TRANSFER AND DEVELOPMENT AGREEMENT

This Transfer and Development Agreement (the "Agreement") is made effective as
of October 29, 1999 (the "Effective Date"), by and between SGI International, a
corporation organized and existing under the laws of Utah, having a place of
business at 1200 Prospect St., Suite 325, La Jolla, California 92037, USA
("SGI") and Mitsubishi Heavy Industries, a corporation ("MHI") organized and
existing under the laws of Japan, having a place of business at 5-1 Marunouchi 2
Chome, Chiyoda-Ku, Tokyo, Japan ("MHI" ).

                                    RECITALS

A. SGI is the inventor of the LFC technology which upgrades low grade coal into
a higher Btu coal and produces coal liquids.

B. SGI entered into a partnership with SMC Mining Company whose name was later
changed to Bluegrass Coal Holding Company and whose wholly-owned subsidiary,
ENCOAL Corporation constructed a liquids from Coal ("LFC") Demonstration Plant
(the "Plant") in Gillette, Wyoming.

C. SGI holds a fifty percent (50%) partnership interest (the "Partnership
Interest") and Bluegrass holds the other fifty percent (50%) partnership
interest (the "Bluegrass Partnership Interest") in a California Partnership,
the TEK-KOL Partnership that owns the technology used in the Plant.

D. SGI entered into a joint venture with Mitsubishi Corporation ("MC") on
January 14, 1999 and created LFC Technologies LLC ("LFC Co."), which is
equally owned by SGI and MC.

E. MHI has provided assistance to SGI and LFC Co. in attempting to develop the
LFC Technology and be involved in product sales in China and throughout the
world.

F. On April 22, 1999, SGI entered into an acquisition agreement with the
present owners (AEI Resources) of Bluegrass and ENCOAL Corporation to
acquire the Plant, the Bluegrass Partnership Interest and all LFC interests
(the "Acquisition") owned by Bluegrass or AEI Resources.

G. As part of a restructuring of the joint venture between MC and SGI described
more specifically in a Letter of Intent dated September 24, 1999 (the "LOI") SGI
intends to convey all of the interest in the LFC Technology to LFC Co. The
first Assignment (the "First Transfer") will convey all of SGI's interests
prior to the close of the Acquisition in the LFC patents (described hereto in
Exhibit A), and in the LFC trade secret information (but excluding the Plant
and all tangible property) (the "LFC Technology") to LFC Co.

H. Effective on the completion of the Acquisition (the "Close",) from AEI
Resources, SGI intends to assign (the "Second Transfer") the other fifty
percent (50%) of the LFC Technology to LFC Co such that LFC Co. will own
one hundred percent (100%) of the LFC Technology.

I. In order to assist SGI in completing the Close with AEI Resources MHI is
willing to execute an agreement titled Waiver and Release (the "Release")
by and Between Mitsubishi Heavy Industries and AEI Resources substantially
in the form attached hereto as Exhibit B in order to obtain certain rights
set forth in the LOI and to be able to be involved in marketing the LFC
Technology and provide engineering services related thereto.

J. The Release releases AEI Resources' subsidiary from an obligation to pay
$1.13 million dollars for engineering work performed for that subsidiary.

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                                   AGREEMENT

Now Therefore, in consideration of the matters set forth in the Recitals, and
for other good and valuable consideration, the parties hereto agree as follows:

1. The Release. MHI shall immediately upon the execution of this Agreement
execute the Release attached hereto as Exhibit B and mail the original by UPS,
FED-EX or the like to SGI for its benefit in completing the Close with AEI
Resources.

2. The Close. SGI agrees that it will not transfer the Release absolutely to AEI
Resources unless it completes the Close of the Acquisition and SGI has executed
an assignment for the Second Transfer making that Second Transfer occur
concurrent with the Close. A copy of the assignment which will be executed in
substantially the same form for the Second Transfer is attached hereto as
Exhibit C.

3. SGI's Obligations. SGI agrees that as consideration to MHI for its execution
of the Release, SGI will assume the obligation to make payment of the sum of
$1.13 million (the "Payment Obligation").

4. SGI's Release. MHI agrees that it hereby releases SGI from the Payment
Obligation on the occurrence of the Second Transfer.

5. Lack of Second Transfer. Both parties hereto agree that if the Second
Transfer does not occur or is terminated or cancelled for any reason that SGI
will continue to have the Payment Obligation until it transmits the Release back
to MHI, at which time it shall be released from any obligation under the Payment
Obligation, and AEI Resources shall have the obligation to perform the Payment
Obligation immediately after such termination, cancellation or failure to occur
of the Second Transfer.

6. Further Agreements. Neither party shall have any obligation to enter into any
further agreement with the other except as is, in its sole judgement may deem
advisable. It is understood that no patent, copyright, trademark or other
proprietary right or license is granted by this Agreement.

7. Effective Date and Termination This agreement shall be effective as of the
Effective Date and shall continue until December 31, 1999.

8. Authority. Each party warrants and represents that it possesses all necessary
powers, rights and authority to lawfully make the disclosures subject in the
Agreement

9. Miscellaneous. This Agreement represents the entire understanding and
agreement of the parties and supersedes all prior communications, agreements and
understandings relating to the subject matter hereof. This Agreement may not be
assigned by either party without the prior written consent of the other.

In Witness Whereof, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives on dates specified below.

Mitsubishi Heavy Industries

BY:

Its:

Dated:

SGI International, Inc.

BY:
Its:
Dated: