**
UNITED STATESSECURITIES AND EXCHANGECOMMISSIONWashington, DC 20549
FORM 10-QSB(Mark One)
[**X**] QuarterlyReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 for the quarterly period ended March 31, 2001
or
[   ] TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 for the transition period from ____ to _____  
Commission File Number 2-93124
**SGI International**(Exact name of small business issueras specified in its charter)
Utah(State or other jurisdiction of incorporation or organization)33-0119035(I.R.S. Employer Identification No.)
1200 Prospect Street, Suite 325, La Jolla, California92037(Address of principal executive offices)
(858) 551-1090(Issuer's telephone number) 
(Former name, former address and former fiscal year, ifchanged since last report)
Check whether the issuer (1) filed all reports requiredto be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirementsfor the past 90 days. 
[**X**] Yes [ ] No
The number of shares of common stock, no par value, outstandingas of May 4, 2001, was 84,327,638.
Transitional Small Business Disclosure Format (Check one):[ ] Yes [**X**] No 

**TABLE OF CONTENTS**
**FORM 10-QSB**
PART I.FINANCIAL INFORMATIONITEM 1. FINANCIALSTATEMENTSCondensed ConsolidatedBalance Sheets3Condensed ConsolidatedStatements of Operations4Condensed ConsolidatedStatement of Stockholders' Deficiency5Condensed ConsolidatedStatements of Cash Flows6Notes to CondensedConsolidated Financial Statements7ITEM 2. MANAGEMENT'SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITIONAND RESULTS OF OPERATIONSIntroductory Note11Results of Operations12Liquidity and CapitalResources13PART II.OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS15ITEM 2. CHANGES INSECURITIES15ITEM 3. DEFAULTS UPONSENIOR DEBT SECURITIES16ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS16ITEM 5. OTHER INFORMATION16ITEM 6. EXHIBITS ANDREPORTS ON FORM 8-K17PART III.SIGNATURES18       
 **SGI INTERNATIONAL AND SUBSIDIARIES****CONDENSED CONSOLIDATED BALANCE SHEETS**     **March 31,** December 31, **2001** 2000**(Unaudited)** ASSETS  Current assets:   Cash$ 472,630 $ 410,352Restricted cash deposit200,000 200,000Trade accounts receivable, lessallowance for doubtful accounts of $45,857and $47,989470,373 1,048,996Inventories414,064 414,268Costs and estimated earnings inexcess of billings on contracts340,448 212,742Prepaid expenses and other currentassets35,553 78,826Total current assets1,933,0682,365,184    LFC Royalty rights, net549,938 628,500LFC Process equipment, net198,810 230,225Investment in LFC Investees214,398 225,608LFC cogeneration project, net78,963 105,284LFC related notes receivable,net150,000 150,000Other assets, net26,656 26,337Property, plant and equipment,net of accumulated depreciation and amortization of $1,416,597 and $1,363,452 2,373,882  2,415,823Goodwill, net of accumulated amortizationof $252,568 and $240,585227,676 239,659Interest receivable on notes fromstockholders46,971 37,680$ 5,800,362$ 6,424,300LIABILITIES AND STOCKHOLDERS'DEFICIENCY   Current liabilities:   Accounts payable$ 1,104,293 $ 1,006,575Notes payable, net1,647,437 1,673,738Accrued salaries, benefits andrelated taxes1,390,989 1,271,155Billings in excess of costs andestimated earnings on contracts645,396 976,867Interest payable328,661 298,893Other accrued expenses253,885 284,470Current maturities of long-termdebt4,170,386 4,170,386Total current liabilities9,541,047 9,682,084Long-term debt, lesscurrent maturities2,305,5842,259,204Total liabilities11,846,631 11,941,288COMMITMENTS AND CONTINGENCIESMinority interest453,920 454,997    Stockholders' deficiency:   Convertible preferredstock605605Common stock54,746,542 53,885,499Paid-in capital8,132,743 7,929,297Accumulated deficit(68,909,079) (67,316,386)Notes receivable from stockholders(471,000) (471,000)Total stockholders' deficiency(6,500,189) (5,971,985)$ 5,800,362$ 6,424,300*See notes to condensedconsolidated financial statements.* **SGI INTERNATIONAL AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS** **(Unaudited)**     **Three months ended March31,** **2001** 2000 REVENUES:     Contract revenues **$1,254,592** $1,055,711    EXPENSES:     Cost of sales **784,168** 809,715 Research and development **463,887** 368,730 Loss on LFC investee **11,210** 18,853 Selling, general and administrative **858,189** 835,584 Legal and accounting **98,003** 97,475 Depreciation and amortization **201,819** 226,109 Total expenses **2,417,276** 2,356,466 Loss from operations **(1,162,684)** (1,300,755)       NON-OPERATING INCOME (EXPENSES):     Interest expense **(523,418)** (210,227) Other income **92,332** 19,023 Loss before minority interest in consolidatedsubsidiary **(1,593,770)** (1,491,959)       Minority interest in loss of consolidatedsubsidiary **1,077** 5,164 Net loss **$ (1,592,693)** $ (1,486,795) Loss per common share basic **$ (0.02)** $ (0.03)       Weighted average shares outstanding **79,823,677** 57,171,299 *See notes to condensed consolidated financial statements.***SGI INTERNATIONAL AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'DEFICIENCY****(Unaudited)**Convertible Preferred StockCommon StockAccumulatedNotesTotalStockholders'SharesAmountSharesAmountPaid-in CapitalDeficitReceivableDeficiencyBalances at December31, 200060,518$ 60577,049,377$ 53,885,499$ 7,929,297$ (67,316,386)$ (471,000)$ (5,971,985)-  Issuance of common stock for services and operating activities
511,21193,93593,935Issuance of common stock for cash, net4,460,751444,410(13,133)431,277Issuance of common stock for notes payable and interest2,045,493        322,698                  322,698Imputed beneficial conversion feature related to convertibledebt          216,579                  216,579Net loss(1,592,693)(1,592,693)Balances at March31, 200160,518$ 60584,066,832$ 54,746,542$ 8,132,743$ (68,909,079)$ (471,000)$ (6,500,189)
*See notes to condensed consolidated financial statements.*  
**SGI INTERNATIONAL AND SUBSIDIARIES**
**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)****Three months endedMarch 31,****2001**2000Operating activities:Net loss**$ (1,592,693)**$ (1,486,795)Adjustments to reconcilenet loss to net cash usedin operating activities:Depreciation and amortization**201,819**226,109Common stock issuedfor services and operating activities**30,616**40,025Common stock issuedfor interest**2,569**-Amortization of beneficialconversion feature on debt**296,135**-Accrued long-terminterest expense**46,380**51,804Accrued interest income**(9,291)**(9,394)Minority interestin loss of consolidated subsidiary**(1,077)**(5,164)Equity in net lossof LFC investee**11,210**18,853Changes in operatingassets and liabilities:Trade accounts receivable**450,917**(449,038)Inventories**204**(1,518)Prepaid expenses and other current assets**43,273**20,042Accounts payable**97,718**7,984Billings in excess of costs and estimated earnings oncontracts**(331,471)**290,279Accrued salaries, benefits and related taxes**119,834**23,001Interest payable**47,639**17,513Other accrued expenses**32,734**(11,540)Net cash used in operating activities**(553,484)**(1,267,839)Investing activities:Purchase of property and equipment**(11,203)**(2,721)Additions to LFC Process equipment**-**(72,000)Other assets**(713)**-Net cash used in investing activities**(11,916)**(74,721)Financing activities:Proceeds from issuance of debt**196,401**425,705Payments of notes payable**-**(2,375)Proceeds from issuance of common stock**431,277**1,209,028Net cash provided by financing activities**627,678**1,632,358Net increase in cash**62,278**289,798Cash at beginningof period**410,352**278,391Cash at end of period**$ 472,630**$ 568,189Supplemental disclosureof cash flow information:Cash paid for interest**$ 126,138**$ 131,304Supplemental disclosureof non-cash activities:Conversion of preferred stock**-**38,312Common stock issued for accrued liabilities**63,319**-Common stock issued for debt and interest payable**320,129**400,378Imputed beneficial conversion feature related to convertibledebt**193,599**-*See notes to condensedconsolidated financial statements.*

**SGI INTERNATIONAL AND SUBSIDIARIES****NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**
**MARCH 31, 2001**
**(1) Business**
SGI International, a Utah corporation, (together withits subsidiaries, hereinafter referred to as the "Company"), has its principaloffice in La Jolla, California. The Company is primarily in the businessof developing and marketing energy-related technologies, which at the presentinclude the Liquids From Coal ("LFC") Process and, the Opti-Crude EnhancementTechnology ("OCET") Process. The LFCÒProcess is designed to convert and upgrade low-rank coal into a higherBtu more efficient fuel to produce power and simultaneously produce a lowtemperature coal tar, which contains valuable chemicals. The OCET Processis designed to increase the efficiency of oil refineries by deasphaltingcrude oil as well as residual oil bottoms ("resid"), which is producedin oil refining. Through Assembly Manufacturing Systems, Inc. ("AMS"),a wholly owned subsidiary, the Company is in the business of designingand manufacturing custom precision automated assembly equipment. The Companyis also attempting to develop the Level Sensor ("LS") and Asphaltenes ProcessingTechnology. The LS technology is designed to overcome a number of limitationspresented by existing "off-the-shelf" equipment and sensors. The Company'ssensor is characterized by a high degree of sensitivity, electrical stabilityand its small size. The Asphaltenes Processing Technology is intended toconvert the unwanted asphaltene by-products of the OCET Process, as wellas the existing solvent deasphalting processes, into a coal-like fuel.
**(2) Basis of Presentation**
The accompanying condensed consolidated financial statementsof SGI International and subsidiaries for the three months ended March31, 2001, and 2000, are unaudited and in the opinion of management havebeen prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial information and theinstructions to Form 10-QSB. Accordingly, they do not include all informationand notes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements. These financial statementsreflect all adjustments, consisting of only normal recurring adjustmentswhich, in the opinion of management, are necessary for a fair statementof the consolidated financial position as of March 31, 2001, and the consolidatedresults of operations and cash flows for the three months ended March 31,2001, and 2000. The results of operations for the three months ended March31, 2001, are not necessarily indicative of the results to be expectedfor the year ending December 31, 2001. For more complete financial information,these financial statements, and the notes thereto, should be read in conjunctionwith the consolidated audited financial statements for the year ended December31, 2000, included in the Company's Form 10-KSB filed with the Securitiesand Exchange Commission.
The accompanying condensed consolidated financial statementsare prepared in conformity with accounting principles generally acceptedin the United States of America, which contemplates continuation of theCompany as a going concern and realization of assets and settlement ofliabilities and commitments in the normal course of business. The recoveryof amounts invested in the Company's principal assets, the LFC and OCETProcess assets are dependent upon the Company's ability to adequately fundits on-going development operations and any capital contributions thatmay be required for its joint venture "LFC Technologies, LLC" ("LFC Tech")with MLFC Corporation ("MLFC"), a wholly-owned subsidiary of MitsubishiCorp. Furthermore, the ability to successfully bring both LFC and OCETProcess technologies to commercialization will ultimately depend on theCompany's ability to attract sufficient additional equity, debt or otherthird-party financing.
Success in commercialization of the LFC Process and OCETProcess is dependent in large part upon the ability to enter into satisfactoryarrangements with other partners, financiers or customers and upon theability of these third parties to perform their responsibilities. The resourcesrequired to profitably develop, construct and operate an LFC plant arelikely to include hundreds of millions of dollars, and expertise in majorplant development and operations. There can be no assurance any licenses,joint venture agreements or other arrangements will be available on acceptableterms, if at all; that any revenue will be derived from such arrangements;or that, if revenue is generated, any of said arrangements will be profitableto the Company. If the Company is unsuccessful in its attempts to licensethe LFC Process or OCET Process, or if such third parties are unsuccessfulin profitably developing and operating LFC plants, the planned businessand operations of the Company will likely not succeed and the Company wouldnot be able to recover the carrying value of the long-lived assets relatedto either the LFC Process or OCET Process.
The Company had negative working capital of $7,608,000and an accumulated deficit of $68,909,000 at March 31, 2001. These factorsand the Company's recurring losses from continuing operations, among others,raise substantial doubt about the Company's ability to continue as a goingconcern. The Company is currently seeking additional financing throughpublic or private sales of its securities to fund working capital requirements.The Company will also seek funding through additional strategic partnerships,joint ventures or similar arrangements to commercialize the technologies.There can be no assurance that any collaborative financing arrangementsthrough a joint venture, and/or with strategic partners, will be availablewhen needed, or on terms acceptable to the Company. If adequate funds arenot available, the Company may be required to curtail or terminate oneor more of its operating activities. The Company is engaged in continuingnegotiations to secure additional capital and financing, and while managementbelieves funds can be raised, there is no assurance that their effortswill be successful. The consolidated financial statements do not includeany adjustments that might result from the outcome of this uncertainty.
**(3) Financing Transactions**
During the quarter ended March 31, 2001, the Company,upon maturity, exchanged three notes payable aggregating $226,192 in principaland interest for 1,585,939 shares of common stock.
During the quarter ended March 31, 2001, the Company soldseven notes payable aggregating $196,401 for cash. The notes bear interestat 9% per annum, mature one year from the sale date and are unsecured.The notes and accrued interest are payable in cash or upon maturity, atthe Company's option, by issuing 2,532,126 shares of restricted commonstock. In conjunction with the sale of these notes the Company recordeda beneficial conversion feature of $193,599.
During the three month period ended March 31, 2001, theCompany issued approximately 4,461,000 shares of restricted common stockto accredited investors for approximately $444,000 in cash. In connectiontherewith the Company paid approximately $13,000 in fees for services rendered.
In February 2001, the Board of Directors approved the2001 Non-Qualified Stock Option Plan (the "2001 Stock Plan") pursuant towhich a maximum aggregate of 4,000,000 shares was reserved for grant. Underthe 2001 Stock Plan, employees may be granted as an incentive or bonusan opportunity to purchase common stock in the Company, by way of non-qualified(a) stock options or warrants, (b) stock purchase rights, (c) stock appreciationrights and (d) long term performance awards. The terms and conditions ofeach award are at the discretion of the Board of Directors or any dulyauthorized committee. During the quarter ended March 31, 2001, in accordancewith the 2001 Stock Plan , the Company issued warrants at fair market valueto employees of the Company. The exercise price was not lower than theclosing bid price on the grant date. The warrants and incentive optionsare exercisable for a total of 1,215,000 shares of common stock at $0.26per share, the closing bid prices on the grant dates. The warrants areexercisable one year from the date of grant and expire on December 31,2005.
During the quarter ended March 31, 2001, the Company,as provided in their related consulting agreements, issued approximately392,000 restricted common shares to consultants for services rendered,valued at approximately $69,500.
During the quarter ended March 31, 2001, the Company issuedapproximately 70,000 shares of restricted common stock valued at approximately$14,500. The shares were issued in full settlement of two contractual claimswhich arose in the ordinary course of business.
**(4) Related Party Transactions**
During the quarter ended March 31, 2001, two outside directorsof the Company, upon maturity, exchanged their notes payable aggregating$96,506 in principal and interest for 459,554 shares of restricted commonstock. On the day of the exchange the bid price of the Company's commonstock was $0.21.
On December 10, 2000, as a condition for obtaining a $100,000line-of-credit for AMS with a financial institution, an entity controlledby an outside director guaranteed the payment of the line-of-credit whichexpires on December 31, 2001. In return for this guarantee the Companyduring the quarter ended March 31, 2001, paid this entity 50,000 sharesof restricted common stock valued at $10,000.
Effective March 23, 2001, the Company amended the termsof a $25,000 note payable to an outside director of the Company. Pursuantto the amendment the note is now due five days after the Company receiveswritten notice of demand and may be paid by mutual consent in cash or restrictedstock.
**(5) Composition of Certain Financial Statement Captions**
Inventories
Inventories are stated at the lower of cost or market, using the first-in,first-out cost method. Substantially, all inventories represent finishedgoods held for use in operations.
Property, Plant and Equipment March 31,December 31, 20012000ENCOAL Demonstration Plant$ 2,121,000$ 2,121,000Laboratory equipment1,036,0001,036,000Machinery and equipment197,000196,000Computer equipment267,000266,000Office furniture and fixtures73,00072,000Leasehold improvements54,00054,000Projects under construction43,00034,000 3,791,0003,779,000Less accumulated depreciation(1,417,000)(1,363,000)Net property, plant and equipment$ 2,374,000$ 2,416,000
Notes Payable
The Company from time to time issues various notes payablewhich contain a beneficial conversion feature. The Company in accordancewith accounting principles generally accepted in the United States of Americahas recognized this beneficial conversion feature by allocating a portionof the proceeds to additional paid-in capital and as an offset to the notespayable. During the three month period ended March 31, 2001, the Companyamortized approximately $296,000 of the beneficial conversion feature.Short-term notes payable are shown below net of the unamortized portionof the beneficial conversion feature.  March 31, December 31,20012000   Notes payable$ 2,201,611$ 2,307,468Beneficial conversion feature(554,174) (633,730)Notes payable, net$1,647,437$ 1,673,738
**(6) INFORMATION ON INDUSTRY SEGMENTS**
The Company in the past has managed its segments basedon business units that are in turn based along technological lines. Thesebusiness units offer products and services to different markets in accordancewith their underlying technology. Accordingly, the Company's three businesssegments were centered on the operations associated with the LFC Process,the OCET Process and the manufacturing of custom automated assembly systems.
During 2000, the Company's focus of its OCET lab and technicalfacilities slowly shifted from being primarily devoted to the OCET Process,to more of a general research and development facility capable of assistingthe Company on its various research and development projects. These variousresearch and development projects include (a) enhancing the value of thevarious CDL by-products, (b) advancing the Level Sensor Technology, (c)further developing the Asphaltenes to Coal Process and (d) advancing thedevelopment of the OCET Process. In keeping with this changing focus theCompany effective February 28, 2001, combined the OCET lab and the SGITechnical Center ("SGITC") into one corporate wide research facility whichwill now be known solely as SGITC. Accordingly, all assets not solely devotedto the OCET Process and the OCET lab's lease have been transferred to SGITC,a division of SGI International. This combination will not result in anychange in business segment reporting as the Company will continue to reportthe operations of its technical facilities as one segment by combiningOCET's operations and those of SGITC.
The Company evaluates performance of each segment basedon profit or loss from operations before income taxes. The Company hasno significant intersegment sales and intersegment transfers are done atcost. Three months endedAutomatedLFCMarch 31,AssemblyProcessSGITCCorporateTotal2001Revenues $ 1,255,000$ -$ -$ -$ 1,255,000Net income (loss)232,000(736,000)(36,000)(1,053,000)(1,593,000)Equity in operationsof investee-(11,000)--(11,000)Identifiable assets,net1,644,0003,706,000120,000330,0005,800,000Depreciation and amortization31,000137,00031,0003,000202,000R&D expenditures-327,00082,00055,000464,000Interest expense---523,000523,0002000Revenues$ 1,054,000$ -$ 2,000$ -$ 1,056,000Net income (loss)35,000(679,000)(172,000)(671,000)(1,487,000)Equity in operationsof investee-(19,000)--(19,000)Identifiable assets,net1,777,0004,316,000186,000994,0007,273,000Depreciation and amortization31,000138,00053,0004,000226,000R&D expenditures-235,000134,000-369,000Interest expense1,000--209,000210,000**(7) Reclassification**
Certain prior period amounts have been reclassified to conform to thecurrent period presentation. These changes had no impact on previouslyreported results of operations, cash flows or stockholders' deficiency. 
**ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND              RESULTS OF OPERATIONS**
**Introductory Note**
This Quarterly Report on Form 10-QSB contains statements relative to(i) projections, (ii) estimates, (iii) future research plans and expenditures,(iv) potential collaborative arrangements, (v) opinions of management and(vi) the need for and availability of additional financing which may beconsidered "forward-looking statements."
The forward-looking statements included herein are based on currentexpectations that involve a number of risks and uncertainties. These forward-lookingstatements are based on assumptions regarding the Company's business andtechnology, which involve judgments with respect to, among other things,future scientific, economic and competitive conditions, and future businessdecisions, as well as risk factors detailed from time to time in the Company'sSecurities and Exchange Commission reports including this Form 10-QSB,all of which are difficult or impossible to predict accurately and manyof which are beyond the control of the Company. Although the Company believesthat the assumptions underlying the forward-looking statements are reasonable,any of the assumptions could prove inaccurate and, therefore, there canbe no assurance that the results contemplated will be realized and actualresults may differ materially.
Readers are urged to carefully review and consider the various disclosuresmade by the Company in this report and in the Company's other reports filedwith the Securities and Exchange Commission that attempt to advise interestedparties of the risks and factors that may affect the Company's business.Historical results and percentage relationships will not necessarily beindicative of the operating results of any future period.
**Results of Operations**
**THREE MONTHS ENDED MARCH 31, 2001, COMPARED TO THREEMONTHS ENDED MARCH 31, 2000.**
***Net Loss per Common Share.***Basic net loss per common sharefor the period ended March 31, 2001, decreased approximately $0.01 pershare over the prior year period. The decrease in basic net loss per sharefor the current three month period is attributable to an increase in theweighted average number of common shares outstanding as the net loss forthe quarter increased approximately $106,000 over the prior year.
***Revenues and Gross Margin*.**Revenues and cost of salesare primarily attributable to Assembly and Manufacturing Systems, Inc.(AMS) and are recorded using the percentage of completion method. Revenuesand gross margin at AMS for the three months ended March 31, 2001, increased19% and 14%, respectively, over 2000. Gross margins may vary in any givenperiod as a result of the variations in profitability of contracts forlarge orders of automated production systems or specialty machines, aswell as efficiencies related to the overall utilization of AMS' manufacturingresources. It is expected that gross margins on future revenues will beat or below normal levels of approximately 24% of sales.
The Company attributes the increase in revenues primarily to strongsales to the medical industry which continued from the prior year. Futuresales to all sectors for the remainder of 2001 are anticipated to be belowprior year levels. This projection is based on the slowing U. S. economyand order activity.
***Loss on Investment in LFC Investee*.**The Company's shareof the losses for its LFC joint venture (LFC Tech) for the three monthsended March 31, 2001, decreased 41% over the same prior year period. Thedecrease is primarily attributable to a decrease in legal and accountingfees for the quarter.
***Research and Development Expenses.***Research and developmentexpenses for the three months ended March 31, 2001, increased 26% overthe same prior year period. The increase is primarily attributable to areduction in capitalizable engineering and development work related tothe ENCOAL LFC plant.
***Selling, General and Administrative Expenses*.**Selling,general and administrative expenses for the three months ended March 31,2001, increased 3% over the same prior year period. The increase is primarilyattributable to the carrying costs associated with the ENCOAL LFC plant.Selling, general and administrative expenses for AMS increased approximately$24,000 or 13% over the same prior year period due to increased sellingexpenses.
***Legal and Accounting Expenses.***Legal and accounting expensesfor the three months ended March 31, 2001, remained relatively unchangedover the same prior year period.
***Depreciation and Amortization Expenses*.**Depreciation andamortization expense for the three months ended March 31, 2001, decreased11% over the same prior year period due primarily to a significant portionof the Company's laboratory assets becoming fully depreciated.
***Interest Expense.***Interest expense for the three monthsended March 31, 2001, increased 149% over the same prior year period. Theincrease is primarily due to a non-cash interest charge of approximately$296,000 related to the amortization of the imputed beneficial conversionfeature of various convertible notes payable, primarily issued during thelast half of 2000.
***Other Income.***Other income for the three months endedMarch 31, 2001, increased 385% due the Company's receipt of $75,000 insettlement of a lawsuit.  
**Liquidity and Capital Resources**
As of March 31, 2001, the Company had assets totaling$5,800,000, including restricted cash of $200,000, and a working capitaldeficiency of $7,608,000. Current maturities of approximately $4,200,000of long-term debt, along with current notes payable, accounts payable andaccrued salaries primarily contribute to the working capital deficiencyat March 31, 2001. This is compared to assets of $7,300,000 and a $1,475,000working capital deficiency as of March 31, 2000. The Company anticipatescontinued operating losses over the next twelve months and has both short-termand long-term liquidity deficiencies as of March 31, 2001.
Other short-term liquidity requirements are expected tobe satisfied from existing cash balances, proceeds from the sale of equitysecurities in the future or other collaborative arrangements. Negotiationsare on-going for the public and private placement of equity securities,the proceeds of which are intended to be used to satisfy the short-termliquidity deficiency. In the event that the Company is unable to financeoperations at the current level, various administrative activities wouldbe curtailed and certain research and development efforts would be reduced.The Company will not be able to sustain operations if it is unsuccessfulin securing sufficient financing and/or generating revenues from operations.
The Company had long-term liquidity deficiencies at March31, 2001. Over the long-term, the Company will require substantial additionalfunds to maintain and expand its research and development activities andultimately to commercialize, with or without the assistance of corporatepartners, any of its proposed technologies. Although there are no commitments,the Company believes the long-term liquidity deficiency will be satisfiedthrough a combination of future equity sales, increased positive cash flowsfrom operations, and research or other collaborative agreements, untilsuch time as the commercialization of the LFC and OCET Processes resultin positive cash flows. The Company is seeking additional funds throughthe financing, sale and operation of the ENCOAL Demonstration plant andthrough collaborative or other arrangements with larger well capitalizedcompanies, under which such companies may provide additional capital tothe Company in exchange for exclusive or non-exclusive licenses or otherrights to certain commercial projects, technologies and products the Companyis developing. Although the Company is presently engaged in discussionswith a number of suitable candidate companies, there can be no assurancethat an agreement or agreements will arise from these discussions in atimely manner, or at all, or that revenues that may be generated therebywill offset operating expenses sufficiently to reduce the Company's short-termor long-term funding requirements.
The use of cash in operating activities of approximately$553,000 and $1,268,000 for the quarters ended March 31, 2001, and 2000,respectively, are primarily related to the Company's general operatingexpenses and R&D activities. The decrease of approximately 56% or $715,000over the previous years' quarter is essentially due to a decrease in accountsreceivable which has been offset by an increase in billings in excess ofcosts.
The Company's investing activities amounted to a use ofcash of approximately $12,000 and $75,000 for the quarters ended March31, 2001, and 2000, respectively. The use of cash in the current year isprimarily related to projects under construction for the acquisition ofmachinery and equipment at the ENCOAL Demonstration plant. AMS had no significantacquisitions of equipment during the three month period ended March 31,2001.
In 2001, the Company is projecting no significant capitalexpenditures for equipment at OCET and that AMS may have to curtail orcut back on its approximately $300,000 capital improvements project whichit started in 2000. Further, the Company, through collaboration with anotherlarger and better capitalized company, intends to obtain financing estimatedat $13,700,000 for the ENCOAL Demonstration plant. The financing is forcapital improvements and start-up expenditures which are necessary to setthe plant on more of a commercial footing and to position it as a referenceplant for potential future commercial LFC facilities. Other than the improvementswhich the Company intends to make to the ENCOAL Demonstration plant, theCompany as of March 31, 2001, does not have any material requirements orcommitments for capital expenditures. The amount of cash used for investingactivities in a given period are directly related to development requirementsand cash availability.
The Company's net financing activities raised approximately$628,000 and $1,632,000 for the three month periods ended March 31, 2001,and 2000, respectively. These funds were raised primarily through the privateplacement of debt and equity securities for both periods. See Note 3 "FinancingTransactions" to the Notes to the Condensed Consolidated Financial Statementsincluded in this Form 10-QSB.
During the fourth quarter of 2000, the Company was successfulin obtaining a new line-of-credit to provide short term working capitalto AMS. The line allows maximum borrowings of $100,000 and bears interestat prime plus 1%. At March 31, 2001, AMS had no borrowings under this lineof credit. The agreement expires November 5, 2001.
As stated earlier the Company intends to obtain financingprimarily related to improvements for the ENCOAL Demonstration plant estimatedat $13,700,000. The Company believes, due to the plant's special nature,that financing for these improvements will not likely be obtained throughconventional methods and that a strategic partner or financier capableof utilizing Internal Revenue Code Section 29 tax credits will be required.Due to the tax laws surrounding the realization of these tax credits thefinancing of the ENCOAL Demonstration plant's improvements will requirethat the Company sell or lease the plant directly to the financier in orderfacilitate the transaction. Following any such transaction the Companyexpects it will continue to be involved with various aspects of the project,including the supervision of the improvements. In this case the Companywill most likely not be required to make any expenditures for the improvementsdiscussed earlier or assume the repayment of the financing associated withthe improvements. There is no assurance that the Company will be able toobtain this financing, or if available, that its terms will be acceptable.
The Company has notes payable and associated accrued interestaggregating $4,170,000 required to be paid prior to October 31, 2001. Inaddition, as of March 31, 2001, the Company has approximately $1,702,000of short-term notes payable which may be satisfied through the issuanceof common stock.
The amount of money raised during a given period is dependentupon financial market conditions, technological progress and the Company'sprojected funding requirements. The Company anticipates that future financingactivities will be influenced by the aforementioned factors. Significantfuture financing activities will be required to fund future operating andinvesting activities and to maintain debt service. While the Company isengaged in continuing negotiations to secure additional capital and financing,there is no assurance such funding will be available or if received willbe adequate.**PART II. OTHER INFORMATION**
**ITEM 1. LEGAL PROCEEDINGS**
The Company and its subsidiaries are from time to timeinvolved in litigation arising in the ordinary course of their respectivebusinesses. On August 23, 2000, the Company filed a lawsuit against Earthcoin San Diego County Superior Court. The lawsuit sought damages for breachof an agreement by which the Company acted as a finder for 10% of Earthco'sinterest in a coal fines briquetting project. In January of 2001 the partiessettled the case prior to going to trial. The Company is not party to anyother pending legal proceeding. 
**ITEM 2. CHANGES IN SECURITIES**
During the quarter ended March 31, 2001, the Company, upon maturity,exchanged three notes payable aggregating $226,192 in principal and interestfor 1,585,939 shares of common stock. The securities were issued pursuantto the exemptions provided by Section 4(2) of the Securities Act and RegulationD. Investment representations were obtained from the accredited investorinvolved and restrictive legends were placed on the certificates.
During the quarter ended March 31, 2001, two outside directors of theCompany, upon maturity, exchanged their notes payable aggregating $96,506in principal and interest for 459,554 shares of restricted common stock.On the day of the exchange the bid price of the Company's common stockwas $0.21. The securities were issued pursuant to the exemptions providedby Section 4(2) of the Securities Act and Regulation D. Investment representationswere obtained from the accredited investor involved and restrictive legendswere placed on the certificates.
On December 10, 2000, as a condition for obtaining a $100,000 line-of-creditfor AMS with a financial institution, an entity controlled by an outsidedirector guaranteed the payment of the line-of-credit which expires onDecember 31, 2001. In return for this guarantee the Company during thequarter ended March 31, 2001, paid this entity 50,000 shares of restrictedcommon stock valued at $10,000.
Effective March 23, 2001, the Company amended the termsof a $25,000 note payable to an outside director of the Company. Pursuantto the amendment the note is now due five days after the Company receiveswritten notice of demand and may be paid by mutual consent in cash or restrictedstock.
During the quarter ended March 31, 2001, the Company soldseven notes payable aggregating $196,401 for cash. The notes bear interestat 9% per annum mature one year from the sale date and are unsecured. Thenotes and accrued interest are payable in cash or upon maturity, at theCompany's option, by issuing 2,532,126 shares of restricted common stock.The securities were issued pursuant to the exemptions provided by Section4(2) of the Securities Act and Regulation D. Investment representationswere obtained from the accredited investors.
During the three month period ended March 31, 2001, theCompany issued approximately 4,461,000 shares of restricted common stockto accredited investors for approximately $444,000 in cash. In connectiontherewith the Company paid approximately $13,000 in fees to J. Russo forservices rendered. These securities were issued pursuant to the exemptionsprovided by Section 4(2) of the Securities Act and Regulation D. Investmentrepresentations were obtained from the accredited investors and legendswere placed on the certificates.
In February 2001, the Board of Directors approved the2001 Non-Qualified Stock Option Plan (the "2001 Stock Plan") pursuant towhich a maximum aggregate of 4,000,000 shares was reserved for grant. Underthe 2001 Stock Plan, employees may be granted as an incentive or bonusan opportunity to purchase common stock in the Company, by way of non-qualified(a) stock options or warrants, (b) stock purchase rights, (c) stock appreciationrights and (d) long term performance awards. The terms and conditions ofeach award are at the discretion of the Board of Directors or any dulyauthorized committee. During the quarter ended March 31, 2001, in accordancewith the 2001 Stock Plan , the Company issued warrants at fair market valueto employees of the Company. The exercise price was not lower than theclosing bid price on the grant date. The warrants and incentive optionsare exercisable for a total of 1,215,000 shares of common stock at $0.26per share, the closing bid prices on the grant dates. The warrants weregranted in reliance upon exemptions from registration pursuant to Section4(2) of the Securities Act and Regulation D. Investment representationswere obtained from each of the employees. The warrants are exercisableone year from the date of grant and expire on December 31, 2005.
During the quarter ended March 31, 2001, the Company,as provided in their related consulting agreements, issued approximately392,000 restricted common shares to consultants for services rendered,valued at approximately $69,500. These securities were issued pursuantto the exemptions provided by Section 4(2) of the Securities Act and RegulationD. Investment representations were obtained and legends were placed onthe certificates.
During the quarter ended March 31, 2001, the Company issuedapproximately 70,000 shares of restricted common stock valued at approximately$14,500. The shares were issued in full settlement of two contractual claimswhich arose in the ordinary course of business. These securities were issuedpursuant to the exemptions provided by Section 4(2) of the Securities Actand Regulation D. Investment representations were obtained and legendswere placed on the certificates. 
**ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES**[NONE]**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**[NONE]**ITEM 5. OTHER INFORMATION**
The Company and subsidiaries of AEI, specifically, Bluegrassand Americoal, have amended effective April 30, 2001 (the "Ninth Amendment"),certain terms and conditions of the Amended Acquisition Agreement betweenthe parties, dated December 9, 1999. The Ninth Amendment essentially providesthe Company with an extension of the April 30, 2001, date to May 31, 2001,in which to satisfy various terms and conditions more fully described inthe Amended Acquisition Agreement. The extension was granted under substantiallysimilar terms and conditions as those agreed to in the previous extension.All other terms and conditions of the Amended Acquisition Agreement remainin full force and effect. 
**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**
**(a) Exhibits**
4.1   Form of promissory note payable in cash or stock. (3)4.2   Form of Restricted Stock Subscription Agreement. (2)4.3   Note Extension Agreement.(1)10.1  2001Non-Qualified Stock Plan. (4)10.2  GuaranteeAgreement dated December 10, 2000. (3)_____________________
(1)  Filed herewith.(2)  Incorporatedby reference to Registrants report on Form 10QSB ending June 30, 1999.(3)  Incorporatedby reference to Registrants report on Form 10KSB ending December 31,2000.(4)  Incorporatedby reference to Registrants Registration Statement on Form S-8 filed February15, 2001.
**(b) Reports on Form 8-K** On March 16, 2001, the Company reported on its CurrentReport on form 8-K, filed with the Securities and Exchange Commission,that it had amended certain terms and conditions of the Amended and RestatedAcquisition Agreement (the "Acquisition Agreement") between itself andcertain subsidiaries of AEI Resources, dated December 9, 1999.  **PART III. SIGNATURES**In accordance with the requirements of the Exchange Act,the registrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized. 
**SGI INTERNATIONAL**  
/s/ MICHAEL L. ROSE                    May 11, 2001Michael L. RoseChairman of the Board, Presidentand Chief Executive Officer
/s/ GEORGE E. DONLOU               May 11, 2001George E. DonlouVice President Finance/Controller  

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