) all costs of any
required or necessary repair,  clean-up or detoxification and the preparation of
any  closure or other  required  plans),  whether  such  action is  required  or
necessary  prior to or following  transfer of title to the Trust Estate,  to the
full extent that such action is  attributable,  directly or  indirectly,  to the
presence or use, generation, storage, release, threatened release or disposal of
hazardous  materials or  environmental  contaminants  by any person on the Trust
Estate;  provided  that  this.  sentence  shall  not  apply to any  loss,  cost,
liability or expense  arising from the act of the Trustee or  Beneficiary or the
failure of the Trustee or the Beneficiary to act when legally required to do so.
The foregoing  indemnity shall survive the repayment in full of the Obligations.
If any action or proceeding is brought  against the Beneficiary in respect of or
in connection with any of the foregoing  indemnified matters, the Borrower shall
upon notice from the  Beneficiary  defend such action or  proceeding  by counsel
satisfactory to the Beneficiary. The Trust Estate shall at all times comply with
all  zoning,  subdivision  regulations,  building  restrictions  and other Legal
Requirements.

                  (c) The Borrower,  as promptly as possible  upon request,  but
only if the  Beneficiary  has a good  faith  reason  to  believe  that a problem
exists,  shall furnish to the  Beneficiary a radon and/or other  hazardous waste
and/or  other  environmental  contaminant  inspection  report,  at the  cost and
expense  of the  Borrower,  covering  the Trust  Estate  (i) in form,  scope and
substance  satisfactory  to the  Beneficiary  and (ii)  prepared by an inspector
selected  and  commissioned  by  the   Beneficiary.   At  the  election  of  the
Beneficiary,  the Borrower shall remove,  encapsulate or otherwise deal with any
radon and/or other hazardous waste and/or other environmental contaminant on the
Trust  Estate  at  the  Borrower's  cost  and  expense  in a  manner  reasonably
satisfactory to the Beneficiary.

                  Section 1.18. Deed of Trust Secures Future Advances. This Deed
of Trust is a credit line deed of trust for the  purposes of Section  38-1-14 of
the West  Virginia  Code,  and the  aggregate  principal  amount of the loans or
indebtedness  secured  by this  Deed of  Trust  shall  not  exceed  the  maximum
principal amount of $9,750,000.00, and this Deed of Trust is also security

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for the  payment of  interest on such  principal  sums and for taxes,  insurance
premiums and other obligations,  including  interest thereon,  undertaken by the
Beneficiary  or the Trustee  (to the extent  permitted  by law)  pursuant to the
provisions of this Deed of Trust. THE  INDEBTEDNESS  SECURED HEREBY PROVIDES FOR
NON-OBLIGATORY  FUTURE ADVANCES  PURSUANT TO THE TERMS OF THE NOTE NOT TO EXCEED
THE MAXIMUM PRINCIPAL AMOUNT OF $9,750,000.00.  ALL NOTICES OF LIENS,  CLAIMS OR
ENCUMBRANCES   AGAINST  THE  PROPERTY  COVERED  HEREBY  SHALL  BE  SENT  TO  THE
BENEFICIARY  AT THE ADDRESS  SPECIFIED  IN THE FIRST  PARAGRAPH  OF THIS DEED OF
TRUST.


                                   ARTICLE II

                               Security Agreement

                  Section  2.01.  Creation  of  Security  Interest  in the Trust
Estate.  The Borrower  hereby grants to the  Beneficiary a security  interest in
such portion of the Trust Estate that is not real property (including all of the
Personal  Property,  the Agreements and the Permits) for the purpose of securing
the Obligations.

                  Section 2.02.  Representations and Warranties of the Borrower.
The Borrower  hereby  warrants,  represents and covenants that: (a) the Personal
Property is not used or bought for personal,  family or household purposes;  and
(b) this Deed of Trust constitutes a Security  Agreement as that term is used in
the Uniform Commercial Code in effect in the State of West Virginia.

                  Section 2.03.  Fixture Fling.  This  instrument is to be filed
for record in the real estate  records of the County in which the Real  Property
is located so as to serve as a fixture  filing  pursuant to West  Virginia  Code
Chapter 46, Article 9, Section 402.

                  Section 2.04.  Technology License.  The Borrower hereby grants
to the Beneficiary an irrevocable non-exclusive, royalty-free license to use the
technology of the Borrower  described on Exhibit B hereto at the Property at any
and all times,  but otherwise  subject to the terms and conditions of the May 5,
1998 Technology  License and Binder Purchase  Agreement between the Borrower and
the  Beneficiary  (i)  during  which an Event of  Default  has  occurred  and is
continuing, or (ii) following a foreclosure pursuant to this Deed of Trust until
such  time as the Note and all  obligations  of the  Borrower  under the Deed of
Trust and under any judgement  obtained with respect to the Note or this Deed of
Trust have been satisfied in full.






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                                   ARTICLE III

                        Events of Default; Remedies; Etc.


                  Section 3.01.  Event of Default.  Borrower shall be in default
under  this  Agreement  upon  the  occurrence  and  continuation  of  any of the
following events or conditions (each, an "Event of Default"):

                  (a) an "Event of Default" as specified and defined in the Note
or in the  Security  Agreement  of even date  herewith  between the Borrower and
Mountaineer Synfuel, L.L.C.

                  (b) any material  default in the performance of any obligation
of Borrower hereunder; and

                  (c) levy or seizure, or attachment of any of the Trust Estate.

                  Section 3.02. Remedies.

                  (a)  If an  Event  of  Default  shall  have  occurred  and  be
continuing,  this Deed of Trust may, to the extent permitted by law, be enforced
as a deed of trust and the Trustee or the  Beneficiary  may  exercise any right,
power or remedy  permitted to it hereunder or by law, and,  without limiting the
generality of the foregoing,  the Trustee or the Beneficiary  may, to the extent
permitted by law:

                           (i) enter and take  possession of the Trust Estate or
                  any  part  thereof,  exclude  the  Borrower  and  all  persons
                  claiming  under the  Borrower  whose claims are junior to this
                  Deed of Trust,  wholly or partly therefrom,  and use, operate,
                  manage  and  control  the same as the  Beneficiary  shall deem
                  best, and upon such entry, from time to time at the expense of
                  the  Trust  Estate,  make  all  such  repairs,   replacements,
                  alterations,  additions or improvements to the Trust Estate or
                  any part thereof as the Beneficiary may deem proper; and

                           (ii) personally or by agents,  with or without entry,
                  if the Beneficiary shall deem it advisable:

                                    (a)  exercise  THE POWER OF SALE  granted by
                           this Deed of Trust and sell all or any portion of the
                           Trust  Estate  in  accordance  with  applicable  West
                           Virginia  law for  cash  in hand on the day of  sale,
                           unless otherwise

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                           specified by the Beneficiary to the highest bidder at
                           public  auction at a sale or sales held at such place
                           or places and time or times and upon such  notice and
                           otherwise  in such  manner as may be required by law,
                           or in the  absence  of any such  requirement,  as the
                           Beneficiary  may deem  appropriate  and from  time to
                           time  adjourn  any such sale by  announcement  at the
                           time and  place  specified  for such sale or for such
                           adjourned sale without further notice, except such as
                           may be required by law;

                                    (b)  proceed  to  protect  and  enforce  its
                           rights under this Deed of Trust, by suit for specific
                           performance of any covenant  contained  herein, or in
                           aid of the execution of any power granted herein,  or
                           for the  foreclosure  of this  Deed of Trust  and the
                           sale of the Trust Estate under the judgment or decree
                           of a  court  of  competent  jurisdiction,  or for the
                           enforcement  of any other right as the Trustee or the
                           Beneficiary   shall  deem  most  effectual  for  such
                           purpose or;

                                    (c)  exercise  any or  all  of the  remedies
                           available  to a secured  party  under the  applicable
                           Uniform Commercial Code, including:

                                            (1) either personally or by means of
                                    a court appointed receiver,  take possession
                                    of all or any of the  Trust  Estate  that is
                                    not real property and exclude  therefrom the
                                    Borrower and all persons  claiming under the
                                    Borrower and thereafter  hold,  store,  use,
                                    operate,  manage, maintain and control, make
                                    repairs,     replacements,      alterations,
                                    additions and  improvements  to and exercise
                                    all  rights and  powers of the  Borrower  in
                                    respect  of all or any of the  Trust  Estate
                                    that   is   not   real   property.   If  the
                                    Beneficiary  demands  or  attempts  to  take
                                    possession of all or any of the Trust Estate
                                    that is not real property in the exercise of
                                    any rights  hereunder,  the  Borrower  shall
                                    promptly  turn  over  and  deliver  complete
                                    possession thereof to the Beneficiary;

                                            (2) without notice to or demand upon
                                    the Borrower  make such payments and do such
                                    acts as the  Beneficiary  may deem necessary
                                    to protect its  security  interest in all or
                                    any of the  Trust  Estate  that is not  real
                                    property   including   paying,   purchasing,
                                    contesting or  compromising  any encumbrance
                                    which  is  prior  to  or   superior  to  the
                                    security interest granted hereunder,  and in
                                    exercising  any such powers or  authority to
                                    pay  all  expenses  incurred  in  connection
                                    therewith;

                                            (3) require the Borrower to assemble
                                    all or any of the Trust  Estate  that is not
                                    real property at a place designated by the

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                                    Beneficiary  and convenient to both parties,
                                    and   promptly   to   deliver   it  to   the
                                    Beneficiary,  or  its  designated  agent  or
                                    representative.  The  Beneficiary,  and  its
                                    agents and  representatives,  shall have the
                                    right  to  enter  upon  the   premises   and
                                    property of the  Borrower  to  exercise  the
                                    Beneficiary's rights hereunder;

                                            (4) sell, lease or otherwise dispose
                                    of all or any of the  Trust  Estate  that is
                                    not real  property at public  sale,  with or
                                    without  having  all or  any  of  the  Trust
                                    Estate  that  is not  real  property  at the
                                    place of sale,  and upon  such  terms and in
                                    such   manner   as   the   Beneficiary   may
                                    reasonably  determine  (the  Trustee  or the
                                    Beneficiary  may be a purchaser  at any such
                                    sale); and

                                            (5) the  Beneficiary  shall give the
                                    Borrower  at  least  ten  (10)  days'  prior
                                    notice of the time and  place of any  public
                                    sale of all or any of the Trust  Estate that
                                    is  not  real  property  or  other  intended
                                    disposition thereof.

                  (b)  If an  Event  of  Default  shall  have  occurred  and  be
continuing,  the Beneficiary,  to the extent permitted by law, shall be entitled
as a matter of right to the  appointment  of a  receiver  of the  Trust  Estate,
without notice or demand, without the requirement for a bond, and without regard
to the  adequacy of the  security  for the  Obligations  or the  solvency of the
Borrower.  The Borrower  hereby  irrevocably  consents to such  appointment  and
waives notice of any application therefor.  Any such receiver or receivers shall
have all the usual powers and duties of  receivers in like or similar  cases and
all the powers and duties of the  Beneficiary  in case of entry as  provided  in
section 3.01(a)(i) and shall continue as such and exercise all such powers until
the date of confirmation of sale of the Trust Estate,  unless such  receivership
is sooner terminated.

                  (c)  If an  Event  of  Default  shall  have  occurred  and  be
continuing,  the  Borrower  hereby also  assents to the passage of a decree by a
court of competent jurisdiction for the sale of the Trust Estate pursuant to the
terms of this Deed of Trust and applicable West Virginia law.

                  (d) In any sale under any  provision  of this Deed of Trust or
pursuant to any  judgment or decree of court,  the Trust  Estate,  to the extent
permitted  by law,  may be sold in one or more  parcels or as an entirety and in
such order as the Trustee or the  Beneficiary  may elect,  without regard to the
right  of the  Borrower,  or any  person  claiming  under  the  Borrower  to the
marshalling  of assets.  The  purchaser at any such sale shall take title to the
Trust  Estate or the part thereof so sold free and  discharged  of the estate of
the Borrower  therein,  the purchaser being hereby discharged from all liability
to see to the  application  of the purchase  money.  Any person,  including  the
Beneficiary and the Trustee,  may purchase at any such sale. Upon the completion
of any such sale made by the  Trustee  or the  Beneficiary  or by virtue of this
Section  3.01,  the  Trustee  shall  execute  and  deliver to the  purchaser  an
appropriate instrument which shall

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effectively  transfer all of the  Borrower's  and the Trustee's  estate,  right,
title,  interest,  property,  claim and  demand  in and to the  Trust  Estate or
portion  thereof so sold,  but without  any  covenant  or  warranty,  express or
implied.  The Trustee and the Beneficiary are hereby  irrevocably  appointed the
attorneys-in-fact  of the Borrower in its name and stead to make all appropriate
transfers  and  deliveries  of the Trust Estate or any portions  thereof so sold
and, for that purpose,  the Beneficiary or the Trustee, or both, may execute all
appropriate instruments of transfer, and may substitute one or more persons with
like power, the Borrower hereby ratifying and confirming all that said attorneys
or such substitute or substitutes  shall lawfully do by virtue hereof.  Any sale
or sales  made  under or by  virtue of this Deed of  Trust,  to the  extent  not
prohibited  by law,  shall  operate  to divest  all the  estate,  right,  title,
interest, property, claim and demand whatsoever, whether at law or in equity, of
the Borrower in and to the Trust Estate,  or any portions  thereof so sold,  and
shall be a  perpetual  bar both at law and in equity  against the  Borrower  and
against  any and all  persons  claiming  or who may claim the same,  or any part
thereof, by through or under the Borrower.  The powers and agency herein granted
are coupled with an interest and are irrevocable.


                  (e) In the event that  foreclosure  proceedings are instituted
hereunder but are not completed,  Trustee shall be reimbursed for all reasonable
costs and expenses so incurred by Trustee,  together with interest thereon until
paid at the Default Rate.

                  Section  3.03.  Application  of Proceeds.  The proceeds of any
enforcement  of this Deed of Trust,  including  any sale made  either  under the
power of sale  hereby  given or under a  judgment,  order or decree  made in any
action to  foreclose  or to  enforce  this  Deed of Trust  shall be  applied  as
determined by the Beneficiary in a manner  consistent with Section 38-1-7 of the
Code of West Virginia, as from time to time amended.

                  Section  3.04.  Right  to Sue.  If an  Event  of  Default  has
occurred and is continuing, the Trustee and the Beneficiary shall have the right
from time to time to sue for any sums required to be paid by the Borrower  under
the  terms of this  Deed of Trust as the same  become  due,  without  regard  to
whether  or not the  Obligations  shall  be,  or have  become,  due and  without
prejudice to the right of the Trustee or the Beneficiary thereafter to bring any
action or proceeding of  foreclosure  or any other action upon the occurrence of
any Event of Default existing at the time such earlier action was commenced.

                  Section 3.05. Powers of the Trustee and the Beneficiary.

                  (a) The  Trustee  or the  Beneficiary  may at any time or from
         time to time  renew or extend  this Deed of Trust,  alter or modify the
         same in any way,  or waive any of the terms,  covenants  or  conditions
         hereof or thereof, in whole or in part, and may release or reconvey any
         portion  of the  Trust  Estate or any other  security,  and grant  such
         extensions and indulgences in relation to the  Obligations,  or release
         any  person  liable  therefor  as the  Trustee or the  Beneficiary  may
         determine without the consent of any junior lien or

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         encumbrancer,  without  any  obligation  to  give  notice  of any  kind
         thereto,  without in any manner  affecting the priority of the lien and
         estate of this Deed of Trust on or in any part of the Trust Estate, and
         without  affecting  the  liability  of the Borrower or any other person
         liable for any of the Obligations;

                  (b) No right or remedy  herein  conferred  upon or reserved to
         the Trustee or the Beneficiary is intended to be exclusive of any other
         right  or  remedy,  and  each  and  every  right  and  remedy  shall be
         cumulative  and in addition  to any right or remedy  under this Deed of
         Trust,  and the failure of the Trustee or the  Beneficiary to insist at
         any time  upon  the  strict  observance  or  performance  of any of the
         provisions  of this Deed of Trust,  or to exercise  any right or remedy
         provided  for herein,  shall not impair any such right or remedy nor be
         construed as a waiver or relinquishment thereof, and

                  (c) The Trustee and the  Beneficiary,  and each of them, shall
         be  entitled  to  enforce   payment  and  performance  of  any  of  the
         Obligations  and to exercise  all rights and powers  under this Deed of
         Trust or any laws now or hereafter in force,  notwithstanding that some
         or all of the  Obligations  may now or hereafter be otherwise  secured,
         whether  by  mortgage,  deed of  trust,  pledge,  lien,  assignment  or
         otherwise;  neither  the  acceptance  of  this  Deed of  Trust  nor its
         enforcement,  whether by court  action or pursuant to the power of sale
         or other  powers  herein  contained,  shall  prejudice or in any manner
         affect the  Trustee's  or the  Beneficiary's  right to realize  upon or
         enforce any other  security now or hereafter held by the Trustee or the
         Beneficiary,  it being stipulated that the Trustee and the Beneficiary,
         and each of them,  shall be entitled to enforce  this Deed of Trust and
         any  other  security  now  or  hereafter  held  by the  Trustee  or the
         Beneficiary in such order and manner as they, in their sole discretion,
         may determine; every power or remedy given by this Deed of Trust to the
         Trustee  or  Beneficiary  or to which  either of them may be  otherwise
         entitled, may be exercised, concurrently or independently, from time to
         time and as often as may be deemed  expedient by the  Beneficiary,  and
         either of them may pursue inconsistent remedies.

                  (d) The Trustee  may act through its agent or attorney  and it
         shall not be  necessary  for the Trustee to be present in person at any
         foreclosure sale under this Deed of Trust.

                  Section  3.06.  Waiver of Stay,  Extension,  Moratorium  Laws;
Equity of Redemption.  To the extent permitted by law, the Borrower shall not at
any time insist  upon,  or plead,  or in any manner  whatever  claim or take any
benefit or advantage  of any  applicable  present or future  stay,  extension or
moratorium  law, which may affect  observance or performance of any provision of
this Deed of Trust;  nor claim,  take or insist upon any benefit or advantage of
any present or future law  providing for the valuation or appraisal of the Trust
Estate or any portion  thereof  prior to any sale or sales  thereof which may be
made under or by virtue of Section 3.01; and the Borrower, to the extent that it
lawfully  may,  hereby  waives all benefit or advantage of any such law or laws.
The Borrower for itself and all who may claim under it,  hereby  waives,  to the
extent  permitted  by  applicable  law,  any  and all  rights  and  equities  of
redemption from sale

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under the power of sale created hereunder or from sale under any order or decree
of  foreclosure  of this Deed of Trust and (if an Event of  Default  shall  have
occurred and be continuing)  all notice or notices of seizure,  and all right to
have the Trust  Estate  marshalled  upon any  foreclosure  hereof.  Neither  the
Trustee nor the  Beneficiary  shall be obligated to pursue or exhaust its rights
or remedies as against any other part of the Trust Estate nor shall the Borrower
have the right to have the Trustee or the Beneficiary  proceed in any particular
order.


                                   ARTICLE IV

                                   The Trustee

                  Section 4.01.  Acceptance by Trustee. The Trustee accepts this
trust when this Deed of Trust, duly executed and acknowledged,  is made a public
record as provided by law.

                  Section 4.02.  Compensation.  The Trustee waives any statutory
fee and  shall  accept  reasonable  compensation  from the  Beneficiary  in lieu
thereof for any services rendered by it in accordance with the terms hereof.

                  Section 4.03.  Action in Accordance  With  Instructions.  Upon
receipt by the Trustee of instructions  from the Beneficiary at any time or from
time to time, the Trustee shall (a) give any notice or direction or exercise any
right,  remedy or power  hereunder or in respect of any part or all of the Trust
Estate as shall be specified in such instructions and (b) approve such direction
or exercise as  satisfactory to the Trustee or to the  Beneficiary.  The Trustee
may, but need not, take any of such actions in the absence of such instructions.
At any  time  or  from  time  to  time,  upon  request  of the  Beneficiary  and
presentation of this Deed of Trust for  endorsement,  and without  affecting the
liability  of any  person for  payment of the  Obligations,  the  Trustee  shall
reconvey all or any part of the Trust  Estate,  consent to the making of any map
or plat thereof, join in granting any easement thereon, or join in any extension
agreement or any agreement subordinating the lien and estate hereof. If there is
at any time more than one person or entity serving as Trustee hereunder,  either
of them or any successor of either of them may act on behalf of the Trustee.

                  Section 4.04. Resignation.  The Trustee may resign at any time
upon giving not less than 60 days' prior  notice to the  Beneficiary,  but shall
continue  to act as  trustee  until its  successor  shall  have been  chosen and
qualified.

                  Section 4.05.  Successor  Trustee.  In the event of the death,
removal,  resignation  or refusal or inability of the Trustee to act, or for any
reason at any time, the Beneficiary  shall have the irrevocable  power,  with or
without  cause,  without prior notice of any kind,  and without  applying to any
court,  to select and appoint a successor  trustee.  Each such  appointment  and
substitution shall be made by notice to the Borrower,  the Trustee and successor
trustee  and by  recording  notice of such in each  office in which this Deed of
Trust is recorded. Such notice shall

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be executed and acknowledged by the Beneficiary and shall be conclusive proof of
proper  appointment  of the  successor  trustee.  Such  successor  shall  not be
required to give bond for the faithful performance of its duties unless required
by the Beneficiary.


                                    ARTICLE V

                                  Miscellaneous

                  Section 5.01. Release by Trustee.  Upon payment by Borrower of
the Obligations and the Trustee's expenses,  the Trustee shall release this Deed
of Trust by an instrument duly acknowledged, in form for recording.

                  Section  5.02.  Notices.  All  notices,   requests,   demands,
consents,  approvals  or other  communications  to, upon or by any party  hereto
shall be sent to the parties at the addresses  set forth in the first  paragraph
of this Deed of Trust or at such other address as may be specified in writing to
the parties.  The address of the Beneficiary as specified is the address for the
party secured by this Deed of Trust.

                  Section  5.03.  Amendments,  Waivers,  Etc. This Deed of Trust
cannot be  modified,  changed or  discharged  except by an agreement in writing,
duly  acknowledged  in form for  recording,  signed  by the party  against  whom
enforcement of such  modification,  change or discharge is sought.  No amendment
shall  be  deemed  approved  by or  consented  to by or  effective  against  the
Beneficiary unless approved in writing by MSDW Synfuels II, Inc. and Fannie Mae.

                  Section 5.04. Successors and Assigns. This Deed of Trust shall
bind and  inure to the  benefit  of the  parties  hereto  and  their  respective
successors and assigns and shall run with the Property, except that the Borrower
may not assign its rights or delegate its obligation hereunder without the prior
consent of the Beneficiary.

                  Section 5.05.  Severability.  If any term or provision of this
Deed of Trust or the application  thereof to any person or circumstance shall to
any extent be invalid or unenforceable,  the remainder of this Deed of Trust, or
the application of such term or provision to persons or circumstances other than
those as to which it is invalid or unenforceable, shall not be affected thereby,
and each term and provision of this Deed of Trust shall be valid and enforceable
to the fullest extent  permitted by law.  Should this Deed of Trust be or become
ineffective  as a deed of trust,  then it shall be  construed  and enforced as a
realty mortgage with the Borrower being the mortgagor and the Beneficiary  being
the mortgagee.

                  Section  5.06.  No Merger.  If both the  lessor's and lessee's
estates under any lease or any portion  thereof which  constitutes a part of the
Trust  Estate shall at any time become  vested in one owner,  this Deed of Trust
and the lien and estate  created  hereby shall not be destroyed or terminated by
application of the doctrine of merger and, in such event, the Beneficiary shall

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                                       18
<PAGE>

continue to have and enjoy all of the rights and  privileges of the  Beneficiary
as to the separate estates. In addition, upon foreclosure of this Deed of Trust,
any such lease shall not be destroyed or terminated by application of the law of
merger  or as a matter  of law or as a result  of such  foreclosure  unless  the
Beneficiary or any purchaser at such foreclosure sale shall so elect.

                  Section 5.07.  Limitation of Interest.  It is the intention of
the Borrower  and the  Beneficiary  in the  execution of the Note to contract in
strict  compliance with all applicable usury laws. In furtherance  thereof,  the
Beneficiary  and the Borrower  stipulate  that none of the terms and  provisions
contained  in the Note shall ever be construed to create a contract for the use,
forbearance  or  detention of money  requiring  payment of interest at a rate in
excess of the maximum  interest rate permitted to be charged by applicable  law.
The Borrower shall never be liable for unearned  interest on the Obligations and
shall  never be  required  to pay  interest  thereon  at a rate in excess of the
maximum  interest which may be lawfully  charged under applicable usury laws and
this Section 5.07 shall  control over all other  provisions of the Note executed
in connection  herewith or therewith which may be in apparent conflict herewith.
If the Beneficiary shall collect monies which are deemed to constitute  interest
which would otherwise increase the effective interest rate on the Obligations to
a rate in excess of that  permitted to be charged by applicable  usury laws, all
such sums  deemed to  constitute  interest  in excess of the legal rate shall be
immediately returned to the Borrower upon such determination.

                  Section 5.08.  Trust is Irrevocable.  The trust created hereby
is  irrevocable  by the Borrower  subject to defeasance in accordance  with this
Deed of Trust.

                  Section  5.09.  Governing  Law.  This  Deed of Trust  shall be
governed  by and  interpreted  in  accordance  with the law of the State of West
Virginia.

                  Section 5. 10.  Beneficial  Owner.  The  beneficial  owner and
holder of the  Obligations  at the time of execution and delivery  hereof is the
Beneficiary,  whose  resident  address is stated in the first  paragraph of this
Deed of Trust.

                  Section 5.11.  Status of Parties.  It is understood and agreed
that the  relationship  of the Borrower and the  Beneficiary is that of borrower
and lender and that nothing herein or in the Note or any document  evidencing or
securing the same shall be construed to constitute a partnership,  joint venture
or co-tenancy among the Borrower or the Beneficiary.



                        [Signatures begin on next page.]

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                                       19
<PAGE>



                  IN WITNESS WHEREOF, this Deed of Trust has been duly executed,
acknowledged  and  delivered  by the Borrower as of the day and year first above
written.

                            COVOL TECHNOLOGIES, INC.

[SEAL]                                               By:   /Stanley M. Kimball/
                                                        ------------------------
                            Name: Stanley M. Kimball
                                                     Title:  President



State of _______Utah________) City/County of _Utah________________), to wit:

         On this _8th_ day of December,  1998,  before me,  __Asael T. Sorensen,
Jr._,  a  notary  public  in and for  the  above-said  jurisdiction,  personally
appeared  ___________________,  personally  known to me (or  proved to me on the
basis of satisfactory evidence) to be the person whose name is subscribed to the
within  instrument as  __President_________  of Covol  Technologies,  Inc.,  the
company which executed and delivered the within  instrument and  acknowledged to
me that, being informed of the contents  thereof,  he executed and delivered the
same,  voluntarily in his capacity as such, for the purposes therein stated,  on
behalf of said company as the free act and deed of said company.

         IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.

[SEAL]                                               /Asael T. Sorensen, Jr./
                                  Notary Public




This Deed of Trust was 
prepared by:                 Michael S. Kosmas, Esq.
                           Jones, Day, Reavis & Pogue
                         1450 G Street, N.W., Suite 600
                             Washington, D.C. 20005



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                                       20


                     AMENDMENT NO. 1 TO DEED OF GROUND LEASE

         THIS AMENDMENT NO. 1 TO DEED OF GROUND LEASE (this "Amendment"),  dated
as of the 8th day of December,  1998, by and between  UPSHUR  PROPERTY,  INC., a
Delaware  corporation (the "Landlord") and COVOL TECHNOLOGIES,  INC., a Delaware
corporation (the "Tenant").

         WHEREAS,  the  Landlord and the Tenant are parties to that certain Deed
of Ground Lease dated as of May 5, 1998 (the "Lease"); and

         WHEREAS,  the Landlord and the Tenant  desire to amend the terms of the
Lease as set forth herein.

         NOW, THEREFORE,  in consideration for Ten Dollars ($10.00) cash in hand
paid by Tenant to  Landlord,  the  receipt  and  sufficiency  of which is hereby
acknowledged,  the Landlord and the Tenant agree to amend the terms of the Lease
as follows:

         1.  Section  6.1 of the Lease is hereby  deleted  in its  entirety  and
replaced  with the  following:  "Section 6.1 Right to Mortgage.  Except for that
certain Leasehold Credit Line Deed of Trust and Security Agreement,  dated as of
December 8, 1998, from Covol Technologies,  Inc. to  ______________________,  as
Trustee,  for the  Benefit of  Mountaineer  Synfuel,  L.L.C.  (the  "Mountaineer
Leasehold Deed of Trust"),  the Tenant shall not grant,  or cause to be created,
any deed of trust or other lien,  encumbrance or security  interest on or in all
or any part of this Lease or Tenant's  interest in the  Premises.  Tenant hereby
covenants  and  agrees  that it will not  agree to  amend,  change  or alter the
Mountaineer  Leasehold Deed of Trust without first obtaining the express written
consent of the Landlord, which consent may be withheld for any reason."

<PAGE>

         2.  Section  9.1(f) of the Lease is hereby  deleted in its entirety and
replaced with the following:  "(f)  Mountaineer  fails to exercise its option to
purchase the Facility and to require  Tenant to assign this Lease to Mountaineer
prior to March 31, 1999."

         3.  Except  as  expressly  set  forth  herein,  all  of the  terms  and
conditions of the Lease shall remain in full force and effect.

         IN WITNESS  WHEREOF,  the  parties  have caused  this  Amendment  to be
executed by their duly authorized  representatives  as of the day and year first
above written.

                                                UPSHUR PROPERTY, INC.,
                                                a Delaware corporation



                                                By:   /Michael M. Matesic/
                                                     -------------------------
                            Name: Michael M. Matesic
                                   Its: Treas.


                                                COVOL TECHNOLOGIES, INC.,
                                                a Delaware corporation



                                                By:   /Stanley M. Kimball/
                                                     -------------------------
                            Name: Stanley M. Kimball
                                                Its:  President


                                       2









                            COVOL TECHNOLOGIES, INC.









                   DEBENTURE AGREEMENT AND SECURITY AGREEMENT











                                 January 9, 1998














<PAGE>



                                TABLE OF CONTENTS

Section                                                                    Page

1.  Loans; Terms and Conditions; Issuance of Debenture and Warrants..........1
    1.1      Loans...........................................................1
    1.2      Terms and Conditions............................................1
    1.3      Issuance of Debenture and Warrants..............................1

2.  Representations, Warranties and Covenants of the Company.................1
    2.1      Corporate Existence; Compliance with Law........................1
    2.2      Corporate Power; Authorization; Enforceable Obligations.........2
    2.3      Authorization and Valid Issuance of Debenture and Warrants......2
    2.4      Securities Laws.................................................3
    2.5      Disclosure......................................................3
    2.6      Authorized and Outstanding Shares of Capital Stock..............3
    2.7      Ownership of Property; Liens....................................3
    2.8      Patents, Trademarks, Copyrights and Licenses....................3
    2.9      No Material Adverse Effect......................................3
    2.10     Environmental Laws..............................................4
    2.11     Use of Proceeds.................................................4

3.  Representations, Warranties and Covenants of the Investor................4
    3.1      Purchase Entirely for Own Account...............................4
    3.2      Disclosure of Information.......................................4
    3.3      Investment Experience...........................................4
    3.4      Restricted Securities...........................................4
    3.5      Legends.........................................................5
    3.6      Accredited Investor.............................................5

4.  Valuation of Warrants....................................................5
    4.1      Value of Warrants...............................................5
    4.2      Financial and Tax Reporting.....................................5
    4.3      Issue Price.....................................................5
    4.4      Interpretation..................................................5

5.  Security Agreement.......................................................6
    5.1      Security Interest...............................................6
    5.2      Collateral......................................................6
    5.3      Perfection and Priority.........................................6
    5.4      Affirmative Covenants...........................................6
    5.5      Negative Covenants..............................................7
    5.6      Insurance; Payment of Premiums..................................7

                                        i

<PAGE>

    5.7      Remedies Upon Default...........................................8

6.  Conditions Precedent.....................................................9
    6.1      Execution and Delivery of Agreement.............................9
    6.2      Documents and Other Agreements..................................9
    6.3      Absence of Material Adverse Change.............................10
    6.4      Conditions to the  Closing.....................................10

7.  Miscellaneous...........................................................10
    7.1      Survival of Warranties.........................................10
    7.2      Successors and Assigns.........................................10
    7.3      Governing Law..................................................11
    7.4      Counterparts...................................................11
    7.5      Titles and Subtitles...........................................11
    7.6      Notices........................................................11
    7.7      Expenses.......................................................11
    7.8      Amendments and Waivers.........................................11
    7.9      Severability...................................................11
    7.10     Indemnity......................................................11
    7.11     Waiver of Trial by Jury........................................12
    7.12     Entire Agreement...............................................12



                                       ii
<PAGE>



                   DEBENTURE AGREEMENT AND SECURITY AGREEMENT


         THIS DEBENTURE  AGREEMENT AND SECURITY  AGREEMENT is made as of the 9th
day of  January,  1998,  by and  among  COVOL  TECHNOLOGIES,  INC.,  a  Delaware
corporation  (the  "Company"),  and AJG  FINANCIAL  SERVICES,  INC.,  a Delaware
corporation ("Investor").

         THE PARTIES HEREBY AGREE AS FOLLOWS:

         1. Loans; Terms and Conditions; Issuance of Debenture and Warrants.

                  1.1 Loans.  During the period July 17, 1997,  to and including
         January 9, 1998,  Investor provided debt financing in the form of loans
         ("Loans") to the Company for use by the Company in the  construction of
         the Wash Plant at the  Company's  facility  at  Wellington,  Utah.  The
         aggregate principal amount of the Loans, together with accrued interest
         thereon, is $4,367,351.28.

                  1.2 Terms and  Conditions.  This Agreement  confirms the terms
         and conditions upon which Investor made the Loans to the Company.

                  1.3  Issuance of  Debenture  and  Warrants.  To  evidence  the
         aggregate outstanding principal amount of the Loans made by Investor to
         the Company,  together  with interest  thereon to the date hereof,  the
         Company  shall issue to Investor,  concurrently  with the execution and
         delivery of this Agreement (the "Closing"),  the Company's Debenture in
         the form set forth in Exhibit A hereto, and the Company's Warrants (one
         designated  Warrant A and the other  designated  Warrant B)  evidencing
         rights to purchase  initially up to an  aggregate of 432,544  shares of
         Common Stock of the Company.  The Debenture shall replace the Company's
         Promissory  Note,  dated  January  9,  1998,  payable  to the  order of
         Investor in the principal amount of $4,325,432.79,  and such Promissory
         Note shall be marked "replaced by Debenture dated January 9, 1998", and
         delivered to the Company.

         2.  Representations,  Warranties  and  Covenants  of the  Company.  The
Company hereby represents, warrants and covenants to Investor that:

                  2.1 Corporate Existence;  Compliance with Law. The Company (i)
         is a corporation duly organized,  validly existing and in good standing
         under the laws of the State of  Delaware;  (ii) is duly  qualified as a
         foreign  corporation  and in  good  standing  under  the  laws  of each
         jurisdiction where its ownership or lease of property or the conduct of
         its  business  requires  such  qualification;  (iii) has the  requisite
         corporate  power  and  authority  and the legal  right to own,  pledge,
         mortgage or otherwise encumber and operate its properties, to lease the
         property it operates  under lease,  and to conduct its business as now,
         heretofore  and  proposed  to  be  conducted;  (iv)  has  all  material
         licenses, permits, consents or approvals

                                        1

<PAGE>



         from or by, and has or will have made all material  filings  with,  and
         has or will have  given  all  material  notices  to,  all  governmental
         authorities  having  jurisdiction,  to the  extent  required  for  such
         ownership,  operation  and  conduct;  (v)  is in  compliance  with  its
         certificate  of  incorporation  and by-laws;  and (vi) is in compliance
         with all applicable  provisions of law, including,  without limitation,
         the Employee Retirement Income Security Act of 1974, as amended,  those
         regarding the  collection,  payment and deposit of  employees'  income,
         unemployment   and  Social  Security  taxes,   and  those  relating  to
         environmental  matters where the failure to comply could  reasonably be
         expected  to have a  material  adverse  effect on the  business  of the
         Company.

                  2.2 Corporate Power;  Authorization;  Enforceable Obligations.
         The  execution,  delivery  and  performance  by  the  Company  of  this
         Agreement  and the  Debenture  (i) are within the  Company's  corporate
         power;  (ii) have  been  duly  authorized  by all  necessary  or proper
         corporate  action;  (iii) are not in  contravention of any provision of
         the Company's  certificate of incorporation  or by-laws;  (iv) will not
         violate any law or  regulation,  or any order or decree of any court or
         governmental  instrumentality;  (v) will not conflict with or result in
         the breach or termination of, constitute a default under, or accelerate
         any performance  required by, any indenture,  mortgage,  deed of trust,
         lease, agreement or other instrument to which the Company is a party or
         by which the  Company  or any of its  property  is bound  (except  such
         conflict,  breach,  termination,  default or  acceleration as could not
         reasonably  be  expected  to  have a  material  adverse  effect  on the
         business  of the  Company);  (vi) will not  result in the  creation  or
         imposition  of any lien upon any of the  property of the Company  other
         than  those in favor of the  Investor;  and  (vii) do not  require  the
         consent or approval of any governmental body, agency,  authority or any
         other Person.  At or prior to the Closing,  each of the documents to be
         delivered at such time shall have been duly  executed and delivered for
         the  benefit  of or on  behalf  of the  Company,  and each  shall  then
         constitute a legal,  valid and binding obligation of the Company to the
         extent it is a party thereto, enforceable against it in accordance with
         its terms,  subject to the effects of laws governing  creditors  rights
         generally and general principles of equity.

                  2.3   Authorization   and  Valid  Issuance  of  Debenture  and
         Warrants.  All  corporate  action  on the part of the  Company  and its
         officers,  directors and stockholders  necessary for the authorization,
         issuance and delivery of the Debenture  being issued  hereunder and the
         reservation  for  issuance  of  shares of Common  Stock  issuable  upon
         exercise of the Warrants  have been taken or will be taken prior to the
         Closing, and this Agreement,  the Debenture and the Warrants shall then
         constitute valid and legally binding  obligations of the Company,  each
         enforceable  in accordance  with its terms.  The  Debentures  which are
         being acquired by the Investor, when issued and delivered in accordance
         with the terms hereof for the consideration  expressed herein,  will be
         duly and validly issued. The Common Stock issuable upon exercise of the
         Warrants  has been duly and validly  reserved for  issuance  and,  upon
         issuance in accordance with the terms of the Warrants and the Company's
         Certificate of Incorporation,  shall be duly and validly issued,  fully
         paid and

                                        2

<PAGE>



         nonassessable, and issued in compliance with all applicable federal and
         state securities laws, as currently in effect.

                  2.4   Securities   Laws.   In  reliance   on  the   investment
         representations  contained in Section 3.1 hereof, the offer,  issuance,
         sale and delivery of the Warrants,  as provided in this  Agreement,  is
         exempt from the  registration  requirements  of the  Securities  Act of
         1933, as amended,  and the rules and  regulations  thereunder,  and all
         applicable state securities laws.

                  2.5  Disclosure.  The Company's  Form 10-K for the fiscal year
         ended September 30, 1997, and all other written  information  furnished
         to Investor  did not, as of the date of such  information,  contain any
         untrue  statement of a material  fact or omit to state a material  fact
         necessary to make the statements therein not misleading.

                  2.6 Authorized and Outstanding  Shares of Capital Stock. After
         giving  effect to the  Closing,  the  authorized  capital  stock of the
         Company  consists  of  50,000,000  shares of Common  Stock,  $0.001 par
         value, of which11,326,404 Shares are issued and outstanding. Except for
         (i) the  Warrants  and (ii) rights to acquire  5,104,518  Shares (a) no
         subscription, warrant, option or other right to purchase or acquire any
         shares of any class of capital stock is authorized or outstanding,  and
         (b) there is no  commitment  of the  Company to issue any such  shares,
         warrants, options or other such rights or securities.

                  2.7  Ownership of Property;  Liens.  The Company owns good and
         merchantable  title to, or valid  leasehold  interests  in,  all of its
         properties  and  assets;  and  the  Company  has  received  all  deeds,
         assignments,  waivers,  consents,  non-disturbance  and  recognition or
         similar  agreements,  bills  of sale  and  other  documents,  and  duly
         effected  all  recordings,  filings  and  other  actions  necessary  to
         establish,  protect and perfect the Company's right, title and interest
         in  and to all  such  property  to the  extent  necessary  to use  such
         property in its ordinary business operations.

                  2.8 Patents, Trademarks,  Copyrights and Licenses. The Company
         owns all material licenses,  patents, patent applications,  copyrights,
         service marks,  trademarks,  trade mark  applications,  and trade names
         necessary to continue to conduct its business as  heretofore  conducted
         by it, now  conducted by it and proposed to be conducted by it, each of
         which is listed,  together with Patent and Trademark Office application
         or registration numbers, where applicable,  on Schedule 2.8 hereto. The
         Company  conducts  its  businesses  without  infringement  or  claim of
         infringement  of  any  license,   patent,   copyright,   service  mark,
         trademark,  trade name,  trade  secret or other  intellectual  property
         right of others.  To the best  knowledge  of the  Company,  there is no
         infringement  or claim  of  infringement  by  others  of any  material,
         license, patent, copyright,  service mark, trademark, trade name, trade
         secret or other intellectual property right of the Company.


                                        3

<PAGE>



                  2.9  No  Material  Adverse  Effect.  Except  as  disclosed  on
         Schedule 2.9 hereto,  no event has occurred  since  September 30, 1997,
         and is continuing which has had or could reasonably be expected to have
         a  material  adverse  effect  on  the  business,   assets,  properties,
         operations, prospects or financial or other condition of the Company.

                  2.10  Environmental  Laws. All premises and facilities  owned,
         leased,  used or operated by the  Company or, to the  knowledge  of any
         executive officer of the Company after a reasonable investigation,  any
         predecessor in interest,  have been, and continue to be, owned, leased,
         used or  operated  in  compliance  in all  material  respects  with all
         applicable environmental laws.

                  2.11 Use of Proceeds. The proceeds of the loans by Investor to
         the  Company  were used for the  construction  of the Wash Plant at the
         Company's facility at Wellington, Utah.

         3. Representations,  Warranties and Covenants of the Investor. Investor
hereby represents and warrants that:

                  3.1  Purchase  Entirely  for  Own  Account.   Investor  hereby
         confirms that the Debenture and the Warrants to be received by Investor
         hereunder  and the Common Stock  issuable upon exercise of the Warrants
         (collectively,  the  "Securities")  will be acquired for Investor's own
         account and not with a view to the resale or  distribution  of any part
         thereof,  and that Investor has no agreement or arrangement with regard
         to or present  intention of selling,  granting any participation in, or
         otherwise distributing the same; provided, however, notwithstanding the
         foregoing,  Investor may effect  transactions  in reliance on Rule 144A
         promulgated under the Securities Act of 1933, as amended (the "Act").

                  3.2 Disclosure of  Information.  Investor has received all the
         information it considers  necessary or appropriate for deciding whether
         to purchase the Securities  being issued  hereunder.  Investor  further
         represents  that it has had an opportunity to ask questions and receive
         answers from the Company regarding the terms and conditions of the sale
         of the Securities.

                  3.3 Investment  Experience.  Investor  acknowledges that it is
         able to fend for itself,  can bear the economic risk of its  investment
         and has such knowledge and experience in financial or business  matters
         that it is capable of evaluating the merits and risks of the investment
         in the Securities being issued hereunder.

                  3.4  Restricted  Securities.  Investor  understands  that  the
         Debenture and the shares of Common Stock  issuable upon exercise of the
         Warrants  it  is  acquiring   pursuant  hereto  are   characterized  as
         "restricted  securities" under the federal  securities laws inasmuch as
         each is being acquired from the Company in a transaction  not involving
         a public  offering and that under such laws and applicable  regulations
         such securities may be resold without  registration  under the Act only
         in  certain  limited  circumstances.   In  this  connection,   Investor
         represents

                                        4

<PAGE>



         that it is  familiar  with  Rule 144  under the Act,  as  presently  in
         effect, and understands the resale  limitations  imposed thereby and by
         the Act.

                  3.5  Legends.  It is  understood  that the  Debenture  and the
         Warrants  being issued  hereunder  and the Common Stock  issuable  upon
         exercise of the Warrants  will bear a legend  substantially  similar to
         the following:

                  "THIS  SECURITY HAS NOT BEEN  REGISTERED  UNDER THE SECURITIES
                  ACT  OF  1933,  AS  AMENDED  (THE  "ACT"),  OR  REGISTERED  OR
                  OTHERWISE  QUALIFIED  FOR  SALE  UNDER  ANY  APPLICABLE  STATE
                  SECURITIES  LAWS AND MAY NOT BE TRANSFERRED OR SOLD OR OFFERED
                  FOR SALE OR OTHERWISE  TRANSFERRED,  PLEDGED,  HYPOTHECATED OR
                  DISPOSED  OF UNLESS IT HAS BEEN  REGISTERED  UNDER THE ACT AND
                  REGISTERED  OR OTHERWISE  QUALIFIED  FOR SALE UNDER SUCH STATE
                  SECURITIES LAWS OR AN EXCEPTION FROM  REGISTRATION  THEREUNDER
                  IS AVAILABLE."

                  3.6 Accredited  Investor.  Investor is an Accredited  Investor
         within the definition set forth in Rule 501(a) under the Act.

         4. Valuation of Warrants.

                  4.1 Value of  Warrants.  The fair market value of Warrant A as
         of the date hereof is $1,000.00  and the fair market value of Warrant B
         as of the date hereof is $100.00, and accordingly, of the $4,367,351.28
         stated principal  amount of the Debenture,  $1,100.00 is to be provided
         by Investor to the Company for the Warrants. Said fair market value was
         determined by the parties based on comparisons with comparable warrants
         of other issuers and Investor's customary investment considerations for
         equity and debt financing of such kind.

                  4.2  Financial  and Tax  Reporting.  The Company and  Investor
         shall prepare their respective  financial  accounting  statements,  and
         shall prepare and file their  respective  Federal (as well as state and
         local) income tax returns,  in a manner  consistent  with the foregoing
         allocation of the stated principal amount of the Debenture  between the
         Debenture and the Warrants, including but not limited to Investor's tax
         basis  in  the  Warrants  and  Debenture  in  accordance  with  Section
         1.1012(d) of the Treasury Regulations.

                  4.3 Issue  Price.  The "issue  price"  (within  the meaning of
         Section  1272(b) of the Internal  Revenue Code of 1986 (the "Code")) of
         the Debenture shall be equal to $4,366,251.28.

                                        5

<PAGE>



                  4.4  Interpretation.  No provision in this Agreement  shall be
         interpreted,  alone or in conjunction with any other agreement  between
         or among  Investor and the Company,  or either of them (i) to alter the
         amount of the  exercise  price of the  Warrants  or to alter any rights
         granted to Investor in conjunction with the Warrants,  or (ii) to limit
         or impair in any way the rights of Investor  under the  Warrants,  this
         Agreement, the Debenture or any other agreement.

         5. Security Agreement. Payment of the Debenture shall be secured to the
extent described below:

                  5.1 Security Interest. The Company hereby grants to Investor a
         security interest in the property and its proceeds described in Section
         5.2 herein to secure the Company's obligations under the Debenture (the
         "Security Interest").

                  5.2 Collateral. The property in which the Security Interest is
         granted (the  "Collateral")  consists of a  continuing  interest in the
         following:  the Wash Plant at the  Company's  facility at Farnum  Road,
         Wellington,  Utah,  and all  machinery  and  equipment  which is a part
         thereof,  including the  machinery and equipment  described on Schedule
         5.2 hereto and all processing equipment, conveyors, data processing and
         computer  equipment  with  software and  peripheral  equipment,  tools,
         attachments, accessories, and other equipment of every kind and nature,
         whether now owned or hereafter  acquired,  together  with all additions
         and accessions thereto,  replacements therefor, all parts therefor, all
         substitutions for any of the foregoing, fuel therefor, and all manuals,
         drawings, instructions, warranties and rights with respect thereto, and
         all products and proceeds thereof and condemnation awards and insurance
         proceeds with respect thereto.

                  5.3  Perfection  and  Priority.  The Security  Interest  grant
         herein shall be a first priority lien on the Collateral,  subject to no
         other liens, claims or rights of others.

                  5.4  Affirmative  Covenants.  The  Company  covenants  that it
         shall:

                           (a) Keep and maintain all  Collateral  consisting  of
                  equipment  and  machinery  in  good  operating  condition  and
                  repair;  make all necessary  replacements  thereof so that the
                  value and operating  efficiency  thereof shall at all times be
                  maintained  and  preserved;  promptly  inform  Investor of any
                  additions to or deletions  from such  equipment and machinery;
                  and prevent any such  equipment and machinery  from becoming a
                  fixture  to  real  estate  or  accession  to  other   personal
                  property;

                           (b) Promptly  discharge  any liens,  encumbrances  or
                  other claims against the Collateral;

                           (c) Maintain such insurance as may be required by law
                  and such  other  insurance  to such  extent and  against  such
                  hazards and liabilities as is customarily

                                        6

<PAGE>



                  maintained  by  companies  similarly  situated,   and  include
                  Investor as an additional  insured on all liability  policies;
                  and

                           (d)  Comply  strictly  and in all  respects  with all
                  applicable environmental laws.

                  5.5 Negative  Covenants.  The Company  covenants that it shall
         not, without  Investor's  prior written consent,  which Investor may or
         may not in its sole discretion give:

                           (a) Enter into any transaction  which  materially and
                  adversely  affects the Collateral or the Company's  ability to
                  repay the indebtedness under the Debenture;

                           (b) Remove the Collateral from the Company's facility
                  at  Wellington,  Utah,  or keep the  Collateral  at any  other
                  location unless (i) the Company gives Investor  written notice
                  thereof  and of the new  location of the  Collateral  at least
                  thirty (30) days prior thereto, and (ii) the other location is
                  within the continental United States of America; or

                           (c)   Create  or  permit  any  lien  on  any  of  the
                  Collateral, other than liens created hereunder.

                  5.6 Insurance;  Payment of Premiums. The Company shall, at its
         sole cost and expense, keep and maintain the Collateral insured for its
         full insurable value against loss or damage by fire, theft,  explosion,
         sprinklers and all other hazards and risks  ordinarily  insured against
         by other owners or users of such  properties in similar  businesses and
         notify Investor  promptly of any occurrence  causing a material loss or
         decline in value of the  Collateral  and the estimated  (or actual,  if
         available) amount of such loss or decline. All policies of insurance on
         the  Collateral  shall  be in form  and  with  insurers  recognized  as
         adequate by prudent  business persons and all such policies shall be in
         such  amounts as may be  satisfactory  to Investor.  The Company  shall
         deliver to Investor a certificate of insurance  and, upon request,  the
         original (or certified copy) of each policy of insurance,  and evidence
         of payment of all premiums  therefor.  Such policies of insurance shall
         contain an endorsement,  in form and substance  acceptable to Investor,
         showing loss payable to Investor,  as its  interests  may appear.  Such
         endorsement,  or an independent instrument furnished to Investor, shall
         provide that the insurance companies will give Investor at least thirty
         (30) days prior  written  notice  before any such policy or policies of
         insurance  shall be altered or  canceled  and that no act or default of
         the Company or any other  person  shall affect the right of Investor to
         recover  under such policy or policies of  insurance in case of loss or
         damage.  The Company hereby directs all insurers under such policies of
         insurance to pay all proceeds payable thereunder  directly to Investor,
         as its interests may appear. The Company irrevocably makes, constitutes
         and appoints Investor (and all officers, employees or agents designated
         by  Investor)  as  the   Company's   true  and  lawful   attorney  (and
         agent-in-fact) for the purpose of making, settling and adjusting claims
         under such policies of insurance, endorsing the name

                                        7

<PAGE>



         of the  Company  on any  check,  draft,  instrument  or other  items of
         payment for the proceeds of such  policies of insurance  and for making
         all  determinations  and  decisions  with  respect to such  policies of
         insurance. In the event the Company, at any time hereafter,  shall fail
         to obtain or maintain any of the policies of insurance  required  above
         or to pay any  premium  in  whole  or in part  relating  thereto,  then
         Investor,  without  waiving or releasing any  obligations or default by
         the Company  hereunder,  may at any time thereafter (but shall be under
         no  obligation  to) obtain and maintain  such policies of insurance and
         pay such premium and take any other action with respect  thereto  which
         Investor deems advisable. All sums so disbursed by Investor,  including
         reasonable  attorneys'  fees,  court costs,  expenses and other charges
         relating thereto, shall be payable on demand by the Company to Investor
         and shall be additional  liabilities under the Debenture secured by the
         Collateral.

                  5.7  Remedies  Upon  Default.  In the  event  of any  Event of
         Default  under the  Debenture,  Investor  may do any one or more of the
         following:

                           (a)  Declare  any  indebtedness  under the  Debenture
                  immediately due and payable;

                           (b)  Enforce  the  security  interest  given  in this
                  Agreement under the provisions of the Uniform  Commercial Code
                  of the applicable state or any other equivalent law;

                           (c) Enter upon the premises of the  Company,  without
                  any obligation to pay rent to the Company,  through  self-help
                  and without judicial process,  without first obtaining a final
                  judgment or giving the Company  notice and  opportunity  for a
                  hearing on the  validity  of  Investor's  claim,  or any other
                  place or places where the  Collateral is located and kept, and
                  remove the Collateral therefrom to the premises of Investor or
                  any agent of  Investor,  for such time as Investor may desire,
                  in order to effectively  collect or liquidate the  Collateral,
                  or (ii)  require the Company to assemble  the  Collateral  and
                  make it available to Investor at a place to be  designated  by
                  Investor, in its sole discretion;

                           (d) Take  possession of the Collateral or any part of
                  it and of the records pertaining to the Collateral;

                           (e)  Sell  or   otherwise   dispose  of  all  or  any
                  Collateral  at public  or  private  sale or  sales,  with such
                  notice as may be required by law, in lots or in bulk, for cash
                  or on credit,  all as Investor,  in its sole  discretion,  may
                  deem advisable; (ii) adjourn such sales from time to time with
                  or without  notice;  (iii) conduct such sales on the Company's
                  premises or elsewhere and use the Company's  premises  without
                  charge for such sales for such time or times as  Investor  may
                  see  fit.  Investor  shall  have the  right to sell,  lease or
                  otherwise dispose of the Collateral,  or any part thereof, for
                  cash,  credit or any  combination  thereof,  and  Investor may
                  purchase all or any part of the

                                        8

<PAGE>



                  Collateral  at public or, if  permitted  by law,  private sale
                  and, in lieu of actual  payment of such  purchase  price,  may
                  setoff the amount of such price against the indebtedness under
                  the  Debenture.  The  proceeds  realized  from the sale of any
                  Collateral  shall be applied  first to the  reasonable  costs,
                  expenses and attorneys' fees and expenses incurred by Investor
                  for collection and for  acquisition,  completion,  protection,
                  removal, storage, sale and delivery of the Collateral;  second
                  to  interest  due  upon  any of  the  indebtedness  under  the
                  Debenture;  and  third to the  principal  of the  indebtedness
                  under  the  Debenture.  If any  deficiency  shall  arise,  the
                  Company shall remain liable to Investor therefor; and

                           (f)  Exercise  any other  rights  and  remedies  of a
                  secured  party  under  the  Uniform  Commercial  Code  of  the
                  applicable  state or other applicable law, all of which rights
                  and remedies  shall be cumulative  and  non-exclusive,  to the
                  extent permitted by law.

         6. Conditions Precedent

         This  Agreement  shall become  effective upon the  satisfaction  of the
following conditions precedent:

                  6.1  Execution and Delivery of  Agreement.  This  Agreement or
         counterparts  thereof  shall have been duly  executed by, and delivered
         to, the Company and the Investor.

                  6.2 Documents and Other  Agreements.  The Investor  shall have
         received all of the following,  each in form and substance satisfactory
         to the Investor:

                           (a) The Debenture;

                           (b) The Warrants (the "Warrants");

                           (c) Registration Rights Agreement between the Company
                  and the Investor (the "Registration Rights Agreement");

                           (d) A  Certificate  of the  Secretary of the Company,
                  together with true and correct  copies of the  Certificate  of
                  Incorporation  and By-Laws of the Company,  and all amendments
                  thereto,  true and correct  copies of the  resolutions  of the
                  Board of Directors of the Company authorizing or ratifying the
                  execution,  delivery and  performance of this  Agreement,  the
                  Debenture, the Warrants and the Registration Rights Agreement,
                  and the  names  of the  officer  or  officers  of the  Company
                  authorized to sign this Agreement, the Debenture, the Warrants
                  and the Registration Rights Agreement,  together with a sample
                  of the true signature of each such officer;


                                        9
<PAGE>



                           (e) Certified copies of all documents  evidencing any
                  other necessary  corporate  action,  consents and governmental
                  approvals  (if  any)  with  respect  to  this  Agreement,  the
                  Debenture, the Warrants and the Registration Rights Agreement;

                           (f) The  favorable  opinion  of  Callister  Nebeker &
                  McCullough,  special counsel for the Company, addressed to the
                  Investor  with  respect to such  matters as may be  reasonably
                  requested by the Investor;

                           (g) The  favorable  opinion  of Harlan  M.  Hatfield,
                  general  counsel for the  Company,  addressed  to the Investor
                  with respect to such matters as may be reasonably requested by
                  the Investor;

                           (h) The Certificate of  Incorporation  of the Company
                  certified by the Secretary of State of Delaware;

                           (i) Good Standing  Certificates  for the Company from
                  the Secretaries of State of Delaware,  Alabama,  Pennsylvania,
                  Utah, Virginia and West Virginia;

                           (j) UCC lien  search  reports of filings  against the
                  Company  for  such   jurisdictions   as  the  Investor   deems
                  appropriate;

                           (k)  UCC  Financing   Statements  filed  against  the
                  Company in respect to such jurisdictions as the Investor deems
                  appropriate; and

                           (l) Landlord's Waiver and Consent by Earthco;

                           (m)   Certificate  of  insurance,   together  with  a
                  properly executed Lender's Loss Payable Clause.

                  6.3 Absence of Material  Adverse Change.  No material  adverse
         change  in  the  business,   operations  or  condition,   financial  or
         otherwise, of the Company shall have occurred or be continuing.

                  6.4 Conditions to the Closing.  It shall be a condition to the
         Closing  that the  conditions  contained  in Sections  5.1, 5.2 and 5.3
         shall have been fulfilled.

         7. Miscellaneous.

                  7.1 Survival of Warranties.  The  warranties,  representations
         and  covenants  of the Company and the  Investor  contained  in or made
         pursuant to this Agreement  shall survive the execution and delivery of
         this  Agreement  and the Closing and shall in no way be affected by any
         investigation  of the subject  matter  thereof  made by or on behalf of
         Investor or the Company.

                                       10

<PAGE>



                  7.2  Successors  and  Assigns.  Except as  otherwise  provided
         herein,  the terms and conditions of this Agreement  shall inure to the
         benefit of and be binding upon the respective successors and assigns of
         the parties (including transferees of the Debenture issued hereunder or
         any Common Stock issued upon exercise of the Warrants).

                  7.3  Governing  Law. This  Agreement  shall be governed by and
         construed  under the laws of the State of Utah without regard to choice
         of law principles.

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

                  7.5 Titles and  Subtitles.  The titles and  subtitles  used in
         this  Agreement  are  used  for  convenience  only  and  are  not to be
         considered in construing or interpreting this Agreement.

                  7.6 Notices. Unless otherwise provided, any notice required or
         permitted  under this Agreement  shall be given in writing and shall be
         deemed  effectively  given upon  personal  delivery  to the party to be
         notified or upon deposit with a reputable overnight courier or with the
         United States Post Office,  by registered  or certified  mail,  postage
         prepaid  and  addressed  to the  party to be  notified  at the  address
         indicated for such party on the signature page hereof, or at such other
         address as such party may  designate by ten (10) days  advance  written
         notice to the other parties.

                  7.7  Expenses.  Each  party  shall  bear its own  expenses  in
         connection with the transactions contemplated by this Agreement.

                  7.8 Amendments and Waivers.  Any term of this Agreement may be
         amended and the  observance of any term of this Agreement may be waived
         only with the  written  consent of the Company  and the  Investor.  Any
         amendment or waiver  effected in accordance  with this Section shall be
         binding  upon  each  holder  of any  securities  purchased  under  this
         Agreement  at the time  outstanding,  each  future  holder  of all such
         securities, and the Company.

                  7.9 Severability.  If one or more provisions of this Agreement
         are held to be unenforceable under applicable law, such provision shall
         be excluded from this Agreement and the balance of the Agreement  shall
         be  interpreted  as if such  provision  were so  exuded  and  shall  be
         enforceable in accordance with its terms.

                  7.10 Indemnity.  The Company hereby  indemnifies the Investor,
         and  its  directors,   officers,   employees,   affiliates  and  agents
         (collectively,  "Indemnified Persons") against, and agrees to hold each
         such  Indemnified  Person  harmless from,  any and all losses,  claims,
         damages and liabilities, including claims brought by any stockholder or
         former stockholder

                                       11

<PAGE>



         of the Company, and related expenses, including reasonable counsel fees
         and expenses,  incurred by such  Indemnified  Person arising out of any
         claim,  litigation,  investigation  or proceeding  (whether or not such
         Indemnified  Person is a party thereto)  relating to any  transactions,
         services or matters that are the subject of this  Agreement;  provided,
         however,  that  such  indemnity  shall  not  apply to any such  losses,
         claims,  damages,  or liabilities or related  expenses  determined by a
         court  of  competent   jurisdiction  to  have  arisen  from  the  gross
         negligence or willful misconduct of such Indemnified Person.

                  7.11 Waiver of Trial by Jury.  THE  COMPANY  AND THE  INVESTOR
         HEREBY  WAIVE  TRIAL  BY  JURY  IN  ANY  ACTION,  SUIT,  PROCEEDING  OR
         COUNTERCLAIM  OF ANY KIND  DIRECTLY  OR  INDIRECTLY  ARISING  OUT OF OR
         RELATED TO THIS AGREEMENT OR THE DEBENTURE OR ANY ACT OR OMISSION WHICH
         EITHER PARTY  ASSERTS  RESULTED IN ANY  LIABILITY  TO THE COMPANY,  THE
         INVESTOR  OR  THEIR  RESPECTIVE  OFFICERS,   DIRECTORS,   STOCKHOLDERS,
         PARTNERS, EMPLOYEES OR AGENTS, TO THE FULL EXTENT PERMITTED BY LAW.

                  7.12 Entire  Agreement.  This  Agreement,  the Debenture,  and
         other  documents  delivered  pursuant  hereto  constitute  the full and
         entire  understanding  and agreement between the parties with regard to
         the subjects hereof and thereof.

                  7.13  Permissible  Offset.  To the extent the Company fails to
         make  payment of principal  or interest  when due under the  Debenture,
         Holder  may  setoff  the  amount of such  deficiency  against  "Royalty
         Amounts" (net of any  commission  that the Company would be required to
         pay (e.g.,  Coalco)) due and owing to the Company from the Holder.  For
         purposes of this Section 7.13,  "Royalty  Amounts" shall mean royalties
         and license fees due to the Company  either from the Holder or from any
         of the  Holder's  assigns  or  transferees  that may owe a  royalty  or
         license fee to the Company.

THE  SECURITIES  ARE  SUITABLE  ONLY  FOR  SOPHISTICATED  INVESTORS  FOR WHOM AN
INVESTMENT IN THE SECURITIES DOES NOT CONSTITUTE A COMPLETE  INVESTMENT  PROGRAM
AND WHO FULLY UNDERSTAND AND ARE WILLING TO ASSUME THE RISK INVOLVED IN PURCHASE
OF THE  SECURITIES.  NO OFFER TO SELL  (OR  SOLICITATION  OF AN OFFER TO BUY) IS
BEING MADE IN ANY  JURISDICTION  IN WHICH SUCH  OFFER OR  SOLICITATION  WOULD BE
UNLAWFUL. THERE WILL BE NO PUBLIC OFFERING OF THE SECURITIES.

IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF
THE  COMPANY  AND THE TERMS OF THE  OFFERING,  INCLUDING  THE  MERITS  AND RISKS
INVOLVED. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY FEDERAL OR
STATE SECURITIES  COMMISSION OR REGULATORY AUTHORITY NOR HAS ANY SUCH FEDERAL OR
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY PASSED UPON THE

                                       12

<PAGE>



ACCURACY OR ADEQUACY OF ANY INFORMATION PROVIDED HEREWITH. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

         IN WITNESS WHEREOF,  the parties have executed this Agreement as of the
date first above written.


Address:  3280 North Frontage Road                COVOL TECHNOLOGIES, INC.
          Lehi, Utah 84043

                                                  By: /Stanley M. Kimball/
                                                     -------------------------
                            Name: Stanley M. Kimball
                                                       Title: President



Address:  The Gallagher Centre                    AJG FINANCIAL SERVICES, INC.
          Two Pierce Place
          Itasca, Illinois 60143-3141

                                                  By: /David R. Long/
                                                     -------------------------
                               Name: David R. Long
                                                      Title: President


                                       13







         THIS  DEBENTURE  HAS  BEEN  ACQUIRED  FOR  INVESTMENT  AND HAS NOT BEEN
         REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
         REGISTERED OR OTHERWISE QUALIFIED FOR SALE UNDER THE SECURITIES LAWS OF
         ANY STATE. THIS DEBENTURE MAY NOT BE TRANSFERRED OR SOLD OR OFFERED FOR
         SALE OR OTHERWISE  TRANSFERRED,  PLEDGED OR HYPOTHECATED IN THE ABSENCE
         OF SUCH  REGISTRATION OR QUALIFICATION OR AN EXEMPTION  THEREFROM UNDER
         SUCH ACT AND SUCH LAWS OR AN  OPINION OF  COUNSEL  SATISFACTORY  TO THE
         ISSUER  HAS BEEN  DELIVERED  TO THE  ISSUER  TO THE  EFFECT  THAT  SUCH
         REGISTRATION IS NOT REQUIRED.

                         DEBENTURE DUE JANUARY 10, 2000

                              Salt Lake City, Utah

$4,367,351.28                                                    January 9, 1998

         COVOL TECHNOLOGIES, INC., a Delaware corporation whose headquarters are
located at 3280 North Frontage Road, Lehi, Utah 84043 (the "Company"),  promises
to pay to the order of AJG  FINANCIAL  SERVICES,  INC.,  or its  successors  and
assigns (the  "Holder"),  the aggregate  principal  sum of Four  Million,  Three
Hundred  Sixty-Seven  Thousand,  Three  Hundred  Fifty-One  and  28/100  Dollars
($4,367,351.28) (the "Principal  Amount"),  in lawful money of the United States
of America,  together with  interest  thereon from the date hereof on the unpaid
Principal  Amount, on the terms and conditions as hereinafter  specified,  until
the Principal Amount is repaid in full.

         1.  Identification  of  Debenture.  This  Debenture is the  "Debenture"
defined in that certain Debenture  Agreement and Security Agreement of even date
herewith between the Company and the Holder (the "Debenture  Agreement") and the
Holder is  entitled  to all of the  benefits  that  arise  under  the  Debenture
Agreement  from  being  the  "Investor"  and  the  holder  of  the   "Debenture"
thereunder.

         2. Payment of Principal and Interest.

         (a)  The  Principal  Amount  shall  be  payable  on  January  10,  2000
("Principal Repayment Date", also herein referred to as the "Maturity Date"). At
the Maturity  Date, any final  Prepayment  (as defined in Section 3 below),  any
acceleration of the Principal Amount pursuant to Section 8

                                        1
<PAGE>

below,  any unpaid  Principal  Amount of this  Debenture,  all interest  accrued
thereon  and other  sums  payable  hereunder  shall be due and  payable in full,
notwithstanding any other provision hereof.

         (b) From and after the date hereof,  interest on the unpaid  balance of
the Principal Amount shall accrue at the per annum rate of six percent (6%) (the
"Interest  Rate") and shall be due and payable upon the Maturity Date,  provided
that upon any Prepayment and any  acceleration of the Principal  Amount pursuant
to Section 8 below,  all accrued and unpaid interest on the principal  amount of
the Prepayment or on the accelerated  Principal  Amount shall be immediately due
and payable. Interest shall be calculated on the basis of a 365-day year and the
actual  number of days  elapsed.  In the event  that all or any  portion  of the
Principal Amount is not paid on the scheduled  payment date of this Debenture or
upon  acceleration  (regardless  of the  reason  therefor),  the  portion of the
Principal  Amount  not paid  when due  shall  bear  interest  until  paid at the
"Default Rate" (as defined in Section 8 below).

         (c) All portions of the Principal Amount,  all interest thereon and all
other sums due hereunder, shall be payable, without set-off or deduction, at the
offices  of the Holder set forth  above or at such other  place as Holder,  from
time to time may designate to the Company in writing,  in cash,  certified check
or check of the  Company  that the  Holder  has  agreed in writing in advance to
accept  or a wire  transfer  to such  account  as  Holder  may  have  previously
designated to the Company in writing.

         3.  Prepayment.  The Company  may prepay any  portion of the  Principal
Amount without penalty or premium,  upon five (5) days' written notice to Holder
(a "Prepayment"). Any Prepayments shall be applied first to any overdue payments
of principal or interest that bear interest at the "Default  Rate",  next to any
other  accrued but unpaid  interest  and then to  reduction  of principal of the
Principal Amount.

         If a Change in Control (as hereinafter defined) occurs, the Holder may,
by notice to the  Company  given not later  than the date 10 days after the date
the Company  has  notified  the Holder of such  Change in  Control,  require the
prepayment  of the entire  unpaid  Principal  Amount of this  Debenture  and all
accrued but unpaid interest thereon; whereupon the Company shall, on the date 10
days after the date such notice is given by the Holder,  prepay this  Debenture.
The  Company  shall give the Holder  notice of the  occurrence  of any Change in
Control not later than 10 days after such Change in Control occurred.

         As used herein, "Change in Control" of the Company means:

                  (a) any "person",  as such term is used in Sections  13(d) and
         14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
         Act"), (other than the Company,  any trustee or other fiduciary holding
         securities  under  an  employee  benefit  plan of the  Company,  or any
         corporation owned,  directly or indirectly,  by the stockholders of the
         Company in  substantially  the same  proportions as their  ownership of
         stock of the Company), is or becomes the "beneficial owner" (as defined
         in Rule 13d-3 under the Exchange Act), directly

                                        2

<PAGE>



         or indirectly, of securities of the Company representing 30% or more of
         the combined voting power of the Company's then outstanding securities;

                  (b) during any period of two consecutive  years (not including
         any period prior to the date of this Debenture), individuals who at the
         beginning  of such period  constitute  the Board,  and any new director
         (other than a director  designated  by a person who has entered into an
         agreement  with the  Company  to  effect  a  transaction  described  in
         paragraph  (a), (c) or (d) of this Section) whose election by the Board
         of Directors or nomination  for election by the Company's  stockholders
         was approved by a vote of at least  two-thirds  (2/3) of the  directors
         then still in office who either were  directors at the beginning of the
         period or whose  election or nomination  for election was previously so
         approved,  cease  for any  reason  to  constitute  at least a  majority
         thereof;

                  (c) the  stockholders  of the  Company  approve  a  merger  or
         consolidation of the Company with any other corporation, other than (I)
         a merger or consolidation  which would result in the voting  securities
         of the Company  outstanding  immediately  prior  thereto  continuing to
         represent  (either by remaining  outstanding or by being converted into
         voting  securities  of  the  surviving  entity)  more  than  80% of the
         combined  voting power of the voting  securities of the Company or such
         surviving  entity   outstanding   immediately   after  such  merger  or
         consolidation or (II) a merger or consolidation effected to implement a
         recapitalization  of the Company (or similar  transaction)  in which no
         "person"  (as  hereinabove  defined)  acquires  more  than  30%  of the
         combined voting power of the Company's then outstanding securities; or

                  (d) the stockholders of the Company approve a plan of complete
         liquidation  of the Company or an agreement for the sale or disposition
         by the Company of all or substantially all of the Company's assets.

         4. Exchange of Debenture.  At the option of the Holder,  this Debenture
may be  exchanged  for other  Debentures  in  denominations  of  $1,000  and any
integral  multiple  thereof and of a like aggregate  principal amount and tenor.
Upon surrender of this Debenture to the Company for exchange,  the Company shall
execute and deliver to the Holder the Debentures which the Holder is entitled to
receive in exchange.

         5. Ranking of Obligations.  The obligations of the Company hereunder do
rank and will rank at least pari  passu in  priority  of payment  with all other
indebtedness of the Company.

         6.  Covenants.  Until  satisfaction  in full of all  obligations of the
Company under this Debenture,  the Company shall at all times comply with all of
the  covenants  of the Company set forth herein or in the  Debenture  Agreement,
which are hereby  incorporated by reference  herein as if each such covenant was
set forth in full in this Debenture,  together with any necessary  defined terms
from the Debenture Agreement.

                                        3

<PAGE>



         7. Events of Default.  The following  events are hereby defined for all
purposes of this Debenture as Events of Default:

                  (a)  Failure of the Company to pay any  principal  or interest
         hereunder  when and as the same  shall  become due and  payable,  which
         failure  shall have  continued  for a period of 5 days after  receiving
         written notice of such late payment.

                  (b) The breach by the  Company  of any of the other  covenants
         set  forth in this  Debenture  or in the  Debenture  Agreement  if such
         breach is not cured  within 30 days  after  written  notice  thereof is
         given by the Holder.

                  (c)  The  institution  by the  Company  of  proceedings  to be
         adjudicated  a  bankrupt  or  insolvent,  or the  consent  by it to the
         institution of bankruptcy or insolvency  proceedings against it, or the
         filing by it of a petition or answer or consent  seeking  relief  under
         Title 11 of the United States Code, as now  constituted or hereafter in
         effect, or any other applicable Federal or State bankruptcy, insolvency
         or other  similar  law,  or the  consent  by it to the  institution  of
         proceedings  thereunder  or the filing of any such  petition  or to the
         appointment of a receiver,  liquidator,  assignee,  trustee, custodian,
         sequestrator  (or other  similar  official)  of the  Company  or of any
         substantial  part of its  property,  or the making by the Company of an
         assignment  for the  benefit  of  creditors,  or the  admission  by the
         Company in writing of its inability to pay its debts  generally as they
         become due;

                  (d)  The  entry  of  a  decree  or  order  by a  court  having
         jurisdiction  for relief in respect of the Company,  or  adjudging  the
         Company a bankrupt or  insolvent,  or  approving  as  properly  filed a
         petition seeking reorganization, arrangement, adjustment or composition
         of or in respect of the  Company  under  Title 11 of the United  States
         Code,  as  now  constituted  or  hereafter  in  effect,  or  any  other
         applicable  Federal or State  bankruptcy,  insolvency  or other similar
         law, or appointing a receiver, liquidator,  assignee, trustee (or other
         similar  official)  of the  Company or of any  substantial  part of its
         property, or ordering the winding-up or liquidation of its affairs, and
         the  continuance of any such decree or order unstayed and in effect for
         a period of 60 consecutive days; or

                  (e) A default shall occur under any other agreement,  document
         or  instrument  to which the Company is a party and such default is not
         cured within any applicable grace period or waived in writing, and such
         default  (i)  involves  the  failure  to make any  payment  when due in
         respect  of any  indebtedness  (other  than the  Principal  Amount  and
         interest  thereon)  of the Company in excess of Five  Hundred  Thousand
         Dollars  ($500,000) in the aggregate,  or (ii) causes such indebtedness
         or a  portion  thereof  in  excess  of Five  Hundred  Thousand  Dollars
         ($500,000) in the aggregate to become due prior to its stated  maturity
         or prior to its regularly  scheduled dates of payment, or (iii) permits
         any holder of such indebtedness or a trustee to cause such indebtedness
         or a  portion  thereof  in  excess  of Five  Hundred  Thousand  Dollars
         ($500,000) in the aggregate to become due prior to its stated

                                        4

<PAGE>



         maturity or prior to the regularly  scheduled dates of payment and such
         default  is not cured or waived  within  30 days  after the  occurrence
         thereof.

         If one or more Events of Default shall happen and be continuing,  then,
and in each and every such case, the Holder, at its option, by notice in writing
to the Company, may declare the entire Principal Amount and all interest accrued
thereon and any other sums due hereunder,  if not already due and payable, to be
immediately due and payable.  If there shall occur an Event of Default described
in Sections 8(c) or 8(d), the entire unpaid balance of the Principal Amount with
interest  accrued  thereon and all other sums due under this Debenture  shall be
immediately due and payable without notice to the Company.  If the entire unpaid
balance  with  interest  accrued  thereon  shall,  as a result  of either of the
preceding two sentences,  be immediately due and payable,  the unpaid balance of
the  Principal  Amount shall accrue  interest at the  Interest  Rate  compounded
annually to the date of default and thereafter at a rate which shall be equal to
the Interest Rate plus two percent (2%) (the "Default  Rate") and all other sums
due by the Company  hereunder  shall also be  immediately  due and payable;  and
payment thereof may be enforced and recovered in whole or in part at any time by
one or more of the  remedies  provided to the Holder in this  Debenture or under
applicable  law. In such case, the Holder may also recover all costs of suit and
other expenses in connection therewith, together with reasonable attorney's fees
for  collection,  together  with the  interest on any  judgment  obtained by the
Holder at the Default Rate,  including  interest at that rate from and after the
date of any execution, judicial or foreclosure sale until actual payment is made
to the Holder of the full amount due the Holder.

         8.  Payment on  Default.  In the event  that an Event of Default  shall
occur,  then the  Company  shall pay to the Holder the whole  amount  which then
shall have  become due on the  Debenture  for  principal  and  interest,  and in
addition  thereto,  such  additional  amount as shall be sufficient to cover the
costs and expenses of collection.

         No delay or  omission  of the Holder to  exercise  any rights or powers
accruing upon any default  which shall not have been  remedied  shall impair any
such right or power, or shall be construed to be a waiver of any such default or
acquiescence therein; and every power and remedy given by this to the Holder may
be  exercised  from time to time and as often as may be deemed  expedient by the
Holder.

         9. Immunity of  Incorporators,  Stockholders,  Officers,  Directors and
Employees. No recourse shall be had for the payment of the principal or interest
on this  Debenture or for any claim based  thereon or otherwise in any manner in
respect  thereof,  to or  against  any  subsidiary,  incorporator,  stockholder,
officer,  director or employee, as such, past, present or future, of the Company
or any respective subsidiary,  incorporator,  stockholder,  officer, director or
employees,  as such,  past,  present or future,  of any predecessor or successor
corporation,  either  directly  or through the  Company or such  predecessor  or
successor  corporation,  whether by virtue of any  constitutional  provision  or
statute or rule of law, or by the  enforcement of any assessment or penalty,  or
in any other manner,  all such liability being expressly  waived and released by
the acceptance of this Debenture and as part of the  consideration for the issue
thereof.

                                        5

<PAGE>



         10.  Notices.   Unless  otherwise  provided,  any  notice  required  or
permitted  under this  Debenture  shall be given in writing  and shall be deemed
effectively  given upon  personal  delivery  to the party to be notified or upon
deposit  with a  reputable  overnight  courier  or with the United  States  Post
Office,  by registered or certified  mail,  postage prepaid and addressed to the
party to be notified at the address  indicated  for such party in the  Debenture
Agreement, or at such other address as such party may designate by ten (10) days
advance written notice to the other party.

         11.      Miscellaneous.

         (a) The Company hereby waives presentment,  demand,  protest, notice of
demand,  notice of  nonpayment  or  dishonor,  notice of  protest  and all other
notices of any kind in  connection  with the delivery,  acceptance,  performance
default or enforcement of the payment of this Debenture. No failure to exercise,
and no delay in exercising any rights hereunder on the part of the Holder hereof
shall operate as a waiver of such rights.

         (b) The Holder and the Company may from time to time enter into written
agreements  amending  or  changing  any  provisions  of  this  Debenture  or the
Debenture  Agreement  or the rights of the Holder or the  Company  hereunder  or
thereunder, or may grant written waivers or consents to a departure from the due
performance of the obligations of the Company hereunder or thereunder.

         (c) The Company agrees that its liability under this Debenture shall be
unconditional, without regard to the liability of any other party, and shall not
be affected in any manner by any indulgence,  extension of time, renewal, waiver
or modification  granted or consented to by the Holder. No course of dealing and
no delay or failure  of the Holder in  exercising  any right,  power,  remedy or
privilege under this Debenture or the Debenture Agreement shall affect any other
or future exercise thereof or operate as a waiver thereof;  nor shall any single
or partial  exercise  thereof or any abandonment or  discontinuance  of steps to
enforce such a right,  power,  remedy of privilege preclude any further exercise
thereof  or of any other  right,  power,  remedy or  privilege.  The  rights and
remedies of the Holder under this  Debenture  and the  Debenture  Agreement  are
cumulative  and not  exclusive  of any  rights  or  remedies  which  they  would
otherwise have. Any waiver, permit, consent or approval of any kind or character
on the part of the Holder of any breach or default  under this  Debenture or any
such waiver of any provision or condition of this  Debenture  must be in writing
and  shall  be  effective  only to the  extent  specifically  set  forth in such
writing.

         (d) Whenever any payment or action to be made or taken  hereunder shall
be stated to be due on a day which is not a business day, such payment or action
shall be made or taken on the next following business day, and such extension of
time shall be included in computing interest or fees, if any, in connection with
such payment or action.

         (e) All notices, requests, demands, directions and other communications
(collectively,  "notices")  given to or made  upon any  party  hereto  under the
provisions of this Debenture shall be in writing and shall be effective if given
in accordance with the provisions of the Debenture Agreement.

                                        6

<PAGE>



         (f) The provisions of this  Debenture are intended to be severable.  If
any provision of this Debenture shall be held invalid or  unenforceable in whole
or in part in any jurisdiction such provision shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability  without in any
manner   affecting  the  validity  or   enforceability   thereof  in  any  other
jurisdiction or the remaining provisions hereof in any jurisdiction.

         (g) This  Debenture  and the Debenture  Agreement  and other  documents
delivered  in   connection   herewith   and   therewith   supersede   all  prior
understandings  and  agreements,  whether  written or oral,  between the parties
hereto and thereto relating to the transactions provided for herein and therein.
Any  Holder of this  Debenture  acknowledges  that  such  Holder is bound by the
applicable  provisions of the Debenture  Agreement and by the acceptance of this
Debenture such Holder agrees to the terms thereof.

         (h) All  representations and warranties of the Company contained herein
or made in  connection  herewith  shall  survive  and shall not be waived by the
execution and delivery of this Debenture or by any  investigation by the Holder,
but  shall  terminate  upon  Company's  full  satisfaction  and  payment  of all
outstanding amounts in the Principal Amount of or interest on this Debenture.

         (i) This Debenture shall be binding upon and shall inure to the benefit
of the Holder, the Company and their respective  successors and assigns,  except
that the Company may not assign or  transfer  any of its rights and  obligations
hereunder or any interest herein.

         (j) Whenever the Holder's consent is required to be obtained under this
Debenture or the  Debenture  Agreement  as a condition to any action,  inaction,
condition or event,  the Holder  shall be  authorized  to give or withhold  such
consent in its sole and absolute  discretion  and to condition  its consent upon
the giving of additional collateral, the payment of money or any other matter.

         (k) The  representations,  warranties  and covenants  contained  herein
shall be  independent  of each  other and no  exception  to any  representation,
warranty  or  covenant  shall  be  deemed  to  be  an  exception  to  any  other
representation, warranty or covenant contained herein unless expressly provided,
nor shall any such  exceptions  be deemed to permit any action or omission  that
would be in contravention of applicable law.

         (l) This  Debenture  shall be governed by, and  construed in accordance
with, the laws of the State of Utah,  excluding,  however, the rules relating to
conflicts of law.

         (m) In no event shall the rate of interest payable under this Debenture
exceed the maximum rate of interest  permitted to be charged by  applicable  law
(including  the  choice of law  rules)  and any  interest  paid in excess of the
permitted  rate shall be refunded to the  Company.  Such refund shall be made by
application  of  the  excessive   amount  of  interest  paid  against  any  sums
outstanding  and shall be applied in such order as the Holder may determine.  If
the excessive amount of interest paid exceeds the sums outstanding,  the portion
exceeding the said sums outstanding shall

                                        7

<PAGE>



be refunded in cash by the Holder.  Any such  crediting or refund shall not cure
or waive any default by the Company hereunder. The Company agrees, however, that
in determining  whether or not any interest payable under this Debenture exceeds
the  highest  rate  permitted  by law,  any  non-principal  payment,  other than
interest payments,  including,  without limitation, fees and late charges, shall
be deemed,  to the extent  permitted by law, to be an expense,  fee,  premium or
liquidated damages, rather than interest.

         (n) THE  COMPANY  AND THE  HOLDER  HEREBY  WAIVE  TRIAL  BY JURY IN ANY
ACTION,  SUIT,  PROCEEDING  OR  COUNTERCLAIM  OF ANY KIND DIRECTLY OR INDIRECTLY
ARISING OUT OF OR RELATED TO THIS  DEBENTURE OR THE  DEBENTURE  AGREEMENT OR ANY
ACT OR OMISSION  WHICH EITHER  PARTY  ASSERTS  RESULTED IN ANY  LIABILITY TO THE
COMPANY,  THE  HOLDER OR THEIR  RESPECTIVE  OFFICERS,  DIRECTORS,  STOCKHOLDERS,
PARTNERS, EMPLOYEES OR AGENTS, TO THE FULL EXTENT PERMITTED BY LAW.

         (o) To the extent the Company  fails to make  payment of  principal  or
interest  when due under  this  Debenture,  Holder may setoff the amount of such
deficiency  against  "Royalty  Amounts" (net of any commission  that the Company
would be required to pay (e.g.,  Coalco))  due and owing to the Company from the
Holder.  For  purposes  of this  paragraph  (o),  "Royalty  Amounts"  shall mean
royalties and license fees due to the Company either from the Holder or from any
of the Holder's  assigns or transferees that may owe a royalty or license fee to
the Company.

         IN WITNESS WHEREOF, the Company,  intending to be legally bound hereby,
has caused  this  Debenture  to be duly  executed by its  respective  authorized
officers on the day and year first above written.

                                                COVOL TECHNOLOGIES, INC.


                                                By: /Stanley M. Kimball/
                                                     -------------------------
                            Name: Stanley M. Kimball
                                                      Title: President
[Corporate Seal]

Attest: /Asael T. Sorensen, Jr./
       ----------------------------
Asael T. Sorensen, Jr., Secretary

Accepted and Agreed to as of
the first day referred to above

AJG FINANCIAL SERVICES, INC.


By:/David R. Long/
   ---------------------
   Name: David R. Long
   Title:   President

                                        8





                                    WARRANT A


Dated: January 9, 1998                                   Warrant No. WA-1997-245
                               **216,272** Shares


         NEITHER  THESE  WARRANTS NOR THE SHARES OF COMMON STOCK  ISSUABLE  UPON
EXERCISE OF THESE  WARRANTS HAVE BEEN  REGISTERED  WITH THE U.S.  SECURITIES AND
EXCHANGE  COMMISSION OR THE SECURITIES  COMMISSION OF ANY STATE IN RELIANCE UPON
AN  EXEMPTION  FROM  REGISTRATION  UNDER  REGULATION  D  PROMULGATED  UNDER  THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE WARRANTS AND THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE OF THESE WARRANTS ARE RESTRICTED AND MAY NOT
BE OFFERED OR SOLD EXCEPT  PURSUANT TO  REGULATION D UNDER THE ACT, AN EFFECTIVE
REGISTRATION  STATEMENT  UNDER THE ACT OR  PURSUANT TO AN  APPLICABLE  EXEMPTION
THEREFROM.

            These  Warrants  shall  cease to be  exercisable  and  shall be void
                   after January 10, 2000, at 5:00 p.m.,
                           Salt Lake City, Utah time.


                         COMMON STOCK PURCHASE WARRANTS
                                       OF
                            COVOL TECHNOLOGIES, INC.


         FOR  VALUE  RECEIVED,  Covol  Technologies,  Inc.  (the  "Company"),  a
Delaware corporation, hereby certifies that AJG Financial Services, Inc., or its
permitted  assigns,  is entitled to purchase  from the  Company,  subject to the
conditions and upon the terms of this Warrant,  at any time or from time to time
after the date  hereof  and prior to 5:00 p.m.  Salt Lake City,  Utah  time,  on
January 10, 2000, an aggregate of 216,272 fully paid and nonassessable shares of
Common Stock, par value $.001, of the Company (subject to adjustment as provided
herein),  at a per  share  exercise  price  of  $10.00  per  share  (subject  to
adjustment as provided herein). This Warrant is issued pursuant to the terms set
forth in a letter  agreement  dated  October 22, 1997, by and between the Holder
(as defined below) and the Company (the "Letter Agreement").

         1.       Definitions.

         As used in this  Warrant,  the  following  terms  have  the  respective
meanings set forth below:

         "Additional  Shares of Common  Stock"  shall  mean all shares of Common
Stock issued by the Company after the Closing Date, other than Warrant Shares.

                                        1

<PAGE>



         "Affiliate"  of  any  Person  shall  mean a  Person  that  directly  or
indirectly, through one or more intermediaries,  controls or is controlled by or
is under common control with, such Person.

         "Appraised  Value" shall mean,  in respect of any share of Common Stock
on any date  herein  specified,  the fair  market  value of such share of Common
Stock  (determined  without  giving  effect to the  discount  for (i) a minority
interest,  or (ii) any lack of liquidity of the Common Stock or to the fact that
the Company may have no class of equity registered under the Exchange Act, based
on the quotient obtained by dividing (x) the value of the Company, as determined
by an investment  banking firm selected in accordance  with the terms of Section
12, by (y) the number of Fully Diluted Outstanding shares of Common Stock.

         "Book Value" shall mean, in respect of any share of Common Stock on any
date  herein  specified,  the  consolidated  book  value  of the  Company  (with
inventory valued on a first-in-first-out basis) applicable to Common Stock as of
the last day of any month immediately preceding such date, divided by the number
of Fully Diluted  Outstanding shares of Common Stock as determined in accordance
with  GAAP by Price  Waterhouse  Coopers  LLP or any other  firm of  independent
certified public  accountants of recognized  national  standing  selected by the
Company and  reasonably  acceptable to the Majority  Holders,  determined in any
event  without any  adjustment  or reduction  for the amount,  if any, that may,
under  modifications  to GAAP adopted after the Closing Date, be required either
as an offset to or  reserve  against  earnings  or  retained  earnings,  or as a
deduction  from book  value or net  worth,  in  either  event as a result of the
exercise,  issuance,  anticipated exercise or anticipated cost to the Company of
any stock option, right or convertible security or any provision of the Warrants
or any other warrant issued by the Company.

         "Business Day" shall mean any day that is not a Saturday or Sunday or a
day on which banks are  required or  permitted to be closed in the State of Utah
or the State of Illinois.

         "Closing Date" shall mean January 9, 1998.

         "Commission"  shall mean the Securities and Exchange  Commission or any
other federal  agency then  administering  the  Securities Act and other federal
securities laws.

         "Common   Stock"  shall  mean  (except  where  the  context   otherwise
indicates) the Common Stock,  $0.001 par value, of the Company as constituted on
the  Closing  Date,  and any  capital  stock into which  such  Common  Stock may
thereafter  be changed,  and shall also include (i) capital stock of the Company
of any other  class  (regardless  of how  denominated)  issued to the holders of
shares of  Common  Stock  upon any  reclassification  thereof  which is also not
preferred as to dividends or assets over any other class of stock of the Company
and which is not subject to  redemption  and (ii) shares of common  stock of any
successor or acquiring  corporation  (as defined in Section 4.8)  received by or
distributed  to the holders of Common Stock of the Company in the  circumstances
contemplated by Section 4.8.

                                        2

<PAGE>



         "Convertible  Securities" shall mean evidences of indebtedness,  shares
of stock or other securities which are convertible into or exchangeable, with or
without payment of additional  consideration in cash or property, for Additional
Shares of Common Stock, either immediately or upon the occurrence of a specified
date or a specified event.

         "Current  Market  Price" shall mean,  in respect of any share of Common
Stock on any date herein specified,  the highest of (a) the Book Value per share
of Common Stock at such date, (b) the Appraised  Value per share of Common Stock
as of a date which is within 120 days of such date,  (c) the fair  market  value
thereof as  determined in good faith by the Board of Directors of the Company as
of a date which is within 15 days of such date,  or (d) if there shall then be a
public market for the Common  Stock,  the average of the daily market prices for
the 30  consecutive  Business Days  immediately  preceding  such date. The daily
market price for each such Business Day shall be (i) the last sale price on such
day on the principal stock exchange on which such Common Stock is then listed or
admitted  to  trading,  (ii) if no sale  takes  place  on such  day on any  such
exchange,  the  last  reported  sale  price  as  officially  quoted  on any such
exchange, (iii) if the Common Stock is not then listed or admitted to trading on
any  stock  exchange,  the last sale  price on such day in the  over-the-counter
market, as reported by the National  Association of Securities Dealers Automatic
Quotation  System  ("NASDAQ"),  or if such sale price is not  available  on such
date,  the average of the closing bid and asked  prices on such date as reported
by NASDAQ,  or if not so reported,  then as reported by the  National  Quotation
Bureau,  Inc.,  (iv) if neither such firm at the time is engaged in the business
of reporting such prices,  as furnished by any similar firm then engaged in such
business,  or (v) if there is no such firm,  as  furnished  by any member of the
NASD  selected  mutually  by the  Majority  Holders  and the Company or, if they
cannot agree upon such  selection,  as selected by two such members of the NASD,
one of which shall be selected by the Majority Holders and one of which shall be
selected by the Company.

         "Current  Warrant  Price"  shall mean,  in respect of a share of Common
Stock at any date herein  specified,  the price at which a share of Common Stock
may be purchased pursuant to this Warrant on such date. On the Closing Date, the
Current Warrant Price is $10.00 per share of Common Stock.

         "Debenture  Agreement" shall mean the Debenture  Agreement and Security
Agreement,  dated as of January 9, 1998,  between the Company and AJG  Financial
Services, Inc.

         "Default Rate" means eight percent (8%).

         "Exchange  Act"  shall mean the  Securities  Exchange  Act of 1934,  as
amended,  or any similar federal  statute,  and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.

         "Exercise  Period"  shall mean the period  during which this Warrant is
exercisable pursuant to Section 2.


                                        3

<PAGE>



         "Fully  Diluted  Outstanding"  shall mean,  when used with reference to
Common  Stock,  at any date as of which the  number of shares  thereof  is to be
determined,  all shares of Common Stock  Outstanding at such date and all shares
of Common Stock issuable in respect of this Warrant outstanding on such date and
other options or warrants to purchase, or securities convertible into, shares of
common  stock  outstanding  on such date which  would be deemed  outstanding  in
accordance  with GAAP for purposes of  determining  book value or net income per
share.

         "GAAP"  shall mean  generally  accepted  accounting  principles  in the
United States of America as from time to time in effect.

         "Holder" shall mean, as the context requires,  the Person in whose name
this  Warrant or one of the other  Warrants  is  registered  on the books of the
Company  maintained for such purpose or the Person  holding any Warrant  Shares,
and "Holders" shall mean two or more such Persons.

         "Independent Counsel" shall mean counsel to the Company, unless counsel
to Holder  disagrees  in writing with the opinion or advice of such counsel with
respect to the issue in question  within fifteen (15) days after receipt of such
opinion or advice,  in which case the Company and Holder  shall  select  another
counsel, not the regular counsel of either, who is experienced in Securities Act
matters, who shall render an opinion with respect to the issue in question.  The
legal fees and expenses of such other counsel  incurred in  connection  with the
rendering of such opinion shall be borne equally by Holder and the Company.

         "Letter  Agreement"  shall  have the  meaning  set  forth in the  first
paragraph of this Warrant.

         "Majority  Holders" shall mean the Holders of Warrants  exercisable for
in  excess of 50% of the  aggregate  number  of  shares  of  Common  Stock  then
purchasable upon exercise of all Warrants, whether or not then exercisable.

         "NASD" shall mean the National Association of Securities Dealers, Inc.,
or any successor corporation thereto.

         "Other Property" shall have the meaning set forth in Section 4.8.

         "Outstanding"  shall mean, when used with reference to Common Stock, at
any date as of which the  number  of shares  thereof  is to be  determined,  all
issued  shares of Common  Stock,  except shares then owned or held by or for the
account of the Company or any Subsidiary,  and shall include all shares issuable
in respect of  outstanding  scrip or any  certificates  representing  fractional
interests in shares of Common Stock.

         "Permitted  Issuances"  shall mean [(i) the  issuance  of up to 800,000
shares of Common Stock pursuant to certain  outstanding  warrants of the Company
which are "out of the money" as of the Closing Date,  (ii) the issuance of up to
1,500,000  shares of Common  Stock  pursuant  to  certain  outstanding  options,
warrants or other securities of the Company convertible into Common Stock


                                        4

<PAGE>



which are "in the  money" as of the  Closing  Date,  (iii)  the  issuance  of or
granting of rights to acquire up to 790,000 shares of Common Stock to PacifiCorp
Financial  Services,  inc.  or any of its  affiliates  ('PacifiCorp"),  or their
respective  assigns,  pursuant to the Convertible  Loan and Security  Agreement,
dated,  between the Company and PacifiCorp,  (iv) the issuance of or granting of
rights to acquire up to 515,000 shares of Common Stock to be sold by the Company
pursuant to a private Placement  Memorandum,  (v) the issuance of or granting of
rights to acquire up to 100,000 shares of Common Stock to LKD Partnership or its
assigns  pursuant  to  a  Convertible  Debenture  in  the  principal  amount  of
approximately  $1,000,000  issued in  November,  1996,  (vi) the  issuance of or
granting  of rights  to  acquire  up to  2,000,000  shares  of  Common  Stock to
officers, directors,  consultants or employees of the Company, which rights vest
over the next 8 to 9 years,  (vii)  the  issuance  of or  granting  of rights to
acquire up to 400,000  additional shares of Common Stock to any third parties in
transactions  other than those referred to in the preceding  clauses (i) through
(vi)],  and (viii) the issuance of shares of Common  Stock upon  exercise of the
Warrants.

         "Person" shall mean any individual,  sole proprietorship,  partnership,
joint  venture,  trust,  incorporated  organization,  association,  corporation,
institution,  public benefit corporation, entity or government (whether federal,
state, county, city, municipal or otherwise,  including, without limitation, any
instrumentality, division, agency, body or department thereof).

         "Registration  Rights  Agreement"  shall mean the  Registration  Rights
Agreement,  dated as of January 9, 1998,  between the Company and AJG  Financial
Services, Inc.

         "Restricted  Common Stock" shall mean shares of Common Stock which are,
or which upon their issuance on the exercise of this Warrant would be, evidenced
by a certificate bearing the restrictive legend set forth in Section 8.1.

         "Securities Act" shall mean the Securities Act of 1933, as amended,  or
any similar  federal  statute,  and the rules and  regulations of the Commission
thereunder, all as the same shall be in effect at the time.

         "Subsidiary"  shall mean any  corporation of which an aggregate of more
than  50% of the  outstanding  stock  having  ordinary  voting  power to elect a
majority of the board of directors of such corporation (irrespective of whether,
at the time, stock of any other class or classes of such corporation  shall have
or might have voting power by reason of the happening of any  contingency) is at
the time,  directly or indirectly,  owned legally or beneficially by the Company
and/or one or more Subsidiaries of the Company.

         "Termination Date" shall have the meaning set forth in Section 2.

         "Transfer"  shall mean any disposition of any Warrant or Warrant Shares
or of any  interest in either  thereof,  which would  constitute  a sale thereof
within the meaning of the Securities Act.


                                        5

<PAGE>



         "Warrant  Price" shall mean an amount equal to (i) the number of shares
of Common  Stock  being  purchased  upon  exercise of this  Warrant  pursuant to
Section 2,  multiplied by (ii) the Current  Warrant Price as of the date of such
exercise.

         "Warrant  Shares"  shall mean the shares of Common  Stock  purchased by
Holders of the Warrants upon the exercise thereof.

         "Warrants"  shall mean the two Warrants (one  designated  Warrant A and
the other  designated  Warrant  B),  each dated  January 9, 1998,  issued by the
Company to AJG Financial Services,  Inc. evidencing rights to purchase initially
up to an aggregate of 432,544  shares of Common Stock,  and all warrants  issued
upon transfer,  division or combination  of, or in substitution or exchange for,
any thereof.

         2. Exercise of Warrant. This Warrant may be exercised,  in whole at any
time or in part from time to time  during the  period  (the  "Exercise  Period")
commending on the date hereof, and ending on January 10, 2000, at 5:00 p.m. Salt
Lake City, Utah time (the "Termination  Date"), by the Holder of this Warrant by
the  surrender  of this Warrant  (with the exercise  form at the end hereof duly
executed) at the address set forth in Section 13 hereof,  together  with payment
of the  Warrant  Price.  Payment  of the  Warrant  Price  shall be made first by
offset, in whole or in part, against any obligation of the Company to the Holder
pursuant to the Debenture issued pursuant to the Debenture  Agreement,  and then
any  balance by wire  transfer  to an  account  in a bank  located in the United
States  designated  for such  purpose by the Company or by certified or official
bank check.  The Warrant shall expire,  and exercise shall no longer be allowed,
to the  extent the  Warrant  has not been  exercised  by the  expiration  of the
Exercise Period.

         If this Warrant is  exercised  in part,  this Warrant must be exercised
for a minimum of 1,000 shares of Common Stock and if the Exercise Period has not
expired the Holder is entitled to receive a new Warrant  covering  the number of
Warrant  Shares in respect  of which this  Warrant  has not been  exercised  and
setting forth the  proportionate  part of the Warrant  Price  applicable to such
Warrant Shares. Upon such surrender of this Warrant,  the Company will (a) issue
a warrant or warrants in the name of the Holder for the largest  number of whole
shares of Common  Stock to which  the  Holder  shall be  entitled  and,  if this
Warrant is exercised  in whole,  in lieu of any  fractional  share of the Common
Stock to which the  Holder  shall be  entitled,  cash equal to the fair value of
such  fractional  share  (determined in such  reasonable  manner as the Board of
Directors of the Company  shall  determine),  and (b) deliver the  proportionate
part thereof if this Warrant is exercised in part, pursuant to the provisions of
this Warrant. The Warrant shall expire, and exercise shall no longer be allowed,
to the  extent the  Warrant  has not been  exercised  by the  expiration  of the
Exercise Period.

         3. Reservation of Warrant Shares.  The Company will at all times during
the Exercise  Period have  authorized  and  reserved,  and will keep  available,
solely for issuance or delivery upon the exercise of this  Warrant,  the Warrant
Shares. All shares of Common Stock which shall be so issuable,  when issued upon
exercise of any Warrant and  payment  therefor in  accordance  with the terms of
such Warrant, shall be duly and validly issued, fully paid and nonassessable and
free and


                                        6

<PAGE>



clear of any liens,  claims and restrictions (other than as provided herein). No
stockholder of the Company has or shall have any preemptive  rights to subscribe
for such shares of Common Stock.

         Before taking any action which would cause an  adjustment  reducing the
Current  Warrant Price below the then par value, if any, of the shares of Common
Stock  issuable  upon  exercise  of the  Warrants,  the  Company  shall take any
corporate  action  which may be  necessary in order that the Company may validly
and legally  issue fully paid and  nonassessable  shares of such Common Stock at
such adjusted Current Warrant Price.

         Before  taking any action  which would result in an  adjustment  in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Current  Warrant  Price,  the Company  shall obtain all such  authorizations  or
exemptions  thereof,  or consents  thereto,  as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.

         If any shares of Common Stock required to be reserved for issuance upon
exercise of Warrants require registration or qualification with any governmental
authority  under any federal or state law (otherwise than as provided in Section
8) before  such shares may be so issued,  the Company  will in good faith and as
expeditiously as possible and at its expense endeavor to cause such shares to be
duly registered.

         4. Adjustments.

         The  number  of  shares of Common  Stock  for  which  this  Warrant  is
exercisable, or the price at which such shares may be purchased upon exercise of
this Warrant,  shall be subject to adjustment  from time to time as set forth in
this  Section 4. The  Company  shall give Holder  notice of any event  described
below which  requires an  adjustment  pursuant to this  Section 4 at the time of
such event.

         4.1 Stock Dividends, Subdivisions and Combinations.  If at any time the
Company shall:

                  (a)      take a record of the holders of its Common  Stock for
                           the purpose of  entitling  them to receive a dividend
                           payable  in,  or other  distribution  of,  Additional
                           Shares of Common Stock,

                  (b)      subdivide its outstanding shares of Common Stock into
                           a larger number of shares of Common Stock, or

                  (c)      combine its outstanding shares of Common Stock into a
                           smaller number of shares of Common Stock,

then (i) the  number  of  shares of Common  Stock  for  which  this  Warrant  is
exercisable immediately after the occurrence of any such event shall be adjusted
to equal the number of shares of Common Stock which a record  holder of the same
number of shares of Common Stock for which this Warrant


                                        7

<PAGE>



is exercisable immediately prior to the occurrence of such event would own or be
entitled to receive  after the  happening  of such  event,  and (ii) the Current
Warrant  Price  shall  be  adjusted  to  equal  (a) the  Current  Warrant  Price
multiplied  by the number of shares of Common  Stock for which  this  Warrant is
exercisable  immediately  prior to the  adjustment  divided by (b) the number of
shares for which this Warrant is exercisable immediately after such adjustment.

         4.2 Certain Other Distributions.  If at any time the Company shall take
a record of the holders of its Common Stock for the purpose of entitling them to
receive any dividend or other distribution of:

                  (a)      cash;

                  (b)      any evidences of its indebtedness,  any shares of its
                           stock or any  other  securities  or  property  of any
                           nature  whatsoever  (other  than  cash,   Convertible
                           Securities or Additional Shares of Common Stock); or

                  (c)      any  warrants  or other  rights to  subscribe  for or
                           purchase  any  evidences  of  its  indebtedness,  any
                           shares  of its  stock  or  any  other  securities  or
                           property of any nature  whatsoever  (other than cash,
                           Convertible Securities or Additional Shares of Common
                           Stock);

then (i) the  number  of  shares of Common  Stock  for  which  this  Warrant  is
exercisable  shall be adjusted to equal the product  obtained by multiplying the
number of  shares  of  Common  Stock  for  which  this  Warrant  is  exercisable
immediately  prior to such  adjustment  by a fraction (a) the numerator of which
shall be the  Current  Market  Price per  share of  Common  Stock at the date of
taking such record and (b) the denominator of which shall be such Current Market
Price per share of Common  Stock,  minus the  amount  allocable  to one share of
Common  Stock of (x) any such cash so  distributable  and (y) the fair value (as
determined  in good faith by the Board of Directors of the Company and supported
by an opinion from an investment  banking firm of recognized  national  standing
acceptable  to  the  Majority   Holders)  of  any  and  all  such  evidences  of
indebtedness, shares of stock, other securities or property or warrants or other
subscription or purchase rights so  distributable,  and (ii) the Current Warrant
Price shall be adjusted to equal (a) the Current Warrant Price multiplied by the
number of  shares  of  Common  Stock  for  which  this  Warrant  is  exercisable
immediately  prior to the  adjustment  divided  by (b) the  number of shares for
which  this  Warrant  is  exercisable  immediately  after  such  adjustment.   A
reclassification  of the Common Stock (other than a change in par value, or from
par  value to no par  value or from no par value to par  value)  into  shares of
Common  Stock  and  shares  of any  other  class  of  stock  shall  be  deemed a
distribution by the Company to the holders of its Common Stock of such shares of
such other  class of stock  within the  meaning of this  Section 4.2 and, if the
outstanding  shares of Common  Stock  shall be changed  into a larger or smaller
number of shares of Common Stock as a part of such reclassification, such change
shall be  deemed  a  subdivision  or  combination,  as the  case may be,  of the
outstanding shares of Common Stock within the meaning of Section 4.1.


                                        8

<PAGE>



         4.3      Issuance of Additional Shares of Common Stock.

                  (a)      If  at  any  time   the  Company   shall  (except  as
                           hereinafter  provided in Sections  4.4 and 4.5) issue
                           or sell any Additional Shares of Common Stock,  other
                           than Permitted  Issuances,  for  consideration  in an
                           amount per Additional Share of Common Stock less than
                           the  greater  of the  Current  Warrant  Price  or the
                           Current Market Price,  then: (i) the number of shares
                           of Common Stock for which this Warrant is exercisable
                           shall be adjusted  to equal the  product  obtained by
                           multiplying  the number of shares of Common Stock for
                           which this Warrant is exercisable  immediately  prior
                           to such issue or sale by a fraction (W) the numerator
                           of which is the  number of  shares  of  Common  Stock
                           Outstanding immediately after the issuance or sale of
                           such Additional  Shares of Common Stock,  and (X) the
                           denominator  of which is  number  of shares of Common
                           Stock Outstanding  immediately prior to such issuance
                           or sale; and (ii) the Current  Warrant Price shall be
                           adjusted to a price  determined  by  dividing  (a) an
                           amount  equal to the sum of (X) the  number of shares
                           of Common Stock Outstanding immediately prior to such
                           issuance  or sale  multiplied  by the  then  existing
                           Current Warrant Price, plus (Y) the consideration, if
                           any,  received by the Company  upon such  issuance or
                           sale,  by (b) the  total  number  of shares of Common
                           Stock Outstanding  immediately after such issuance or
                           sale.

                  (b)      If  at  any  time   the  Company  shall   (except  as
                           hereinafter  provided in Sections  4.4 and 4.5) issue
                           or sell any Additional Shares of Common Stock,  other
                           than Permitted  Issuances,  for  consideration  in an
                           amount per Additional  Share of Common Stock equal to
                           or greater  than the greater of the  Current  Warrant
                           Price or the Current Market Price, then the number of
                           shares for which this  Warrant is  exercisable  shall
                           not change,  but the Company  shall issue to Holder a
                           new Warrant for the number of shares of Common  Stock
                           equal to (i) the product  obtained by multiplying the
                           number  of shares  of  Common  Stock  for which  this
                           Warrant  is  exercisable  immediately  prior  to such
                           issuance or sale by a fraction  (W) the  numerator of
                           which  is  the  number  of  shares  of  Common  Stock
                           Outstanding immediately after the issuance or sale of
                           such Additional  Shares of Common Stock,  and (X) the
                           denominator  of  which is the  number  of  shares  of
                           Common Stock  Outstanding  immediately  prior to such
                           issuance or sale,  less (ii) the number of shares for
                           which this Warrant is exercisable  immediately  prior
                           to such issuance or sale.  The new Warrant shall have
                           the same terms and  provisions as this Warrant except
                           with  respect to the number of shares for which it is
                           exercisable and except that the Current Warrant Price
                           (as  defined  in the new  Warrant)  for each share of
                           Common   Stock  for  which   such  new   Warrant   is
                           exercisable  shall be equal to the fair  value of the
                           consideration per Additional Share of Common Stock.


                                        9
<PAGE>

                  (c)      The provisions of this Section 4.3 shall not apply to
                           any issuance of Additional Shares of Common Stock for
                           which an adjustment is provided  under Section 4.1 or
                           4.2. No  adjustment  shall be made under this Section
                           4.3 upon the  issuance  of any  Additional  Shares of
                           Common  Stock  which  are  issued   pursuant  to  the
                           exercise  of any  warrants or other  subscription  or
                           purchase  rights or pursuant  to the  exercise of any
                           conversion  or  exchange  rights  in any  Convertible
                           Securities,  if any such adjustment  shall previously
                           have been made upon the issuance of such  warrants or
                           other rights or upon the issuance of such Convertible
                           Securities  (or upon the  issuance  of any warrant or
                           other  rights  therefor)  pursuant  to Section 4.4 or
                           Section 4.5.

         4.4  Issuance of Warrants or Other  Rights.  If at any time the Company
shall  take a record of the  holders  of its  Common  Stock for the  purpose  of
entitling  them to receive a  distribution  of, or shall in any manner  (whether
directly  or by  assumption  in a merger in which the  Company is the  surviving
corporation)  issue or sell,  any  warrants  (other than the  Warrants) or other
rights to subscribe for or purchase any Additional Shares of Common Stock or any
Convertible  Securities,  whether  or not the  rights  to  exchange  or  convert
thereunder are immediately exercisable, and the price per share for which Common
Stock is issuable  upon the  exercise of such  warrants or other  rights or upon
conversion  or exchange of such  Convertible  Securities  shall be less than the
greater of the  Current  Warrant  Price or the  Current  Market  Price in effect
immediately  prior to the  time of such  distribution,  issue or sale,  then the
number of shares of Common Stock for which this Warrant is  exercisable  and the
Current  Warrant  Price shall be  adjusted as provided in Section  4.3(a) on the
basis that (i) the maximum number of Additional  Shares of Common Stock issuable
pursuant  to all such  warrants  or other  rights or  necessary  to  effect  the
conversion  or exchange of all such  Convertible  Securities  shall be deemed to
have been issued and  outstanding,  (ii) the price per share for such Additional
Shares of Common Stock shall be deemed to be the lowest price per share at which
such Additional Shares of Common Stock are available to such holders,  and (iii)
the Company shall have received all of the  consideration,  if any,  payable for
such warrants or other rights as of the date of the actual issuance thereof.  No
further  adjustments  of the  number of shares  of Common  Stock for which  this
Warrant is  exercisable  or of the Current  Warrant Price shall be made upon the
actual  issue  of such  Common  Stock  or of such  Convertible  Securities  upon
exercise  of such  warrants  or other  rights or upon the  actual  issue of such
Common Stock upon such conversion or exchange of such Convertible Securities.

         4.5  Issuance  of  Convertible  Securities.  If at any time the Company
shall  take a record of the  holders  of its  Common  Stock for the  purpose  of
entitling  them to receive a  distribution  of, or shall in any manner  (whether
directly  or by  assumption  in a merger in which the  Company is the  surviving
corporation)  issue or sell,  any  Convertible  Securities,  whether  or not the
rights to exchange or convert  thereunder are immediately  exercisable,  and the
price per share for which  Common  Stock is  issuable  upon such  conversion  or
exchange  shall be less than the  greater of the  Current  Warrant  Price or the
Current  Market Price in effect  immediately  prior to the time of such issue or
sale,  then the  number  of shares of Common  Stock for which  this  Warrant  is
exercisable  and the  Current  Warrant  Price  shall be  adjusted as provided in
Section 4.3(a) on the basis that (i) the maximum


                                       10

<PAGE>



number of  Additional  Shares of Common Stock  issuable  upon the  conversion or
exchange of all such Convertible  Securities shall be deemed to have been issued
and  outstanding,  (ii) the price per share of such Additional  Shares of Common
Stock shall be deemed to be the lowest  possible price in any range of prices at
which such Additional Shares of Common Stock are available to such holders,  and
(iii) the Company shall have received all of the consideration payable therefor,
if any, as of the date of actual  issuance of such  Convertible  Securities.  No
further  adjustment  of the  number of shares  of  Common  Stock for which  this
Warrant is exercisable or of the Current  Warrant Price shall be made under this
Section 4.5 upon the  issuance of any  Convertible  Securities  which are issued
pursuant to the  exercise  of any  warrants  or other  subscription  or purchase
rights therefor, if any such adjustment shall previously have been made upon the
issuance of such  warrants or other  rights  pursuant to Section 4.4. No further
adjustments  of the number of shares of Common  Stock for which this  Warrant is
exercisable or of the Current  Warrant Price shall be made upon the actual issue
of such Common Stock upon conversion or exchange of such Convertible  Securities
and, if any issue or sale of such  Convertible  Securities is made upon exercise
of any warrant or other right to subscribe  for or to purchase or any warrant or
other right to purchase any such  Convertible  Securities for which  adjustments
thereof have been or are to be made pursuant to other provisions of this Section
4, no further adjustments shall be made by reason of such issue or sale.

         4.6 Superseding Adjustment. If, at any time after any adjustment of the
number of shares of Common  Stock for which this  Warrant is  exercisable  shall
have been made  pursuant  to  Section  4.4 or  Section  4.5 as the result of any
issuance of warrants, rights or Convertible Securities, and either

                  (a)      such  warrants or rights,  or the right of conversion
                           or  exchange  in such other  Convertible  Securities,
                           shall  expire,  and all or a portion of such warrants
                           or rights,  or the right of  conversion  or  exchange
                           with  respect  to  all or a  portion  of  such  other
                           Convertible Securities, as the case may be, shall not
                           have been exercised, or

                  (b)      the  consideration  per  share  for  which  shares of
                           Common Stock are issuable  pursuant to such  warrants
                           or  rights,  or the terms of such  other  Convertible
                           Securities,  shall be  increased  solely by virtue of
                           provisions   therein   contained   for  an  automatic
                           increase  in such  consideration  per share  upon the
                           occurrence of a specified date or event,

then such previous adjustment shall be rescinded and annulled and the Additional
Shares of Common  Stock  which were  deemed to have been issued by virtue of the
computation  made in  connection  with the  adjustment so rescinded and annulled
shall no longer be  deemed  to have been  issued by virtue of such  computation.
Thereupon, a recomputation shall be made of the effect of such rights or options
or other Convertible Securities on the then outstanding Warrants, but not on any
then outstanding Warrant Shares, on the basis of



                                       11

<PAGE>



                  (c)      treating  the number of  Additional  Shares of Common
                           Stock or other property, if any, theretofore actually
                           issued or issuable  pursuant to the previous exercise
                           of any such  warrants  or rights or any such right of
                           conversion or exchange,  as having been issued on the
                           date  or  dates  of any  such  exercise  and  for the
                           consideration   actually   received  and   receivable
                           therefor, and

                  (d)      treating  any such  warrants  or  rights  or any such
                           other   Convertible   Securities  which  then  remain
                           outstanding   as  having   been   granted  or  issued
                           immediately  after the time of such  increase  of the
                           consideration  per share  for which  shares of Common
                           Stock or  other  property  are  issuable  under  such
                           warrants or rights or other Convertible Securities.

         4.7 Other Provisions  Applicable to Adjustments under this Section. The
following  provisions shall be applicable to the making of adjustments  provided
for in this Section 4:

                  (a)      Computation of Consideration.  To the extent that any
                           Additional  Shares of Common Stock or any Convertible
                           Securities   or  any  warrants  or  other  rights  to
                           subscribe  for or purchase any  Additional  Shares of
                           Common Stock or any Convertible  Securities  shall be
                           issued  for  cash  consideration,  the  consideration
                           received by the Company  therefor shall be the amount
                           of the cash received by the Company therefor,  or, if
                           such Additional Shares of Common Stock or Convertible
                           Securities   are   offered   by   the   Company   for
                           subscription,  the  subscription  price,  or, if such
                           Additional  Shares  of  Common  Stock or  Convertible
                           Securities  are sold to  underwriters  or dealers for
                           public offering without a subscription  offering, the
                           initial  public  offering  price  (in any  such  case
                           subtracting   any  amounts  paid  or  receivable  for
                           accrued  interest  or  accrued  dividends,   but  not
                           subtracting any  compensation,  discounts or expenses
                           paid  or  incurred  by  the  Company  for  and in the
                           underwriting of, or otherwise in connection with, the
                           issuance  thereof).  To the extent that such issuance
                           shall be for a consideration  other than cash,  then,
                           except as herein otherwise  expressly  provided,  the
                           amount  of such  consideration  shall be deemed to be
                           the fair value of such  consideration  at the time of
                           such  issuance  as  determined  in good  faith by the
                           Board  of  Directors  of the  Company.  In  case  any
                           Additional  Shares of Common Stock or any Convertible
                           Securities   or  any  warrants  or  other  rights  to
                           subscribe for or purchase such  Additional  Shares of
                           Common  Stock  or  Convertible  Securities  shall  be
                           issued  in  connection  with any  merger in which the
                           Company   issues  any   securities,   the  amount  of
                           consideration therefor shall be deemed to be the fair
                           value,  as  determined  in good faith by the Board of
                           Directors  of the  Company,  of such  portion  of the
                           assets and business of the  nonsurviving  corporation
                           as such Board in good  faith  shall  determine  to be
                           attributable  to such  Additional  Shares  of  Common
                           Stock,  Convertible  Securities,  warrants  or  other
                           rights, as the case may be. The consideration for any
                           Additional Shares of Common


                                       12

<PAGE>



                           Stock  issuable  pursuant  to any  warrants  or other
                           rights to subscribe for or purchase the same shall be
                           the consideration received by the Company for issuing
                           such  warrants or other  rights  plus the  additional
                           consideration payable to the Company upon exercise of
                           such warrants or other rights.  The consideration for
                           any  Additional   Shares  of  Common  Stock  issuable
                           pursuant to the terms of any  Convertible  Securities
                           shall be the  consideration,  if any, received by the
                           Company  for  issuing  warrants  or other  rights  to
                           subscribe   for   or   purchase   such    Convertible
                           Securities, plus the consideration paid or payable to
                           the  Company in respect  of the  subscription  for or
                           purchase  of such  Convertible  Securities,  plus the
                           additional  consideration,  if  any,  payable  to the
                           Company upon the exercise of the right of  conversion
                           or exchange in such Convertible  Securities.  In case
                           of the issuance at any time of any Additional  Shares
                           of Common Stock or Convertible  Securities in payment
                           or  satisfaction  of any dividends  upon any class of
                           stock other than Common  Stock,  the Company shall be
                           deemed to have received for such Additional Shares of
                           Common    Stock   or    Convertible    Securities   a
                           consideration equal to the amount of such dividend so
                           paid or satisfied.

                  (b)      When Adjustments to Be Made. The adjustments required
                           by this Section 4 shall be made whenever and as often
                           as any specified event requiring an adjustment  shall
                           occur,  except that any  adjustment  of the number of
                           shares of Common  Stock for  which  this  Warrant  is
                           exercisable  that would  otherwise be required may be
                           postponed  (except  in the case of a  subdivision  or
                           combination  of  shares  of  the  Common  Stock,   as
                           provided  for in  Section  4.1) up to, but not beyond
                           the date of  exercise  if such  adjustment  either by
                           itself or with other  adjustments not previously made
                           adds  or  subtracts  less  than 1% of the  shares  of
                           Common  Stock for which this  Warrant is  exercisable
                           immediately  prior to the making of such  adjustment.
                           Any  adjustment  representing  a change  of less than
                           such minimum  amount  (except as aforesaid)  which is
                           postponed  shall be carried forward and made upon the
                           earlier of (i) the date upon  which such  adjustment,
                           together  with  other  adjustments  required  by this
                           Section 4 and not previously  made, would result in a
                           minimum  adjustment,  and (ii) the date of  exercise.
                           For the  purpose  of any  adjustment,  any  specified
                           event  shall be deemed to have  occurred at the close
                           of business on the date of its occurrence.

                  (c)      Fractional Interests.  In computing adjustments under
                           this Section 4, fractional  interests in Common Stock
                           shall be taken into account to the nearest  1/10th of
                           a share.

                  (d)      When  Adjustment  Not Required.  If the Company shall
                           take a record of the holders of its Common  Stock for
                           the purpose of  entitling  them to receive a dividend
                           or  distribution  or  subscription or purchase rights
                           and shall,


                                       13

<PAGE>

                           thereafter   and   before   the    distribution    to
                           stockholders thereof, legally abandon its plan to pay
                           or deliver such dividend, distribution,  subscription
                           or purchase  rights,  then  thereafter  no adjustment
                           shall be  required  by reason  of the  taking of such
                           record  and any such  adjustment  previously  made in
                           respect thereof shall be rescinded and annulled.

                  (e)      Escrow  of  Warrant  Shares.  If  after  any property
                           becomes  distributable  pursuant to this Section 4 by
                           reason of the taking of any record of the  holders of
                           Common  Stock,  but  prior to the  occurrence  of the
                           event  for  which  such   record  is  taken,   Holder
                           exercises  this  Warrant,  any  Additional  Shares of
                           Common   Stock    issuable    and   other    property
                           distributable   upon   exercise  by  reason  of  such
                           adjustment  shall be held in escrow for Holder by the
                           Company to be issued to Holder upon and to the extent
                           that the event actually takes place,  upon payment of
                           the then Current Warrant Price.  Notwithstanding  any
                           other provision to the contrary herein,  if the event
                           for which such  record was taken fails to occur or is
                           rescinded,   then  such  escrowed   shares  shall  be
                           canceled  by  the  Company  and   escrowed   property
                           returned.

                  (f)      Challenge to Good Faith  Determination.  Whenever the
                           Board of Directors  of the Company  shall be required
                           to make a  determination  in good  faith  of the fair
                           value  of  any  item  under  this   Section  4,  such
                           determination  may be challenged  in  good  faith  by
                           Holder,  and any  dispute  shall  be  resolved  by an
                           investment   banking  firm  of  recognized   national
                           standing  selected by the Company and  acceptable  to
                           such Holder.

         4.8   Reorganization,   Reclassification,   Merger,   Consolidation  or
Disposition  of  Assets.  In case the  Company  shall  reorganize  its  capital,
reclassify  its  capital  stock,  consolidate  or  merge  with or  into  another
corporation  (where the Company is not the surviving  corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation (hereinafter, a "Reorganization") and,
pursuant  to the terms of such  Reorganization,  shares  of common  stock of the
successor  or  acquiring  corporation,  or any  cash,  shares  of stock or other
securities  or property of any nature  whatsoever  (including  warrants or other
subscription  or purchase  rights) in addition to or in lieu of common  stock of
the successor or acquiring corporation ("Other Property"), are to be received by
or distributed  to the holders of Common Stock of the Company,  then each Holder
shall have the right  following  the  effectiveness  of such  Reorganization  to
receive,  upon exercise of such Warrant, the number of shares of common stock of
the successor or acquiring corporation or of the Company, if it is the surviving
corporation,  and  Other  Property  receivable  upon  or  as a  result  of  such
Reorganization  by a holder of the  number  of shares of Common  Stock for which
this Warrant is exercisable immediately prior to such event. In case of any such
Reorganization,  the  successor  or  acquiring  corporation  (if other  than the
Company) shall expressly assume the due and punctual  observance and performance
of each and every  covenant and  condition  of this Warrant to be performed  and
observed by the Company and all the obligations and liabilities


                                       14

<PAGE>



hereunder,  subject to such appropriate modifications as are satisfactory to the
Majority  Holders in order to provide  for  adjustments  of shares of the Common
Stock for which this Warrant is exercisable  which shall be as nearly equivalent
as practicable to the  adjustments  provided for in this Section 4. For purposes
of this Section 4.8 "common  stock of the  successor  or acquiring  corporation"
shall include stock of such  corporation  of any class which is not preferred as
to  dividends  or assets over any other class of stock of such  corporation  and
which is not  subject to  redemption  and shall also  include any  evidences  of
indebtedness,  shares of stock or other securities which are convertible into or
exchangeable  for any such stock,  either  immediately  or upon the arrival of a
specified  date or the happening of a specified  event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing  provisions of
this Section 4.8 shall similarly apply to successive Reorganizations.

         4.9 Other Action  Affecting  Common Stock.  In case at any time or from
time to time the Company  shall take any action in respect of its Common  Stock,
other than the payment of  dividends  permitted  by Section  4.2(a) or any other
action  described  in this  Section 4, then,  unless such action will not have a
materially  adverse effect upon the rights of the Holders,  the number of shares
of Common Stock or other stock for which this Warrant is exercisable  and/or the
purchase  price  thereof shall be adjusted in such manner as may be equitable in
the circumstances.

         4.10  Certain  Limitations.  Notwithstanding  anything  herein  to  the
contrary,  the Company agrees not to enter into any transaction which, by reason
of any adjustment  hereunder,  would cause the Current  Warrant Price to be less
than the par value per share of Common Stock.

         5. Notices to Warrant Holders.

         5.1  Notice of  Adjustments.  Whenever  the  number of shares of Common
Stock for which this  Warrant is  exercisable,  or whenever the price at which a
share of such Common Stock may be purchased upon exercise of this Warrant, shall
be  adjusted  pursuant  to  Section 4, the  Company  shall  forthwith  prepare a
certificate to be executed by the chief financial officer of the Company setting
forth, in reasonable  detail,  the event requiring the adjustment and the method
by which such adjustment was calculated (including a description of the basis on
which the Board of  Directors  of the Company  determined  the fair value of any
evidences of  indebtedness,  shares of stock,  other  securities  or property or
warrants or other  subscription or purchase rights referred to in Section 4.2 or
4.7(a)),  specifying the number of shares of Common Stock for which this Warrant
is exercisable  and (if such adjustment was made pursuant to Section 4.8 or 4.9)
describing  the number and kind of any other  shares of stock or Other  Property
for which this Warrant is  exercisable,  and any change in the purchase price or
prices thereof,  after giving effect to such  adjustment or change.  The Company
shall promptly cause a signed copy of such certificate to be delivered to Holder
in  accordance  with Section 13. The Company  shall keep at its chief  executive
office  copies of all such  certificates  and cause the same to be available for
inspection  at said  office  during  normal  business  hours  by  Holder  or any
prospective purchaser of a Warrant designated by Holder.


                                       15
<PAGE>

         5.2 Notice of Certain Corporate Action. Holder shall be entitled to the
same rights to receive notice of corporate action as any holder of Common Stock.

         6. No Impairment.

         The  Company  shall not by any action  including,  without  limitation,
amending  its  certificate  of  incorporation  or  through  any  reorganization,
transfer  of  assets,  consolidation,  merger,  dissolution,  issue  or  sale of
securities or any other voluntary action,  avoid or seek to avoid the observance
or  performance  of any of the terms of this  Warrant,  but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or  appropriate to protect the rights of Holder
against  impairment.  Without  limiting the  generality  of the  foregoing,  the
Company  will (a) not  increase  the par value of any  shares  of  Common  Stock
receivable  upon the exercise of this Warrant above the amount payable  therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be  necessary  or  appropriate  in order that the Company may
validly and legally issue fully paid and  nonassessable  shares of Common Stock,
free and clear of any liens,  claims,  encumbrances and restrictions (other than
as provided  herein)  upon the  exercise of this  Warrant,  and (c) use its best
efforts to obtain  all such  authorizations,  exemptions  or  consents  from any
public regulatory body having jurisdiction thereof as may be necessary to enable
the Company to perform its obligations under this Warrant.

         7. Fully Paid Stock;  Taxes. The shares of the Common Stock represented
by each and every  certificate  for Warrant Shares  delivered on the exercise of
this  Warrant  shall,  at the  time of such  delivery,  be  validly  issued  and
outstanding,  fully paid and non-assessable,  and not subject to any pre-emptive
rights. The Company shall pay all expenses in connection with, and all taxes and
other  governmental  charges  that may be imposed  with respect to, the issue or
delivery  thereof,  unless such tax or charge is imposed by law upon Holder,  in
which case such taxes or charges shall be paid by Holder.  The Company shall not
be required,  however, to pay any tax or other charge imposed in connection with
any transfer involved in the issue of any certificate for shares of Common Stock
issuable  upon  exercise of this  Warrant in any name other than that of Holder,
and in such case the Company shall not be required to issue or deliver any stock
certificate  until  such  tax or  other  charge  has  been  paid or it has  been
established to the  satisfaction of the Company that no such tax or other charge
is due.

         8. Transfer.

         8.1  Securities  Laws.  Neither  this  Warrant nor the  Warrant  Shares
issuable  upon the exercise  hereof have been  registered in reliance on Section
4(2) of the  Securities  Act or under any state  securities  laws and  unless so
registered may not be  transferred,  sold,  pledged,  hypothecated  or otherwise
disposed of unless an exemption  from  registration  pursuant to Rule 144 of the
Securities  Act is  available.  Except as provided in Section 8.6,  this Warrant
shall bear the following legend:


                                       16
<PAGE>


         NEITHER  THESE  WARRANTS NOR THE SHARES OF COMMON STOCK  ISSUABLE  UPON
EXERCISE OF THESE  WARRANTS HAVE BEEN  REGISTERED  WITH THE U.S.  SECURITIES AND
EXCHANGE  COMMISSION OR THE SECURITIES  COMMISSION OF ANY STATE IN RELIANCE UPON
AN  EXEMPTION  FROM  REGISTRATION  UNDER  REGULATION  D  PROMULGATED  UNDER  THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE WARRANTS AND THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE OF THESE WARRANTS ARE RESTRICTED AND MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE  REGISTRATION STATEMENT UNDER
THE ACT OR PURSUANT TO AN APPLICABLE EXEMPTION THEREFROM.

         8.2  Conditions  to Transfer.  In the event Holder  desires to transfer
this Warrant or any of the Warrant Shares issued (in the absence of registration
under the Securities Act), the Holder must give the Company prior written notice
of such  proposed  transfer  including  the name  and  address  of the  proposed
transferee.  Such transfer may be made only either (i) upon  publication  by the
Commission of a ruling, interpretation, opinion or "no action letter" based upon
facts  presented to said  Commission,  or (ii) upon receipt by the Company of an
opinion of Holder's  counsel  acceptable  to the Company,  in either case to the
effect  that the  proposed  transfer  will not  violate  the  provisions  of the
Securities Act, the Exchange Act, or the rules and regulations promulgated under
either  such  act  (collectively,  the  "Securities  Laws").  Prior  to any such
proposed  transfer,  and as a condition  thereto,  if such  transfer is not made
pursuant to an effective  registration  statement  under the Securities Act, the
Holder  will,  if  requested  by  the  Company,   deliver  to  the  Company  any
representation or agreement  reasonably  requested to determine  compliance with
the Securities Laws.

         8.3 Indemnity.  The Holder acknowledges that the Holder understands the
meaning and legal  consequences  of this  Section 8 and the Holder  hereby shall
indemnify and hold harmless the Company,  its  representatives and each officer,
director and control person thereof from and against any and all loss, damage or
liability  (including all  attorneys'  fees and costs incurred in enforcing this
indemnity provision) due to or arising out of (i) any transfer of the Warrant or
any of the Warrant Shares in violation of the Securities  Act, the Exchange Act,
or the rules and regulations  promulgated under either of such acts, or (ii) any
transfer of the Warrant or any of the Warrant Shares not in accordance with this
Warrant or any of the Warrant Shares not in accordance with this Warrant.

         8.4  Transfer.  Except as provided in this  Section 8, this Warrant and
the Warrant  Shares issued may be  transferred by the Holder in whole or in part
at any time or from time to time.  Upon surrender of this Warrant to the Company
or at the office of its stock transfer  agent,  if any, with the Assignment Form
annexed  hereto duly executed and funds  sufficient to pay any transfer tax, and
upon  compliance  with the  foregoing  provisions,  the Company  shall,  without
charge,  execute  and  deliver  a new  Warrant  or  Warrants  in the name of the
assignee or assignees named in such Assignment Form (and if the entire amount of
the  Warrant  is not being  transferred,  in the name of the  Holder),  and this
Warrant  shall  promptly  be  canceled.   Any  assignment,   transfer,   pledge,
hypothecation  or other  disposition of this Warrant  attempted  contrary to the
provisions of this


                                       17
<PAGE>

Warrant,  or any levy of execution,  attachment or other process  attempted upon
the Warrant, shall be null and void and without effect.

         8.5 Registration. The Holders of Warrants and Warrant Shares shall have
the  right to  request  registration  of such  Warrant  Shares  pursuant  to the
Registration Rights Agreement.

         8.6  Termination  of   Restrictions.   Notwithstanding   the  foregoing
provisions  of Section 8, the  restrictions  imposed  by this  Section  upon the
transferability  of the Warrants,  the War rant Shares and the Restricted Common
Stock (or Common  Stock  issuable  upon the  exercise of the  Warrants)  and the
legend  requirements of Section 8.1 shall terminate as to any particular Warrant
or Warrant Share or Restricted  Common Stock (or Common Stock  issuable upon the
exercise of the Warrants) (i) when and so long as such security  shall have been
effectively  registered  under  the  Securities  Act and  disposed  of  pursuant
thereto,  or (ii) when the Company shall have delivered to the Holder or Holders
of Warrants,  Warrant Shares or Restricted  Common Stock the written  opinion of
Independent  Counsel stating that such legend is not required in order to ensure
compliance with the Securities Act. Whenever the restrictions imposed by Section
8 shall  terminate  as to this War rant,  as  hereinabove  provided,  the Holder
hereof  shall be entitled  to receive  from the  Company,  at the expense of the
Company,  a new Warrant bearing the following legend in place of the restrictive
legend set forth hereon:

                  "THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT
         CONTAINED IN SECTION 8 HEREOF TERMINATED ON ____________, 19__, AND
         ARE OF NO FURTHER FORCE AND EFFECT."

All Warrants issued upon  registration of transfer,  division or combination of,
or in  substitution  for,  any Warrant or Warrants  entitled to bear such legend
shall have a similar legend endorsed thereon.  Whenever the restrictions imposed
by this Section shall  terminate as to any share of Restricted  Common Stock, as
hereinabove  provided,  the Holder thereof shall be entitled to receive from the
Company,  at the Company's expense,  a new certificate  representing such Common
Stock not bearing the restrictive legend set forth in Section 8.1.

         9. Loss, etc. of Warrant.  Upon receipt of evidence satisfactory to the
Company of the loss,  theft,  destruction or mutilation of this Warrant,  and of
indemnity  reasonably  satisfactory to the Company (it being understood that the
written indemnity agreement of AJG Financial Services,  Inc. shall be sufficient
indemnity), if lost, stolen or destroyed, and upon surrender and cancellation of
this Warrant, if mutilated,  the Company shall execute and deliver to the Holder
a new Warrant of like date, tenor, and denomination.

         10. Warrant Holder Not Shareholder.  Except as otherwise provided here,
this  Warrant does not confer upon the Holder any right to vote or to consent to
or receive  notice as a shareholder  of the Company,  as such, in respect of any
matters  whatsoever,  or any other rights or liabilities as a shareholder of the
Company, either at law or in equity, and the rights of the Holder are limited to
those expressed in this Warrant.


                                       18

<PAGE>



         11. Liquidated Damages. In the event the Company fails to comply in all
material respects with any provision of the Registration Rights Agreement,  upon
written  request of the Holder of this  Warrant or Warrant  Shares,  the Company
shall promptly obtain from an independent  investment banking firm acceptable to
such Holder an opinion  estimating the net proceeds which such Holder would have
received (after deducting  underwriting  commissions and discounts and any other
expenses  that  would  have been  solely  attributable  to the  registration  or
qualification  of such  shares  of  Warrant  Shares)  upon the sale of shares of
Warrant  Shares   proposed  to  be  sold  pursuant  to  such   registration   or
qualification.  Such opinion of the independent investment banking firm shall be
(a)  delivered  in writing to the Company,  with a copy to such  Holder,  within
thirty (30) days after the date of the request of such Holder to the Company and
(b) conclusive and binding on the Company and such Holder.

         Within 30 days of receipt by the Company of such estimate,  the Company
shall pay to such  Holder an amount  equal to (a) such  estimated  net  proceeds
minus (b) the  aggregate  Warrant  Price  paid or payable  with  respect to such
shares of Warrant Shares. Payment of such amount shall be made by, at the option
of such person,  (i) wire transfer to an account in a bank located in the United
States  designated  by such  Holder  for such  purpose  or (ii) a  certified  or
official bank check drawn on a member of the Chicago or New York Clearing  House
payable  to the  order of such  Holder.  Upon  payment  to such  Holder  of such
liquidated damages, such Holder shall assign to the Company this Warrant and the
Warrant Shares proposed to be sold pursuant to the registration or qualification
in question without any  representation or warranty (other than that such Holder
has  good and  marketable  title  thereto,  free and  clear  of  liens,  claims,
encumbrances  and  restrictions  of any kind). If less than all of the shares of
Common Stock issuable upon the exercise hereof were proposed to be sold pursuant
to the registration or qualification in question,  the Company shall cancel this
Warrant  and issue in the name of, and  deliver  to,  the  Holder,  pursuant  to
Section  2, a new  Warrant  for the  shares of Common  Stock  issuable  upon the
exercise  hereof not  required to be  assigned  to the  Company  pursuant to the
provisions  of the  preceding  sentence.  The Company  agrees that the amount of
actual damages that would be sustained by such Holder as a result of the failure
of the  Company  to  comply  with  any  provisions  of the  Registration  Rights
Agreement is not capable of ascertainment on any other basis.

         12.  Appraisal.  The  determination of the Appraised Value per share of
Common  Stock  shall  be  made  by an  investment  banking  firm  of  nationally
recognized  standing  selected by the  Majority  Holders and  acceptable  to the
Company.  If the investment banking firm selected by the Majority Holders is not
acceptable to the Company and the Company and the Majority  Holders cannot agree
on a mutually acceptable  investment banking firm, then the Majority Holders and
the  Company  shall  each  choose  one  such  investment  banking  firm  and the
respective  chosen  firms shall agree on another  investment  banking firm which
shall make the determination.  The Company shall, at its sole cost, pay all fees
of such  investment  banking firm as may be necessary for the  determination  of
Appraised Value required by the terms of this Warrant.

         13. Communication.  No notice or other communication under this Warrant
shall be  effective  unless the same is in  writing  and is either (i) mailed by
first-class mail, postage prepaid,


                                       19

<PAGE>



in which event the notice shall be deemed  effective three days after deposit in
the mails, or (ii) delivered by established  delivery  service which  guarantees
three business days or less delivery,  in which event the notice shall be deemed
effective  on the date of  guaranteed  delivery.  Regardless  of the  method  of
delivery, the notice or communication shall be addressed to:

                  (a)      the Company at 3280 North  Frontage Road,  Lehi, Utah
                           84043,  Attention:  Chief  Executive  Officer or such
                           other  address  as  the  Company  has  designated  in
                           writing to the Holder, or

                  (b)      the Holder at the  address  indicated  in the opening
                           paragraph hereof, or such other address as the Holder
                           has designated in writing to the Company.

         14.  Headings.  The headings of this  Warrant  have been  inserted as a
matter of convenience and shall not affect the construction hereof.

         15.  Applicable Law. This Warrant shall be governed by and construed in
accordance  with the law of the State of Delaware  without  giving effect to the
principles of conflicts of law thereof.

         16.  Warrant  Register.  The Company will  register this Warrant in the
Warrant  Register  in  the  name  of the  record  holder  to  whom  it has  been
distributed  or assigned in accordance  with the terms  hereof.  The Company may
deem and treat the  registered  Holder of this  Warrant  as the  absolute  owner
hereof  (notwithstanding  any notation of ownership or other writing hereon made
by anyone) for the purpose of any  exercise  hereof or any  distribution  to the
Holder and for all other purposes,  and the Company shall not be affected by any
notice to the contrary.

         17.  Successors.  All of the  provisions  of this Warrant by or for the
benefit  of the  Company or the  Holder  shall bind and inure to the  benefit of
their respective successors and assigns.

         IN WITNESS WHEREOF, Covol Technologies, Inc. has caused this Warrant to
be signed by its  President and its  corporate  seal to be hereunto  affixed and
attested by its Secretary this 9th day of January, 1998.


ATTEST:                                                COVOL TECHNOLOGIES, INC.


/Asael T. Sorensen, Jr./                               By: Stanley M. Kimball
- -------------------------                                 ---------------------
Secretary                                                     President




                                       20

<PAGE>



                                  EXERCISE FORM

                          To be executed by the Holder
                          in Order to Exercise Warrants


         The undersigned  Holder hereby  irrevocably elects to exercise Warrants
represented by this Warrant,  and to purchase the  securities  issuable upon the
exercise of such Warrants,  and requests that  certificates  for such securities
shall be issued in the Holder's name and be delivered to






                         [please print or type address]

and if such number of Warrants  shall not be all the Warrants  evidenced by this
Warrant,  that a new Warrant for the balance of such  Warrants be  registered in
the name of, and delivered to, the Holder at the address stated above.

         The undersigned  acknowledges  that, if this Exercise Form is submitted
prior to the Company having given notice that the issuance of the Warrant Shares
has been  registered  under the  Securities  Act, the Warrant  Shares  issued on
exercise will be "restricted  securities" and will bear appropriate  restrictive
legends.


Dated:
                               Signature of Holder






                              Signature Guaranteed





                                       21

<PAGE>


                                   ASSIGNMENT

                          To Be Executed by the Holder
                           in Order to Assign Warrants


         THE WARRANTS  REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER FEDERAL
OR STATE SECURITIES LAWS AND TRANSFER THEREOF HAS BEEN RESTRICTED.  ANY TRANSFER
OR  PURPORTED  TRANSFER  DESCRIBED  IN THIS  FORM  OF  ASSIGNMENT  SHALL  NOT BE
EFFECTIVE   UNTIL  AND  UNLESS  THE  PROPOSED   TRANSFEREE   COMPLIES  WITH  THE
RESTRICTIONS ON TRANSFER DESCRIBED IN THE WARRANT CERTIFICATE.

         FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto

Name:
                           [please print or type]

Address:



Social Security:
or Taxpayer
I.D. No.

the  undersigned's  right to purchase up to  ___________  Shares of Common Stock
represented by this Warrant,  and hereby  irrevocably  constitutes  and appoints
____________________________________  attorney to transfer the same on the books
of the Company, with full power of substitution in the premises.


Dated:
                              Signature Guaranteed



                                       22



                                    WARRANT B


Dated: January 9, 1998                                   Warrant No. WA-1997-246
                               **216,272** Shares


         NEITHER  THESE  WARRANTS NOR THE SHARES OF COMMON STOCK  ISSUABLE  UPON
EXERCISE OF THESE  WARRANTS HAVE BEEN  REGISTERED  WITH THE U.S.  SECURITIES AND
EXCHANGE  COMMISSION OR THE SECURITIES  COMMISSION OF ANY STATE IN RELIANCE UPON
AN  EXEMPTION  FROM  REGISTRATION  UNDER  REGULATION  D  PROMULGATED  UNDER  THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE WARRANTS AND THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE OF THESE WARRANTS ARE RESTRICTED AND MAY NOT
BE OFFERED OR SOLD EXCEPT  PURSUANT TO  REGULATION D UNDER THE ACT, AN EFFECTIVE
REGISTRATION  STATEMENT  UNDER THE ACT OR  PURSUANT TO AN  APPLICABLE  EXEMPTION
THEREFROM.

            These  Warrants  shall  cease to be  exercisable  and  shall be void
                   after January 10, 2000, at 5:00 p.m.,
                           Salt Lake City, Utah time.


                         COMMON STOCK PURCHASE WARRANTS
                                       OF
                            COVOL TECHNOLOGIES, INC.


         FOR  VALUE  RECEIVED,  Covol  Technologies,  Inc.  (the  "Company"),  a
Delaware corporation, hereby certifies that AJG Financial Services, Inc., or its
permitted  assigns,  is entitled to purchase  from the  Company,  subject to the
conditions and upon the terms of this Warrant,  at any time or from time to time
after the date  hereof  and prior to 5:00 p.m.  Salt Lake City,  Utah  time,  on
January 10, 2000, an aggregate of 216,272 fully paid and nonassessable shares of
Common Stock, par value $.001, of the Company (subject to adjustment as provided
herein),  at a per  share  exercise  price  of  $20.00  per  share  (subject  to
adjustment as provided herein). This Warrant is issued pursuant to the terms set
forth in a letter  agreement  dated  October 22, 1997, by and between the Holder
(as defined below) and the Company (the "Letter Agreement").

         1.       Definitions.

         As used in this  Warrant,  the  following  terms  have  the  respective
meanings set forth below:

         "Additional  Shares of Common  Stock"  shall  mean all shares of Common
Stock issued by the Company after the Closing Date, other than Warrant Shares.

                                        1

<PAGE>



         "Affiliate"  of  any  Person  shall  mean a  Person  that  directly  or
indirectly, through one or more intermediaries,  controls or is controlled by or
is under common control with, such Person.

         "Appraised  Value" shall mean,  in respect of any share of Common Stock
on any date  herein  specified,  the fair  market  value of such share of Common
Stock  (determined  without  giving  effect to the  discount  for (i) a minority
interest,  or (ii) any lack of liquidity of the Common Stock or to the fact that
the Company may have no class of equity registered under the Exchange Act, based
on the quotient obtained by dividing (x) the value of the Company, as determined
by an investment  banking firm selected in accordance  with the terms of Section
12, by (y) the number of Fully Diluted Outstanding shares of Common Stock.

         "Book Value" shall mean, in respect of any share of Common Stock on any
date  herein  specified,  the  consolidated  book  value  of the  Company  (with
inventory valued on a first-in-first-out basis) applicable to Common Stock as of
the last day of any month immediately preceding such date, divided by the number
of Fully Diluted  Outstanding shares of Common Stock as determined in accordance
with  GAAP by Price  Waterhouse  Coopers  LLP or any other  firm of  independent
certified public  accountants of recognized  national  standing  selected by the
Company and  reasonably  acceptable to the Majority  Holders,  determined in any
event  without any  adjustment  or reduction  for the amount,  if any, that may,
under  modifications  to GAAP adopted after the Closing Date, be required either
as an offset to or  reserve  against  earnings  or  retained  earnings,  or as a
deduction  from book  value or net  worth,  in  either  event as a result of the
exercise,  issuance,  anticipated exercise or anticipated cost to the Company of
any stock option, right or convertible security or any provision of the Warrants
or any other warrant issued by the Company.

         "Business Day" shall mean any day that is not a Saturday or Sunday or a
day on which banks are  required or  permitted to be closed in the State of Utah
or the State of Illinois.

         "Closing Date" shall mean January 9, 1998.

         "Commission"  shall mean the Securities and Exchange  Commission or any
other federal  agency then  administering  the  Securities Act and other federal
securities laws.

         "Common   Stock"  shall  mean  (except  where  the  context   otherwise
indicates) the Common Stock,  $0.001 par value, of the Company as constituted on
the  Closing  Date,  and any  capital  stock into which  such  Common  Stock may
thereafter  be changed,  and shall also include (i) capital stock of the Company
of any other  class  (regardless  of how  denominated)  issued to the holders of
shares of  Common  Stock  upon any  reclassification  thereof  which is also not
preferred as to dividends or assets over any other class of stock of the Company
and which is not subject to  redemption  and (ii) shares of common  stock of any
successor or acquiring  corporation  (as defined in Section 4.8)  received by or
distributed  to the holders of Common Stock of the Company in the  circumstances
contemplated by Section 4.8.


                                        2

<PAGE>



         "Convertible  Securities" shall mean evidences of indebtedness,  shares
of stock or other securities which are convertible into or exchangeable, with or
without payment of additional  consideration in cash or property, for Additional
Shares of Common Stock, either immediately or upon the occurrence of a specified
date or a specified event.

         "Current  Market  Price" shall mean,  in respect of any share of Common
Stock on any date herein specified,  the highest of (a) the Book Value per share
of Common Stock at such date, (b) the Appraised  Value per share of Common Stock
as of a date which is within 120 days of such date,  (c) the fair  market  value
thereof as  determined in good faith by the Board of Directors of the Company as
of a date which is within 15 days of such date,  or (d) if there shall then be a
public market for the Common  Stock,  the average of the daily market prices for
the 30  consecutive  Business Days  immediately  preceding  such date. The daily
market price for each such Business Day shall be (i) the last sale price on such
day on the principal stock exchange on which such Common Stock is then listed or
admitted  to  trading,  (ii) if no sale  takes  place  on such  day on any  such
exchange,  the  last  reported  sale  price  as  officially  quoted  on any such
exchange, (iii) if the Common Stock is not then listed or admitted to trading on
any  stock  exchange,  the last sale  price on such day in the  over-the-counter
market, as reported by the National  Association of Securities Dealers Automatic
Quotation  System  ("NASDAQ"),  or if such sale price is not  available  on such
date,  the average of the closing bid and asked  prices on such date as reported
by NASDAQ,  or if not so reported,  then as reported by the  National  Quotation
Bureau,  Inc.,  (iv) if neither such firm at the time is engaged in the business
of reporting such prices,  as furnished by any similar firm then engaged in such
business,  or (v) if there is no such firm,  as  furnished  by any member of the
NASD  selected  mutually  by the  Majority  Holders  and the Company or, if they
cannot agree upon such  selection,  as selected by two such members of the NASD,
one of which shall be selected by the Majority Holders and one of which shall be
selected by the Company.

         "Current  Warrant  Price"  shall mean,  in respect of a share of Common
Stock at any date herein  specified,  the price at which a share of Common Stock
may be purchased pursuant to this Warrant on such date. On the Closing Date, the
Current Warrant Price is $10.00 per share of Common Stock.

         "Debenture  Agreement" shall mean the Debenture  Agreement and Security
Agreement,  dated as of January 9, 1998,  between the Company and AJG  Financial
Services, Inc.

         "Default Rate" means eight percent (8%).

         "Exchange  Act"  shall mean the  Securities  Exchange  Act of 1934,  as
amended,  or any similar federal  statute,  and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.

         "Exercise  Period"  shall mean the period  during which this Warrant is
exercisable pursuant to Section 2.


                                        3

<PAGE>



         "Fully  Diluted  Outstanding"  shall mean,  when used with reference to
Common  Stock,  at any date as of which the  number of shares  thereof  is to be
determined,  all shares of Common Stock  Outstanding at such date and all shares
of Common Stock issuable in respect of this Warrant outstanding on such date and
other options or warrants to purchase, or securities convertible into, shares of
common  stock  outstanding  on such date which  would be deemed  outstanding  in
accordance  with GAAP for purposes of  determining  book value or net income per
share.

         "GAAP"  shall mean  generally  accepted  accounting  principles  in the
United States of America as from time to time in effect.

         "Holder" shall mean, as the context requires,  the Person in whose name
this  Warrant or one of the other  Warrants  is  registered  on the books of the
Company  maintained for such purpose or the Person  holding any Warrant  Shares,
and "Holders" shall mean two or more such Persons.

         "Independent Counsel" shall mean counsel to the Company, unless counsel
to Holder  disagrees  in writing with the opinion or advice of such counsel with
respect to the issue in question  within fifteen (15) days after receipt of such
opinion or advice,  in which case the Company and Holder  shall  select  another
counsel, not the regular counsel of either, who is experienced in Securities Act
matters, who shall render an opinion with respect to the issue in question.  The
legal fees and expenses of such other counsel  incurred in  connection  with the
rendering of such opinion shall be borne equally by Holder and the Company.

         "Letter  Agreement"  shall  have the  meaning  set  forth in the  first
paragraph of this Warrant.

         "Majority  Holders" shall mean the Holders of Warrants  exercisable for
in  excess of 50% of the  aggregate  number  of  shares  of  Common  Stock  then
purchasable upon exercise of all Warrants, whether or not then exercisable.

         "NASD" shall mean the National Association of Securities Dealers, Inc.,
or any successor corporation thereto.

         "Other Property" shall have the meaning set forth in Section 4.8.

         "Outstanding"  shall mean, when used with reference to Common Stock, at
any date as of which the  number  of shares  thereof  is to be  determined,  all
issued  shares of Common  Stock,  except shares then owned or held by or for the
account of the Company or any Subsidiary,  and shall include all shares issuable
in respect of  outstanding  scrip or any  certificates  representing  fractional
interests in shares of Common Stock.

         "Permitted  Issuances"  shall mean [(i) the  issuance  of up to 800,000
shares of Common Stock pursuant to certain  outstanding  warrants of the Company
which are "out of the money" as of the Closing Date,  (ii) the issuance of up to
1,500,000  shares of Common  Stock  pursuant  to  certain  outstanding  options,
warrants or other securities of the Company convertible into Common Stock


                                        4

<PAGE>



which are "in the  money" as of the  Closing  Date,  (iii)  the  issuance  of or
granting of rights to acquire up to 790,000 shares of Common Stock to PacifiCorp
Financial  Services,  inc.  or any of its  affiliates  ('PacifiCorp"),  or their
respective  assigns,  pursuant to the Convertible  Loan and Security  Agreement,
dated,  between the Company and PacifiCorp,  (iv) the issuance of or granting of
rights to acquire up to 515,000 shares of Common Stock to be sold by the Company
pursuant to a private Placement  Memorandum,  (v) the issuance of or granting of
rights to acquire up to 100,000 shares of Common Stock to LKD Partnership or its
assigns  pursuant  to  a  Convertible  Debenture  in  the  principal  amount  of
approximately  $1,000,000  issued in  November,  1996,  (vi) the  issuance of or
granting  of rights  to  acquire  up to  2,000,000  shares  of  Common  Stock to
officers, directors,  consultants or employees of the Company, which rights vest
over the next 8 to 9 years,  (vii)  the  issuance  of or  granting  of rights to
acquire up to 400,000  additional shares of Common Stock to any third parties in
transactions  other than those referred to in the preceding  clauses (i) through
(vi)],  and (viii) the issuance of shares of Common  Stock upon  exercise of the
Warrants.

         "Person" shall mean any individual,  sole proprietorship,  partnership,
joint  venture,  trust,  incorporated  organization,  association,  corporation,
institution,  public benefit corporation, entity or government (whether federal,
state, county, city, municipal or otherwise,  including, without limitation, any
instrumentality, division, agency, body or department thereof).

         "Registration  Rights  Agreement"  shall mean the  Registration  Rights
Agreement,  dated as of January 9, 1998,  between the Company and AJG  Financial
Services, Inc.

         "Restricted  Common Stock" shall mean shares of Common Stock which are,
or which upon their issuance on the exercise of this Warrant would be, evidenced
by a certificate bearing the restrictive legend set forth in Section 8.1.

         "Securities Act" shall mean the Securities Act of 1933, as amended,  or
any similar  federal  statute,  and the rules and  regulations of the Commission
thereunder, all as the same shall be in effect at the time.

         "Subsidiary"  shall mean any  corporation of which an aggregate of more
than  50% of the  outstanding  stock  having  ordinary  voting  power to elect a
majority of the board of directors of such corporation (irrespective of whether,
at the time, stock of any other class or classes of such corporation  shall have
or might have voting power by reason of the happening of any  contingency) is at
the time,  directly or indirectly,  owned legally or beneficially by the Company
and/or one or more Subsidiaries of the Company.

         "Termination Date" shall have the meaning set forth in Section 2.

         "Transfer"  shall mean any disposition of any Warrant or Warrant Shares
or of any  interest in either  thereof,  which would  constitute  a sale thereof
within the meaning of the Securities Act.


                                        5

<PAGE>



         "Warrant  Price" shall mean an amount equal to (i) the number of shares
of Common  Stock  being  purchased  upon  exercise of this  Warrant  pursuant to
Section 2,  multiplied by (ii) the Current  Warrant Price as of the date of such
exercise.

         "Warrant  Shares"  shall mean the shares of Common  Stock  purchased by
Holders of the Warrants upon the exercise thereof.

         "Warrants"  shall mean the two Warrants (one  designated  Warrant A and
the other  designated  Warrant  B),  each dated  January 9, 1998,  issued by the
Company to AJG Financial Services,  Inc. evidencing rights to purchase initially
up to an aggregate of 432,544  shares of Common Stock,  and all warrants  issued
upon transfer,  division or combination  of, or in substitution or exchange for,
any thereof.

         2. Exercise of Warrant. This Warrant may be exercised,  in whole at any
time or in part from time to time  during the  period  (the  "Exercise  Period")
commending on the date hereof, and ending on January 10, 2000, at 5:00 p.m. Salt
Lake City, Utah time (the "Termination  Date"), by the Holder of this Warrant by
the  surrender  of this Warrant  (with the exercise  form at the end hereof duly
executed) at the address set forth in Section 13 hereof,  together  with payment
of the  Warrant  Price.  Payment  of the  Warrant  Price  shall be made first by
offset, in whole or in part, against any obligation of the Company to the Holder
pursuant to the Debenture issued pursuant to the Debenture  Agreement,  and then
any  balance by wire  transfer  to an  account  in a bank  located in the United
States  designated  for such  purpose by the Company or by certified or official
bank check.  The Warrant shall expire,  and exercise shall no longer be allowed,
to the  extent the  Warrant  has not been  exercised  by the  expiration  of the
Exercise Period.

         If this Warrant is  exercised  in part,  this Warrant must be exercised
for a minimum of 1,000 shares of Common Stock and if the Exercise Period has not
expired the Holder is entitled to receive a new Warrant  covering  the number of
Warrant  Shares in respect  of which this  Warrant  has not been  exercised  and
setting forth the  proportionate  part of the Warrant  Price  applicable to such
Warrant Shares. Upon such surrender of this Warrant,  the Company will (a) issue
a warrant or warrants in the name of the Holder for the largest  number of whole
shares of Common  Stock to which  the  Holder  shall be  entitled  and,  if this
Warrant is exercised  in whole,  in lieu of any  fractional  share of the Common
Stock to which the  Holder  shall be  entitled,  cash equal to the fair value of
such  fractional  share  (determined in such  reasonable  manner as the Board of
Directors of the Company  shall  determine),  and (b) deliver the  proportionate
part thereof if this Warrant is exercised in part, pursuant to the provisions of
this Warrant. The Warrant shall expire, and exercise shall no longer be allowed,
to the  extent the  Warrant  has not been  exercised  by the  expiration  of the
Exercise Period.

         3. Reservation of Warrant Shares.  The Company will at all times during
the Exercise  Period have  authorized  and  reserved,  and will keep  available,
solely for issuance or delivery upon the exercise of this  Warrant,  the Warrant
Shares. All shares of Common Stock which shall be so issuable,  when issued upon
exercise of any Warrant and  payment  therefor in  accordance  with the terms of
such Warrant, shall be duly and validly issued, fully paid and nonassessable and
free and


                                        6

<PAGE>



clear of any liens,  claims and restrictions (other than as provided herein). No
stockholder of the Company has or shall have any preemptive  rights to subscribe
for such shares of Common Stock.

         Before taking any action which would cause an  adjustment  reducing the
Current  Warrant Price below the then par value, if any, of the shares of Common
Stock  issuable  upon  exercise  of the  Warrants,  the  Company  shall take any
corporate  action  which may be  necessary in order that the Company may validly
and legally  issue fully paid and  nonassessable  shares of such Common Stock at
such adjusted Current Warrant Price.

         Before  taking any action  which would result in an  adjustment  in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Current  Warrant  Price,  the Company  shall obtain all such  authorizations  or
exemptions  thereof,  or consents  thereto,  as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.

         If any shares of Common Stock required to be reserved for issuance upon
exercise of Warrants require registration or qualification with any governmental
authority  under any federal or state law (otherwise than as provided in Section
8) before  such shares may be so issued,  the Company  will in good faith and as
expeditiously as possible and at its expense endeavor to cause such shares to be
duly registered.

         4. Adjustments.

         The  number  of  shares of Common  Stock  for  which  this  Warrant  is
exercisable, or the price at which such shares may be purchased upon exercise of
this Warrant,  shall be subject to adjustment  from time to time as set forth in
this  Section 4. The  Company  shall give Holder  notice of any event  described
below which  requires an  adjustment  pursuant to this  Section 4 at the time of
such event.

         4.1 Stock Dividends,  Subdivisions and Combinations. If at any time the
Company shall:

                  (a)      take a record of the holders of its Common  Stock for
                           the purpose of  entitling  them to receive a dividend
                           payable  in,  or other  distribution  of,  Additional
                           Shares of Common Stock,

                  (b)      subdivide its outstanding shares of Common Stock into
                           a larger number of shares of Common Stock, or

                  (c)      combine its outstanding shares of Common Stock into a
                           smaller number of shares of Common Stock,

then (i) the  number  of  shares of Common  Stock  for  which  this  Warrant  is
exercisable immediately after the occurrence of any such event shall be adjusted
to equal the number of shares of Common Stock which a record  holder of the same
number of shares of Common Stock for which this Warrant


                                        7
<PAGE>

is exercisable immediately prior to the occurrence of such event would own or be
entitled to receive  after the  happening  of such  event,  and (ii) the Current
Warrant  Price  shall  be  adjusted  to  equal  (a) the  Current  Warrant  Price
multiplied  by the number of shares of Common  Stock for which  this  Warrant is
exercisable  immediately  prior to the  adjustment  divided by (b) the number of
shares for which this Warrant is exercisable immediately after such adjustment.

         4.2 Certain Other Distributions.  If at any time the Company shall take
a record of the holders of its Common Stock for the purpose of entitling them to
receive any dividend or other distribution of:

                  (a)      cash;

                  (b)      any evidences of its indebtedness,  any shares of its
                           stock or any  other  securities  or  property  of any
                           nature  whatsoever  (other  than  cash,   Convertible
                           Securities or Additional Shares of Common Stock); or

                  (c)      any  warrants  or other  rights to  subscribe  for or
                           purchase  any  evidences  of  its  indebtedness,  any
                           shares  of its  stock  or  any  other  securities  or
                           property of any nature  whatsoever  (other than cash,
                           Convertible Securities or Additional Shares of Common
                           Stock);

then (i) the  number  of  shares of Common  Stock  for  which  this  Warrant  is
exercisable  shall be adjusted to equal the product  obtained by multiplying the
number of  shares  of  Common  Stock  for  which  this  Warrant  is  exercisable
immediately  prior to such  adjustment  by a fraction (a) the numerator of which
shall be the  Current  Market  Price per  share of  Common  Stock at the date of
taking such record and (b) the denominator of which shall be such Current Market
Price per share of Common  Stock,  minus the  amount  allocable  to one share of
Common  Stock of (x) any such cash so  distributable  and (y) the fair value (as
determined  in good faith by the Board of Directors of the Company and supported
by an opinion from an investment  banking firm of recognized  national  standing
acceptable  to  the  Majority   Holders)  of  any  and  all  such  evidences  of
indebtedness, shares of stock, other securities or property or warrants or other
subscription or purchase rights so  distributable,  and (ii) the Current Warrant
Price shall be adjusted to equal (a) the Current Warrant Price multiplied by the
number of  shares  of  Common  Stock  for  which  this  Warrant  is  exercisable
immediately  prior to the  adjustment  divided  by (b) the  number of shares for
which  this  Warrant  is  exercisable  immediately  after  such  adjustment.   A
reclassification  of the Common Stock (other than a change in par value, or from
par  value to no par  value or from no par value to par  value)  into  shares of
Common  Stock  and  shares  of any  other  class  of  stock  shall  be  deemed a
distribution by the Company to the holders of its Common Stock of such shares of
such other  class of stock  within the  meaning of this  Section 4.2 and, if the
outstanding  shares of Common  Stock  shall be changed  into a larger or smaller
number of shares of Common Stock as a part of such reclassification, such change
shall be  deemed  a  subdivision  or  combination,  as the  case may be,  of the
outstanding shares of Common Stock within the meaning of Section 4.1.


                                        8

<PAGE>



         4.3      Issuance of Additional Shares of Common Stock.

                  (a)      If  at  any   time  the  Company   shall  (except  as
                           hereinafter  provided in Sections  4.4 and 4.5) issue
                           or sell any Additional Shares of Common Stock,  other
                           than Permitted  Issuances,  for  consideration  in an
                           amount per Additional Share of Common Stock less than
                           the  greater  of the  Current  Warrant  Price  or the
                           Current Market Price,  then: (i) the number of shares
                           of Common Stock for which this Warrant is exercisable
                           shall be adjusted  to equal the  product  obtained by
                           multiplying  the number of shares of Common Stock for
                           which this Warrant is exercisable  immediately  prior
                           to such issue or sale by a fraction (W) the numerator
                           of which is the  number of  shares  of  Common  Stock
                           Outstanding immediately after the issuance or sale of
                           such Additional  Shares of Common Stock,  and (X) the
                           denominator  of which is  number  of shares of Common
                           Stock Outstanding  immediately prior to such issuance
                           or sale; and (ii) the Current  Warrant Price shall be
                           adjusted to a price  determined  by  dividing  (a) an
                           amount  equal to the sum of (X) the  number of shares
                           of Common Stock Outstanding immediately prior to such
                           issuance  or sale  multiplied  by the  then  existing
                           Current Warrant Price, plus (Y) the consideration, if
                           any,  received by the Company  upon such  issuance or
                           sale,  by (b) the  total  number  of shares of Common
                           Stock Outstanding  immediately after such issuance or
                           sale.

                  (b)      If  at  any  time   the  Company  shall   (except  as
                           hereinafter  provided in Sections  4.4 and 4.5) issue
                           or sell any Additional Shares of Common Stock,  other
                           than Permitted  Issuances,  for  consideration  in an
                           amount per Additional  Share of Common Stock equal to
                           or greater  than the greater of the  Current  Warrant
                           Price or the Current Market Price, then the number of
                           shares for which this  Warrant is  exercisable  shall
                           not change,  but the Company  shall issue to Holder a
                           new Warrant for the number of shares of Common  Stock
                           equal to (i) the product  obtained by multiplying the
                           number  of shares  of  Common  Stock  for which  this
                           Warrant  is  exercisable  immediately  prior  to such
                           issuance or sale by a fraction  (W) the  numerator of
                           which  is  the  number  of  shares  of  Common  Stock
                           Outstanding immediately after the issuance or sale of
                           such Additional  Shares of Common Stock,  and (X) the
                           denominator  of  which is the  number  of  shares  of
                           Common Stock  Outstanding  immediately  prior to such
                           issuance or sale,  less (ii) the number of shares for
                           which this Warrant is exercisable  immediately  prior
                           to such issuance or sale.  The new Warrant shall have
                           the same terms and  provisions as this Warrant except
                           with  respect to the number of shares for which it is
                           exercisable and except that the Current Warrant Price
                           (as  defined  in the new  Warrant)  for each share of
                           Common   Stock  for  which   such  new   Warrant   is
                           exercisable  shall be equal to the fair  value of the
                           consideration per Additional Share of Common Stock.


                                        9

<PAGE>



                  (c)      The provisions of this Section 4.3 shall not apply to
                           any issuance of Additional Shares of Common Stock for
                           which an adjustment is provided  under Section 4.1 or
                           4.2. No  adjustment  shall be made under this Section
                           4.3 upon the  issuance  of any  Additional  Shares of
                           Common  Stock  which  are  issued   pursuant  to  the
                           exercise  of any  warrants or other  subscription  or
                           purchase  rights or pursuant  to the  exercise of any
                           conversion  or  exchange  rights  in any  Convertible
                           Securities,  if any such adjustment  shall previously
                           have been made upon the issuance of such  warrants or
                           other rights or upon the issuance of such Convertible
                           Securities  (or upon the  issuance  of any warrant or
                           other  rights  therefor)  pursuant  to Section 4.4 or
                           Section 4.5.

         4.4  Issuance of Warrants or Other  Rights.  If at any time the Company
shall  take a record of the  holders  of its  Common  Stock for the  purpose  of
entitling  them to receive a  distribution  of, or shall in any manner  (whether
directly  or by  assumption  in a merger in which the  Company is the  surviving
corporation)  issue or sell,  any  warrants  (other than the  Warrants) or other
rights to subscribe for or purchase any Additional Shares of Common Stock or any
Convertible  Securities,  whether  or not the  rights  to  exchange  or  convert
thereunder are immediately exercisable, and the price per share for which Common
Stock is issuable  upon the  exercise of such  warrants or other  rights or upon
conversion  or exchange of such  Convertible  Securities  shall be less than the
greater of the  Current  Warrant  Price or the  Current  Market  Price in effect
immediately  prior to the  time of such  distribution,  issue or sale,  then the
number of shares of Common Stock for which this Warrant is  exercisable  and the
Current  Warrant  Price shall be  adjusted as provided in Section  4.3(a) on the
basis that (i) the maximum number of Additional  Shares of Common Stock issuable
pursuant  to all such  warrants  or other  rights or  necessary  to  effect  the
conversion  or exchange of all such  Convertible  Securities  shall be deemed to
have been issued and  outstanding,  (ii) the price per share for such Additional
Shares of Common Stock shall be deemed to be the lowest price per share at which
such Additional Shares of Common Stock are available to such holders,  and (iii)
the Company shall have received all of the  consideration,  if any,  payable for
such warrants or other rights as of the date of the actual issuance thereof.  No
further  adjustments  of the  number of shares  of Common  Stock for which  this
Warrant is  exercisable  or of the Current  Warrant Price shall be made upon the
actual  issue  of such  Common  Stock  or of such  Convertible  Securities  upon
exercise  of such  warrants  or other  rights or upon the  actual  issue of such
Common Stock upon such conversion or exchange of such Convertible Securities.

         4.5  Issuance  of  Convertible  Securities.  If at any time the Company
shall  take a record of the  holders  of its  Common  Stock for the  purpose  of
entitling  them to receive a  distribution  of, or shall in any manner  (whether
directly  or by  assumption  in a merger in which the  Company is the  surviving
corporation)  issue or sell,  any  Convertible  Securities,  whether  or not the
rights to exchange or convert  thereunder are immediately  exercisable,  and the
price per share for which  Common  Stock is  issuable  upon such  conversion  or
exchange  shall be less than the  greater of the  Current  Warrant  Price or the
Current  Market Price in effect  immediately  prior to the time of such issue or
sale,  then the  number  of shares of Common  Stock for which  this  Warrant  is
exercisable  and the  Current  Warrant  Price  shall be  adjusted as provided in
Section 4.3(a) on the basis that (i) the maximum

                                       10

<PAGE>



number of  Additional  Shares of Common Stock  issuable  upon the  conversion or
exchange of all such Convertible  Securities shall be deemed to have been issued
and  outstanding,  (ii) the price per share of such Additional  Shares of Common
Stock shall be deemed to be the lowest  possible price in any range of prices at
which such Additional Shares of Common Stock are available to such holders,  and
(iii) the Company shall have received all of the consideration payable therefor,
if any, as of the date of actual  issuance of such  Convertible  Securities.  No
further  adjustment  of the  number of shares  of  Common  Stock for which  this
Warrant is exercisable or of the Current  Warrant Price shall be made under this
Section 4.5 upon the  issuance of any  Convertible  Securities  which are issued
pursuant to the  exercise  of any  warrants  or other  subscription  or purchase
rights therefor, if any such adjustment shall previously have been made upon the
issuance of such  warrants or other  rights  pursuant to Section 4.4. No further
adjustments  of the number of shares of Common  Stock for which this  Warrant is
exercisable or of the Current  Warrant Price shall be made upon the actual issue
of such Common Stock upon conversion or exchange of such Convertible  Securities
and, if any issue or sale of such  Convertible  Securities is made upon exercise
of any warrant or other right to subscribe  for or to purchase or any warrant or
other right to purchase any such  Convertible  Securities for which  adjustments
thereof have been or are to be made pursuant to other provisions of this Section
4, no further adjustments shall be made by reason of such issue or sale.

         4.6 Superseding Adjustment. If, at any time after any adjustment of the
number of shares of Common  Stock for which this  Warrant is  exercisable  shall
have been made  pursuant  to  Section  4.4 or  Section  4.5 as the result of any
issuance of warrants, rights or Convertible Securities, and either

                  (a)      such  warrants or rights,  or the right of conversion
                           or  exchange  in such other  Convertible  Securities,
                           shall  expire,  and all or a portion of such warrants
                           or rights,  or the right of  conversion  or  exchange
                           with  respect  to  all or a  portion  of  such  other
                           Convertible Securities, as the case may be, shall not
                           have been exercised, or

                  (b)      the  consideration  per  share  for  which  shares of
                           Common Stock are issuable  pursuant to such  warrants
                           or  rights,  or the terms of such  other  Convertible
                           Securities,  shall be  increased  solely by virtue of
                           provisions   therein   contained   for  an  automatic
                           increase  in such  consideration  per share  upon the
                           occurrence of a specified date or event,

then such previous adjustment shall be rescinded and annulled and the Additional
Shares of Common  Stock  which were  deemed to have been issued by virtue of the
computation  made in  connection  with the  adjustment so rescinded and annulled
shall no longer be  deemed  to have been  issued by virtue of such  computation.
Thereupon, a recomputation shall be made of the effect of such rights or options
or other Convertible Securities on the then outstanding Warrants, but not on any
then outstanding Warrant Shares, on the basis of


                                       11

<PAGE>



                  (c)      treating  the number of  Additional  Shares of Common
                           Stock or other property, if any, theretofore actually
                           issued or issuable  pursuant to the previous exercise
                           of any such  warrants  or rights or any such right of
                           conversion or exchange,  as having been issued on the
                           date  or  dates  of any  such  exercise  and  for the
                           consideration   actually   received  and   receivable
                           therefor, and

                  (d)      treating  any such  warrants  or  rights  or any such
                           other   Convertible   Securities  which  then  remain
                           outstanding   as  having   been   granted  or  issued
                           immediately  after the time of such  increase  of the
                           consideration  per share  for which  shares of Common
                           Stock or  other  property  are  issuable  under  such
                           warrants or rights or other Convertible Securities.

         4.7 Other Provisions  Applicable to Adjustments under this Section. The
following  provisions shall be applicable to the making of adjustments  provided
for in this Section 4:

                  (a)      Computation of Consideration.  To the extent that any
                           Additional  Shares of Common Stock or any Convertible
                           Securities   or  any  warrants  or  other  rights  to
                           subscribe  for or purchase any  Additional  Shares of
                           Common Stock or any Convertible  Securities  shall be
                           issued  for  cash  consideration,  the  consideration
                           received by the Company  therefor shall be the amount
                           of the cash received by the Company therefor,  or, if
                           such Additional Shares of Common Stock or Convertible
                           Securities   are   offered   by   the   Company   for
                           subscription,  the  subscription  price,  or, if such
                           Additional  Shares  of  Common  Stock or  Convertible
                           Securities  are sold to  underwriters  or dealers for
                           public offering without a subscription  offering, the
                           initial  public  offering  price  (in any  such  case
                           subtracting   any  amounts  paid  or  receivable  for
                           accrued  interest  or  accrued  dividends,   but  not
                           subtracting any  compensation,  discounts or expenses
                           paid  or  incurred  by  the  Company  for  and in the
                           underwriting of, or otherwise in connection with, the
                           issuance  thereof).  To the extent that such issuance
                           shall be for a consideration  other than cash,  then,
                           except as herein otherwise  expressly  provided,  the
                           amount  of such  consideration  shall be deemed to be
                           the fair value of such  consideration  at the time of
                           such  issuance  as  determined  in good  faith by the
                           Board  of  Directors  of the  Company.  In  case  any
                           Additional  Shares of Common Stock or any Convertible
                           Securities   or  any  warrants  or  other  rights  to
                           subscribe for or purchase such  Additional  Shares of
                           Common  Stock  or  Convertible  Securities  shall  be
                           issued  in  connection  with any  merger in which the
                           Company   issues  any   securities,   the  amount  of
                           consideration therefor shall be deemed to be the fair
                           value,  as  determined  in good faith by the Board of
                           Directors  of the  Company,  of such  portion  of the
                           assets and business of the  nonsurviving  corporation
                           as such Board in good  faith  shall  determine  to be
                           attributable  to such  Additional  Shares  of  Common
                           Stock,  Convertible  Securities,  warrants  or  other
                           rights, as the case may be. The consideration for any
                           Additional Shares of Common


                                       12

<PAGE>



                           Stock  issuable  pursuant  to any  warrants  or other
                           rights to subscribe for or purchase the same shall be
                           the consideration received by the Company for issuing
                           such  warrants or other  rights  plus the  additional
                           consideration payable to the Company upon exercise of
                           such warrants or other rights.  The consideration for
                           any  Additional   Shares  of  Common  Stock  issuable
                           pursuant to the terms of any  Convertible  Securities
                           shall be the  consideration,  if any, received by the
                           Company  for  issuing  warrants  or other  rights  to
                           subscribe   for   or   purchase   such    Convertible
                           Securities, plus the consideration paid or payable to
                           the  Company in respect  of the  subscription  for or
                           purchase  of such  Convertible  Securities,  plus the
                           additional  consideration,  if  any,  payable  to the
                           Company upon the exercise of the right of  conversion
                           or exchange in such Convertible  Securities.  In case
                           of the issuance at any time of any Additional  Shares
                           of Common Stock or Convertible  Securities in payment
                           or  satisfaction  of any dividends  upon any class of
                           stock other than Common  Stock,  the Company shall be
                           deemed to have received for such Additional Shares of
                           Common    Stock   or    Convertible    Securities   a
                           consideration equal to the amount of such dividend so
                           paid or satisfied.

                  (b)      When Adjustments to Be Made. The adjustments required
                           by this Section 4 shall be made whenever and as often
                           as any specified event requiring an adjustment  shall
                           occur,  except that any  adjustment  of the number of
                           shares of Common  Stock for  which  this  Warrant  is
                           exercisable  that would  otherwise be required may be
                           postponed  (except  in the case of a  subdivision  or
                           combination  of  shares  of  the  Common  Stock,   as
                           provided  for in  Section  4.1) up to, but not beyond
                           the date of  exercise  if such  adjustment  either by
                           itself or with other  adjustments not previously made
                           adds  or  subtracts  less  than 1% of the  shares  of
                           Common  Stock for which this  Warrant is  exercisable
                           immediately  prior to the making of such  adjustment.
                           Any  adjustment  representing  a change  of less than
                           such minimum  amount  (except as aforesaid)  which is
                           postponed  shall be carried forward and made upon the
                           earlier of (i) the date upon  which such  adjustment,
                           together  with  other  adjustments  required  by this
                           Section 4 and not previously  made, would result in a
                           minimum  adjustment,  and (ii) the date of  exercise.
                           For the  purpose  of any  adjustment,  any  specified
                           event  shall be deemed to have  occurred at the close
                           of business on the date of its occurrence.

                  (c)      Fractional Interests.  In computing adjustments under
                           this Section 4, fractional  interests in Common Stock
                           shall be taken into account to the nearest  1/10th of
                           a share.

                  (d)      When  Adjustment  Not Required.  If the Company shall
                           take a record of the holders of its Common  Stock for
                           the purpose of  entitling  them to receive a dividend
                           or  distribution  or  subscription or purchase rights
                           and shall,


                                       13

<PAGE>

                           thereafter   and   before   the    distribution    to
                           stockholders thereof, legally abandon its plan to pay
                           or deliver such dividend, distribution,  subscription
                           or purchase  rights,  then  thereafter  no adjustment
                           shall be  required  by reason  of the  taking of such
                           record  and any such  adjustment  previously  made in
                           respect thereof shall be rescinded and annulled.

                  (e)      Escrow  of  Warrant  Shares.  If  after  any property
                           becomes  distributable  pursuant to this Section 4 by
                           reason of the taking of any record of the  holders of
                           Common  Stock,  but  prior to the  occurrence  of the
                           event  for  which  such   record  is  taken,   Holder
                           exercises  this  Warrant,  any  Additional  Shares of
                           Common   Stock    issuable    and   other    property
                           distributable   upon   exercise  by  reason  of  such
                           adjustment  shall be held in escrow for Holder by the
                           Company to be issued to Holder upon and to the extent
                           that the event actually takes place,  upon payment of
                           the then Current Warrant Price.  Notwithstanding  any
                           other provision to the contrary herein,  if the event
                           for which such  record was taken fails to occur or is
                           rescinded,   then  such  escrowed   shares  shall  be
                           canceled  by  the  Company  and   escrowed   property
                           returned.

                  (f)      Challenge to Good Faith  Determination.  Whenever the
                           Board of Directors  of the Company  shall be required
                           to make a  determination  in good  faith  of the fair
                           value  of  any  item  under  this   Section  4,  such
                           determination  may  be  challenged  in good  faith by
                           Holder,  and any  dispute  shall  be  resolved  by an
                           investment   banking  firm  of  recognized   national
                           standing  selected by the Company and  acceptable  to
                           such Holder.

         4.8   Reorganization,   Reclassification,   Merger,   Consolidation  or
Disposition  of  Assets.  In case the  Company  shall  reorganize  its  capital,
reclassify  its  capital  stock,  consolidate  or  merge  with or  into  another
corporation  (where the Company is not the surviving  corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation (hereinafter, a "Reorganization") and,
pursuant  to the terms of such  Reorganization,  shares  of common  stock of the
successor  or  acquiring  corporation,  or any  cash,  shares  of stock or other
securities  or property of any nature  whatsoever  (including  warrants or other
subscription  or purchase  rights) in addition to or in lieu of common  stock of
the successor or acquiring corporation ("Other Property"), are to be received by
or distributed  to the holders of Common Stock of the Company,  then each Holder
shall have the right  following  the  effectiveness  of such  Reorganization  to
receive,  upon exercise of such Warrant, the number of shares of common stock of
the successor or acquiring corporation or of the Company, if it is the surviving
corporation,  and  Other  Property  receivable  upon  or  as a  result  of  such
Reorganization  by a holder of the  number  of shares of Common  Stock for which
this Warrant is exercisable immediately prior to such event. In case of any such
Reorganization,  the  successor  or  acquiring  corporation  (if other  than the
Company) shall expressly assume the due and punctual  observance and performance
of each and every  covenant and  condition  of this Warrant to be performed  and
observed by the Company and all the obligations and liabilities


                                       14

<PAGE>

hereunder,  subject to such appropriate modifications as are satisfactory to the
Majority  Holders in order to provide  for  adjustments  of shares of the Common
Stock for which this Warrant is exercisable  which shall be as nearly equivalent
as practicable to the  adjustments  provided for in this Section 4. For purposes
of this Section 4.8 "common  stock of the  successor  or acquiring  corporation"
shall include stock of such  corporation  of any class which is not preferred as
to  dividends  or assets over any other class of stock of such  corporation  and
which is not  subject to  redemption  and shall also  include any  evidences  of
indebtedness,  shares of stock or other securities which are convertible into or
exchangeable  for any such stock,  either  immediately  or upon the arrival of a
specified  date or the happening of a specified  event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing  provisions of
this Section 4.8 shall similarly apply to successive Reorganizations.

         4.9 Other Action  Affecting  Common Stock.  In case at any time or from
time to time the Company  shall take any action in respect of its Common  Stock,
other than the payment of  dividends  permitted  by Section  4.2(a) or any other
action  described  in this  Section 4, then,  unless such action will not have a
materially  adverse effect upon the rights of the Holders,  the number of shares
of Common Stock or other stock for which this Warrant is exercisable  and/or the
purchase  price  thereof shall be adjusted in such manner as may be equitable in
the circumstances.

         4.10  Certain  Limitations.  Notwithstanding  anything  herein  to  the
contrary,  the Company agrees not to enter into any transaction which, by reason
of any adjustment  hereunder,  would cause the Current  Warrant Price to be less
than the par value per share of Common Stock.

         5. Notices to Warrant Holders.

         5.1  Notice of  Adjustments.  Whenever  the  number of shares of Common
Stock for which this  Warrant is  exercisable,  or whenever the price at which a
share of such Common Stock may be purchased upon exercise of this Warrant, shall
be  adjusted  pursuant  to  Section 4, the  Company  shall  forthwith  prepare a
certificate to be executed by the chief financial officer of the Company setting
forth, in reasonable  detail,  the event requiring the adjustment and the method
by which such adjustment was calculated (including a description of the basis on
which the Board of  Directors  of the Company  determined  the fair value of any
evidences of  indebtedness,  shares of stock,  other  securities  or property or
warrants or other  subscription or purchase rights referred to in Section 4.2 or
4.7(a)),  specifying the number of shares of Common Stock for which this Warrant
is exercisable  and (if such adjustment was made pursuant to Section 4.8 or 4.9)
describing  the number and kind of any other  shares of stock or Other  Property
for which this Warrant is  exercisable,  and any change in the purchase price or
prices thereof,  after giving effect to such  adjustment or change.  The Company
shall promptly cause a signed copy of such certificate to be delivered to Holder
in  accordance  with Section 13. The Company  shall keep at its chief  executive
office  copies of all such  certificates  and cause the same to be available for
inspection  at said  office  during  normal  business  hours  by  Holder  or any
prospective purchaser of a Warrant designated by Holder.


                                       15

<PAGE>


         5.2 Notice of Certain Corporate Action. Holder shall be entitled to the
same rights to receive notice of corporate action as any holder of Common Stock.

         6. No Impairment.

         The  Company  shall not by any action  including,  without  limitation,
amending  its  certificate  of  incorporation  or  through  any  reorganization,
transfer  of  assets,  consolidation,  merger,  dissolution,  issue  or  sale of
securities or any other voluntary action,  avoid or seek to avoid the observance
or  performance  of any of the terms of this  Warrant,  but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or  appropriate to protect the rights of Holder
against  impairment.  Without  limiting the  generality  of the  foregoing,  the
Company  will (a) not  increase  the par value of any  shares  of  Common  Stock
receivable  upon the exercise of this Warrant above the amount payable  therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be  necessary  or  appropriate  in order that the Company may
validly and legally issue fully paid and  nonassessable  shares of Common Stock,
free and clear of any liens,  claims,  encumbrances and restrictions (other than
as provided  herein)  upon the  exercise of this  Warrant,  and (c) use its best
efforts to obtain  all such  authorizations,  exemptions  or  consents  from any
public regulatory body having jurisdiction thereof as may be necessary to enable
the Company to perform its obligations under this Warrant.

         7. Fully Paid Stock;  Taxes. The shares of the Common Stock represented
by each and every  certificate  for Warrant Shares  delivered on the exercise of
this  Warrant  shall,  at the  time of such  delivery,  be  validly  issued  and
outstanding,  fully paid and non-assessable,  and not subject to any pre-emptive
rights. The Company shall pay all expenses in connection with, and all taxes and
other  governmental  charges  that may be imposed  with respect to, the issue or
delivery  thereof,  unless such tax or charge is imposed by law upon Holder,  in
which case such taxes or charges shall be paid by Holder.  The Company shall not
be required,  however, to pay any tax or other charge imposed in connection with
any transfer involved in the issue of any certificate for shares of Common Stock
issuable  upon  exercise of this  Warrant in any name other than that of Holder,
and in such case the Company shall not be required to issue or deliver any stock
certificate  until  such  tax or  other  charge  has  been  paid or it has  been
established to the  satisfaction of the Company that no such tax or other charge
is due.

         8. Transfer.

         8.1  Securities  Laws.  Neither  this  Warrant nor the  Warrant  Shares
issuable  upon the exercise  hereof have been  registered in reliance on Section
4(2) of the  Securities  Act or under any state  securities  laws and  unless so
registered may not be  transferred,  sold,  pledged,  hypothecated  or otherwise
disposed of unless an exemption  from  registration  pursuant to Rule 144 of the
Securities  Act is  available.  Except as provided in Section 8.6,  this Warrant
shall bear the following legend:


                                       16

<PAGE>



         NEITHER  THESE  WARRANTS NOR THE SHARES OF COMMON STOCK  ISSUABLE  UPON
EXERCISE OF THESE  WARRANTS HAVE BEEN  REGISTERED  WITH THE U.S.  SECURITIES AND
EXCHANGE  COMMISSION OR THE SECURITIES  COMMISSION OF ANY STATE IN RELIANCE UPON
AN  EXEMPTION  FROM  REGISTRATION  UNDER  REGULATION  D  PROMULGATED  UNDER  THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE WARRANTS AND THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE OF THESE WARRANTS ARE RESTRICTED AND MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE  REGISTRATION STATEMENT UNDER
THE ACT OR PURSUANT TO AN APPLICABLE EXEMPTION THEREFROM.

         8.2  Conditions  to Transfer.  In the event Holder  desires to transfer
this Warrant or any of the Warrant Shares issued (in the absence of registration
under the Securities Act), the Holder must give the Company prior written notice
of such  proposed  transfer  including  the name  and  address  of the  proposed
transferee.  Such transfer may be made only either (i) upon  publication  by the
Commission of a ruling, interpretation, opinion or "no action letter" based upon
facts  presented to said  Commission,  or (ii) upon receipt by the Company of an
opinion of Holder's  counsel  acceptable  to the Company,  in either case to the
effect  that the  proposed  transfer  will not  violate  the  provisions  of the
Securities Act, the Exchange Act, or the rules and regulations promulgated under
either  such  act  (collectively,  the  "Securities  Laws").  Prior  to any such
proposed  transfer,  and as a condition  thereto,  if such  transfer is not made
pursuant to an effective  registration  statement  under the Securities Act, the
Holder  will,  if  requested  by  the  Company,   deliver  to  the  Company  any
representation or agreement  reasonably  requested to determine  compliance with
the Securities Laws.

         8.3 Indemnity.  The Holder acknowledges that the Holder understands the
meaning and legal  consequences  of this  Section 8 and the Holder  hereby shall
indemnify and hold harmless the Company,  its  representatives and each officer,
director and control person thereof from and against any and all loss, damage or
liability  (including all  attorneys'  fees and costs incurred in enforcing this
indemnity provision) due to or arising out of (i) any transfer of the Warrant or
any of the Warrant Shares in violation of the Securities  Act, the Exchange Act,
or the rules and regulations  promulgated under either of such acts, or (ii) any
transfer of the Warrant or any of the Warrant Shares not in accordance with this
Warrant or any of the Warrant Shares not in accordance with this Warrant.

         8.4  Transfer.  Except as provided in this  Section 8, this Warrant and
the Warrant  Shares issued may be  transferred by the Holder in whole or in part
at any time or from time to time.  Upon surrender of this Warrant to the Company
or at the office of its stock transfer  agent,  if any, with the Assignment Form
annexed  hereto duly executed and funds  sufficient to pay any transfer tax, and
upon  compliance  with the  foregoing  provisions,  the Company  shall,  without
charge,  execute  and  deliver  a new  Warrant  or  Warrants  in the name of the
assignee or assignees named in such Assignment Form (and if the entire amount of
the  Warrant  is not being  transferred,  in the name of the  Holder),  and this
Warrant  shall  promptly  be  canceled.   Any  assignment,   transfer,   pledge,
hypothecation  or other  disposition of this Warrant  attempted  contrary to the
provisions of this


                                       17

<PAGE>



Warrant,  or any levy of execution,  attachment or other process  attempted upon
the Warrant, shall be null and void and without effect.

         8.5 Registration. The Holders of Warrants and Warrant Shares shall have
the  right to  request  registration  of such  Warrant  Shares  pursuant  to the
Registration Rights Agreement.

         8.6  Termination  of   Restrictions.   Notwithstanding   the  foregoing
provisions  of Section 8, the  restrictions  imposed  by this  Section  upon the
transferability  of the Warrants,  the War rant Shares and the Restricted Common
Stock (or Common  Stock  issuable  upon the  exercise of the  Warrants)  and the
legend  requirements of Section 8.1 shall terminate as to any particular Warrant
or Warrant Share or Restricted  Common Stock (or Common Stock  issuable upon the
exercise of the Warrants) (i) when and so long as such security  shall have been
effectively  registered  under  the  Securities  Act and  disposed  of  pursuant
thereto,  or (ii) when the Company shall have delivered to the Holder or Holders
of Warrants,  Warrant Shares or Restricted  Common Stock the written  opinion of
Independent  Counsel stating that such legend is not required in order to ensure
compliance with the Securities Act. Whenever the restrictions imposed by Section
8 shall  terminate  as to this War rant,  as  hereinabove  provided,  the Holder
hereof  shall be entitled  to receive  from the  Company,  at the expense of the
Company,  a new Warrant bearing the following legend in place of the restrictive
legend set forth hereon:

                  "THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT
         CONTAINED IN SECTION 8 HEREOF TERMINATED ON ____________, 19__, AND
         ARE OF NO FURTHER FORCE AND EFFECT."

All Warrants issued upon  registration of transfer,  division or combination of,
or in  substitution  for,  any Warrant or Warrants  entitled to bear such legend
shall have a similar legend endorsed thereon.  Whenever the restrictions imposed
by this Section shall  terminate as to any share of Restricted  Common Stock, as
hereinabove  provided,  the Holder thereof shall be entitled to receive from the
Company,  at the Company's expense,  a new certificate  representing such Common
Stock not bearing the restrictive legend set forth in Section 8.1.

         9. Loss, etc. of Warrant.  Upon receipt of evidence satisfactory to the
Company of the loss,  theft,  destruction or mutilation of this Warrant,  and of
indemnity  reasonably  satisfactory to the Company (it being understood that the
written indemnity agreement of AJG Financial Services,  Inc. shall be sufficient
indemnity), if lost, stolen or destroyed, and upon surrender and cancellation of
this Warrant, if mutilated,  the Company shall execute and deliver to the Holder
a new Warrant of like date, tenor, and denomination.

         10. Warrant Holder Not Shareholder.  Except as otherwise provided here,
this  Warrant does not confer upon the Holder any right to vote or to consent to
or receive  notice as a shareholder  of the Company,  as such, in respect of any
matters  whatsoever,  or any other rights or liabilities as a shareholder of the
Company, either at law or in equity, and the rights of the Holder are limited to
those expressed in this Warrant.


                                       18

<PAGE>



         11. Liquidated Damages. In the event the Company fails to comply in all
material respects with any provision of the Registration Rights Agreement,  upon
written  request of the Holder of this  Warrant or Warrant  Shares,  the Company
shall promptly obtain from an independent  investment banking firm acceptable to
such Holder an opinion  estimating the net proceeds which such Holder would have
received (after deducting  underwriting  commissions and discounts and any other
expenses  that  would  have been  solely  attributable  to the  registration  or
qualification  of such  shares  of  Warrant  Shares)  upon the sale of shares of
Warrant  Shares   proposed  to  be  sold  pursuant  to  such   registration   or
qualification.  Such opinion of the independent investment banking firm shall be
(a)  delivered  in writing to the Company,  with a copy to such  Holder,  within
thirty (30) days after the date of the request of such Holder to the Company and
(b) conclusive and binding on the Company and such Holder.

         Within 30 days of receipt by the Company of such estimate,  the Company
shall pay to such  Holder an amount  equal to (a) such  estimated  net  proceeds
minus (b) the  aggregate  Warrant  Price  paid or payable  with  respect to such
shares of Warrant Shares. Payment of such amount shall be made by, at the option
of such person,  (i) wire transfer to an account in a bank located in the United
States  designated  by such  Holder  for such  purpose  or (ii) a  certified  or
official bank check drawn on a member of the Chicago or New York Clearing  House
payable  to the  order of such  Holder.  Upon  payment  to such  Holder  of such
liquidated damages, such Holder shall assign to the Company this Warrant and the
Warrant Shares proposed to be sold pursuant to the registration or qualification
in question without any  representation or warranty (other than that such Holder
has  good and  marketable  title  thereto,  free and  clear  of  liens,  claims,
encumbrances  and  restrictions  of any kind). If less than all of the shares of
Common Stock issuable upon the exercise hereof were proposed to be sold pursuant
to the registration or qualification in question,  the Company shall cancel this
Warrant  and issue in the name of, and  deliver  to,  the  Holder,  pursuant  to
Section  2, a new  Warrant  for the  shares of Common  Stock  issuable  upon the
exercise  hereof not  required to be  assigned  to the  Company  pursuant to the
provisions  of the  preceding  sentence.  The Company  agrees that the amount of
actual damages that would be sustained by such Holder as a result of the failure
of the  Company  to  comply  with  any  provisions  of the  Registration  Rights
Agreement is not capable of ascertainment on any other basis.

         12.  Appraisal.  The  determination of the Appraised Value per share of
Common  Stock  shall  be  made  by an  investment  banking  firm  of  nationally
recognized  standing  selected by the  Majority  Holders and  acceptable  to the
Company.  If the investment banking firm selected by the Majority Holders is not
acceptable to the Company and the Company and the Majority  Holders cannot agree
on a mutually acceptable  investment banking firm, then the Majority Holders and
the  Company  shall  each  choose  one  such  investment  banking  firm  and the
respective  chosen  firms shall agree on another  investment  banking firm which
shall make the determination.  The Company shall, at its sole cost, pay all fees
of such  investment  banking firm as may be necessary for the  determination  of
Appraised Value required by the terms of this Warrant.

         13. Communication.  No notice or other communication under this Warrant
shall be  effective  unless the same is in  writing  and is either (i) mailed by
first-class mail, postage prepaid,


                                       19

<PAGE>



in which event the notice shall be deemed  effective three days after deposit in
the mails, or (ii) delivered by established  delivery  service which  guarantees
three business days or less delivery,  in which event the notice shall be deemed
effective  on the date of  guaranteed  delivery.  Regardless  of the  method  of
delivery, the notice or communication shall be addressed to:

                  (a)      the Company at 3280 North  Frontage Road,  Lehi, Utah
                           84043,  Attention:  Chief  Executive  Officer or such
                           other  address  as  the  Company  has  designated  in
                           writing to the Holder, or

                  (b)      the Holder at the  address  indicated  in the opening
                           paragraph hereof, or such other address as the Holder
                           has designated in writing to the Company.

         14.  Headings.  The headings of this  Warrant  have been  inserted as a
matter of convenience and shall not affect the construction hereof.

         15.  Applicable Law. This Warrant shall be governed by and construed in
accordance  with the law of the State of Delaware  without  giving effect to the
principles of conflicts of law thereof.

         16.  Warrant  Register.  The Company will  register this Warrant in the
Warrant  Register  in  the  name  of the  record  holder  to  whom  it has  been
distributed  or assigned in accordance  with the terms  hereof.  The Company may
deem and treat the  registered  Holder of this  Warrant  as the  absolute  owner
hereof  (notwithstanding  any notation of ownership or other writing hereon made
by anyone) for the purpose of any  exercise  hereof or any  distribution  to the
Holder and for all other purposes,  and the Company shall not be affected by any
notice to the contrary.

         17.  Successors.  All of the  provisions  of this Warrant by or for the
benefit  of the  Company or the  Holder  shall bind and inure to the  benefit of
their respective successors and assigns.

         IN WITNESS WHEREOF, Covol Technologies, Inc. has caused this Warrant to
be signed by its  President and its  corporate  seal to be hereunto  affixed and
attested by its Secretary this 9th day of January, 1998.


ATTEST:                                               COVOL TECHNOLOGIES, INC.


/Asael T. Sorensen, Jr./                              By: /Stanley M. Kimball/
- ------------------------                                 ----------------------
Secretary                                                    President





                                       20

<PAGE>



                                  EXERCISE FORM

                          To be executed by the Holder
                          in Order to Exercise Warrants


         The undersigned  Holder hereby  irrevocably elects to exercise Warrants
represented by this Warrant,  and to purchase the  securities  issuable upon the
exercise of such Warrants,  and requests that  certificates  for such securities
shall be issued in the Holder's name and be delivered to






                         [please print or type address]

and if such number of Warrants  shall not be all the Warrants  evidenced by this
Warrant,  that a new Warrant for the balance of such  Warrants be  registered in
the name of, and delivered to, the Holder at the address stated above.

         The undersigned  acknowledges  that, if this Exercise Form is submitted
prior to the Company having given notice that the issuance of the Warrant Shares
has been  registered  under the  Securities  Act, the Warrant  Shares  issued on
exercise will be "restricted  securities" and will bear appropriate  restrictive
legends.


Dated:
                                                     Signature of Holder






                                                     Signature Guaranteed






                                       21

<PAGE>


                                   ASSIGNMENT

                          To Be Executed by the Holder
                           in Order to Assign Warrants


         THE WARRANTS  REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER FEDERAL
OR STATE SECURITIES LAWS AND TRANSFER THEREOF HAS BEEN RESTRICTED.  ANY TRANSFER
OR  PURPORTED  TRANSFER  DESCRIBED  IN THIS  FORM  OF  ASSIGNMENT  SHALL  NOT BE
EFFECTIVE   UNTIL  AND  UNLESS  THE  PROPOSED   TRANSFEREE   COMPLIES  WITH  THE
RESTRICTIONS ON TRANSFER DESCRIBED IN THE WARRANT CERTIFICATE.

         FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto

Name:
                           [please print or type]

Address:



Social Security:
or Taxpayer
I.D. No.

the undersigned's right to purchase up to ______________  Shares of Common Stock
represented by this Warrant,  and hereby  irrevocably  constitutes  and appoints
______________________________________  attorney  to  transfer  the  same on the
books of the Company, with full power of substitution in the premises.


Dated:
                              Signature Guaranteed



                                       22



                          REGISTRATION RIGHTS AGREEMENT


         THIS  REGISTRATION  RIGHTS  AGREEMENT  is  made  as of the  9th  day of
January,  1998, by and among COVOL  TECHNOLOGIES,  INC., a Delaware  corporation
(the "Company"),  and AJG FINANCIAL SERVICES,  INC. and its successors,  assigns
and  transferees   (herein   referred  to  collectively  as  the  "Holders"  and
individually as a "Holder").

                              W I T N E S S E T H:

         WHEREAS,  on the date  hereof,  Holder is the  holder of those  certain
Warrants To Purchase  Common Stock of the Company,  both issued January 9, 1998,
to AJG Financial Services, Inc., one designated Warrant A for 216, 272 Shares of
Common Stock, and the other  designated  Warrant B for 216, 272 Shares of Common
Stock.

         WHEREAS,  the Company has agreed to provide  the Holders  with  certain
registration rights as set forth herein.

         NOW,   THEREFORE,   in   consideration  of  the  mutual  covenants  and
undertakings  contained herein,  and for other good and valuable  consideration,
the receipt and sufficiency of which are hereby acknowledged, and subject to and
on the terms and  conditions  herein  set forth,  the  parties  hereto  agree as
follows:

         1.       Definitions.

         As used in this  Agreement,  the  following  capitalized  defined terms
shall have the following meanings:

         "Company"  shall have the meaning set forth in the  preamble  and shall
also include the Company's successors.

         "Company Common Stock" shall mean the shares of common stock, $.001 par
value per share, of the Company.

         "Effective Date" shall mean the date of this Agreement.

         "Exchange  Act"  shall mean the  Securities  Exchange  Act of 1934,  as
amended from time to time.

         "Holder" or "Holders" shall have the meaning set forth in the preamble.

         "Person" shall mean an individual, partnership,  corporation, trust, or
unincorporated organization,  or a government or agency or political subdivision
thereof.


                                        1

<PAGE>



         "Prospectus"  shall  mean the  prospectus  included  in a  Registration
Statement,  and any such prospectus as amended or supplemented by any prospectus
supplement  with  respect  to the terms of the  offering  of any  portion of the
Registrable  Securities  covered by a Registration  Statement,  and by all other
amendments  and  supplements  to  such  prospectus,   including   post-effective
amendments,  and in each case including all material  incorporated  by reference
therein.

         "Public Sale" shall mean a public sale or  distribution  of Registrable
Securities, including a sale pursuant to Rule 144 (or any similar provision then
in effect) under the Securities Act.

         "Registrable  Securities"  shall mean the Shares,  excluding (i) Shares
for which a  Registration  Statement  relating to the sale thereof by the Holder
shall  have  become  effective  under the  Securities  Act and  which  have been
disposed of by the Holder  under such  Registration  Statement,  and (ii) Shares
sold or otherwise distributed pursuant to Rule 144 under the Securities Act.

         "Registration  Expenses"  shall mean any and all  expenses  incident to
performance of or compliance with this Agreement, including, without limitation:
(i) all  SEC or  National  Association  of  Securities  Dealers,  Inc.  ("NASD")
registration and filing fees, (ii) all fees and expenses  incurred in connection
with  compliance with state  securities or blue sky laws  (including  reasonable
fees and  disbursements of counsel in connection with blue sky  qualification of
any of the Registrable  Securities and the preparation of a Blue Sky Memorandum)
and  compliance  with the rules of the NASD,  (iii) all  expenses of any Persons
engaged by the Company in preparing or assisting in preparing,  word processing,
printing  and   distributing  any   Registration   Statement,   any  Prospectus,
certificates  and other documents  relating to the performance of and compliance
with this Agreement,  (iv) all fees and expenses incurred in connection with the
listing, if any, of any of the Registrable Securities on any securities exchange
or  exchanges  pursuant  to  Section  3(a)(vii)  hereof,  and (v) the  fees  and
disbursements  of  counsel  for  the  Company  and  of  the  independent  public
accountants  of the Company,  including  the  expenses of any special  audits or
"cold comfort" letters,  if any, required by or incident to such performance and
compliance.  Registration  Expenses  shall  specifically  exclude  the  fees and
disbursements  of  counsel   representing  a  selling  Holder  and  underwriting
discounts and commissions,  and transfer taxes, if any,  relating to the sale or
disposition of Registrable Securities by a selling Holder, all of which shall be
borne by such Holder in all cases.

         "Registration  Statement"  shall mean a  registration  statement of the
Company and any other entity  required to be a  registrant  with respect to such
registration  statement pursuant to the requirements of the Securities Act which
covers the  Registrable  Securities  requested  by Holders to be covered by such
registration statement,  and all amendments and supplements to such registration
statement,  including  post-effective  amendments,  in each case  including  the
Prospectus   contained   therein,   all  exhibits   thereto  and  all  materials
incorporated by reference therein.

         "SEC" shall mean the Securities and Exchange Commission.

         "Securities Act" shall mean the Securities Act of 1933, as amended from
time to time.


                                        2

<PAGE>



         "Selling Holder" shall mean each Holder who elects to participate in an
underwritten public offering of Company Common Stock.

         "Shares"  shall mean Company  Common Stock that is issued upon exercise
of the Warrants.

         "Warrants"  shall mean the two Warrants (one  designated  Warrant A and
the other  designated  Warrant  B),  each dated  January 9, 1998,  issued by the
Company to AJG Financial Services,  Inc. evidencing rights to purchase initially
up to an aggregate of 432,544  shares of Common Stock,  and all warrants  issued
upon transfer,  division or combination  of, or in substitution or exchange for,
any thereof.

         2.       Registration Under the Securities Act.

                  (a)  Filing  of   Registration   Statement.   As  promptly  as
practicable after the date hereof, the Company intends, but is not obligated, to
cause to be filed a  Registration  Statement  providing  for the issuance of the
Shares to the Holder to the extent  allowed by  applicable  regulations  and the
resale by the  Holder of  Registrable  Securities  then held by the  Holder  and
intends to use its best efforts to cause such Registration Statement if filed to
be declared effective by the SEC as soon as reasonably practicable.  The Company
agrees to use its best efforts to keep such Registration  Statement continuously
effective  under the  Securities  Act for a period  expiring on the date two (2)
years from the date of the last  issuance  of any Shares and  further  agrees to
supplement or amend the Registration Statement, if and as required by the rules,
regulations  or  instructions  applicable to the  registration  form used by the
Company for such Registration Statement or by the Securities Act or by any other
rules and regulations thereunder for such Registration Statement.

                  (b)  Demand  Registration.  In the event the  Company  has not
caused to be filed a  Registration  Statement as provided in Section 2(a) within
six (6) months from the date hereof,  Holder  shall have the right,  at any time
and from time to time  after  such six (6)  month  period,  to  demand  that the
Company  cause  to be  filed  a  Registration  Statement  or an  amendment  to a
Registration  Statement  providing for the registration under the Securities Act
of the  Shares  to be  issued to Holder  to the  extent  allowed  by  applicable
regulations and the resale by the Holder of all Registrable  Securities,  or, in
the event the Company has filed a Registration  Statement as provided in Section
2(a) within six (6) months from the date hereof, but such Registration Statement
has not been declared  effective by the SEC,  Holder shall have the right at any
time and from time to time after  September 1, 1998,  to demand that the Company
cause to be filed a  Registration  Statement or an  amendment to a  Registration
Statement  providing for the registration under the Securities Act of the Shares
to be  issued  to  Holder  and  the  resale  by the  Holder  of all  Registrable
Securities;  provided,  however,  if at the time of such demand, the Shares have
been issued,  such Registration  Statement shall only relate to sales by Holder.
The Company agrees to use its best efforts to keep such  Registration  Statement
continuously  effective  under the Securities  Act for a period  expiring on the
date two (2) years from the date of the last  issuance of any Shares and further
agrees to supplement or amend the Registration  Statement, if and as required by
the rules, regulations or instructions


                                        3

<PAGE>



applicable to the  registration  form used by the Company for such  Registration
Statement  or by the  Securities  Act  or by any  other  rules  and  regulations
thereunder for such Registration Statement.

                  (c)  Cut-Back  Registration.  In the event that the Holder has
requested the inclusion of Registrable  Securities in a  registration  statement
pursuant to Section 3(a) or Section 3(b) and all or a portion of the Registrable
Securities with respect to which the Holder has requested  registration  are not
registered by virtue of the provisions of said sections,  Holder shall thereupon
have the right to require  the  registration  under the  Securities  Act of such
Registrable Securities pursuant to the provisions of Section 2(b),  irrespective
of whether the date upon which Registration is requested is within six months of
the date of this Agreement.

                  (d) Expenses.  The Company shall pay all Registration Expenses
in connection with any Registration Statement filed pursuant to this Section 2.


                  (e)  Inclusion  in  Registration  Statement.  The  Company may
require  each  Holder of  Registrable  Securities  to furnish to the  Company in
writing such information  regarding the proposed offer or sale by such Holder of
such  Registrable  Securities  as the Company  may from time to time  reasonably
request in writing.  Any Holder who does not provide the information  reasonably
requested  by the  Company in  connection  with the  Registration  Statement  as
promptly as  practicable  after receipt of such  request,  but in no event later
than ten (10) days  thereafter,  shall not be entitled  to have its  Registrable
Securities included in the Registration Statement.

                  (f) Underwritten Demand by Holder. If at the demand of Holder,
the  Company  proposes  to  file  a  Registration   Statement   relating  to  an
underwritten  public offering of any Registerable  Securities and the investment
banking firm selected by Holder to act as lead  underwriter  in connection  with
such public  offering of securities  by Holder  advises in writing that, in such
firm's opinion,  a registration of other  securities of the Company at that time
would  materially  and  adversely  affect  the  offering  by  Holder,  no person
(including  the  Company)  shall have a right to have shares of common  stock or
other securities  included in such Registration  Statement;  provided,  however,
that if an offering of some but not all of the shares requested to be registered
by Holder  would not  adversely  affect the  offering by Holder,  the  aggregate
number of shares  requested  to be included in such  offering by the Company and
each other  person  shall be reduced pro rata  according  to the total number of
securities proposed to be sold by the Company and other Person taken as a whole;
provided, in no event shall the shares requested by Holder to be included in the
Registration Statement be reduced.

                  (g) Rights to  Subsequent  Investors.  The  Company  shall not
grant any rights to any other person which shall  diminish in any way the rights
granted to the Holders  hereunder.  The Company may grant  subsequent  investors
rights of registration  (such as those provided in Section 2 hereof);  provided,
however,  that (i) such rights are limited to shares of Common Stock (including,
in the case of any underwritten offering, shares issuable upon the conversion of
convertible  securities  or upon the exercise of warrants if such  conversion or
exercise is effected by the sellers or the


                                        4

<PAGE>



underwriters prior to sale to the public in such offering), (ii) such rights are
not inconsistent with the provisions hereof;  (iii) the instrument granting such
rights  specifically  confirms the rights of the Holders of  Registrable  Shares
hereunder;  (iv) the  rights of the  Holder  hereunder  shall be the same as the
rights of registration granted to the subsequent investors.

         3.       Incidental Registration.

                  (a) If the Company  proposes to register any shares of Company
Common Stock ("Other  Securities") for public sale by the Company pursuant to an
underwritten  offering  under the  Securities  Act it will give  prompt  written
notice to Holders of its  intention  to do so, and upon the  written  request of
Holders  delivered to the Company  within  fifteen (15)  Business Days after the
giving of any such notice which request shall specify the number of  Registrable
Securities  intended to be disposed of by Holders and the Company  shall include
such Registrable Securities in such Registration Statement. The Company will not
be required to effect any  registration  pursuant  to this  Section  3(a) if the
Company shall have been advised in writing (with a copy to the Selling  Holders)
by a nationally recognized  independent  investment banking firm selected by the
Company to act as lead  underwriter  in connection  with the public  offering of
securities by the Company that, in such firm's  opinion,  a registration at that
time by other holders would  materially  and adversely  affect the Company's own
scheduled offering;  provided,  however, that if an offering of some but not all
of the shares  requested to be  registered by Holder and other holders would not
adversely  affect  the  Company's  offering,  the  aggregate  number  of  shares
requested  to be  included  in such  offering by each  selling  holder  shall be
reduced pro rata according to the total number of securities proposed to be sold
by the selling holders taken as a whole.

                  (b) If at the  demand  of any  other  Person  but  the  Holder
("Other  Person"),  the Company proposes to register Other Securities for public
sale pursuant to an underwritten  offering under the Securities Act it will give
prompt  written notice to Holder of its intention to do so, and upon the written
request of Holders  delivered to the Company  within  fifteen (15) Business Days
after the giving of any such notice which  request  shall  specify the number of
Registrable  Securities  intended  to be  disposed  of by Holder and the Company
shall include such Registrable Securities in such Registration Statement. If the
Other  Person  shall have been  advised in writing  (with a copy to the  Selling
Holders) by a nationally recognized  independent  investment banking firm acting
as lead  underwriter in connection with the public offering of securities by the
Other Person that, in such firm's opinion, a registration by the Holders at that
time would materially and adversely affect the offering by the Other Person, the
Registrable Securities of the Holder shall not be included in such Registration,
provided the number of shares  requested to be included in such  offering by the
Holders and all other Persons  shall be reduced pro rata  according to the total
number of securities proposed to be sold by the Holder and other selling holders
taken as a whole; provided, however, notwithstanding the foregoing sentence, the
shares  requested by the Other Person  demanding  registration to be included in
the  Registration  Statement  shall not be reduced if required  by an  agreement
between such Other Person and the Company.


                                        5

<PAGE>



                  (c) With respect to any proposed sale or sale by the Holder of
Registrable  Securities  pursuant to this  Section 3 the  Company  shall pay all
Registration Expenses.

                  (d) No registration of Registrable  Securities  effected under
this Section 3 shall  relieve the Company of its  obligation  (if any) to effect
registrations of Registrable Securities pursuant to Section 2.

         4.       Registration Procedures.

                  (a)  Obligations  of  the  Company.  In  connection  with  any
Registration Statement pursuant to Sections 2 or 3 hereof, the Company shall:

                           (i)      cause  the   Registration  Statement  to  be
                                    available  for the  sale of the  Registrable
                                    Securities   by   Holders  in  one  or  more
                                    transactions,  in  negotiated  transactions,
                                    through   the  writing  of  options  of  the
                                    Registrable Securities,  or a combination of
                                    such  methods  of sale,  and to comply as to
                                    form  in  all  material  respects  with  the
                                    requirements  of  the  applicable  form  and
                                    include all financial statements required by
                                    the  SEC to be  filed  therewith  and in the
                                    event the  Company  is listed on the  NASDAQ
                                    National  Market  System  ("NMS")  in one or
                                    more  transactions  on NMS or  otherwise  in
                                    special offerings, exchange distributions or
                                    secondary  distribution  pursuant  to and in
                                    accordance with the rules of the NMS, in the
                                    over-the-counter market;

                           (ii)     (A) prepare  and  file  with  the  SEC  such
                                    amendments and post- effective amendments to
                                    any   Registration   Statement   as  may  be
                                    necessary  to keep  each  such  Registration
                                    Statement   effective  for  the   applicable
                                    period; (B) cause the Prospectus included in
                                    each  such  Registration   Statement  to  be
                                    supplemented  by  any  required   prospectus
                                    supplement,  and  as so  supplemented  to be
                                    filed  pursuant  to Rule 424 or any  similar
                                    rule   that  may  be   adopted   under   the
                                    Securities Act; (C) respond  promptly to any
                                    comments  received from the SEC with respect
                                    to  each  Registration   Statement,  or  any
                                    amendment,   post-effective   amendment   or
                                    supplement relating thereto;  and (D) comply
                                    with the  provisions of the  Securities  Act
                                    with  respect  to  the  disposition  of  all
                                    securities   covered  by  each  Registration
                                    Statement;

                           (iii)    furnish  to  each   Holder  of   Registrable
                                    Securities,  without charge,  as many copies
                                    of each  Prospectus,  and any  amendment  or
                                    supplement  thereto and such other documents
                                    as they may reasonably  request, in order to
                                    facilitate   the   public   sale  or   other
                                    disposition of the  Registrable  Securities;
                                    the Company consents to the use of the


                                        6

<PAGE>

                                    Prospectus,   by   each   such   Holder   of
                                    Registrable  Securities,  in connection with
                                    the  offering  and  sale of the  Registrable
                                    Securities covered by the Prospectus;

                           (iv)     notify promptly  each Holder of  Registrable
                                    Securities   and  confirm   such  advice  in
                                    writing  (A) of the  issuance  by the SEC or
                                    any state  securities  authority of any stop
                                    order  suspending  the  effectiveness  of  a
                                    Registration  Statement or the initiation of
                                    any proceedings for that purpose, (B) if the
                                    Company  receives  any   notification   with
                                    respect   to   the    suspension    of   the
                                    qualification of the Registrable  Securities
                                    for   sale  in  any   jurisdiction   or  the
                                    initiation  of  any   proceeding   for  such
                                    purpose,  and  (C) of the  happening  of any
                                    event  during  the  period  a   Registration
                                    Statement  is effective as a result of which
                                    such  Registration  Statement or the related
                                    Prospectus  contains any untrue statement of
                                    a  material  fact  or  omits  to  state  any
                                    material fact required to be stated  therein
                                    or necessary to make the statements therein,
                                    in light of the  circumstances  under  which
                                    they   were   made   (in  the  case  of  the
                                    Prospectus), not misleading;

                           (v)      use its best effort to obtain the withdrawal
                                    of any order suspending the effectiveness of
                                    a  Registration  Statement  at the  earliest
                                    possible moment;

                           (vi)     use its best efforts to  register or qualify
                                    the  Registrable  Securities by the time the
                                    applicable    Registration    Statement   is
                                    declared  effective  by the  SEC  under  all
                                    applicable  state  securities  or "blue sky"
                                    laws of such  jurisdictions as any Holder of
                                    Registrable    Securities   covered   by   a
                                    Registration   Statement  shall   reasonably
                                    request   in   writing,   keep   each   such
                                    registration  or   qualification   effective
                                    during   the   period   such    Registration
                                    Statement  is required to be kept  effective
                                    or  during  the  period  offers or sales are
                                    being made by a Holder that has  delivered a
                                    Registration    Notice   to   the   Company,
                                    whichever  is  shorter,  and do any  and all
                                    other   acts  and   things   which   may  be
                                    reasonably  necessary or advisable to enable
                                    such Holder to consummate the disposition in
                                    each such  jurisdiction of such  Registrable
                                    Securities  owned by such Holder;  provided,
                                    however,  that  the  Company  shall  not  be
                                    required  to  (A)  qualify  generally  to do
                                    business in any  jurisdiction or to register
                                    as a broker or  dealer in such  jurisdiction
                                    where it would not  otherwise be required to
                                    qualify but for this Section  4(a)(vi),  (B)
                                    subject  itself  to  taxation  in  any  such
                                    jurisdiction,  or (C) submit to the  general
                                    service of process in any such jurisdiction;


                                        7

<PAGE>



                           (vii)    upon    the    occurrence   of   any   event
                                    contemplated by Section  4(a)(iv)(C) hereof,
                                    use its best efforts promptly to prepare and
                                    file  a  supplement  or  prepare,  file  and
                                    obtain  effectiveness  of  a  post-effective
                                    amendment to a Registration Statement or the
                                    related    Prospectus    or   any   document
                                    incorporated  therein by  reference  or file
                                    any  other  required  document  so that,  as
                                    thereafter  delivered to the  purchasers  of
                                    the Registrable Securities,  such Prospectus
                                    will not contain any untrue  statement  of a
                                    material  fact or omit to  state a  material
                                    fact  required  to  be  stated   therein  or
                                    necessary to make the statements therein, in
                                    the light of the  circumstances  under which
                                    they were made, not misleading;

                           (viii)   use  its   best   efforts   to   cause   all
                                    Registrable  Securities  to be listed on any
                                    securities   exchange   on   which   similar
                                    securities  issued by the  Company  are then
                                    listed;

                           (ix)     provide a CUSIP  number for all  Registrable
                                    Securities,  not  later  than the  effective
                                    date  of  the   Registration   Statement  or
                                    amendment    thereto    relating   to   such
                                    Registrable Securities;

                           (x)      otherwise  use its best  efforts  to  comply
                                    with all applicable rules and regulations of
                                    the SEC and make  available  to its security
                                    holders, as soon as reasonably  practicable,
                                    an  earning  statement   covering  at  least
                                    twelve (12) months  which shall  satisfy the
                                    provisions   of   Section   11(a)   of   the
                                    Securities Act and Rule 158 thereunder; and

                           (xi)     use  its   best   efforts   to   cause   the
                                    Registrable    Securities   covered   by   a
                                    Registration Statement to be registered with
                                    or  approved  by  such  other   governmental
                                    agencies or  authorities as may be necessary
                                    by virtue of the business and  operations of
                                    the Company to enable  Holders to consummate
                                    the   disposition   of   such    Registrable
                                    Securities.

                  (b)  Obligations  of  Holders.  In  connection  with  and as a
condition to the Company's obligations with respect to a Registration  Statement
pursuant to Section 2 hereof and this Section 4, each Holder  agrees that (i) it
will  not  offer or sell  its  Registrable  Securities  under  the  Registration
Statement until it has received copies of the supplemental or amended Prospectus
contemplated   by  Section   4(a)(ii)   hereof  and  receives  notice  that  any
post-effective  amendment  has become  effective;  and (ii) upon  receipt of any
notice from the Company of the  happening of any event of the kind  described in
Section 4(a)(iv)(C) hereof, such Holder will forthwith  discontinue  disposition
of Registrable Securities pursuant to a Registration Statement until such Holder
receives  copies of the  supplemented  or  amended  Prospectus  contemplated  by
Section 4(a)(vii) hereof and receives notice that any  post-effective  amendment
has become  effective,  and,  if so directed  by the  Company,  such Holder will
deliver to the Company (at the expense of the Company) all copies in


                                        8

<PAGE>



its  possession,  other  than  permanent  file  copies  then  in  such  Holder's
possession,  of the Prospectus  covering such Registrable  Securities current at
the time of receipt of such notice.

                  (c) Lockup.  In the event the  Company  proposes to effect the
distribution  of its securities by the Company  through an  underwritten  public
offering,  each Holder who then  beneficially  owns in excess of 100,000  shares
agrees for a period of time,  beginning  seven (7) days  prior to the  effective
date of the underwriting agreement pertaining to such offering and ending thirty
(30) days after such effective  date that such Holder will  forthwith  cease any
sale or other disposition of any of the Registrable  Securities or sale or other
disposition of any of its Registrable  Securities during such period of time, if
requested in writing by the  representatives  of the  underwriters  for any such
underwritten  public  offering;  provided,  however,  that Holders  shall not be
subject to more than one Lockup Period during any twelve (12) month period.

         5. Indemnification; Contribution.

                  (a)  Indemnification  by the  Company.  The Company  agrees to
indemnify  and hold  harmless  each  Holder,  each  officer and director of such
Holder,  and each Person,  if any, who controls any Holder within the meaning of
Section 15 of the Securities Act as follows:

                           (i)      against any and all loss,  liability, claim,
                                    damage and expense whatsoever,  as incurred,
                                    arising  out  of  any  untrue  statement  or
                                    alleged untrue  statement of a material fact
                                    contained in any Registration  Statement (or
                                    any  amendment  thereto)  pursuant  to which
                                    Registrable Securities were registered under
                                    the Securities Act,  including all documents
                                    incorporated  therein by  reference,  or the
                                    omission or alleged omission  therefrom of a
                                    material fact necessary in order to make the
                                    statements  therein,  in  the  light  of the
                                    circumstances  under  which  they were made,
                                    not misleading;

                           (ii)     against any and all loss, liability,  claim,
                                    damage and expense whatsoever,  as incurred,
                                    to the extent of the  aggregate  amount paid
                                    in   settlement   of  any   litigation,   or
                                    investigation    or    proceeding   by   any
                                    governmental  agency or body,  commenced  or
                                    threatened, or of any claim whatsoever based
                                    upon any such untrue  statement or omission,
                                    or any  such  alleged  untrue  statement  or
                                    omission,  if such  settlement  is  effected
                                    with the written consent of the Company; and

                           (iii)    against any and all expense  whatsoever,  as
                                    incurred  (including   reasonable  fees  and
                                    disbursements   of   counsel),    reasonably
                                    incurred  in  investigating,   preparing  or
                                    defending   against   any   litigation,   or
                                    investigation    or    proceeding   by   any
                                    governmental  agency or body,  commenced  or
                                    threatened,  in each case  whether  or not a
                                    party,  or any claim  whatsoever  based upon
                                    any such untrue statement or omission,

                                        9

<PAGE>



                                    or any  such  alleged  untrue  statement  or
                                    omission,   to  the  extent  that  any  such
                                    expense is not paid under  subparagraph  (i)
                                    or (ii) above;

provided,  however,  that the indemnity  provided  pursuant to this Section 4(a)
does not apply to any Holder with respect to any loss, liability,  claim, damage
or expense to the extent  arising  out of any untrue  statement  or  omission or
alleged  untrue  statement or omission  made in reliance  upon and in conformity
with written  information  furnished to the Company by such Holder expressly for
use in a Registration Statement (or any amendment thereto) or any Prospectus (or
any amendment or supplement thereto).

                  (b)  Indemnification  by the  Holders.  Each Holder  severally
agrees to indemnify and hold harmless the Company and the other selling Holders,
and each of their respective directors and officers (including each director and
officer of the Company who signed the Registration Statement),  and each Person,
if any, who controls the Company or any other selling  Holder within the meaning
of  Section  15 of the  Securities  Act,  to the same  extent  as the  indemnity
contained  in Section  5(a) hereof  (except  that any  settlement  described  in
Section  4(a)(ii)  shall be  effected  only  with the  written  consent  of such
Holder),  but only  insofar as such loss,  liability,  claim,  damage or expense
arises out of or is based upon (i) any untrue statement or omission,  or alleged
untrue  statements  or  omissions,  made  in a  Registration  Statement  (or any
amendment thereto) or any Prospectus (or any amendment or supplement thereto) in
reliance  upon and in  conformity  with  written  information  furnished  to the
Company by such selling Holder expressly for use in such Registration  Statement
(or any amendment  thereto) or such  Prospectus  (or any amendment or supplement
thereto), or (ii) such Holder's failure to deliver a Prospectus to any purchaser
of  Registrable  Securities  where such a delivery  obligation was applicable to
such Holder's sale of  Registrable  Securities and such Holder had been provided
with sufficient copies of such Prospectus for the relevant  deliveries  thereof.
In no event shall the liability of any Holder under this Section 4(b) be greater
in amount than the dollar  amount of the  proceeds  received by such Holder upon
the  sale of the  Registrable  Securities  giving  rise to such  indemnification
obligation.

                  (c) Conduct of Indemnification  Proceedings.  Each indemnified
party shall give  reasonably  prompt  notice to each  indemnifying  party of any
action or proceeding  commenced  against it in respect of which indemnity may be
sought hereunder,  but failure to so notify an indemnifying  party (i) shall not
relieve it from any liability  which it may have under the  indemnity  agreement
provided  in  Section  4(a) or (b)  above,  unless  and to the extent it did not
otherwise learn of such action and the lack of notice by the  indemnified  party
results in the forfeiture by the  indemnifying  party of substantial  rights and
defenses and (ii) shall not, in any event,  relieve the indemnifying  party from
any  obligations  to  any  indemnified  party  other  than  the  indemnification
obligation  provided under Section 4(a) or (b) above. If the indemnifying  party
so  elects  within  a  reasonable  time  after  receipt  of  such  notice,   the
indemnifying  party may assume the defense of such action or  proceeding at such
indemnifying  party's own expense with counsel chosen by the indemnifying  party
and approved by the indemnified  parties defendant in such action or proceeding,
which approval shall not be unreasonably withheld;  provided,  however, that, if
such  indemnified  party or parties  reasonably  determine  that a  conflict  of
interest exists where it is advisable for such indemnified party


                                       10

<PAGE>



or  parties to be  represented  by  separate  counsel  or that,  upon  advice of
counsel,  there may be legal defenses available to them which are different from
or  in  addition  to  those  available  to  the  indemnifying  party,  then  the
indemnifying  party  shall  not be  entitled  to  assume  such  defense  and the
indemnified  party or parties  shall be entitled to one separate  counsel at the
indemnifying party's expense. If an indemnifying party is not entitled to assume
the  defense  of such  action or  proceeding  as a result of the  proviso to the
preceding  sentence,  such  indemnifying  party's  counsel  shall be entitled to
conduct the defense of such  indemnified  party or parties,  it being understood
that both such counsel will  cooperate with each other to conduct the defense of
such action or proceeding as efficiently as possible.  If an indemnifying  party
is not so  entitled to assume the defense of such action or does not assume such
defense,  after having  received the notice referred to in the first sentence of
this paragraph,  the indemnifying  party or parties will pay the reasonable fees
and  expenses of counsel for the  indemnified  party or parties.  In such event,
however,  no  indemnifying  party  will be liable  for any  settlement  effected
without the written consent of such indemnifying party. If an indemnifying party
is entitled to assume, and assumes,  the defense of such action or proceeding in
accordance with this paragraph,  such indemnifying party shall not be liable for
any fees and expenses of counsel for the indemnified parties incurred thereafter
in connection with such action or proceeding.  The  indemnification  obligations
provided  pursuant to Sections  4(a) and (b) hereof  survive,  with respect to a
Holder, the transfer of Registrable  Securities by such Holder, and with respect
to a Holder or the Company,  shall remain in full force and effect regardless of
any investigation made by or on behalf of any indemnified party.

                  (d)      Contribution.

                           (i)      In order to  provide for  just and equitable
                                    contribution in  circumstances  in which the
                                    indemnity  agreement  provided  for in  this
                                    Section  4 is  for  any  reason  held  to be
                                    unenforceable    although    applicable   in
                                    accordance  with its terms,  the Company and
                                    the selling Holders shall  contribute to the
                                    aggregate   losses,   liabilities,   claims,
                                    damages   and   expenses   of   the   nature
                                    contemplated  by  such  indemnity  agreement
                                    incurred  by the  Company  and  the  selling
                                    Holders,    in   such   proportion   as   is
                                    appropriate to reflect the relative fault of
                                    and  benefits to the Company on the one hand
                                    and the  selling  Holders  on the  other (in
                                    such  proportions  that the selling  Holders
                                    are severally, not jointly,  responsible for
                                    the  balance),   in   connection   with  the
                                    statements  or omissions  which  resulted in
                                    such losses, claims, damages, liabilities or
                                    expenses,  as  well  as any  other  relevant
                                    equitable   considerations.   The   relative
                                    benefits  to  the  indemnifying   party  and
                                    indemnified  parties  shall be determined by
                                    reference to, among other things,  the total
                                    proceeds  received by the indemnified  party
                                    and  indemnified  parties in connection with
                                    the offering to which such  losses,  claims,
                                    damages, liabilities or expenses relate. The
                                    relative fault of the indemnifying party and
                                    indemnified  parties  shall be determined by
                                    reference  to, among other  things,  whether
                                    the action in question,


                                       11

<PAGE>



                                    including  any  untrue  or  alleged   untrue
                                    statement of a material  fact or omission or
                                    alleged  omission to state a material  fact,
                                    has been made by, or relates to  information
                                    supplied by, such indemnifying  party or the
                                    indemnified   parties,   and  the   parties'
                                    relative   intent,   knowledge,   access  to
                                    information  and  opportunity  to correct or
                                    prevent such action.

                           (ii)     The Company and  the Holders agree  that  it
                                    would   not  be   just   or   equitable   if
                                    contribution  pursuant to this  Section 4(d)
                                    were determined by pro rata allocation or by
                                    any other  method of  allocation  which does
                                    not   take   account   of   the    equitable
                                    considerations    referred    to   in    the
                                    immediately       preceding       paragraph.
                                    Notwithstanding   the   provisions  of  this
                                    Section  4(d),  no selling  Holder  shall be
                                    required to contribute  any amount in excess
                                    of the  amount by which  the total  price at
                                    which  the  Registrable  Securities  of such
                                    selling  Holder  were  offered to the public
                                    exceeds the amount of any damages which such
                                    selling  Holder  would  otherwise  have been
                                    required  to pay by  reason  of such  untrue
                                    statement or omission.

                           (iii)    Notwithstanding  the  foregoing,  no  Person
                                    guilty   of   fraudulent   misrepresentation
                                    (within the meaning of Section  11(f) of the
                                    Securities   Act)  shall  be   entitled   to
                                    contribution  from  any  Person  who was not
                                    guilty of such fraudulent misrepresentation.
                                    For  purposes  of this  Section  4(d),  each
                                    Person, if any, who controls a Holder within
                                    the meaning of Section 15 of the  Securities
                                    Act and  directors  and officers of a Holder
                                    shall have the same  rights to  contribution
                                    as such  Holder,  and each  director  of the
                                    Company,  each  officer of the  Company  who
                                    signed the  Registration  Statement and each
                                    Person,  if any,  who  controls  the Company
                                    within  the  meaning  of  Section  15 of the
                                    Securities Act shall have the same rights to
                                    contribution as the Company.

                           (iv)     The   contribution   provided  for  in  this
                                    Section 4(d) shall survive,  with respect to
                                    a  Holder,   the  transfer  of   Registrable
                                    Securities by such Holder,  and with respect
                                    to a Holder or the Company,  shall remain in
                                    full  force  and  effect  regardless  of any
                                    investigation  made by or on  behalf  of any
                                    indemnified party.

         6.       Rule 144 Sales.

                  (a)  Reports.  The  Company  covenants  that it will  file the
reports  required to be filed by the Company  under the  Securities  Act and the
Securities  Exchange Act of 1934, as amended,  and will take such further action
as any Holder of Registrable Securities may reasonably request, all to


                                       12

<PAGE>



the  extent  required  to  enable  such  Holder to sell  Registrable  Securities
pursuant to Rule 144 under the Securities Act.

                  (b)  Certificates.  In connection  with any sale,  transfer or
other disposition by any Holder of any Registrable  Securities  pursuant to Rule
144 under the  Securities  Act, the Company shall  cooperate with such Holder to
facilitate  the timely  preparation  and delivery of  certificates  representing
Registrable Securities to be sold and not bearing any Securities Act legend, and
enable  certificates  for such  Registrable  Securities to be for such number of
shares  and  registered  in such names as the  selling  Holders  may  reasonably
request  at  least  two (2)  business  days  prior  to any  sale of  Registrable
Securities.

         7. Miscellaneous.

                  (a) Amendments and Waivers.  The provisions of this Agreement,
including  the  provisions  of this  sentence,  may not be amended,  modified or
supplemented,  and waivers or consents to departures from the provisions  hereof
may not be given without the written consent of the Company and the Holders of a
majority in amount of the outstanding Registrable Securities; provided, however,
that no  amendment,  modification  or  supplement  or waiver or  consent  to the
departure  with respect to the  provisions of Sections 2, 3, 4, 5, 6 or 7 hereof
shall be  effective  as against  any  Holder of  Registrable  Securities  unless
consented to in writing by such Holder of  Registrable  Securities,  as the case
may be. Notice of any  amendment,  modification  or supplement to this Agreement
adopted in accordance with this Section 6(a) shall be provided by the Company to
each Holder of  Registrable  Securities  at least  thirty (30) days prior to the
effective date of such amendment, modification or supplement.

                  (b) Notices. All notices and other communications provided for
or permitted  hereunder  shall be made in writing by  hand-delivery,  registered
first-class  mail,  telex,  telecopier,  or any courier  guaranteeing  overnight
delivery,  (i) if to a Holder,  at the most current address given by such Holder
to the Company by means of a notice given in accordance  with the  provisions of
this Section 6(b), which address initially is, with respect to each Holder,  the
address  set forth next to such  Holder's  name on the books and  records of the
Company,  or (ii) if to the Company,  at: Covol  Technologies,  Inc., 3280 North
Frontage Road,  Lehi,  Utah 84043;  Facsimile:  (801)  768-4483;  Attn:  General
Counsel.

                  All such  notices and  communications  shall be deemed to have
been duly given:  at the time delivered by hand, if personally  delivered;  five
(5) business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt is acknowledged,  if telecopied; or
at the time  delivered  if delivered  by an air courier  guaranteeing  overnight
delivery.

                  (c) Successors and Assigns.  This Agreement shall inure to the
benefit of and be binding upon the  successors,  assigns and transferees of each
of the Company and the Holders,  including  without  limitation  and without the
need for an express assignment,  subsequent Holders. If any successor,  assignee
or transferee of any Holder shall acquire Registrable Securities, in any


                                       13

<PAGE>


manner, whether by operation of law or otherwise,  such Registrable  Securities,
as the case may be, shall be held subject to all of the terms of this Agreement,
and by taking and holding  such  Registrable  Securities  such  Person  shall be
entitled to receive the benefits hereof and shall be conclusively deemed to have
agreed to be bound by all of the terms and provisions hereof.

                  (d)  Headings.  The  headings  in this  Agreement  are for the
convenience  of  reference  only and  shall not limit or  otherwise  affect  the
meaning hereof.

                  (e)  GOVERNING  LAW. THIS  AGREEMENT  SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE  WITH THE LAWS OF THE STATE OF DELAWARE  WITHOUT  GIVING
EFFECT TO THE CONFLICTS OF LAW PROVISIONS THEREOF.

                  (f) Specific  Performance.  The Company and the Holders hereto
acknowledge  that there would be no adequate remedy at law if any party fails to
perform any of its obligations hereunder, and accordingly agree that each party,
in addition to any other remedy to which it may be entitled at law or in equity,
shall be entitled to compel specific performance of the obligations of any other
party under this  Agreement in accordance  with the terms and conditions of this
Agreement  in any  court  of the  United  States  or any  State  thereof  having
jurisdiction.

                  (g)  Entire  Agreement.  This  Agreement  is  intended  by the
Company as a final expression of its agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the Company in respect
of the subject matter  contained  herein.  This  Agreement  supersedes all prior
agreements  and  understandings  of the  Company  with  respect to such  subject
matter.

         IN WITNESS WHEREOF,  the parties hereto have executed this Agreement as
of the date first written above.

                                                 COVOL TECHNOLOGIES, INC.


                                                 By:/Stanley M. Kimball/
                                                    ---------------------------
                             Name:Stanley M. Kimball
                                                      Title: President


                                                 AJG FINANCIAL SERVICES, INC.


                                                 By: /David R. Long/
                                                    ---------------------------
                               Name: David R. Long
                                                      Title: President



                                       14








                              EMPLOYMENT AGREEMENT

                                 By and Between

                            COVOL TECHNOLOGIES, INC.

                                       And

                                Steven G. Stewart


                                 Effective as of

                                   May 1, 1998








<PAGE>


                              EMPLOYMENT AGREEMENT

         THIS EMPLOYMENT  AGREEMENT (this Agreement@) is effective as of the 1st
day of May, 1998 (the AEffective Date@) by and between COVOL TECHNOLOGIES,  INC.
a Delaware Corporation (the ACompany@), and Steven G. Stewart (AEmployee@).  The
Company and Employee are sometimes later in this Agreement collectively referred
to as the AParties.@

                                    RECITALS

         This Agreement is entered into with  reference to the following  facts,
definitions, and objectives:

         A. Employee is a Certified Public  Accountant and immediately  prior to
his  employment  by the  Company,  was  employed by Coopers & Lybrand,  LLP as a
Business Assurance Partner.

         B. Employee=s  services are deemed to be of value to the Company and it
is  recognized  that  inducements  must be offered to Employee in order that the
company may obtain and retain Employee=s services.

         NOW THEREFORE,  in consideration of this Agreement and of the covenants
and conditions contained in this Agreement, the Parties agree as follows:

         1.       Employment and Positions.

                  (a)  Positions.  The Company  employed  Employee  and Employee
accepted  employment  by the Company as an officer of the Company with the title
of AVice  President  of Finance  and  Treasurer@  for the  Period of  Employment
specified  in  Paragraph 3 (APeriod of  Employment@).  Such  position and title,
including related duties and responsibilities, may be changed during the term of
this  contract  provided  that such  Employee  continues  as an  officer  of the
Company.  Also, provided further that any new position would be of comparable or
higher responsibility level with compensation for such services at a level at or
above the Employees then current  compensation  level prior to such title and/or
position change.

         2. Services to be Rendered.  The Employee  shall,  during the Period of
Employment,  serve  the  Company  in the  positions  set  forth in  Paragraph  1
(AEmployment and Positions@)  diligently,  competently,  and in conformance with
the corporate policies of the Company. Employee shall have the responsibility to
always act in the best  interest of the Company  and  recognizes  opportunities,
ideas,  and intellectual  property  relating to the business of the Company that
are developed as an officer or employee of Covol  Technologies,  Inc. remain the
property of Company.  In fulfilling his duties and  responsibilities  under this
Agreement,  Employee  shall report to the President  and/or the Chief  Executive
Officer of the Company.

                                       1
<PAGE>



         3. Period of Employment.  Employee=s employment by the Company pursuant
to this Agreement  shall,  began as of May 1, 1998 (the AEffective  Date@).  The
period  of  employment  continues  for a period  of  three  (3)  years  from the
Effective Date (APeriod of  Employment@)  renewing  annually on May 1st so as to
result in a continuing effective period of three (3) years from the renewal date
until normal retirement or resignation by the employee.

         4. Base  Salary.  At the  commencement  of the  Period  of  Employment,
Employee  shall be paid a yearly base salary of  $80,000.  Base salary  shall be
paid in semi  monthly  installments  during the Period of  Employment.  The base
salary will be increased effective May 1, 1999 by 25% to a yearly base salary of
$100,000.  The base salary will be  increase  effective  May 1, 2000 by 25% to a
yearly base salary of  $125,000.  It is  recognized  by the Company and Employee
that a Salary Compensation Study has recently been conducted and the base salary
of this  Employee  may be  adjusted  in the  future as a result  of this  Salary
Compensation  Study. If and when the base salary is adjusted as a result of this
study,  the salary  increases as provided in this  paragraph will be adjusted so
that the increase will not result in the  percentage  reflected  herein but will
instead result in the actual dollar amount increases set forth herein of $20,000
and $25,000 in the respective years.

         5. Incentive Bonus. During the Period of Employment,  Employee shall be
entitled to receive a bonus pursuant to the Company=s  bonus plan, if any, as in
effect  from  time to time.  It is  recognized  that a bonus  plan,  if any,  is
established at the discretion of the Company and may be subject to variables and
conditions including income performance and general performance evaluations.

         6.  Expense  Reimbursement.  The  Employee  shall be entitled to prompt
reimbursement  for  reasonable  expenses  incurred by the Employee in performing
services  for the  Company.  Employee  shall be  required  to provide  proof and
documentation of such expenditures as required by the Company.

         7. Grant of  Options.  The  Company  may grant from time to time to the
Employee,  in accordance with the terms of a stock option  agreement,  the right
and option to purchase shares of the Company=s Common Stock .

                  (a) Stock  Options  Pursuant to Stock Option  Plan.  Any Stock
Options  (AStock  Option@)  issued  shall be issued  pursuant and subject to the
provisions of the Company  Employee  Stock Option Plan (the AStock Option Plan@)
or as approved by the Board of  Directors.  Number of options,  purchase  price,
exercise periods and vesting  requirements shall be included in the stock option
document.

                  (b)  Vesting  of  Options  in  Event  of  Full  and   Complete
Disability  or Death.  In the event of full and complete  disability or death of
the employee any unvested  Stock Options shall vest  effective as of the date of
the full and  complete  disability  or the  death of  Employee.  In the event of
Employee=s full and complete disability or death, the Employee,  heirs or estate
of Employee, as the case may be, may exercise any unexecuted options at any time
subject to the time limitations within which exercise of option must occur.

                                       2
<PAGE>


                  (c) Vesting of Options in Event of  Ownership  Change.  In the
event a change in control,  all non-vested  Stock Options shall vest immediately
prior to such stock or asset  purchase.  A change in control  shall be deemed to
have taken  place if, as the result of a tender  offer,  merger,  consolidation,
sale of  substantially  all  assets,  a third party  purchase  of a  controlling
interest of the total outstanding  shares of the Company,  or any combination of
the  foregoing  transactions,  the person s who were  directors  of the  Company
immediately  before the transaction  shall cease to constitute a majority of the
board of directors of the Company or any successor to the Company. The intent of
this section is to allow the Employee to exercise any unexercised options at the
Employee=s discretion.

                  (d)  Options   Granted.   In  connection  with  acceptance  of
employment as provided  herein,  Employee is granted  qualified  incentive stock
options under the Company  Employee Stock Option Plan to purchase  50,000 shares
of the Company=s Common Stock at a price of $12.625.  These options will vest on
a  pro-rata  basis  over 60 months  beginning  May 1,  1998 and are  exercisable
through April 30, 2008.

                  8. Other Benefits.  In addition to the benefits previously set
forth in this  Agreement,  Employee shall,  during the Period of Employment,  be
entitled to the  benefits  described  below,  and as concerns  all such  benefit
programs  where years of service are a factor,  to the extent  permitted by law,
Employee shall be given credit for his years of service with Covol Technologies,
Inc. prior to the implementation of any benefit program.

                  (a) Vacation. During the Period of Employment,  Employee shall
be entitled to not less than four weeks of paid  vacation  during each  calendar
year  occurring  during the Period of  Employment.  Any and all unused  vacation
will,  at the  Company's  option,  be paid for by the Company at the end of each
calendar  year,  or will  carry  forward  from year to year  until  taken by the
Employee or paid the Employee by the Company.  Upon  termination  of  Employee=s
employment under this Agreement,  Employee shall be paid for any unused vacation
in the year in which the  termination  occurred,  and vacation  will continue to
accrue up to and including the termination  date in  proportionate to the amount
of time employed during that year.

                  (b) Sick  Leave.  Leave time will be  granted to the  Employee
that is  reasonable  under the  circumstances  and that is  consistent  with the
Company=s  policies  and  procedures,  as the same may be  changed,  modified or
provided for other officers of the Company from time to time.

                  (c) Insurance. Participation in the group insurance program of
the Company as concerns life, disability, medical and dental insurance currently
available to other employee=s as the same may be implemented,  changed, modified
or terminated for all participants from time to time. Employee shall be required
to pay that portion of the premiums for coverage  under such  insurance  that is
payable by other officers of the Company for their insurance coverage.

                                       3
<PAGE>

                  (d) Retirement  Plan.  The Employee  shall  participate in the
Company=s  Retirement  Plans in  accordance  with the  terms and  provision  and
applicable law as the same may be implemented,  changed,  amended, or terminated
from  time to  time.  Employee  shall  become  eligible  to  participate  in the
Company=s  Retirement  Plans at date of hire or as of the effective  date of the
implementation of such plans, whichever is later.

                  (e)  Automobile  Allowance.   The  Company  will  provide  the
Employee a monthly  automobile  allowance.  This  allowance is to compensate the
Employee for the use of his personal  automobile in the amount of $550 per month
during the Employment Period

                  (f) Other  Miscellaneous  Benefits.  The Company  shall pay or
reimburse Employee for the following miscellaneous benefits:

                           (i)  Annual  dues  for  association   membership  for
relevant  professional  groups and  organizations  as deemed  appropriate by the
Employee.

                           (ii)  Subscription  and purchase of books,  journals,
and publications which relate to job duties and responsibilities.

Employee shall first obtain  authorization for payment or purchases  referred to
in (i) and (ii) from the President of the Company before incurring such costs.

         9.       Terms of Employment.

                  (a) Term.  The Company  hereby agrees to continue the Employee
in its employ,  and the  Employee  hereby  agrees to remain in the employ of the
Company,  in  accordance  with the terms and  provisions  of paragraph 3 of this
Agreement, for the Period of Employment, thus terminating upon the retirement of
the Employee,  upon resignation of the Employee,  or upon thirty (30) days prior
written notice from the Company to the Employee of termination for cause.

                  (b) During the Period of Employment.  The Employee=s  services
shall be performed at the location  where the Employee was employed  immediately
preceding the Effective Date or at any office which is the  headquarters  of the
Company.

         10.      Termination of Agreement.

                  (a)  Termination  of Employment by Employer.  Anything in this
Agreement to the contrary notwithstanding,  the Company shall have the following
rights with respect to termination of Employee=s employment.

                           (i) Disability.  The Company may terminate Employee=s
employment  under this  Agreement if Employee shall become unable to fulfill his
duties  under this  Agreement,  as  measured  by the  Company=s  usual  business
activities,  by reason of any  medically  determinable  physical  and/or  mental
disability.

                           (ii) Cause.  Employee=s  employment may be terminated
for Cause.  For  purpose  of the  Agreement,  ACause@  shall mean and refer to a
determination made in good faith by the Company=s Board of Directors that:

                                    (1)  Employee  has been  convicted of or has
entered a plea of guilty or nolo  contendere  to a felony or to any other crime,
which other crime is punishable by incarceration for a period of one (1) year or
longer, or which is a crime involving moral turpitude;

                                    (2) there has been a theft, embezzlement, or
other criminal  misappropriation  of funds by Employee,  whether from Company or
any other person;

                                    (3) Employee has willfully  failed to follow
reasonable written policies or directives  established by the Board of Directors
or the Chief Executive  Officer of the Company.  Additionally,  the Employee has
willfully  failed to attend to  material  duties or  obligations  of  Employee=s
office (other than any such failure resulting from Employee=s  incapacity due to
physical or mental  illness,  which is a cause or  manifestation  of  Employee=s
disability),  which failure or refusal  continues for ninety (90) days following
delivery of a written  demand from the  Company=s  Chief  Executive  Officer for
performance to Employee  identifying  the manner in which Employee has failed to
follow such policies or directives or to perform such duties.

                           (iii) Termination pursuant to this Paragraph 10 shall
be effective as of the  effective  date of the notice by the Board of Directors,
Chief Executive Officer,  or President to Employee that it has made the required
determination,  or at such  other  subsequent  date,  if any  specified  in such
notice.

                           (iv)  Death.  If  Employee  dies during the Period of
Employment, Employee=s employment shall be terminated effective as of the end of
the calendar month during which Employee died.

         (b)      Termination by Employee.

                  (i)  With  Good  Reason.  Employee  shall  have  the  right to
terminate  his  employment  under this  Agreement  at any time for Good  Reason,
provided  Employee has  delivered  written  notice to the Company  which briefly
describes the facts  underlying  Employee=s  belief that AGood Reason@ exist and
the Company has failed to cure such situation  within thirty (30) days after the
effective  date of such notice.  For purposes of the  Agreement,  AGood  Reason@
shall mean and consist of:

                                    (1) a material  breach by the Company of its
obligations under this Agreement;

                                    (2) the  assignment  to  Employee  of duties
that are materially  inconsistent with, or that constitute a material alteration
in the  status  of  his  responsibilities  set  forth  in  Paragraph  1 of  this
Agreement, as an employee of the Company;

                                    (3) a reduction by the Company of Employee=s
Base Salary below the Base Salary set forth in Paragraph 5 (ABase Salary@);

                                    (4)   without   Employee=s   prior   written
consent,  the transfer or relocation  of  Employee=s  place of employment to any
place  other  than  the Salt  Lake  City/Provo  metropolitan  area,  except  for
reasonable travel on the business of the Company;

                                    (5) upon a change of  control  as defiend in
Paragraph 6(c) herein, or

                                    (6) upon the  consummation  of a third party
purchase  of a  controlling  interest  of the  total  outstanding  shares of the
Company.

         11.  Confidential  Information.  The Employee shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential  information,
knowledge or data relating to the Company or any of its affiliated companies and
their respective businesses,  which has been obtained by the Employee during the
Employee=s  employment  by the Company or any of its  affiliated  companies  and
which  shall  not be or  become  public  knowledge  (other  than  by acts by the
Employee or  representatives  of the Employee in  violation of this  Agreement).
After  termination of the Employee=s  employment with the Company,  the Employee
shall not,  without prior written  consent of the Company or as may otherwise be
required by law or legal process,  communicate or divulge any such  information,
knowledge or data to anyone other than the Company and those  designated  by the
Company.  In no event  shall an asserted  violation  of the  provisions  of this
Section  constitute a basis for deferring or withholding  any amounts  otherwise
payable to the Employee under the provisions of this Agreement.

         12.      Inventions.

                  (a) Assignment.  Without further  consideration,  the Employee
shall fully and promptly  report to the Company all writings,  ideas,  concepts,
inventions,  discoveries,  formulas, designs, and know-how conceived or produced
by the  Employee  at any time  during the Period of  Employment  relating to the
Company=s  trade or  business,  whether  alone or with others and whether or not
patentable or subject to copy or service  rights or trademark or other  property
protections (collectively, AInventions@ pertaining directly or indirectly to the
business  of the  Company as  conducted  by the  Employee at any time during the
Employment Period) and shall assign and hereby does assign to the Company or its
nominee  the  Employee=s  entire  right,  title and  interest in and to all such
Inventions.

                                       4
<PAGE>


                  (b) Cooperation. The Employee shall take all reasonable action
requested by the Company to protect or obtain title to any and all United States
and/or foreign patents on any such Inventions,  including execution and delivery
of all  applications,  assignments  and  other  documents  deemed  necessary  or
desirable by the Company,  provided the Company shall reimburse the Employee for
all expenses  incurred by the Employee in  connection  with such  execution  and
delivery.

         13.      Non-Competition after Termination.

                  (a)  Acknowledgment.   The  Employee   acknowledges  that  his
services and  responsibilities  are of a particular  significance to the Company
and that his  position  with the Company  does and will  continue to give him an
intimate  knowledge  of its  business.  Because of this,  it is important to the
Company that the Employee be restricted  from  competing with the Company in the
event of the termination of his employment.

                  (b)  Agreement.  The Employee  agrees that, in addition to any
other  limitations,  for a period of two (2) years after the  termination of his
employment  under this  Agreement,  the Employee will not directly or indirectly
compete with the Company or its business.

         14.  Severance Pay.  Except for  termination  for Cause under Paragraph
10(a)(iii)  herein,  if the  Employee  does not  continue  in the  employ of the
Company during the Period of Employment as provided in this  Agreement,  whether
or not the Employee is offered  continued  employment  by the  Company,  Company
shall  pay  to  Employee,  no  later  than  30  days  following  termination  of
employment,  the sum of 200% of the then current year=s annual base salary.  The
Employee  shall not be required to mitigate  the amount of the payment  provided
for in this section by seeking  other  employment  or  otherwise;  nor shall the
amount of the payment be reduced by any  compensation  earned by the Employee as
the result of employment by another employer after termination or otherwise.

         15.   Indemnification.   Subject  to  the  Company's   Certificate   of
Incorporation,  as  amended,  the  Company  shall  release,  indemnify  and hold
harmless  the  Employee  against and from any and all loss,  claims,  actions or
suits,  including  costs  and  attorney=s  fees,  both at trial  and on  appeal,
resulting  from, or arising out of or in any way connected  with the  Employee=s
acts as an officer of the Company.

                                       5
<PAGE>


         16.  Miscellaneous.  Any  notice or other  communications  required  or
permitted  to be given to the parties  hereto shall be deemed to have been given
when  received,  addressed  as follows  (or at such  other  address as the party
addressed may have substituted by notice pursuant to this Section):


                  (a)      If to the Company:

                           President and/or Chief Executive Officer
                           3280 North Frontage Road
                           Lehi, Utah
                           Attention: President and CEO


                  (b)      If to Employee:

                           Steven G. Stewart
                           187 South 1225 East
                           Bountiful, Utah  84010


         17. Governing Law. This Agreement shall in all respects be interpreted,
construed and governed by and in accordance with the laws of the State of Utah.


                  Executed this 4th day of January, 1999:

Covol Technologies, Inc.:                            Employee:



By:______________________________                    __________________________
     Brent M. Cook                                   Steven G. Stewart
     Chief Executive Officer


                                       6




                              Employment Agreement


THIS EMPLOYMENT AGREEMENT (this "Agreement") is effective as of the first day of
August 1997 (the "Effective  Date") by and between Covol  Technologies,  Inc., a
Delaware corporation (the "Company") and Dee J. Priano ("Employee"). The Company
and Employee are sometimes later in this Agreement  collectively  referred to as
the "Parties".

RECITALS

This  Agreement  is  entered  into  with  reference  to  the  following   facts,
definitions and objectives.

NOW,  THEREFORE,  in  Consideration  of  this  Agreement  and of  the  covenants
contained in this Agreement, the Parties agree as follows:

1)   Employment  and  Position.  The Company  employs  Employee and the Employee
     accepts employment by the Company as Vice President of the Company or other
     mutually  agreed  senior  position  for  the  Company  for  the  Period  of
     Employment specified in Paragraph 3, Period of Employment.

2)   Services to be Rendered.  Employee shall,  during the Period of Employment,
     serve the Company in the position set forth in Paragraph 1,  Employment and
     Position,  diligently,  competently  and in conformance  with the corporate
     policies  of the  Company.  Employee  shall be free to conduct  real estate
     investment   activities   that  do  not  conflict  or  interfere  with  the
     performance of his duties under this  Agreement.  Employee may from time to
     time perform services for Kennecott Utah Copper Corporation as long as said
     services do not conflict or interfere  with the  performance  of his duties
     under this Agreement.  In fulfilling his duties and responsibilities  under
     this  Agreement,  Employee shall report to the President or Chief Executive
     Officer of the Company.

3)   Period of Employment. Employee's employment by the Company pursuant to this
     Agreement shall, unless sooner terminated as provided in this Agreement, be
     for a term of three  (3)  years,  commencing  as of the first day of August
     1997,  and ending with the close of "business" on the  thirty-first  day of
     July 2000 (the "Period of Employment").

4)   Base Salary.  During the first  twenty-four  months of this Agreement,  the
     Employee's regular salary,  before all customary and proper taxes, shall be
     no less than $80,000 per year,  payable  bi-weekly.  During the last twelve
     months  of this  Agreement,  the  Employee's  regular  salary,  before  all
     customary  and  proper  taxes,  shall be no less  than  $125,000  per year,
     payable bi-weekly.

                                       1
<PAGE>

5)   Incentive  Bonus.  During  the  Period  of  Employment,  Employee  shall be
     entitled  to receive  bonuses  pursuant to the  Company's  bonus plan as in
     effect from time to time.

6)   Stock  Options.  Incentive  Stock Options (as defined in Section 422 of the
     Internal  Revenue  Code)  shall  be  issued  pursuant  and  subject  to the
     provisions outlined below or as otherwise mutually agreed to:

         a)       Purchase  Price.  The purchase  price per share for the shares
                  subject  to  the  Stock  Option  will  be  Eight  Dollars  and
                  Twenty-five Cents ($8.25) per share.

         b)       Number of Shares.  The Stock  Options  will be for One Hundred
                  Thousand  (100,000)  shares of the Company's Common Stock (the
                  "Optioned Shares").

         c)       Exercise  Periods.  Four Thousand (4,000) Optioned Shares will
                  be vested and  exercisable on August 1, 1997 and Four Thousand
                  (4,000)   additional   Optioned  Shares  will  be  vested  and
                  exercisable on the first day of each month  following  through
                  September  1,  1999,  at which time all One  Hundred  Thousand
                  Optioned Shares will be fully vested and exercisable.

         d)       Additional  Stock Options.  Employee shall also be eligible to
                  receive   additional   stock  options  during  the  Period  of
                  Employment  pursuant to a stock  option bonus plan as may from
                  time to time be in effect.

         e)       Vesting  of Options in Event of  Disability  or Death.  In the
                  event of disability or death of Employee,  any nonvested Stock
                  Options shall vest  effective as of the date of the disability
                  or  the  death  of  Employee.   In  the  event  of  Employee's
                  disability  or  death,  the  Employee,   heirs  or  estate  of
                  Employee,  as the case may be,  may  exercise  any  unexecuted
                  options at any time.

         f)       Vesting of Options in Event of Management Change. In the event
                  of replacement of Brent M. Cook as Chief Executive  Officer of
                  the Company,  all nonvested Stock Options and Additional Stock
                  Options  shall vest as of the date  Brent M. Cook is  released
                  from the position of Chief Executive Officer of the Company.

         g)       Vesting of Options in Event of Ownership  Change. In the event
                  a third party  tenders to purchase all  outstanding  shares of
                  the  Company,  or  substantially  all  of  the  assets  of the
                  Company,  all  non-vested  Stock  Options shall vest as of the
                  date the tender offer or asset sale is  announced.  The intent
                  of this  section is to allow the  Employee  to vote the shares
                  represented  by  the  Stock  Options  and  at  the  Employee's
                  discretion, exercise any unexecuted options.

                                       2
<PAGE>


7)   Other  Benefits.  In addition to the benefits  previously set forth in this
     Agreement,  Employee shall, during the Period of Employment, be entitled to
     the benefits  described  below,  and as concerns all such benefit  programs
     where  years of  service  are a factor,  to the  extent  permitted  by law,
     Employee  shall be given  credit  for his years of service  with  Kennecott
     Corporation and/or any of its subsidiaries.

         a)       Vacation.  During the Period of Employment,  Employee shall be
                  entitled  to not less  than  Five (5)  weeks of paid  vacation
                  during  each  calendar  year  occurring  during  the Period of
                  Employment  and that  amount  of  vacation  provided  to other
                  senior executive officers of the Company.  Upon termination of
                  Employee's employment under this Agreement,  Employee shall be
                  paid  for  any  unused  vacation  in the  year  in  which  the
                  termination occurred.

         b)       Sick  Leave.  Sick leave time will be granted to the  Employee
                  that  is  reasonable  under  the  circumstances  and  that  is
                  consistent with the Company's policies and procedures,  as the
                  same  may  be  changed,   modified  or   terminated   for  all
                  participants from time to time.

         c)       Insurance. At the Employee's option, the Company shall pay the
                  premium for and provide life, disability,  medical, and dental
                  benefits for the Employee and his family.

         d)       Retirement  Plan.  The  Employee  shall   participate  in  the
                  Company's  Retirement  Plans in accordance  with the terms and
                  provisions and applicable law, as the same may be implemented,
                  changed,  amended,  or terminated from time to time.  Employee
                  shall  become   eligible  to   participate  in  the  Company's
                  Retirement  Plans as of August 1,  1997,  or as the  effective
                  date of the implementation of such plans whichever is later.

         e)       Other  Miscellaneous   Benefits.  The  Company  shall  pay  or
                  reimburse Employee for the following miscellaneous benefits:

                  i)       Annual dues for  association membership  for relevant
                           professional groups.

                  ii)      Subscription  and  purchase of books,  journals,  and
                           publications   which   relate  to  job   duties   and
                           responsibilities.

8)   Termination of Employment by the Company.  Anytime in this Agreement to the
     contrary notwithstanding,  the Company shall have the following rights with
     respect to termination of the Employee's employment:

         a)       Cause.  Employee's employment may be terminated for Cause. For
                  purpose of this  Agreement,  "cause" shall mean and refer to a
                  determination  made in good  faith by the  Company's  Board of
                  Directors that:

                                       3
<PAGE>


                  i)       Employee has been  convicted of or has entered a plea
                           of  guilty  or nolo  contendre  to a felony or to any
                           other  crime,  which  other  crime is  punishable  by
                           incarceration for a period of one (1) year or longer,
                           or which is a crime involving moral turpitude.

                  ii)      There  has  been  a  theft,  embezzlement,  or  other
                           criminal   misappropriation  of  funds  by  Employee,
                           whether from Company or any other person.

                  iii)     Employee has  willfully  failed or refused  to follow
                           reasonable written policies or directives established
                           by the  Board of  Directors  or the  Chief  Executive
                           Officer of the  Company,  or Employee  has  willfully
                           failed to attend to material duties or obligations of
                           his office  (other  than any such  failure  resulting
                           from Employee's  incapacity due to physical or mental
                           illness  which  is  a  cause  or   manifestation   of
                           Employee's  disability),  which  failure  or  refusal
                           continues for thirty (30) days following  delivery of
                           a written demand from the Company's  Chief  Executive
                           Officer for  performance to Employee  identifying the
                           manner in which  Employee  has failed to follow  such
                           policies or  directives  or to perform  such  duties.
                           Termination  pursuant  to  this  Paragraph  shall  be
                           effective as of the  effective  date of the notice by
                           the Board of Directors  to Employee  that it has made
                           the   required   determination,   or  at  such  other
                           subsequent date, if any, specified in such notice.

         b)       Without Cause. Employee's employment may be terminated without
                  cause  provided  that the Company pays Employee upon notice of
                  termination,  any  unearned  salary  specified in Paragraph 4,
                  Base Salary,  the amount  specified in Paragraph 10, Severance
                  Pay, any earned  Incentive  Bonuses  specified in Paragraph 5,
                  Incentive Bonus, vests Employee in any Stock Options specified
                  in Paragraph 6)b,  Stock Options Number of Shares,  which have
                  not  vested as of the date of  termination  and  awards to and
                  vests Employee,  effective date of termination, any Additional
                  Stock  Options  that  Employee  has received or is eligible to
                  receive under Paragraph 6)d, Additional Stock Options.

9)   Termination  of  Employment by Employee.  Anytime in this  Agreement to the
     contrary notwithstanding, the Employee shall have the following rights with
     respect to termination of the Employee's employment:

         a)       With Good Reason.  Employee  shall have the right to terminate
                  his  employment  under  this  Agreement  at any  time for Good
                  Reason,  provided Employee has delivered written notice to the
                  Company   which  briefly   describes   the  facts   underlying
                  Employee's  belief that "Good  Reason"  exists and the Company
                  has  failed to cure such  situation  within  thirty  (30) days
                  after   effective  date  of  such  notice.   If  the  employee
                  terminates  With  Good  Reason,  the  Company  shall  pay  the

                                       4
<PAGE>

                  Employee  on the  date of  termination,  any  unearned  salary
                  specified in Paragraph 4, Base Salary, the amount specified in
                  Paragraph  10,  Severance  Pay, any earned  Incentive  Bonuses
                  specified in Paragraph 5, Incentive  Bonus,  vests Employee in
                  any Stock Options  specified in Paragraph  6)b,  Stock Options
                  Number  of  Shares  which  have not  vested  as of the date of
                  termination  and awards to and vests  Employee,  effective the
                  date  of  termination,   any  Additional  Stock  Options  that
                  Employee  has  received  or  is  eligible  to  receive   under
                  Paragraph 6)d, Additional Stock Options.  For purposes of this
                  Agreement, "Good Reason" shall mean and consist of:

                  i)       A material  breach by  the Company of its obligations
                           under  this  Agreement;   without   Employee's  prior
                           written consent, the assignment to Employee of duties
                           that  are  materially   inconsistent  with,  or  that
                           constitute a material alteration in the status of his
                           responsibilities  set forth in this  Agreement,  as a
                           Vice  President  of the Company;  without  Employee's
                           prior written consent,  the transfer or relocation of
                           Employee's  place of  employment  to any place  other
                           than  the Salt  Lake  City/Provo  metropolitan  area,
                           except for  reasonable  travel on the business of the
                           Company  or;  upon  consummation  of a sale of all or
                           substantially  all of the outstanding stock or assets
                           of the  Company in which sale the  acquiring  company
                           did not assume all of the  obligations of the Company
                           under this Agreement.

         b)       Without Good Reason.  With not less than sixty (60) days prior
                  written  notice  (which  notice  shall  specify  the  date  of
                  termination),  Employee  shall have the right to terminate his
                  employment under this Agreement without Good Reason.

10)  Severance  Pay. If this  Agreement  terminates  and the  Employee  does not
     continue in the  employment of the Company,  whether or not the Employee is
     offered continued  employment by the Company,  the Company shall pay to the
     Employee an amount  equal to two times the base annual  salary in effect at
     the  time of such  termination.  The  Employee  shall  not be  required  to
     mitigate the amount of the payment  provided for in this section by seeking
     other  employment  or  otherwise,  nor shall the  amount of the  payment be
     reduced  by any  compensation  earned  by the  Employee  as the  result  of
     employment by another employer after termination or otherwise.

                                        5
<PAGE>

11)  Automobile Allowance.  Commencing January 1, 1999 and continuing until this
     Agreement  terminates,  the Company  shall pay the  Employee an  Automobile
     Allowance of no less than $550 per month.






Accepted and Agreed to:


/Dee J. Priano/                                               4 January 1999
- -------------------------------------                  -------------------------
Dee J. Priano                                                     Date




Accepted and Agreed to for Covol Technologies:


/Brent M. Cook/                                               4 January 1999
- -------------------------------------                  -------------------------
Brent M. Cook                                                     Date


                                       6




                            COVOL TECHNOLOGIES, INC.

                              List of Subsidiaries
                                 Jurisdiction of

        Name                                     Organization

        Utah Synfuel #1, Ltd.                    Delaware limited Partnership

        Alabama Synfuel #1, Ltd.                 Delaware limited Partnership

        Flat Ridge Corporation                   Utah corporation

        Commonwealth Synfuel, L.L.C.             Utah limited liability company




                       CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the  incorporation by reference in the  registration  statement of
Covol  Technologies,  Inc. on Form S-3 (File No.  333-67371) of our report dated
December 22, 1998,  on our audits of the  consolidated  financial  statements of
Covol  Technologies,  Inc. as of September 30, 1998 and 1997,  and for the years
ended  September  30,  1998,  1997,  and 1996,  which report is included in this
Annual Report on Form 10-K.

/PricewaterhouseCoopers LLP/

Salt Lake City, Utah
December 22, 1998

<TABLE> <S> <C>


<ARTICLE>                     5
<LEGEND>
THIS  SCHEDULE  CONTAINS  SUMMARY  FINANCIAL   INFORMATION  EXTRACTED  FROM  THE
CONSOLIDATED  FINANCIAL  STATEMENTS  AS OF AND FOR THE YEAR ENDED  SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>                               1,000
       
<S>                             <C>
<PERIOD-TYPE>                  YEAR
<FISCAL-YEAR-END>                           SEP-30-1998
<PERIOD-END>                                SEP-30-1998
<CASH>                                              727
<SECURITIES>                                          0
<RECEIVABLES>                                     3,891
<ALLOWANCES>                                          0
<INVENTORY>                                       1,645
<CURRENT-ASSETS>                                 38,101
<PP&E>                                           16,056
<DEPRECIATION>                                    1,154
<TOTAL-ASSETS>                                   67,909
<CURRENT-LIABILITIES>                            29,552
<BONDS>                                          14,077
                                 0
                                           1
<COMMON>                                             11
<OTHER-SE>                                       21,559
<TOTAL-LIABILITY-AND-EQUITY>                     67,909
<SALES>                                           3,569
<TOTAL-REVENUES>                                 12,699
<CGS>                                             9,295
<TOTAL-COSTS>                                     9,295
<OTHER-EXPENSES>                                  1,579
<LOSS-PROVISION>                                      0
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<INCOME-PRETAX>                                  (3,986)
<INCOME-TAX>                                          0
<INCOME-CONTINUING>                              (3,986)
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<CHANGES>                                             0
<NET-INCOME>                                     (3,986)
<EPS-PRIMARY>                                     (0.43)
<EPS-DILUTED>                                     (0.43)
        

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<TABLE> <S> <C>


<ARTICLE>                     5
<LEGEND>
THIS  SCHEDULE  CONTAINS  SUMMARY  FINANCIAL   INFORMATION  EXTRACTED  FROM  THE
CONSOLIDATED  FINANCIAL  STATEMENTS AS OF AND FOR THE YEARS ENDED  SEPTEMBER 30,
1997 AND 1996 AND IS QUALIFIED  IN ITS  ENTIRETY BY REFERENCE TO SUCH  FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER>                                   1,000
       
<S>                                         <C>                 <C>                  
<PERIOD-TYPE>                                 YEAR                YEAR
<FISCAL-YEAR-END>                              SEP-30-1997         SEP-30-1996
<PERIOD-END>                                   SEP-30-1997         SEP-30-1996
<CASH>                                               4,780                 490
<SECURITIES>                                             0                   0
<RECEIVABLES>                                        1,099                  78
<ALLOWANCES>                                             0                   0
<INVENTORY>                                          1,819                 163  
<CURRENT-ASSETS>                                    17,268                 779
<PP&E>                                               6,060               7,528
<DEPRECIATION>                                         596                 403
<TOTAL-ASSETS>                                      26,870               8,772
<CURRENT-LIABILITIES>                               12,308               4,261
<BONDS>                                              3,389                 151
                                    0                   0
                                              1                   0 
<COMMON>                                                 9                   8
<OTHER-SE>                                           5,919                (241) 
<TOTAL-LIABILITY-AND-EQUITY>                        26,870               8,772
<SALES>                                                251                 195
<TOTAL-REVENUES>                                       251                 295
<CGS>                                                4,803                 860
<TOTAL-COSTS>                                        4,803                 860
<OTHER-EXPENSES>                                     3,364               8,783
<LOSS-PROVISION>                                         0                   0
<INTEREST-EXPENSE>                                   1,645                  94
<INCOME-PRETAX>                                    (10,995)            (12,932) 
<INCOME-TAX>                                             0                  23
<INCOME-CONTINUING>                                (10,995)            (12,955)
<DISCONTINUED>                                           0                (881) 
<EXTRAORDINARY>                                          0                   0 
<CHANGES>                                                0                   0
<NET-INCOME>                                       (10,995)            (13,836)  
<EPS-PRIMARY>                                        (1.38)              (1.99) 
<EPS-DILUTED>                                        (1.38)              (1.99)
        

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