****UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**Washington, D.C.  20549
**FORM 10-KSB**
(Mark one)[  **X**  ] **A**NNUAL **R**EPORT **P**URSUANTTO **S**ECTION 13 OR 15(D) OF THE **S**ECURITIES **E**XCHANGE**A**CT OF 1934
For the fiscal year endedDecember 31, 2000
[      ] **T**RANSITION **R**EPORT **P**URSUANTTO **S**ECTION 13 OR 15(D) OF THE **S**ECURITIES **E**XCHANGE**A**CT OF 1934
Commission File No.    2-93124
For the transition period from _______  to ________
**SGI INTERNATIONAL***(Names of small business issuer in its charter)*
    **UTAH   **                                       **33-0119035**(State or other jurisdiction of          (IRS Employer incorporation or organization)       Identification No.)
**1200 Prospect Street, Suite 325, La Jolla, California  92037***(Address of principal executive offices including Zip Code)***
**(858) 551-1090***(Issuers telephone number, including area code)*
Securities registered under Section 12(b) of the Exchange Act:
*Title of each class:***Common Stock (No Par Value)***Name of each exchange on which registered: ***None**
Check whether the issuer (1) has filed all reports required to be filedby Section 13 or 15(d) of the Exchange Act during the past 12 months (orfor 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
Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B is not contained in this form, and no disclosurewill be contained, to the best of registrants knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-KSB or any amendment to this Form 10-KSB. **X**
The issuers revenues for its most recent fiscal year.   $5,166,349
The aggregate market value of the voting stock held by non-affiliatesof the registrant was approximately $14.1 million as of March 30, 2001. The number of shares of Common Stock, no par value, outstanding as of March30, 2001, was 82,897,061.
DOCUMENTS INCORPORATED BY REFERENCE
As noted in Part III of the Form 10-KSB, portions of the registrantsproxy statement, to be filed within 120 days of December 31, 2000, havebeen incorporated by reference.
Transitional Small Business Disclosure Format (Check one): YES       NO  **X**  
**PART I**
**ITEM 1. DESCRIPTION OF BUSINESS** 
The following discussion contains forward-looking statements,which describe risks and uncertainties involving the Company. Such forward-lookingstatements include, but are not limited to, statements regarding futureevents and the Company's plans and expectations. The Company's actual resultsmay differ significantly from the results discussed in the forward-lookingstatements as a result of certain factors including, but not limited to,those discussed herein. See "Forward-Looking Statements."
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.
(a) Historical Development of Business
Organized in July 1980 to pursue the development and commercializationof the LFCÒ Process, the Company knownthen as Synfuel Genesis, Inc. merged with Vision Development, Inc. in June1985 and changed its name to SGI International. In mid-1989 the Companyand Shell Mining Company ("SMC") entered into a 50/50 partnership (the"TEK-KOL Partnership") to jointly own, commercialize and license the LFCÒProcess. Also in 1990, a subsidiary of SMC, the ENCOAL Corporation ("ENCOAL"),pursuant to a Cooperative Agreement with the Department of Energy ("DOE"),began constructing a LFC demonstration plant, which began operation in1992. In November 1992, Zeigler Coal Holding Company ("Zeigler"), purchasedSMC and its assets, including the ENCOAL Demonstration Plant. From 1990through April 1995, the principal business of the Company was to continuethe development of the LFCÒ Process throughresearch at the ENCOAL Demonstration Plant, testing the efficacy of applyingthe LFCÒ Process to low-rank coals ona worldwide basis, and working to develop LFC plant projects domesticallyand internationally.
In April 1995 the Company and Zeigler agreed that theENCOAL Demonstration Plant had met its production goals as defined by anexisting agreement between the parties. As part of that agreement, theparties agreed to make the TEK-KOL Partnership an operating entity to pursueLFCÒ Process licensing and other opportunitiesboth overseas and in the United States. Zeigler continued to operate theENCOAL Plant through the third quarter of 1997 when operations were suspendedin anticipation of a sale of Zeigler's coal properties. The TEK-KOL Partnershippursued LFCÒ Process development andLFC project development until termination in November 1998.
During 1995 the Company commenced development of the OCETProcess, which is designed to deasphalt crude oil and residual oil. Alsoin late 1995 the Company acquired AMS, which is in the business of designingand manufacturing custom precision automated assembly equipment.
In May 1998, as a result of Zeigler's intended sale ofits coal properties and ENCOAL, the Company gave notice to Zeigler thatit was terminating the TEK-KOL Partnership Agreement. Termination occurredon November 11, 1998. In September of that same year AEI Resources ("AEI")acquired Zeigler in a stock purchase and subsequently sold the former Zeiglerwestern coal mines (Buckskin Mine-location of the ENCOAL Demonstrationplant and the North Rochelle Mine) to Vulcan Coal Holding Company ("Vulcan").All of Zeigler's LFC related assets remained the property of AEI.
In January of 1999, the Company entered into a numberof agreements with MLFC, a wholly-owned subsidiary of Mitsubishi Corporation,relating to the formation of LFC Technologies, LLC ("LFC Tech") a jointventure with MLFC, for the purposes of commercializing the LFCÒProcess. The Company and MLFC entered into a LFC Joint Venture FormationAgreement, Operating Agreement, License Agreement, Services Agreement andSecurity Agreement with the purpose of further developing the LFCÒProcess and licensing its use in proposed LFC plants worldwide.
In October of 1999, the Company and MLFC further amendedthe terms of their above described business relationship, by executingcertain amendments (the "Amendment") to the various joint venture agreementsthat they had previously entered into in January 1999. The Amendment calledfor the transfer of the LFC patents and other items to LFC Tech, in returnfor certain payments more fully described in Note 4 "LFC Process RelatedAssets" of the Notes to Consolidated Financial Statements included in Item7 of Part II of this Form 10-KSB.
On December 9, 1999, the Company acquired from BluegrassCoal Development Company ("Bluegrass") and Americoal Development Company("Americoal"), both wholly owned subsidiaries of AEI: (1) Bluegrass' 50%interest in the LFCÒ Process as wellas Bluegrass' interest in the TEK-KOL Partnership; (2) the ENCOAL Corporation,which owns the ENCOAL LFC demonstration plant; certain existing permitsnecessary to build a commercial sized LFC plant near Gillette, Wyoming;other tangible and intangible LFC assets and (3) NuCoal, LLC which ownscertain design and engineering drawings for the construction of a commercialLFC plant (collectively referred to as the "ENCOAL Acquisition"). See Note11 "Asset Acquisition" of the Notes to Consolidated Financial Statementsincluded in Item 7 of Part II of this Form 10-KSB for additional informationregarding the ENCOAL Acquisition.
Effective January 4, 2001, MLFC and the Company amendedthe LFC Tech Operating Agreement, which governs the management of the jointventure company. Pursuant to this amendment the parties have terminatedthe LFC Joint Venture Formation Agreement, License Agreement, and ServicesAgreement, as the purpose for which these agreements were established hadbeen accomplished or were no longer necessary. In addition, among otheradministrative changes the amendment extended the termination date from2008 to January 4, 2011.
(b) Business of Company
The Company is primarily engaged in the business of developingand marketing energy related technologies. The Company identifies its businesssegments based on its developing technologies. These strategic businesssegments offer products and services to different markets. Accordingly,the Company's basic business segments are centered on the operations associatedwith the LFCÒ Process, the OCET Process,and manufacturing customized automated assembly systems. The Company'soperations are primarily centered in the United States. However, throughits various collaborative arrangements (previously with TEK-KOL and nowLFC Tech) the Company will continue to participate in the marketing ofthe LFCÒ Process on an internationalbasis. 
**LFC Operating Segment**
***Overview.*** The Company has developed a patentedtechnology, which it refers to as the LFCÒProcess. The LFCÒ Process is intendedto convert and upgrade low-rank coal and simultaneously produce a hydrocarbonliquid. The LFCÒ Process produces twoproducts, one called Process Derived Fuel (PDF), and the other, Coal DerivedLiquids (CDL). PDFÒ produced by the LFCÒProcess has a higher heating value and in general has improved environmentalproperties when compared to the feed coal. The Company believes the LFCÒProcess could upgrade a significant portion of the world's abundant low-rankcoal reserves into a higher Btu coal and also produce valuable chemicalproducts from the CDLÒ . In the opinionof management, PDF, with the appropriate feed coal, could provide cost-effectivecompliance with certain environmental legislation and regulations, includingthe 1990 Clean Air Act Amendments, and other current and possibly futureU.S. and international environmental regulations. As of December 31, 2000,the Company through LFC Tech has one outstanding license for the LFCÒProcess. This license was issued for the operation of the ENCOAL LFC DemonstrationPlant.
The LFCÒ Process producesPDF and CDL by heating low-rank coal under carefully controlled conditions.The Company believes many existing users of coal in the U.S., such as electricutilities, face costly capital expenditures to modify their coal-fueledelectric power plants to comply with Phase I and Phase II of the CleanAir Act Amendments ("CAAA"). According to the DOE, Phase I of the CleanAir Act impacted over 261 generating units at approximately 100 coal firedelectrical generating plants in the U.S. and required many major U.S. powerplants to achieve specified reductions of nitrogen oxide (NOx)and sulfur dioxide (SO2) emissions. The Company believes manycountries outside the United States, who currently generate much of theirelectricity from burning coal and which have substantial low-rank coalreserves, could use the LFCÒ Processto provide a more cost-effective fuel source for the production of power.
The Company intends through LFC Tech to license the LFCÒProcess to electric utilities, coal producers, steel companies, foreigngovernments or agencies thereof, or affiliates of these parties. Whilethe Company also intends to be actively involved in owning, at least partially,and operating domestic and international LFC plants, the resources requiredto develop, construct and operate an LFC plant are likely to require inexcess of $450 million. Therefore, the Company intends to seek financingdirectly or through other collaborative arrangements to construct a commercialLFC plant. The Company believes that the level to which LFC will have beendeveloped, once the ENCOAL Demonstration Plant is again operational andthe various finished products are being sold, will merit a considerablevalue being placed on the operating experience and technical know-how ofthe Company. This technical and operating experience combined with theexpected rate of return on a commercial LFC plant investment should allowthe Company to obtain a considerable developer's fee on the first commercialLFC plant. The Company believes that this developers fee could be in theform of either an up-front payment or a small carried equity interest inexchange for such experience and know-how.
***LFCÒ Process Descriptionand Development.*** The LFCÒProcess employs a mild gasification process that produces a chemical changein the feedstock coal by drying, pyrolyzing and stabilizing the feed productunder carefully controlled conditions. In the drying phase of the process,screened coal is fed into a dryer where most of the moisture inherent inthe feed coal is driven off. The dried coal is then subjected to highertemperatures in the pyrolysis step where much of the volatile matter isturned into gas and chemical changes are effected in the solid product.The gases from the pyrolysis step are condensed into the liquid product,CDLÒ . CDLÒcontains a range of distillate grade liquid fuels and a series of highvalue organic chemicals and industrial waxes. The solid product PDF fromthe pyrolysis step is quenched with water to stop the pyrolytic reaction.The PDF is then cooled and rehydrated to about 8% moisture, its new equilibriumlevel, prior to entering the finisher for the final step that creates astable product.
The key elements that differentiate the LFCÒProcess from other coal technologies are as follows:-  The process simultaneously produces valuable, solids andliquids.
-  The process is low temperature and low pressure when comparedto other technologies.
-  The control system regulates the heating rate and temperaturelevel to control the governing kinetics of gasification and stabilizationreactions producing products that are consistent in quality.
-  The solid product can be stored and shipped in conventionalcoal cars and has the same stability (lack of spontaneous combustion) asthe feed coal.
-  Over 70% of the process heat required is provided by combustionof the non-condensable gases produced by the process. The overall processmaintains 90% of the energy inherent in the feed coal.
***LFCÒ Process DemonstrationPlant.***In 1989, ENCOALCorporation, then owned by SMC, and the DOE each committed to fund one-halfof the costs to construct, own and operate a "Clean Coal DemonstrationPlant" using the LFCÒ Process at theBuckskin Mine near Gillette, Wyoming. The Demonstration Plant was constructedas part of the U.S. government's Clean Coal Technology Program. Severalamendments of the original Cooperative Agreement with the DOE extendedthe shared funding of the Demonstration Plant to September 1996. Additionalamendments extended the Agreement end date to July 1997 to permit completionof final reporting. TEK-KOL licensed the LFCÒProcess to SMC Mining for use at the Demonstration Plant. Constructionof the Demonstration Plant began in 1990 and was completed in 1992. TheDemonstration Plant was not expected to, and did not, produce any licensingroyalties to the Company.
In November 1992, Zeigler purchased SMC and its assets,including the ENCOAL Corporation and Demonstration Plant. The purpose ofthe Demonstration Plant was to demonstrate the validity of the LFCÒProcess and it was not intended as a commercial plant. During its yearsof operation, the Demonstration Plant produced and shipped 83,600 tonsof PDF to eight utility customers and 119,285 barrels of CDL to eight industrialusers. Based on the Company's analysis, test burns of PDF indicate thatPDF is a viable fuel, which can be used with minimal modification of thecoal burning equipment. The Company believes PDF can be a means for helpingutilities or other coal burning facilities meet the requirements of theClean Air Act and its amendments.
The Company believes the operation of the DemonstrationPlant from 1992 through the third quarter of 1997, when its operationswere discontinued, has provided invaluable design data and engineeringparameters to assist in the commercial development of the LFCÒProcess. Although the Company believes it has completed the basic developmentof the LFCÒ Process, the Company continuesto refine the process in order to reduce the cost and improve efficienciesfor a future commercial LFC plant. Further, a number of utilities haveindicated they would like to have PDF delivered to them for test burns,which if successful, would be used as a basis for entering into longerterm agreements to purchase additional quantities from large scale commercialLFC plants. At the present time, one utility has executed an agreementto purchase commercial quantities of PDF when a commercial plant becomesoperational. To provide these test burn quantities, the Company believesit would be valuable to restart operation of the Demonstration Plant. Consequently,as previously stated, the Company acquired the ENCOAL plant in December1999 and is working diligently toward financing the restart of the plant.There can be no assurance that the Company will successfully restart theDemonstration Plant or after having done so will be able to license theprocess, sell LFC products commercially, or generate profits for the Company.The cessation of operations of the Demonstration Plant may have a materialadverse impact on the marketing of the LFCÒProcess and co-products.
***Products & Markets.*** The Company's marketingefforts are in part based on the Company's belief that low-grade (or low-rank)coals of the world are relatively disadvantaged in the marketplace comparedto higher-rank bituminous coals. Low-rank coals generally have higher watercontent, which makes them more expensive to transport to distant markets.Additionally, their lower heat value can make them a less efficient boilerfuel. The Company expects that PDF and CDL produced from Powder River Basin("PRB") coal can reduce transportation costs by removing water, and economicallyproduce lower sulfur, higher heat-rate, cleaner burning coals along withvaluable co-product low temperature coal tar derived chemicals. Due tothe low-sulfur and low NOx qualities when processing PRB coalsboth PDF and CDL provideenvironmental benefits that the Company believes willbe increasingly valuable as more stringent environmental regulations areimplemented.
The Company believes that electric utilities that arelocated east of the Mississippi River and burn predominantly bituminousrank coals represent the largest potential market for PDF. Specifically,those generating stations that both, use high sulfur coals and that maybe affected by pending state implementation plans to reduce nitrogen oxideemissions, represent the best marketing opportunities. This belief is predicatedon two forces, which are currently driving the market. The first is cleanerair standards being promulgated by the EPA and other state agencies andthe second is the deregulation of the electric generation industry.
Cleaner air standards are being driven primarily by TitleIV of the Clean Air Act Amendment ("CAAA") Phase II (which became effectiveJanuary 1, 2000) requires that electric utility power plants built before1990 with annual generating capacity in excess of 25 megawatts reduce totalemissions of sulfur dioxide from power plant stacks below 1.2 lbs. SO2per MMBtu. Phase II affects more than 2,000 boilers at over 1,000 electricalgenerating plants and other industrial users of coal. When using PDF producedfrom coal feedstock mined from Wyoming's southern PRB, test data has indicatedthat a SO2 emission rate of between 0.3 and 0.5 lbs. per MMBtucan be expected. In addition, emissions from the use of PDF from the PRBcan reduce NOx emissions by approximately 25% when comparedto typical competing eastern coals. While PDF represents a product froma technology that may reduce NOx and SO2 emissionsfrom power plant stacks, there can be no assurance any of these utilitieswould elect to use PDF once development is completed.
In addition to the enhanced environmental requirementsfor using fossil fuels, the Company believes that other events are alreadytaking place that will favor markets for PDF. These events include, butare not limited to, recognition that coal reserves represent over 200 yearsof U.S. energy supply, deregulation of the electric utility industry, consolidationamong the coal and railroad companies and the consequent need to reducecosts will promote the use of more efficient boiler fuel technologies likePDF.
Deregulation in the electric power industry is expectedto result in intensified price competition, and increased price volatilityas the industry moves towards full-scale open competition. This competitionis being accomplished through the unbundling of generation, transmissionand distribution services that have traditionally been integrated by thelocal service provider. This restructuring is expected to cause some electricitygenerators to operate as merchant plants without a guaranteed market fortheir production output. In such an environment these generators will faceconstant competition for the sales of their products and services. As aresult, in order to stay competitive plant operators will be required tocut costs, improve operating efficiencies and keep capital expendituresto a minimum. All of this is coming at a time when both federal and stateregulators are enacting and enforcing more stringent air quality standards.With coal-fired electric utility power plants coming under more and morepressure to comply with these standards the Company believes that operatorsof these coal-fired units will look to PDF for a solution to this dilemma.
In the Company's opinion, legislative efforts pertainingto air emission standards will likely continue to pressure electric utilitiesalready faced with steady growth in electric loads, and constrained byfixed environmental emission limits. The emission allowances created inthe 1990's are being depleted and technological "fixes" such as flue gasdesulfurization (scrubbing) and selective catalytic reduction (SCR) areexpensive, especially for units rated less than 200 megawatts (Mw). TheCompany believes that these smaller generating units that cannot economicallysupport large-scale, capital improvements, could benefit substantiallyby switching to efficient, clean-burning fuels like PDF. Action by theDepartment of Justice on behalf of the EPA against eight major electricutilities throws into question the utilities compliance strategy and heightensthe risk that they will have to make further capital investments. Historyindicates that while EPA regulations are often delayed and weakened theyare usually implemented. The Company believes that fuel switching, freeof long-term capital investment, is a financially safe solution for reducingemissions. Of course this anticipated market assumes that regulations passedunder the CAAA remain in effect. Any amendments to the CAAA or other stateemissions standards that reduce the specified limits on SO2or NOx emissions could negatively impact the potential sizeof the market and the domestic growth prospects of the Company.
In the Company's opinion, the most significant factorsinfluencing the use of PRB feedcoal in the manufacturing of PDF are:
*Location*. The PRB contains an abundant, long-termsupply of low-sulfur coal that is served by one of the most efficient transportationsystems in the world.
*Quality.* The low emission levels of sulfur andnitrogen oxides when burning PDF adds value to a utility plant, under thecurrent regulatory scheme, since both SO2 and NOxare commodities that are traded through an allowance tracking system.
*Ash Composition.* The ash in PDF remains unchangedin the LFCÒ Process, therefore maintainingsimilar characteristics as other PRB coals during combustion.
*Quantity.* The abundance of long-term coal suppliescombined with the economics of producing low-sulfur western coal have createddemand for western coals considered improbable ten years ago. With increasedinvestment in rail infrastructure, the Company believes that the PRB willremain the largest coal-producing region in the U.S. for the foreseeablefuture. A relatively high Btu fuel like PDF or blends of PDF with run-of-minePRB coal should benefit from the growing demand anticipated by the Companyfor western coals, assuming they can be delivered economically to Midwesternand Eastern utility markets.
The Company believes that a number of factors indicatethat PDF, produced from PRB feed coal, should be an attractive boiler fuelfor steam generation under the conditions previously noted.
A number of factors support the likely utilization ofbeneficiated coals like PDF as an alternative fuel choice for coal-firedunits in the foreseeable future:
The historically low cost of coal production and the existingcoal fired infrastructure that generates most of the electricity (56%)in the U.S.
Electricity load-growth is projected to increase about2% per year requiring the capacity factors and the consumption of coalin existing coal-fired units to increase. For example, nationally, coalplants have been operating at an average 62% capacity factor. The Companybelieves a feasible maximum is about 70%. Based on the Company's analysis,an increase in coal-fired capacity of 8% would result in over 100 milliontons per year of additional coal demand in existing plants.
The sky-rocketing cost of natural gas, along with continuingquestions as to the long term availability of supply, are drawing the focusback to the development of clean burning coal facilities.
Phase II of the Clean Air Act Amendments (1990) may havea profound effect on fuel choices in the future, especially favoring coalslike PDF that emit low levels of sulfur and nitrogen oxides.
A high percentage of older, higher-cost, power plantswill soon be retired requiring even more generation from the remainingnewer, efficient coal plants.
These projections are supported by the fact that severalmajor U.S. utilities have shown interest in including PDF as a part oftheir future fuel plans and have even conducted limited test burns of PDF.In fact, the Company signed an agreement with one of these utilities fortheir purchase of all the PDF produced from the ENCOAL Demonstration Plantthrough 2004 with an option to purchase up to 750,000 tons per year froma commercial sized LFC plant utilizing southern PRB quality feed coal.This equates to roughly 20% of the output of PDF from a commercial facility. 
***CDLÒ***isa complex liquid produced by the LFCÒProcess, which in the past has been sold into the fuel oil market. However,fuel market prices do not reflect the full value of CDL as it containsseveral high value chemicals and chemical feedstocks. The Company believesthat a significant and growing shortfall in industrial waxes and coal tarpitch feedstock supply is likely. This shortfall combined with an anticipatedgrowth in demand for these same products may fuel a strong interest inobtaining new, large-scale supplies of feedstocks like those derived fromCDL.
Since early 1999, considerable laboratory effort by SGI'sTechnical Center ("SGITC") has helped define potential markets for thevarious components of CDL. The combined value of these components is estimated,based on written purchase commitments from third parties to be in the rangeof $30.00 per barrel, up from the original $6.00 per barrel when the productwas sold as a fuel. A product slate has been developed for both the ENCOALDemonstration Plant and for the first commercial LFC plant. A majorityof the products fit predominantly into specialty product applications.
Due to the specialty nature of the CDL products, limitedmarket information is published. In most cases, a few chemical processorscontrol the markets and set the prices based on their available feedstocksupply to either a single or very few chemical-processing facilities. TheCompany believes that even in those limited markets, demand for each ofthe Company's liquid products is likely to increase. Prices are also expectedto increase as the current suppliers of chemical feedstocks face economicpressure from tightening environmental regulations. The slate of chemicalproducts expected to be produced from CDLÒconsists of cresylic acid, a light hydrocarbon fuel, mineral waxes andanode feedstocks.
***Cresylic Acid.*** The lightest liquids distilledand extracted from crude CDL contain commercially useful tar acids. Cresylicacid, also known as tar acids in the chemical industry, is a mixture ofphenols, cresol, xylenols and other alkyl phenols. It is further processedinto phenolic resins for plastics production, magnet wire enamel solventand other chemical intermediates. Rapid growth is expected for 2,6 xylenol.Modest growth is projected for major cresylics.
***Light Hydrocarbon Fuel.*** The CDL deriveddistillate fuel is produced by solvent extraction of material boiling below550° F. It has viscosity, boiling pointand flash point characteristics below SAE #2 fuel oil and an energy contentgreater than a SAE #2 fuel oil on a weight basis. It can be blended withother petroleum-based fuels for use in boilers or other oil-fired burners.The Company's principal markets would likely be regional users of varioustypes of industrial fuel oils. Because of its similarity with Diesel #2,future testing may demonstrate additional economic applications such asa locomotive diesel fuel extender.
***Mineral Wax.***Industrialgrade waxes, similar to those that can be extracted from CDL, are knownas "slack waxes" and represent the largest segment of the wax industry.Applications for slack wax include composite board coatings (particleboardand oriented strand board), fertilizer de-dusting agents, anti-corrosivecoatings and fire logs. The most effective application to date for slackwax is board coatings as an additive to prevent swelling and moisture absorption.Composites in the lumber industry are expected to have strong market growth.Within the composites market, oriented strand board consumes about 175,000tons per year of wax and is the single fastest growing segment of the lumbermarket at 7% per year.
The supply of petroleum based slack waxes is expectedto diminish, as refiners will be forced by SAE guidelines in 2002 to improvegrades of lubricants. Enhancing lubricants requires further reduction inwax production. As a result, at least four major refiners, Amoco, Lyondell,Texaco and UNOCAL have exited the wax production business in the past severalyears.
***Anode Feedstock.***Coaltar from the CDL appears to be a good blending agent with coal tars derivedfrom the production of metallurgical grade coke. Pitch is the "glue" usedto bind carbon particles together in industrial anodes, an essential componentfor the electrochemical reduction process to refine aluminum. Environmentalregulations have required processing changes in the international steeland aluminum industries resulting in decreased production of coal tar andincreased demand for coal tar pitch with low levels of unsubstituted polynucleicaromatics ("PNA"). Production of coke in the United States is expectedto decrease sharply over the next five years due to environmental legislationaffecting emissions from coke plants. Analytical testing of coal tar pitchproduced from the LFCÒProcess indicatesthat it contains very little unsubstituted PNA's. Assuming such decreasein coke production and demand, the Company believes that this could createa demand for LFC produced coal tars if they were to become commerciallyavailable.
For the future, results from SGITC's research indicatethat several additional products may be profitably extracted from CDL.Development of products such as phenolic resins, surfactants, other highervalue waxes, asphalt sealers, phenols, naphthalene and mixed fuel gasesare currently underway and are expected to increase the overall potentialvalue of a barrel of CDL even further.
***International Markets.*** As stated previously,the Company believes that the current domestic market holds the most short-termeconomic potential. However, the international coal market is estimatedby the Company to be substantially larger, at approximately four timesthe size of the domestic market. While the Company has completed over seventyfeasibility studies on candidate coals, including those in China, Russia,and Indonesia, and entered into various memorandums of understanding withinternational governments and private entities, the recent economic andpolitical conditions in these countries has negatively impacted the progressof these projects. Consequently, the Company does not expect these projectsto progress until conditions improve. The Company's objective in theseforeign markets is primarily to meet the needs of providing more energyefficient products as an upgraded coal utility fuel, a liquid fuel, specialtyproducts and chemical feedstocks for domestic use and/or to provide a valueadded export product.
***Competition.*** The principal markets for PDFand CDL are in the energy industry, which is intensely competitive. Thereare many companies engaged in research into ways to clean or convert coalinto a more environmentally acceptable fuel or other commercially viableproducts. Many of the Company's existing or potential competitors havesubstantially greater financial, technical and human resources and maybe better equipped to develop, test and license coal-refining technologies.In addition, some of these companies have extensive experience in operatingrefining plants and have extensive experience in operating coal-burningplants. These companies may develop and introduce coal-refining technologiescompetitive with or superior to those of the Company prior to any marketacceptance for the LFCÒ Process or othertechnologies developed by the Company or its subsidiaries. However, tothe best of the Company's knowledge no other competitor using a coal upgradingtechnology has shipped as many unit trains of product or has had producttested in as many coal fired boilers of various utilities as the Company.In fact, to the best of the Company's knowledge none of these competitors'efforts have yet resulted in an economically viable and commercially acceptableprocess.
The relative speed with which the Company markets theLFCÒ Process and enters into licensesor other agreements with third parties who thereafter construct, own andoperate a plant using the LFCÒ Processand their success in supplying processed coal products, depends on manyfactors and can not be easily forecasted. The Company expects the principalfactors to include, among other things compliance with environmental standards,transportation costs, cost and quality comparisons to other fuels, andthe strength of any patents for the LFCÒProcessor for other related technologies.
The demand, if any, by coal-fired electrical generationfacilities for processed coal products derived from using the LFCÒProcess may also be materially impacted by competing fuels such as othernaturally occurring low-sulfur coals, natural gas and emission controltechnologies, such as selective catalytic reduction. The Company believesother factors which may influence competition include the availabilityand cost of delivered coal; the difference between the costs of other energyalternatives and coal prices and availability; regulatory efforts to reducepollution and other emissions; regulatory incentives, if any, to utilizeclean coal based energy sources; and the reliability and cost effectivenessof the LFCÒ Process relative to othercompeting technologies.
The Company's competitive position also depends upon itsability to attract and retain qualified personnel, maintain patent protectionor otherwise develop proprietary products or processes and secure sufficientcapital resources for the period between development and testing of theLFCÒ Process and its introduction intothe commercial market place.
The Company is aware of several entities in the U.S. andin foreign countries, which are engaged in producing clean-burning coal.These include Western SynCoal, LLC, a subsidiary of Montana Power Company,which owns a plant in Colstrip, Montana and KFx, Inc., a public company,engaged in coal upgrading development. There can be no assurance that theCompany will be able to compete successfully with any of these companies.However, to the best of the Company's knowledge, none of these competitorsproduce both a solid and liquid product in commercial quantities.
***Patents and Proprietary Technology.***TheCompany has patents or patent applications for eight LFCÒProcess and LFCÒ Process related patentsin the U.S. and eleven patents in foreign countries.
There can be no assurance any additional patents combinedwith the existing Company patents will be sufficiently broad to affordprotection against competitors using a similar technology. The Company'ssuccess will depend in large part on its ability to obtain patents forthe LFCÒ Process improvements and relatedtechnologies, if any, to defend patents once obtained, to maintain tradesecrets and to operate without infringing upon the proprietary rights ofothers, both in the United States and in foreign countries.
There can be no assurance that any patents issued to theCompany will not be challenged, invalidated or circumvented, or that therights granted thereunder will provide competitive advantages to the Company.Litigation over patent or other intellectual property claims could resultin substantial costs to the Company. United States patents do not provideany remedies for infringement occurring before a patent is granted. Aspatent rights are territorial, the Company may not have an effective remedyagainst use of their patented technology in any country in which the Companydoes not, at the time, have an issued patent.
The commercial success of the Company may also dependupon avoiding the infringement of patents issued to competitors. LFC Tech,which the Company currently owns 50% of, now owns all of the technologyrelating to the LFCÒ Process. If competitorsprepare and file patent applications in the United States claiming technologyalso claimed as proprietary by the Company, the Company may incur substantialcosts in participating in interference proceedings declared by the U.S.Patent office ("PTO") to determine the priority or infringement of theinvention. An adverse outcome of such proceedings could subject the Companyto significant liabilities to third parties and could require the Companyto license disputed rights from third parties or cease using the infringingtechnology. Although the Company believes its current and proposed activitiesdo not and will not infringe upon patents for competing technologies, therecan be no assurance that the Company's belief would be affirmed in anylitigation over any patent or that the Company's future technological developmentswill be outside the scope of these patents.
A U.S. patent application is maintained under conditionsof confidentiality while the application is pending in the PTO, so theCompany cannot determine the extent or nature of inventions being claimedin pending patent applications filed by its competitors. If competitorsinfringe on the Company patents, which are pending, but not yet issued,LFC Technologies, LLC and the Company will not be able to pursue infringementclaims against them unless the infringement continues after such patentsare issued.
The Company also relies on certain proprietary information,which may not be patentable. Although the Company has taken steps to protectits proprietary information, in part through the use of confidentialityagreements with certain employees, potential partners, consultants andcontractors, there can be no assurance these agreements will not be breached,the Company will have adequate remedies for any breach, or the Company'sproprietary information will not otherwise become known or be independentlydeveloped or discovered by others including its competitors.
***Governmental Regulation.***TheLFCÒ Process, as it is proposed to beused in the operation of a LFC plant, will likely be subject to numerousfederal and state regulations. Although the Company intends to own a portionof any future commercial LFC plant constructed in the United States, (andexpects to have a carried interest in the first LFC plant) it is more likelyfor the plant to be wholly owned by others since the Company does not nowhave, and may not in the near future have, the financial resources necessaryto develop, construct or operate such plants.
***Domestically.*** LFC plants will likely requirenumerous permits, approvals and certificates from appropriate federal,state and local governmental agencies before construction of any such facilitymay begin, and will be subject to periodic maintenance or review requirementsonce any such facilities begin production. Such permits and regulationsinclude, among others: (i) air quality; (ii) wastewater discharge; and(iii) land quality. There can be no assurance that such approval will begranted to any licensees of the LFCÒProcess in the event a plant is proposed to be constructed and operatedusing the LFCÒ Process. In addition,there can be no assurance future domestic or international governmentalregulations will not change and the necessary permits and approvals forany future commercial-scale production facilities will not be prohibitivelyexpensive or difficult to obtain. Any failure by any licensee of the LFCÒProcessto obtain required regulatory approvals, or any substantial delay in obtainingsuch approvals could have a material adverse affect on the Company.
Mine Health and Safety Administration ("MHSA") regulationsand approvals may be applicable to any use of the LFCÒProcess at a plant constructed for such use. The Demonstration Plant inWyoming operated under the oversight of the MHSA since construction began.The Company believes the ideal location for an LFCÒProcess plant will be on the grounds of or adjacent to a coal mine to minimizetransportation costs.
The Clean Air Act and its amendments specify certain airemission requirements for electrical utility companies and industrial coalusers. The Company believes the Clean Air Act is now, and will in the futurebe, a significant factor in creating demand and a market in the U.S. forthe LFCÒ Process and products from thePRB. The Company believes electric utilities and industrial coal userswho use the LFC products will be subject to the Clean Air Act, and compliancewith such regulations could be fully or partially met through the use ofthese products. Beginning on January 1, 2000, Phase II of the Clean AirAct Amendments imposed a permanent cap on sulfur dioxide emissions andrequires nitrogen oxide reductions.
***Internationally.*** Future international LFCplants, if any, will also be subject to various permitting and operationalregulations specific to each country. Generally, environmental permittingand operating regulations in countries outside the United States are notas stringent as those within the United States. Nevertheless, internationalinitiatives, such as the Kyoto Protocol, are expected to create increasingpressures on the electric power generation industry on a worldwide basisto reduce emissions of various pollutants, which the Company expects willcreate additional demand for its products.
***Research and Development.***In2000 and 1999 the Company incurred approximately $1,641,000 and $841,000,respectively, in research and development expenses to further refine anddevelop the LFCÒ Process, its associatedproducts and markets. 
**OCET Operating Segment** 
***Overview.*** The OCET Corporation, a totally-ownedsubsidiary of the Company, is a development stage company incorporatedin the state of Delaware. OCET is developing an energy-related technologyreferred to as the OCET Process. The OCET Process is designed to deasphaltcrude oil or resid. Resid is the residue remaining after processing crudeoil in a refinery to produce liquid fuels and lubricants. The OCET Processis still in development, and will require additional research and developmentbefore it is ready (if ever) for commercial use. Future funding necessaryto carry on the development of the OCET Process will be primarily for theoperation and maintenance of the OCET Process Development Unit ("PDU").However, due to the Company's concentration on commercializing the LFCProcess, essentially all work on the OCET Process was stopped in May 2000.See Note 6 "Information on Industry Segments" of Notes to ConsolidatedFinancial Statements included in Item 7 of Part II of this form 10-KSBfor additional information.
The OCET Process uses an electric field to enhance theeffect of the solvent used to destabilize the crude oil or resid to separateout the asphaltenes and metal contaminants contained in the feedstock therebyproducing a higher quality liquid. The electric field processing distinguishesthe OCET Process from other deasphalting processes known to the Company,and the Company believes OCET could provide an additional method for controllingthe rate, selectivity and yield of the separation.
In its simplest form, OCET may be viewed as an enhancementof a process already utilized by the petroleum refiner; namely, solventdeasphalting. OCET uses electric fields in combination with additives toenhance the rate and selectivity of the separation of the feedstock intotwo streams, one reduced in asphaltenes and metals, and a second streamcontaining the asphaltenes and the bulk of the metals. The latter can beused as feedstock to a coker, as a heavy fuel blend stock, or as an asphaltblend stock. The composition of each phase can be adjusted to accommodatethe intended end use for each stream. Specific benefits are a functionof the feedstock and the conditions under which the process is applied.The OCET Process was reviewed in 2000 by an international constructionand engineering firm and a major international refiner, and the resultof these reviews indicates that OCET improves the existing technology thatuses pentanes and butanes as a solvent. Therefore, the Company is encouragedthat OCET may eventually become a cost-effective means of improving thequality of deasphalted oil while reducing levels of sulfur, catalyst-foulingmetals such as vanadium and nickel, and carbon-forming components. However,based on the feedback from these third party firms, the Company has determinedthat it has additional research and development to perform before it isready to truly assess the value of OCET.
The Company's principal efforts in commercializing theOCET Process are intended to focus on licensing the technology to petroleumengineering and construction companies, oil refineries, oil companies,and other parties with related interests. The Company also intends to developand commercialize all related applications for the process. The Companyis planning to seek collaborative arrangements with manufacturers and developersof deasphalting equipment as potential partners. Construction and operationof any future commercial scale facility using the OCET Process is dependentupon funding from a petroleum engineering and construction company, oilrefiner, oil company, or other third parties. There can be no assurancesuch funding will be made available.
***Markets.*** The Company believes domestic andworldwide demand for gasoline and chemical feedstocks will increase inthe future. Consequently, worldwide refining capacity is also expectedto increase, in conjunction with an expected increase in the supply oflow quality heavy crudes. The Company believes new as well as upgradedexisting oil refineries are likely to be called upon to meet increasedworldwide demand for fuels and chemical feedstocks while relying on increasinglyheavy crude as feedstock, especially on the Gulf Coast, Western and EasternSeaboards.
On average, most refineries produce approximately 40%to 50% Atmospheric Resid (AR) per barrel of crude processed. Vacuum Resid("VR") is approximately 50% of the AR and in particular has a low valueand in some instances poses a disposal problem. A paper presented at the1996 National Petroleum Refiners Association pointed out that the driveby petroleum companies to increase profitability of their refineries hasbeen implemented by using a number of methods to deal with VR. In an attemptto increase refinery profitability, recent commercial advances in processtechnologies have been employed. As a means of disposing of the VR, refinershave used the VR in its fuel oil pool or as a feedstock to a coker.
Current processes for treating VR force refiners to makedifficult compromises. High-temperature processes (mainly cokers) crackVR, resulting in gas, coke, and liquid fractions. Refiners use lower temperaturecrackers for the upgrade of the vacuum gas oil (the lighter fraction ofthe AR). The VR cannot be sent to this low temperature cracker due to itsasphaltenes and metal contaminants content which will destroy the catalystsused in making the higher value products. For this reason many refineriestry to minimize the amount of VR by utilizing solvent deasphalting processesupstream where the process reduces the asphaltenes and metal content allowingthe refiner to send the VR fraction to the cracker. The OCET Process isdesigned to increase the efficiency of the solvent deasphalting operations.
Industry data available to the Company indicates thatthere has been a shift of crude oils over time to being higher in residvolume and contaminant levels, and therefore, the need for a successfuldeasphalting technology has increased. The Company, together with manyindustry experts believe that the quality of crude oils has declined forthere is a greater amount of asphaltenes, nickel, vanadium, and other contaminantscontained in both the crude oil as well as in the resid. This reduces thevalue of the crude and resid since these elements inhibit the refiner'sability to produce high value products.
The target application for the OCET Process is the upgradingof refinery resid to produce high quality feedstocks for refinery catalyticcracking and hydrocracking upgrading processes. A higher quality feedstockwith reduced asphaltenes, carbon residue and other contaminants increasesthe effectiveness and longevity of the catalyst in producing more valuableproducts. The Company believes there may be other potential markets, includingdeasphalting and viscosity reduction of heavy crude oil at the well siteor upgrading crude oil before introduction into the crude distillationtower at the refinery.
***International Markets.*** While the Company'sinitial efforts are being focused domestically, management believes thatinternational markets will be substantially larger and provide a greateropportunity for the OCET Process. With worldwide petroleum demand of approximately68 million barrels a day and refinery capacity utilization of approximately95%, management estimates that these refineries also produced approximately12-15 million barrels per day of VR. To meet the projected growth in internationaloil demand, the Energy Information Administration (EIA) notes that refinerycapacity will have to increase to 129 million barrels per day by 2020.The areas of greatest growth are expected to be in the Middle East, Centraland South America, and the Asia/Pacific region. The same report by theEIA notes that new refineries will be called upon to meet increased worldwidedemand for lighter products, such as motor fuels and chemical feedstocksto upgrade resids, to supply transportation fuels with reduced lead, andto supply both distillate and residual fuels with decreased sulfur levels.
***Competition.*** The OCET Process is expectedto enhance existing solvent deasphalting processes and to compete withalternative methods for separation of resid solvent extraction processes.The primary method for disposing of VR is coking, which exposes resid tohigh enough temperatures to break apart some of the chemical bonds to producegases, liquids and solid coke, but has high capital, operating and environmentalcosts producing a lower quality cracker feedstock and very low value cokeas a product. The OCET Process seeks to upgrade the value of the residstream by improving the asphaltene and thus metal removal efficiency ofthe dominant deasphalting process which utilizes solvents.
There can be no assurance the OCET Process will be determinedto be commercially viable, or will be developed to the point where it canbe determined to be commercially viable, or that there will be a marketfor the OCET Process, or, if a market develops, OCET will license its technologyor otherwise produce revenue from the OCET Process or any other enterpriseor technology development.
The OCET Process is still in development and has not beenlicensed or used on a commercial scale plant. The OCET Process will requiresignificant additional research and development, including substantialadditional funding to finish development of the process and demonstrateits potential (if any) for commercial use. There can be no assurance suchefforts will be successfully completed. At the present time, OCET has noagreements with any oil refinery or other party to use the OCET Processin a commercial or large scale testing facility.
***Patents and Proprietary Technology.***OCETpresently has two patents issued for the process both of which were issuedin 1998. There can be no assurance any patents issued to the Company, orOCET will not be challenged, invalidated or circumvented, or that the rightsgranted thereunder will provide competitive advantages to the Company.Further, litigation over patent or other intellectual property claims couldresult in substantial costs to the Company.
Since crude oils are complex mixtures of literally hundredsof thousands of compounds, a major focus of the Company has been to developthe analytical tools necessary to characterize incoming materials and beable to optimize process conditions "on the fly." Because existing refineriesprocess crude oils purchased from widely different sources, this abilityis important for widespread refinery application of the technology. Thisunderstanding, which is essential to squeezing more useful materials outof each incoming barrel, also serves to protect the Company's technologyand business from those who might attempt to copy it. These "trade secrets,"coupled with appropriate patent filings, are the cornerstones of the Company'stechnology protection strategy.
***Research and Development.***TheCompany through SGITC developed the PDU in its lab which it believes iscapable of measuring OCET Process performance under refinery-like conditionsof temperature and pressure. Concurrently, SGITC has developed the analyticalmethods and put in place laboratory staff, capable of measuring the performanceof the PDU and presenting the data in industry standard terms, for thepurpose of marketing the process to potential customers. These analyticalresources are also capable of measuring properties of feedstocks and otherrefinery streams, so as to gauge the performance of the OCET Process againstcompetitive processes in an effort to determine its commercial value andoptimize process performance.
The Company has now tested the OCET Process on resid andcrude oil samples from Venezuela, Mexico, and the Middle East. Resultsof these tests have been compared with those obtained in the commercialworld through contacts with refineries and engineering companies, and discussionsare continuing to develop various implementation opportunities. In allcases to date, the OCET Process was successful in reducing metals contamination.Careful analysis shows that OCET typically reduces metals in excess of10% over non-electric solvent deasphalting experiments in the PDU. Thismetals reduction could translate into reduced catalytic cracker and/orhydrocracker catalyst usage, increased deasphalter throughput or increasedDeasphalted Oil ("DAO") yield, reduced solvent-to-oil ratios, smaller processorsize, depending on how the process is operated, all of which have varyinglevels of economic benefit to the petroleum refiner. These benefits couldbe translated into revenue generating opportunities for the OCET Processvia licensing the technology, either to an engineering company for newsolvent deasphalter construction, or to refiners for addition to existingconventional solvent deasphalters or both. As these early results are consideredpositive by the Company additional testing on resids provided by potentialcustomers are planned. There can be no assurance the results of such laboratorytests will be proved in actual commercial scale developments, or that anycommercial use will be made of the OCET Process.
In 2000 and 1999 the Company incurred approximately $418,000and $810,000, respectively in research and development expenses to furtherrefine and develop the OCET Process, its associated products and markets.
***Government Regulation.***TheOCET Process, as it is proposed to be used in conjunction with oil refineryoperations, will likely be implemented, if at all, by construction of facilitiesowned and operated by owners of these refineries and not by the Company.However, before any future new OCET Process facility may be constructedin the United States, it will likely require numerous permits, approvalsand certificates from appropriate federal, state and local governmentalagencies. Any such facility constructed would likely be subject to periodicmaintenance or review requirements once the facility begins production.Such permits and regulations may include, among others: (i) air quality;(ii) wastewater discharge; (iii) land quality; and (iv) hazardous wastetreatment storage and disposal. There can be no assurance that such approvalswill be granted to any licensees of the OCET Process in the event a facilityis proposed to be constructed and operated. In addition, there can be noassurance future domestic or international governmental regulations willnot change and the necessary permits and approvals for any future facilitieswill not be prohibitively expensive or difficult to obtain. Any failureby any licensee of the OCET Process to obtain required regulatory approvals,or any substantial delay in obtaining such approval, could have a materialadverse effect on the Company's efforts to commercialize OCET.  
**NEW PRODUCTS UNDER DEVELOPMENT BY THE SGI TECHNOLOGYCENTER** 
**Asphaltene Processing**
***Description.***As a resultof the work related to the OCET Process the Company believes that the asphaltenesproduced by the OCET Process may produce a better coal like product thanasphaltenes produced by the current processes used by refiners today. Consequently,the Company is currently developing a process that will, if successful,convert the unwanted asphaltene by-products of the OCET Process, as wellas the existing solvent deasphalting processes, into a coal-like fuel.Preliminary results obtained on a laboratory scale, using a proprietaryprocess, have been encouraging, in that the resulting coal-like productshave shown high melting points and little dusting, as compared to thoseproduced by other means. These qualities along with higher volatile content,which aids in combustion, could contribute toward producing a higher valuepetroleum based solid fuel than coke.
***Current*.** Presently,asphaltenes produced from the existing solvent-extraction processes cannotbe moved in large quantities or for any significant distances for use assolid power plant fuels due to their poor physical properties. Therefore,refiners either send this material to their fuel oil pool at low or novalue, destroy it using units called cokers, which may entail a disposalcost, "cut" the asphaltenes with expensive low boiling fuels to make lowvalue #6 oil, or inventory the material at a negative value. To solve thisdisposal problem, some refiners are looking to invest in projects thatbuild an expensive electric generating facility "across the fence" fromtheir refinery boundary limits and use the asphaltenes as feedstock tothat electrical facility because the heating value (Btu) of this materialis extremely high. However, this approach often runs afoul of environmentalissues, as handling and burning of un-treated asphaltenes can result inenvironmental hazards.
Technical work at the SGITC is under way to fully developa process for converting asphaltenes to coal-like fuels, and to identifyindustrial or electrical generation markets where this fuel could be profitablysold. The Company currently believes that if it were the owner and/or operatorof any resulting conversion plant, that this product could provide it,if successful, with a significant revenue opportunity. 
**Level Sensor**
***Description*.** A newand novel level sensor was invented by the Company during the developmentof the OCET PDU in 1998, which overcame a number of limitations presentedby existing "off-the-shelf" equipment at the time. While some of theselimitations were somewhat unique to the PDU, the resulting sensor withhigh sensitivity, electrical stability with long cable runs and small sizewas a significant improvement over existing capacitive level sensors.
***Current*.**The Company'smarket research conducted in 1999 indicates that the level sensing businessis highly competitive and heavily fragmented, both in distribution andtechnology, leading to relatively small sales volumes in many technologysegments and making entry at any significant sales volume difficult. Verylarge industrial instrument companies generally have only very small businessunits in the level sensing area, and the successful ones must sell a varietyof products based on multiple technologies, in order to support their operations
Because of this situation, the Company has chosen to investigateother opportunities, not only in the application of our new level sensingtechnology, but also in a range of applications in the industrial sensingbusiness in general. Due to the Company's concentration on the LFC Processno significant work was done on this technology in 2000. It is plannedin 2001 for the Company to do limited market research and product developmentwork to explore not only level sensing, but also unique industrial sensingapplications as well. Some of the opportunities that will be investigatedinclude: sensing of thermal levels in household appliances, refinery applicationsof interface level sensing, level sensing in underground gasoline storagetanks, development of long line digital sensors and others. Managementbelieves some of these potential applications could lead to significantrevenue opportunities.
Part of the level sensing device is based on a patentedchip technology which is the proprietary property of one supplier. Thissupplier, to management's knowledge, is the sole source of this type ofchip. To assure an ongoing supply of these chips and to protect itselffrom other competitors in the instrument manufacturing industry in theUnited States, the Company has entered into a distribution and supply contractwith this supplier. While we normally seek to reduce our dependence onsole and limited source suppliers, in some cases alternative sources areeither limited or unavailable. In cases where the Company depends on limitedsources, the complete or partial loss of certain of these sources couldhave a negative effect on our operations while we attempt to locate andqualify replacement suppliers.
***Patents and Proprietary Technology.***TheCompany has filed for a United States patent for the level sensor whichis currently pending. There can be no assurance any patents will be issuedor if issued to the Company, will not be challenged, invalidated or circumvented,or that the rights granted there under will provide competitive advantagesto the Company. Litigation over patent or other intellectual property claimscould result in substantial costs to the Company.
The Company also seeks to protect its proprietary information,in part through the use of confidentiality and non-circumvention agreementswith certain employees, consultants, contractors or other third partieswho may be exposed to such information in the ordinary course of business.There can be no assurance however, that these agreements will not be breached,that the Company would have adequate remedies for any breach, or that theCompany's proprietary information will not otherwise become known or beindependently developed or discovered by others including competitors.
**Automated Assembly Operating Segment** 
AMS, a wholly-owned subsidiary of the Company, incorporatedin the State of California, is a supplier of custom made precision assemblyequipment. AMS designs and builds custom, automated assembly systems marketedprincipally to manufacturers in three principal industries: medical, automotiveand high-tech (which includes the electronics and communications industries).These assembly systems integrate multiple manufacturing functions ofteninto a single custom production line built to the customer's specificationsand objectives. In a typical job for AMS a customer will approach AMS witha specific objective in mind. AMS will then work with this customer todesign, engineer, assemble, test and install a machine that performs tothis objective.
Assembly functions integrated into products manufacturedby AMS include: material and component handling, dispensing and placementof film or liquid adhesives, sealants or customer-formulated materialssuch as pharmaceuticals, marking and encoding, assembly of components,riveting, swaging, inspection functions including machine vision inspection,testing, data collection and analysis. Completed AMS assembly systems maybe from bench top size to almost a hundred feet in length, and may incorporateall types of subsystems, including robots, machine vision, conveyors, welders,mechanical tests, electronic tests and others as specified by the customer.AMS believes it is well positioned to capitalize on what it forecasts isan ongoing consolidation and growth in the fragmented automation assemblymarket.
Automation system functions integrated into products manufacturedby AMS are generally computer controlled through custom software writtenby AMS, and incorporate control, data handling, reporting and safety functions.The completed automation systems are generally tested and accepted by thecustomer at AMS prior to shipment and installation at the customer's site.
AMS believes that a majority of its current customersand future customers purchase automation systems for several reasons includingsupport of new product introductions and start-up, labor cost reductions,increase in capacity, increase in quality, increase in productivity, anda favorable return on investment and/or payback.
AMS believes it offers customers a number of competitiveadvantages over its competitors including successful on-time project execution,competitive pricing, systems which meet specified performance criteria,engineering and manufacturing expertise and experience and innovative machineconcepts. The typical AMS contract price is currently in excess of $350,000.
***Marketing and Sales*.**AMS relies primarily on personal contact by its executive and sales personnelto secure new customers and to market its products. AMS regularly participatesin local, regional and national trade show meetings in its key industrygroups. AMS believes personal contact by its sales and engineering staffis critical to retain new customers.
AMS has targeted large, established manufacturing companiesin the medical, automotive and high-tech industries as prospective clients.AMS targets companies that need small manufactured equipment and devices,requiring mechanical or electric mechanical assembly and test, or inspectionwith material handling, as key accounts. To assist in marketing productsand services, AMS also works to develop new applications for target customersfor their various manufacturing needs.
As part of its current marketing focus, AMS is targetingFortune 1000 businesses with assembly contracts in the range of $750,000to $1.5 million per project to increase market share and benefit from economiesof scale.
***Major Customers.***Revenue from salesof automated assembly equipment accounted for 99% and 80% of the Company'srevenues in 2000 and 1999, respectively. As is typical in the automatedassembly industry, AMS relies on a limited number of customers for a substantialpercentage of its net sales. In 2000 sales revenues derived from threecustomers represented approximately 72% of total sales. In 1999 sales revenuesderived from four customers represented approximately 66% of total sales.
The majority of AMS' sales are attributable to repeatcustomers, some of which have been customers for many years. AMS believessuch repeat business is indicative of its engineering capabilities, thequality of its products and overall customer satisfaction. However, AMSdoes not have long-term contracts with any of its customers and expectsthat a small number of customers will continue to account for a substantialportion of sales for the foreseeable future. The loss of, or a significantreduction in, orders by these or other significant customers could adverselyimpact the Company's results of operations. Furthermore, the concentrationof the Company's revenues in a limited number of large customers may causesignificant fluctuations in the Company's future annual and quarterly operatingresults. Due to the small number of annual projects attempted by AMS, asignificant performance problem with any one of AMS' projects could havea material adverse effect on AMS. There can be no assurance revenue fromcustomers who accounted for significant revenue in past periods, individually,or as a group, will continue, or if continued, will reach or exceed historicallevels in any period.
***Manufacturing.***Alldesign, engineering, fabrication, assembly and testing of AMS's productsare carried out at its facility in Simi Valley, California. Proprietarysoftware and in-house procedures are used to ensure the quality and timelinessof project execution, and AMS's custom automation related software incorporatescontrol, data handling, reporting and safety features. AMS also uses state-of-the-artcomputer-aided design practices to create the customized assembly processesfor its customers.
To manufacture certain of its automation equipment, AMSuses subcontractors for common industrial services such as machining, fabricationof welded structures, painting and powder coating on an as-needed basis.Manufacturing operations include purchasing, receiving, cutting, machining,grinding, electrical fabrication and testing, machine assembly as wellas testing and all other functions required to complete the automated assemblyproduct. When needed, AMS also employs a number of subcontractors for specialassembly operations including welding, wire electric discharge machiningand other unique operations.
AMS has implemented certain quality control proceduresfor its manufacturing facility. AMS's quality control personnel regularlymonitor the manufacturing process and have initiated numerous procedures,which assist in quality control. AMS believes new customers, particularlyFortune 1000 customers with large assembly projects, may impose additionalquality control standards. It is possible such customers or other qualitycontrol standards may require additional substantial expenditures overa long period of time, or that AMS may determine that such expenses arenot cost-effective.
***Raw Materials.*** The primary raw materialsused by AMS in assembly systems include such items as stock steel shapes,aluminum extrusions, billet and plate software. These raw material itemsare converted by AMS into the needed support structures and are custom-machinedin house to be incorporated into the automated assembly systems purchasedby AMS customers. Raw materials used by AMS are generally standard industrymaterials, which AMS believes can be provided from multiple sources ofsupply. AMS believes the most critical machine subsystems such as computers,vision systems, part feeders, conveyors and robots are also common andhave multiple sources of supply. Up to approximately 75% of the AMS assemblysystem components are purchased off the shelf. AMS does not have any long-termcontracts with any of its raw material suppliers, and believes there areadequate alternative sources of raw materials and components of sufficientquantity and quality in the event its current suppliers are not available.
***Competition.*** The Company believes competitionin the automation assembly industry is fragmented, and that no single competitordominates the industry. AMS competes with a number of competitors thatvary in size and resources most of which are smaller privately held companiesor subsidiaries of larger companies, many of which are larger than AMS.AMS believes the majority of these competitors provide custom assemblyequipment for smaller projects, and cannot handle the larger custom projects(over $250,000 in price) for which AMS is currently competing. AMS's principalcompetitors currently include Anatol Automation Inc., Ismeca Europe S.A.,Midwest Automation Division of DT Industries and Wright Industries. Manyof AMS's competitors have substantially greater financial, marketing andtechnological resources than AMS.
The automation industry is characterized by rapid technologicalchange, and competitors may develop their automation products more rapidlythan AMS. AMS believes competition among automation companies is basedprimarily on price, the speed and quantity of products produced, timelydelivery, product quality, safety, product innovation and assistance inmarketing and customer service. The competitive position of AMS will dependin part on AMS's ability to remain current in automation manufacturingand to increase the innovation, speed and reliability of its automatedassembly processes. AMS believes that it competes favorably with respectto each of these factors. There can be no assurance AMS will be able tocompete successfully.
***Patents and Proprietary Technology*.**AMS does not own or share in any patents. The Company seeks to protectits proprietary information, in part through the use of confidentialityand non-circumvention agreements with certain employees, consultants, contractorsor other third parties who may be exposed to such information in the ordinarycourse of business. There can be no assurance however, that these agreementswill not be breached, that the Company would have adequate remedies foranybreach, or that the Company's proprietary information will not otherwisebecome known or be independently developed or discovered by others includingcompetitors. 
***Backlog*.** Backlog consistsof uncompleted portions of engineering and construction contracts withvarious corporate entities. Backlog of all uncompleted contracts at December31, 2000, totaled approximately $1.5 million, compared to a backlog asof December 31, 1999, of approximately $1.9 million. Although backlog reflectsbusiness, which is considered to be firm, cancellations or scope adjustmentsmay occur. Where appropriate, backlog has been adjusted to reflect knownproject cancellations, deferrals and revisions in project scope and cost,both upward and downward.
***Liability Insurance.*** The design and saleof AMS' products expose it to possible product liability claims, if theuse of such products results in personal injury, death or property damage.AMS maintains product liability insurance in the principal amount of $2million through April 2001. There can be no assurance such insurance willbe adequate in terms and scope to protect AMS against material adverseeffects in the event of a successful claim, or that such insurance willbe renewed with acceptable terms and conditions. 
**Employees**
As of December 31, 2000, the Company and its subsidiariesemployed approximately 54 full-time employees. None of the Company's employeesare represented by a labor union or bound by a collective bargaining agreement.The Company has not experienced any work stoppages in the last five yearsand considers its relations with employees to be positive. 
**ITEM 2. PROPERTIES**
The Company leases 5,500 square feet of office space at1200 Prospect Street, Suite 325, La Jolla, California 92037. The term ofthe lease expires in December 2005. In addition, the Company leases officespace in a suburb of Denver, Colorado, for marketing purposes. The termof this lease expires in July 2001. The Company also maintains an officein Gillette, Wyoming, for engineering and administrative purposes. Theterm of this lease expires in July 2001. The Company's OCET subsidiaryleases 5,080 square feet of laboratory space at 11588-20 and 21 SorrentoValley Road, San Diego, California 92121 pursuant to a lease which expiresin May 2003. AMS leases 20,000 square feet of office and manufacturingspace at 2222 Shasta Way, Simi Valley, California 93065, which includes15,000 square feet of manufacturing space, which is currently being leasedon a monthly basis. The Company and AMS believe their current facilitieswill be adequate for their respective expected needs for the foreseeablefuture. 
**ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**
No matters were submitted during the three months endedDecember 31, 2000, to a vote of the shareholders.  
**PART II**
**ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERMATTERS**
The Common Stock of the Company is currently traded andprices are quoted on the NASD OTC Bulletin Board under the symbol SGII.The following table sets forth the high and low bid prices for SGI CommonStock during the periods indicated. The prices represent bid quotationsand do not include retail mark-ups, mark-downs or fees, nor do they necessarilyrepresent actual tradesHighLow1999First Quarter$ 0.41$ 0.13Second Quarter0.240.08Third Quarter0.170.11Fourth Quarter0.190.092000First Quarter$ 0.60$ 0.14Second Quarter0.440.23Third Quarter0.420.22Fourth Quarter0.370.14
As of March 12, 2001, the Company had approximately 2,340stockholders of record, and believes it has beneficial owners in excessof that number.
The Company has not declared any cash dividends on theCommon Stock and does not currently intend to pay any cash dividends onthe Common Stock in the foreseeable future.
**The Company had the following sales of unregisteredsecurities during the three month period ended December 31, 2000.**
During the three month period ended December 31, 2000,the Company raised approximately $781,243 through the issuance of 6,514,837restricted common shares to accredited investors. In addition, the Companygranted the holders piggyback registration rights. These securities wereissued pursuant to the exemptions provided by Section 4(2) of the SecuritiesAct and Regulation D. Investment representations were obtained and legendswere placed on the certificates. In connection therewith the Company incurredfinders' fees of $18,250 in cash and issued an aggregate of 141,080 sharesof restricted common stock valued at $15,980. The Company accrued an additional$7,100 in finders' fees.
In November 2000, the Company granted one warrant to purchasean aggregate of 1,500 common shares, pursuant to an employment offer. Thewarrant was issued pursuant to the exemptions provided by Section 4(2)of the Securities Act and Regulation D. In connection therewith, the Companyobtained investment representations and granted the holder piggyback registrationrights. The exercise price was equal to or greater than the closing bidprice on the grant date and expires on December 31, 2005. The warrant isexercisable one year from the date of grant at $0.195 per share.
During the three month period ended December 31, 2000,the Company issued for cash three unsecured 9% notes payable with an aggregateface value of $208,500 to one accredited investor. The notes are payableupon 30 days written demand but no sooner than one year following theirissuance date. Both the principal and accrued interest thereon may be paidin cash or at the option of the Company, on the due date by issuing 2,610,920shares of restricted common stock to the holder. The notes were issuedpursuant to the exemptions provided by Section 4(2) of the Securities Actand Regulation D. Investment representations were obtained from the accreditedinvestor. 
In November 2000 the Company amended one 12% note payablewith a face value of $50,000, payable to an entity controlled by a directorof the Company. The principal and interest on the note which was due onNovember 15, 2000, was amended to be due and payable thirty days afterthe Company receives written notice of demand for payment. As of December31, 2000, no demand had been made.
On November 15, 2000, the Company sold one unsecured notepayable to an outside director with a principle amount of $35,000 for cash.The note bears interest at 9% per annum and is due on demand upon fivedays written notice, but no sooner than on December 31, 2000. Both theprincipal and interest may be paid in cash or by mutual agreement in restrictedcommon stock of the Company. This security was issued pursuant to the exemptionsprovided by Section 4(2) of the Securities Act and Regulation D. Investmentrepresentations were obtained and legends were placed on the certificates.
During the three month period ended December 31, 2000,two 9% notes payable with an aggregate face value of $84,000 and accruedinterest of $3,790 became due and payable. The Company, pursuant to theterms of these notes, paid both the principal and accrued interest thereonby issuing to the holder of those notes 977,068 shares of restricted commonstock. The securities were issued pursuant to the exemptions provided bySection 4(2) of the Securities Act and Regulation D. Investment representationswere obtained from the accredited investor and legends were placed on thecertificates.
During the three month period ended December 31, 2000,the Company as provided in their related consulting agreements issued approximately105,000 restricted common shares to consultants for services rendered,valued at $17,500. These securities were issued pursuant to the exemptionsprovided by Section 4(2) of the Securities Act and Regulation D. Investmentrepresentations were obtained and legends were placed on the certificates.
On December 10, 2000, as a condition for obtaining a $100,000line of credit for AMS with a bank, 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 accrued a $10,000liability payable by issuing to this entity 50,000 shares of restrictedcommon stock of the Company. The securities were issued pursuant to theexemptions provided by Section 4(2) of the Securities Act and RegulationD. Investment representations were obtained and a legend was placed onthe certificate.
**ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLANOF OPERATION**
***Forward-Looking Statements:***This AnnualReport on Form 10-KSB contains statements relative to: (i) projections,(ii) estimates, (iii) future research plans and expenditures, (iv) potentialcollaborative arrangements, (v) opinions of management, and (vi) the needfor and availability of additional financing; which may be considered forward-lookingstatements.
The forward-looking statements included herein are basedon current expectations that involve a number of risks and uncertainties.These forward-looking statements are based on assumptions regarding theCompany's business and technology, which involve judgments with respectto, among other things, future scientific, economic and competitive conditions,and future business decisions, as well as risk factors detailed from timeto time in the Company's SEC reports including this Form 10-KSB, all ofwhich are difficult or impossible to predict accurately and many of whichare beyond the control of the Company. Although the Company believes thatthe 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 thevarious disclosures made by the Company in this report and in the Company'sother reports filed with the SEC that attempt to advise interested partiesof the risks and factors that may affect the Company's business. Therefore,historical results and percentage relationships will not necessarily beindicative of the operating results of any future period.  
**Results of Operations**
***Year ended December 31, 2000, compared to Year endedDecember 31, 1999.***
***Net Loss per Common Share.*** Basic net lossper common share increased $0.01 per share over the prior year after takinginto account a $1,130,000 or $0.03 per share, gain on extinguishment ofdebt in 1999. The amortization of approximately $523,000 of the imputedbeneficial conversion feature associated with the issuance of various convertibledebt, along with approximately $850,000 in carrying costs associated withmaintaining the idle ENCOAL LFC plant contributed to the current year netloss applicable to common of approximately $7,087,000. The increase inthe basic net loss per share for the current year was partially offsetby an increase in the weighted average number of common shares outstanding.
***Revenues and Gross Margin*.**Revenueson a consolidated basis increased 34% over fiscal 1999. Revenues and costof sales for the current year are primarily attributable to AMS and arerecorded using the percentage of completion method.
Sales and gross margin at AMS increased 67%, and 7% from the prior year,respectively. Revenues at AMS totaled approximately $5,161,000 essentiallyequaling the best sales effort ever since it became a subsidiary of SGIin 1995.
The Company attributes the increase in revenues and improved gross marginsprimarily to strong sales to the medical and automotive industries whichaccounted for the majority of total sales. AMS' sales were mainly concentratedin three customers who made up approximately 72% of sales. Based on backlogand current order activity the Company anticipates that sales for the firstquarter of 2001 will be flat or below year 2000 levels. AMS tries to maintaina steady growth in revenues by marketing to at least three different industries,specifically, medical, automotive and high-tech. However, it cannot guaranteesecuring sufficient contracts from these industries to maintain its growth.Consequently, AMS may experience significant fluctuations in its futureannual and quarterly operating results.
Gross margin as a percentage of sales for the automatedassembly segment returned to normal levels averaging 24% in the currentyear compared to 17% over the 1999 fiscal year, a 7% increase. Gross marginsmay vary in a given period as a result of the variations in profitabilityof contracts for large orders of automated production systems or specialtymachines. The margins in the automated assembly segment increased duringthe current year reflecting improved efficiencies related to the higherutilization of manufacturing resources and improved margins on new business.
During 1999 the Company's LFC segment received net revenuesof $750,000 from its services agreement with LFC Tech. The Company didnot receive any additional revenues from this services agreement in 2000,thereby offsetting the increase in revenues from AMS. In January of 2001the parties terminated this agreement.
***Loss on Investment in LFC Investees.***TheCompany's share of the losses for its LFC joint ventures (TEK-KOL and LFCTech) for year 2000, increased over the same prior year period. The increaseis primarily attributable to the amortization of patents which LFC Techacquired in late 1999. LFC Tech during 2000 incurred very little in theway of direct operating expenses as the members agreed to perform certainservices for the joint venture at their own expense, without pass throughto LFC Tech.
On December 9, 1999, the Company acquired AEI's 50% interestin the TEK-KOL partnership, along with various other assets, resultingin the Company owning 100% of TEK-KOL. See Note 11 "Asset Acquisition"to the Notes to Consolidated Financial Statements included in Item 7 ofPart II of this Form 10-KSB. No significant expenses were incurred by theTEK-KOL partnership during 2000 as active operations of this entity terminatedin 1998. Furthermore, no other material expenses related to this partnershipare anticipated in the future as it is pending termination.
***Research and Development Expenses.***Engineering,research and development expenses for the year 2000 increased 28%. Theincrease for the current year is essentially attributable to an increasein expenses related to the development of the LFC Process technology. Morespecifically, the increase in expenses are primarily related to the designof the CDL processing unit and engineering associated with planned improvementsat the ENCOAL Demonstration plant. Expenses for the research and developmentof the OCET Process technology declined approximately $392,000 or 48% overthe prior year as the Company shifted its laboratory resources and personneltowards increasing the value of CDL produced from the LFC Process.
In addition, during 2000, the Company capitalized certain costs relatedto the design and construction of R&D equipment which would be usedat SGITC to evaluate among other things CDL produced from various typesof coal, as well as ways to enhance the value of CDL processing and itsby-products. In the fourth quarter of 2000, the Company determined thatthere was a more cost effective and efficient alternative to building thispiece of equipment and discontinued work on the project. Accordingly, capitalizedcosts aggregating almost $593,000, which included approximately $483,000of internal costs, were expensed in the fourth quarter to research anddevelopment expenses.
The Company anticipates that it will continue to concentrate its resourceson the LFC Process, increasing the value of CDL and reducing the cost ofequipment associated with producing the current slate of CDL derived productsinto 2001.
***Selling, General and Administrative Expenses.***Selling,general and administrative expenses for the year increased 26% over the1999 fiscal year. The increase is primarily attributable to the carryingcosts associated with maintaining the ENCOAL LFC plant in idle condition,which the Company acquired in late 1999. These costs, which are estimatedat $100,000 per month, are expected to continue until the Company concludesa sale or lease of the facility more fully described in Note 9 "ENCOALDemonstration Plant" of the Notes to Consolidated Financial Statementsincluded in item 7 of Part II of this Form 10-KSB. Selling, general andadministrative expenses for AMS, for the year increased 19% or $149,000over the 1999 fiscal year. This increase is primarily attributable to highersales commissions and bonuses resulting from the significant increase insales revenues over the 1999 fiscal year.
***Legal and Accounting Expenses.***Legal and accounting expensesfor 2000, decreased 31% over the prior year period. The decrease is relatedprimarily to a reduction in legal and accounting salaries and the settlementof various lawsuits to which the Company was a party.
***Depreciation and Amortization Expenses.***Depreciation andamortization expense for the current year decreased 16% over the 1999 fiscalyear. This decrease is primarily attributable to a non-recurring amortizationcharge of $80,000 which occurred in 1999 and a significant portion of OCETCorporation's fixed assets becoming fully depreciated. Partially offsettingthis decrease is the Company's acquisition of various LFC related assetsfrom AEI late in 1999. AMS' depreciation and amortization expense for thecurrent year remained relatively unchanged over the same prior year period.
***Interest Expense.***Interest expense for 2000 increased113% over the 1999 fiscal year. The increase is due to the addition ofapproximately $2.0 million in long-term debt associated with the purchaseof the ENCOAL LFC plant and various LFC assets in late 1999 and a non-cashinterest charge of approximately $523,000 related to the amortization ofthe imputed beneficial conversion feature of various convertible notespayable, primarily issued during the last half of 2000.
***Gain on Disposition of Assets.***The Company had no significantdisposition of assets in the current year. The net gain on dispositionof assets of $268,963, recorded in 1999 is related to the transfer of theLFC Process rights to LFC Tech. (See Note 4 "LFC Process Related Assets"to the Notes to Consolidated Financial Statements included in Item 7 ofPart II of this Form 10-KSB.)
***Other Non-Operating Income.***Other non-operating incomefor the year, decreased 51% over the 1999 fiscal year. This decrease wasdue primarily to the settlement of a lawsuit the Company had pending inSuperior Court in 1999.
***Extraordinary Gain on Extinguishment of Debt.*T**he Companyhad no extraordinary items in 2000. In 1999 the extraordinary gain on extinguishmentof debt is related to the assumption of a $1,130,000 liability to MitsubishiHeavy Industries ("MHI") which the Company assumed with its acquisitionof various assets from AEI. This liability was subsequently forgiven byMHI in accordance with the restructured LFC Tech joint venture agreementswith MLFC. (See Notes 4 and 11 to the Notes to the Consolidated FinancialStatements included in Item 7 of Part II of this Form 10-KSB). The Companyrecorded the extraordinary gain on its consolidated statement of operationson a gross basis as no tax liability was incurred due to sufficient stateand federal loss carryforwards.  
**Liquidity and Capital Resources**
**A**s of December 31, 2000, the Company had assets totaling $6.4million, including restricted cash of $0.2 million, and a working capitaldeficiency of $7.3 million. Current maturities of approximately $4.2 millionof long-term debt, along with current notes payable, accounts payable andaccrued salaries primarily contribute to the working capital deficiencyat December 31, 2000. This is compared to assets of $6.7 million and a$1.8 million working capital deficiency as of December 31, 1999. The Companyanticipates continued operating losses over the next twelve months andhas both short-term and long-term liquidity deficiencies as of December31, 2000. 
Other short-term liquidity requirements are expected to be satisfiedfrom existing cash balances, proceeds from the sale of equity securitiesin the future or other collaborative arrangements. Negotiations are on-goingfor the public and private placement of equity securities, the proceedsof which are intended to be used to satisfy the short-term liquidity deficiency.In the event that the Company is unable to finance operations at the currentlevel, various administrative activities would be curtailed and certainresearch and development efforts would be reduced. The Company will notbe able to sustain operations if it is unsuccessful in securing sufficientfinancing and/or generating revenues from operations. 
The Company had long-term liquidity deficiencies at December 31, 2000.Over the long-term, the Company will require substantial additional fundsto maintain and expand its research and development activities and ultimatelyto commercialize, with or without the assistance of corporate partners,any of its proposed technologies. Although there are no commitments, theCompany believes the long-term liquidity deficiency will be satisfied througha combination of future equity sales, increased positive cash flows fromoperations, and research or other collaborative agreements, until suchtime, if ever, 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 $4.3 millionand $2.6 million for the years ended December 31, 2000, and 1999, respectively,are primarily related to the Company's general operating expenses and R&Dactivities. The increase of approximately 66% or $1.7 million is, in thecurrent year, essentially due to engineering and other general costs associatedwith the ENCOAL Demonstration plant.
Cash used in operating activities for the year ended December 31, 2000,increased 66% over 1999. The Company's activities associated with the holdingcosts of the ENCOAL Demonstration plant are the primary reason for thisincrease. In December of 1999 the Company acquired various LFC relatedassets and originally estimated that it would take six months in whichto secure an investor/financier for planned improvements of the ENCOALDemonstration plant. Accordingly, in 2000 we expected to incur approximately$350,000 in expenses associated with maintaining the ENCOAL Demonstrationplant in idle condition. As of December 31, 2000, the Company had incurredapproximately $850,000 of expenses and anticipates incurring an additional$100,000 of expenses each month until it concludes a sale or lease of thefacility as described below.
The Company's investing activities amounted to a use of cash of approximately$155,000 and a source of cash of approximately $640,000 for the years endedDecember 31, 2000, and 1999, respectively. The use of cash in the currentyear is primarily related to the acquisition of machinery and equipmentat AMS and the construction of equipment for the ENCOAL Demonstration plant.The source of cash for 1999 is primarily related to the proceeds on transferof the LFC technology rights to LFC Tech (See Note 4 "LFC Process RelatedAssets" to the Notes to Consolidated Financial Statements included in Item7 of Part II of this Form 10-KSB), which was partially offset by increasedacquisitions of LFC Process related equipment.
In January of 1999 the Company and MLFC a wholly-owned subsidiary ofMitsubishi Corporation formed LFC Technologies, LLC ("LFC Tech"). Accordingly,the Company may be required from time to time to make capital contributionsto LFC Tech. The Company is required to contribute one-half of any suchrequired capital contributions. In accordance with the Amended ServicesAgreement between the Company and LFC Tech, the Company received approximately$750,000 of net revenues through the year ended December 31, 1999. Thisagreement was amended subsequent to October 1999, and the Company did notreceive any additional revenues pursuant thereto in 2000. In January 2001,by mutual agreement, the parties terminated the Services Agreement. TheCompany does not anticipate that any significant contributions to LFC Techwill be required in 2001.
In 2001 the Company is projecting no significant capital expendituresfor equipment at OCET and that AMS will continue with its approximately$300,000 capital improvements project which it started in 2000. In accordancewith this plan AMS invested approximately $100,000 in 2000 to improve manufacturingcapabilities and efficiencies. Further, the Company, through collaborationwith another larger and better capitalized company, intends to obtain financingestimated at $13.7 million for the ENCOAL Demonstration plant. The financingis for capital improvements and start-up expenditures which are necessaryto set the plant on more of a commercial footing and to position it asa reference plant for potential future commercial LFC facilities. Otherthan the improvements which the Company intends to make to the ENCOAL Demonstrationplant the Company as of December 31, 2000, does not have any material requirementsor commitments 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 $4.6 millionand $2.0 million for the years ended December 31, 2000, and 1999. Thesefunds were raised primarily through the private placement of debt and equitysecurities for both years. See Note 5 "Debt" to the Notes to ConsolidatedFinancial Statements included in Item 7 of Part II of this Form 10-KSBfor the maturity dates and amounts of the various notes payable outstanding,as of December 31, 2000. Offsetting the $4.6 million of cash raised duringthe year was the pay-off and termination of the Company's $400,000 line-of-creditwhich was collateralized by a $402,500 certificate of deposit that maturedin May 2000. In 2000, the Company incurred in the aggregate approximately$746,000 in charges related to its financing activities. This amount consistsof non-cash charges of approximately $523,000 for the amortization of thebeneficial conversion feature related to certain convertible notes payable;$135,000 in non-cash charges and $88,000 in cash charges for costs associatedwith private placement services.
During the fourth quarter of 2000 the Company was successful in obtaininga new line-of-credit to provide short term working capital to AMS. Theline allows maximum borrowings of $100,000 and bears interest at primeplus 1%. At December 31, 2000, AMS had no borrowings under this line ofcredit. The agreement expires November 5, 2001.
As stated earlier the Company intends to obtain financing primarilyrelated to improvements for the ENCOAL Demonstration plant estimated at$13.7 million. 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.
In 1999 the Company had notes payable and associated accrued interestaggregating $4.2 million required to be paid prior to October 31, 1999.In October 1999, the Company satisfied these liabilities through its 99Dexchange offering. This exchange offering extended the due date of theseliabilities two years to September 30, 2001, primarily in exchange forconvertible debt and equity securities. In addition, the Company, by agreement,modified the due dates on $500,000 of short-term notes payable plus associatedinterest due September 27, 1999, to be payable upon demand, which had notbeen made as of December 31, 2000. (See Note 5 "Debt" to the Notes to ConsolidatedFinancial Statements included in Item 7 of Part II of this Form 10-KSB.)
The amount of money raised during a given period is dependent upon financialmarket conditions, technological progress and the Company's projected fundingrequirements. The Company anticipates that future financing activitieswill be influenced by the aforementioned factors. Significant future financingactivities will be required to fund future operating and investing activitiesand to maintain debt service. While the Company is engaged in continuingnegotiations to secure additional capital and financing, there is no assurancesuch funding will be available or if received will be adequate.  
**Impact of Inflation**
The results of the Company's operations for periods discussed have notbeen significantly affected by inflation. Further, although AMS often sellsproducts on a fixed quote basis, the average time between the receipt ofan order and delivery is generally under nine months. Therefore, AMS generallyis not adversely affected by increases in the cost of raw materials andcomponents. This could change in situations in which AMS is working againsta substantial backlog and may not be able to pass on higher costs to customers.In addition, interest on the Company's line-of-credit is tied to the primerate and therefore may increase with inflation.  
**Recent Accounting Pronouncements**

The Financial Accounting Standards Board, during the year ended December31, 2000, has issued certain pronouncements that will become effectivein subsequent periods; however, management does not believe that any ofthose pronouncements will affect any financial accounting measurementsor disclosures the Company will be required to make based on its currentoperations.  
**Risk Factors**

You should carefully consider the risks described belowbefore making an investment decision. The risks and uncertainties describedbelow are not the only ones facing our company. Additional risks and uncertaintiesnot presently known to us or that we currently deem immaterial may alsoaffect our business operations.
If any of the following risks actually occur, our business,financial condition or results of operations could be materially adverselyaffected. In such case, the trading price of our common stock could decline,and you could lose part of or all of your investment.
***Historical Losses; Probable Future Losses**.*We have had a net loss in every year since we were incorporated in 1980.As of December 31, 2000, we had an accumulated deficit of approximately$67.3 million and a working capital deficiency of approximately $7.3 million.Our operations may result in substantial and continuing losses in the future.We have only generated limited revenue from our principal business whichis the LFC Process. Almost all of our recent revenues have been providedby AMS, our principal subsidiary. AMS provided 99% and 80% of our grossrevenues in each of the years ended December 31, 2000, and 1999, respectively.To achieve profitability, we must, among other things, successfully completedevelopment of and license the LFC Process to third parties who will operatea commercial scale LFC Process plant. Accordingly, we cannot assure youthat we will be able to achieve profitability at all or on a sustainedbasis.
***Substantial Debt.***We have substantialdebt and debt service obligations. As of December 31, 2000, we had approximately$4.2 million of long-term debt, and another $5.5 million of current obligationsdue in 2001. Of the total debt and current obligations due in 2001 approximately$4.6 million may be converted into equity. Other than this equity conversion,we have no procedures in place to retire any of the debt prior to the duedate. Absent conversions into equity, unless we receive substantial additionalfinancing or can extend or convert the debt, based on current operations,we may not be able to pay the principal or interest payments on our debt.If we can't pay or refinance our debts, we may be unable to continue inbusiness. We cannot assure you that we will receive enough funding to payour debts, or that we will be able to refinance or convert our debts beforeor when they become due.
***Substantial Capital Requirements*.**We must raise substantialadditional financing to market the LFC Process and OCET Process, to conductresearch and development and to pay our debt obligations. During the nextyear, we must pay our current obligations as noted previously. We do notcurrently have the funds available to pay these obligations. Based on pastoperations and funding activities, we typically have on average one totwo months worth of operating capital available. We intend to raise thefunds necessary for these expenses through the sale of the ENCOAL Plant,selling equity or debt securities. We have no commitments for any additionalfinancing and we cannot assure you any additional financing will be availableon acceptable terms. If additional financing is not available, we may berequired to reduce or suspend operations, seek to sell our assets or sellsecurities on unfavorable terms. Our $200,000 bank loan is secured by collateraland our $100,000 bank line-of-credit is guaranteed by an entity controlledby an outside director. We are uncertain whether we can obtain additionalbank financing in the near term. Our future financing requirements willbe affected by numerous factors including, but not limited to, the saleof the ENCOAL Demonstration Plant, research and development results, andcompeting technologies. 
***Amended and Restated Acquisition Agreement*.**On December9, 1999, the Company and AEI Resources executed an agreement pursuant towhich the Company purchased free and clear of any liens and obligations,all of AEI and its subsidiaries' interests in the TEK-KOL Partnership andthe LFC Technology. See Note 11 "Asset Acquisition" of the Notes to ConsolidatedFinancial Statements included in Item 7 of Part II of this Form 10-KSB.The Company also purchased the ENCOAL Corporation as well as NuCoal CompanyLLC, which owns engineering plans for a commercial size LFC plant. TheAcquisition Agreement provided that the Company had several obligationsthat it was required to fulfill by the end of the first quarter of 2000.The requirement to fulfill those obligations has been extended to April30, 2001. If the Company fails to fulfill these obligations then AEI hasthe right to foreclose and take back the ENCOAL Corporation stock, andthe NuCoal membership interests. While the Company has fulfilled a numberof the conditions imposed on it in the Acquisition Agreement there is nocertainty that it will be able to fulfill the other obligations, and inparticular the obligation to find an investor to take over AEI's obligationsto Triton Coal Company, a subsidiary of Vulcan, relative to the plant.In the event that the Company cannot fulfill these obligations or obtainan extension of the deadline, if required, to fulfill these obligations,it could have a material adverse affect on our business. The failure torestart the ENCOAL plant could materially adversely impact the Company'smarketing and licensing efforts for the LFC Process.
***The ENCOAL Demonstration Plant*.**In the event that theCompany does find an investor for the ENCOAL Demonstration plant, thenit intends to make a number of improvements to the plant. There is no certaintythat those improvements will be made timely, on budget, or that they willfunction as expected. Should an investor be secured, the investor is likelyto require the Company to bear a significant amount of risk as to costoverruns relative to the construction of the improvements. The failureof that third party investor and owner of the ENCOAL Demonstration Plantto implement all improvements proposed to it and based thereon demonstratethe LFC technology on a commercial basis could have a material adverseaffect on the Company. Since the upgraded coal and liquid products of thePlant are being sold on either a typical specification or on a limit specificationbasis the failure of the Plant to produce products meeting these specificationscould result in the termination of these agreements. This could in turnresult in significant liabilities being imposed on the Company.
***LFC Process or OCET Process Plants and Products.***Whilewe believe a market will develop in the United States and abroad for LFCProcess and OCET Process plants, we are still in the process of developingthese markets. We must establish and develop a market for the LFC Processplants among potential customers such as electric utility companies, industrialcoal users, specialty chemical users and chemical feedstock processingcompanies and for the OCET Process among petroleum refineries, oil companiesand others. Further, potential customers of our products may be able tochoose among alternative products. We can not assure you that the OCETProcess will ever be successfully implemented on a commercial basis orgain acceptance by its potential customers. While the Company believesthere is a large market for the LFC Process's PDF there will need to betesting of the PDF by potential customers as a precondition to sellingthem significant quantities of PDF. If the ENCOAL Plant is not restartedso that PDF can be sold to these potential customers for testing then therecould be a material adverse affect on the Company. There is a market formany of the liquid products produced by the LFC Process, but some of thosemarkets may consist of only a few customers or the market's requirementsmay be limited. Certain other LFC liquid products such as waxes have extremelylarge market demand, but it is necessary to demonstrate that the ENCOALDemonstration Plant can produce, to customer specifications, these waxesand other LFC liquid products on a commercial basis. Our previous jointventure partner (Zeigler Coal Holding Company) successfully operated theENCOAL Demonstration Plant. Even assuming the ENCOAL Demonstration Plantsuccessfully restarts and demonstrates on a commercial basis the LFC Processthe market viability of the LFC Process won't be known until we completeconstruction of one or more commercial-scale production facilities, eitherin the United States or internationally, that successfully scales up theresults of that demonstration and produces, on a consistent basis, commercialquantities of LFC Process products which meet certain minimum quality specifications.We cannot assure you that a commercial-scale facility using either theLFC Process or OCET Process will ever be built or if built will be successful.
***Demonstration Plant Operations Discontinued*.**The ENCOALDemonstration Plant was built to demonstrate the LFC Process, and has producedand shipped both PDF and CDL. ENCOAL discontinued the operations of theDemonstration Plant in the fourth quarter of 1997 and without financialassistance from a third party, the plant is unlikely to resume operations.We are actively pursuing a potential third party to invest the needed capitalto resume operations at the ENCOAL Demonstration Plant and have been involvedin discussions with that party. However until final definitive agreementsare executed we cannot give you any assurance as to when or if the ENCOALDemonstration Plant will ever resume operations. If the Company is unsuccessfulin its efforts to make improvements and resume operations at the ENCOALDemonstration Plant it may have a material adverse impact on our abilityto market and license the LFC Process and therefore on our business andoperations.
***Ability to Take Advantage of Net Operating Losses Could Be Limited*.**Pursuantto Section 382 of the Internal Revenue Code of 1986, the use of prior netoperating losses is limited after an ''ownership change''. The limitation,if applicable, may be equal to some or all of our net operating losseson the date of the ownership change. Additional issuances of equity interestsby us, including the issuance of shares of common stock upon the conversionof our 12% convertible debentures or on the exercise of outstanding warrantsor options to purchase our common stock may result in an ownership changeas defined by Section 382. In the event we achieve profitable operations,any significant limitation on the use of our net operating losses wouldhave the effect of increasing our tax liability and reducing net incomeand available cash resources.
***Licenses for LFC Process; No Licenses for OCET Process*.**Therecan be no assurance we will successfully market, license or sell eitherthe LFC Process or the OCET Process. We will be dependent upon third partiesto finance the construction, development and operation of plants usingthe LFC Process and the OCET Process. We do not have any license agreementsfor the use of the OCET Process as the OCET Process is in the developmentstage.
***Dependence on Third Parties*.**We do not presently haveadequate capital, resources or personnel to finance, design, engineer,and construct an LFC Process or OCET Process production plant. Therefore,we will be dependent on entering into licensing and other agreements withthird parties to provide such financial participation and services forboth the LFC Process and OCET Process. If we are not successful in ourattempts to license the LFC Process and/or the OCET Process it will havea material adverse impact on our business and operations.
We have established relationships with third parties to develop andexploit the LFC and OCET Process technologies and further develop marketsfor the processes and their products. Our success in that development willdepend upon our ability to maintain existing strategic relationships anddevelop and maintain additional relationships. We are and will continueto be dependent upon these strategic relationships to, among other things,fund operations and to provide necessary technical, operational, personneland other resources. A decline in the financial prospects or business interestsof any of these third parties could adversely affect such party's commitmentto a joint venture or project, which could have a material adverse affecton the Company. Moreover, joint ventures or similar arrangements requireus to have financial and other resources to meet our commitments to thejoint ventures or projects. We cannot assure you that we will be able tomaintain existing strategic relationships, develop or maintain additionalstrategic relationships, meet our commitments with respect to our jointventures or projects or that existing or future third parties, with whomwe have a strategic relationship, will meet their commitments to any respectivejoint venture or project.
***General Project Development is Uncertain*.**The processof developing, permitting, financing and constructing LFC Process or OCETProcess production facilities is complex, lengthy and costly and subjectto numerous risks, uncertainties and factors beyond our control, includingcost overruns, delays, property damage and technical delays. We believethat a three module commercial LFC plant would require approximately $450million or more, several years of construction and expertise in major plantdevelopment and operations to develop, construct and operate. We cannotassure you we will enter into any agreement with any third parties forfinancing and construction or even if such agreements are entered intothat they will be successful or profitable. Additionally, only a smallpercentage, if any, of the projects that we evaluate and pursue may ultimatelyresult in operating projects. As a result, we may not be able to recoverany expenses that we incur in the evaluation and development of certainprojects.
***Dilutive Effects of Outstanding Securities*.**We have asubstantial number of options, warrants and other convertible securities,which are outstanding. The exercise of the options and warrants or theconversion of a significant number of the convertible securities couldresult in substantial additional dilution to our existing shareholders.As long as such options, warrants or convertible securities are outstanding,our ability to obtain equity capital on favorable terms may be adverselyaffected. Several of our outstanding series of convertible preferred stockare convertible into a variable number of shares of common stock pursuantto a formula which results in the holders receiving more shares of commonstock the lower the trading price of our common stock.
Conversion of some of our preferred stock and the resale of the commonstock could result in a lower market price for our securities. Such conversionscould also result in other holders of our convertible securities receivingmore shares of common stock resulting in even greater potential dilution.
***Liquidity of Trading Market; Penny Stock.***Shares of theCompany's common stock are quoted on the OTC Bulletin Board system. Thisover-the-counter market on an electronic bulletin board generally supportsquotations for securities of companies that do not meet the NASDAQ SmallCap Market listing requirements. As a result, investors may find it moredifficult to dispose of, or to obtain accurate price quotations of, ourcommon stock than they would if our common stock were quoted on the NASDAQSmall Cap Market. In addition, quotation on the OTC Bulletin Board dependson the willingness of broker-dealers to make a market in our common stock.We cannot assure you that our common stock will continue to be so quotedor that there will continue to be a market for buying and selling our commonstock. Our common stock is also subject to so-called "penny stock" rulesthat impose additional sales practice and market making requirements onbroker-dealers who sell and/or make a market in such securities. Such rulesmay discourage the ability or willingness of broker-dealers to sell and/ormake a market in our common stock.
***Competition and Technology Obsolescence*.**The principalmarket for our PDF is the energy industry, which is intensely competitive.Many utility companies, coal companies and other companies are engagedin research to clean or convert coal into a less polluting and more efficientfuel. Many of our competitors have substantially greater financial, technicaland human resources than us and may be better equipped to develop, testand license coal related technologies. In addition, some of these companieshave extensive experience in operating coal plants. These companies maydevelop and introduce coal related technologies competitive with or superiorto our LFC Process prior to any market acceptance for the LFC Process orother technologies developed by the Company or by our affiliates.
We expect that LFC Process product competition will be based, amongother things, on how economically, if at all, the PDF and liquid productscan be produced, their quality, transportation costs, competitive pricingof comparable products, government incentive programs, comparison to energygenerating alternatives, and the strength and duration of any patents onthe LFC Process or other potential technologies.
The automation assembly industry within which AMS competes is also highlycompetitive. Competition is based primarily on price, the speed and quantityof products produced, timely delivery, product quality, safety, productinnovation and assistance in marketing and customer service. AMS competeswith numerous other companies in the automation assembly business. Manyof AMS's competitors are substantially larger and more diversified, andhave substantially greater financial and marketing resources than AMS.We cannot assure you that AMS will be able to compete successfully.
***Patents and Intellectual Property*.**Patents, trade secrets,customer relationships and other proprietary rights are very importantto our success and competitive position. We have patents in the U.S. relatedto the LFC Process and OCET Process. We also have foreign counterpartsfor certain of these patents related to both the LFC Process and OCET Process.We cannot assure you that any of the patents issued, will provide meaningfulprotection or not be challenged or invalidated. Any patents obtained willbe for a limited time, generally not exceeding 17 years from the date ofissuance or 20 years from the date of filing.
We seek to protect our patents and other proprietary rights, but ouractions may be inadequate. Further, we may fail to prevent others fromclaiming that we have infringed on their patents and other proprietaryrights. Any claims, with or without merit, made against us related to ourpatents and proprietary technology would subject us to costly litigationand the diversion of our technical and management personnel and could havea material adverse impact on our business, financial condition and resultsof operations.
***Electric Utility Regulatory Changes*.**The domestic electricutility industry is in the early stages of deregulation. The National EnergyPolicy Act of 1992 exempts a new class of facilities from certain federalutility regulation and liberalizes access for non-utility generators. Thislegislation also initiated competition in the wholesale electric market.In addition, many states are considering the elimination of many of theregulations that currently limit the ability of parties to sell withinspecific geographic boundaries. We believe these regulatory changes willresult in utilities and other power generators striving to reduce costs.We also believe these changes will result in increased competition in theelectric wholesale and retail markets and increase pressures on all suppliersto electric utilities to reduce costs. These factors may make it more difficultto obtain the pricing needed to sell PDF into the United States utilitymarket.
***Dependence Upon Key Personnel*.**Our success in developingthe LFC Process, the OCET Process and additional marketable products andprocesses and achieving a competitive position is dependent in large parton our ability to retain qualified scientific and management personnel.We cannot assure you that we can retain such personnel. If we lost anyof these individuals, it could have a material adverse impact on the businessand operations of the Company. Our potential growth and expansion intoareas requiring additional expertise, such as expanded programs for theLFC Process and OCET Process requires additional research, testing, engineeringand marketing personnel, which could place increased demands on our humanresources. If we expand and cannot attract and retain personnel with appropriateexpertise it could have a material adverse effect on our prospects forsuccess. We also partially rely on consultants and advisors to assist uswith marketing, management, and research and development strategies. Ourconsultants and advisors are self-employed or are employees of other companies,and may have commitments to, or consulting or advisory contracts with,more than one other entity that may affect their ability to contributeto our projects.
AMS's success will depend, in large part, on its ability to retain qualifiedproject management, qualified engineers and management personnel. We cannotassure you we will be able to retain such personnel. The loss of any ofthese individuals could have a material adverse impact on AMS's business.
***Environmental and Other Government Laws and Regulations*. P**otentialLFC Process and OCET Process plants and the operations of AMS are now andwill likely in the future be subject to federal, state and local environmentaland other laws and regulations. These laws and regulations include theClean Air Act and various regulatory provisions of the United States Departmentof Energy, the Environmental Protection Agency and the Internal RevenueService, as well as the laws and regulations of other countries and internationaltreaties. Future new tax policies could also negatively impact our prospectsif the government encouraged production of other than coal for fuel sources.
It is likely LFC Process Plants will be subject to the application ofvarious environmental regulations designed to ensure, among other things,environmentally compatible plant operations. Failure to comply with applicableregulatory requirements can result in fines, suspensions of regulatoryapprovals, operating restrictions, criminal prosecution and other negativeconsequences. Furthermore, additional government regulation may occur inthe future, which could prevent or delay the commercialization of eitherthe LFC Process and/or the OCET Process.
***Market Value of Company's Securities*.**We must obtain substantialadditional funds from investors for the sale of our debt or equity securitiesto continue in business. In the event the market price of our publiclytraded Common Stock decreases below a certain price, we may be unable tosell additional equity, or if we are able to sell securities, we may notobtain sufficient consideration from the sale of our securities to provideadequate funding to continue our operations.
***Exercise of Existing Warrants and Conversion of Convertible Securities*.**Wewill be able to issue shares of Common Stock registered for resale uponexercise of the warrants, options and/or the conversion of any convertiblesecurities only if there is an effective registration statement filed withthe Commission or an applicable exemption is available. Also, the CommonStock must be qualified or exempt from qualification under applicable statesecurities laws for each state in which the various holders of the warrants,options and convertible securities live. Subject to our other contractualobligations, we reserve the right in our discretion to not register orqualify the Common Stock in any state where the time and expense do notjustify registration or qualification. The warrants, options and convertiblesecurities may be deprived of any value in the event we do not satisfyor we choose not to satisfy such state and federal requirements. Althoughit is our present intention to satisfy such requirements, we cannot assureyou we will be able to do so.  
**ITEM 7. FINANCIAL STATEMENTS**  
Index to Consolidated Financial Statements 
Report of Independent Public Accountants.....................................................34
Consolidated Balance Sheet - December 31, 2000.........................................35
Consolidated Statements of Operations for the years endedDecember 31, 2000, and 1999. ....................................................................36
Consolidated Statements of Stockholders' Deficiency for theyears ended December 31, 2000, and 1999. ................................................37
Consolidated Statements of Cash Flows for the years endedDecember 31, 2000, and 1999    .. ...............................................................38-39
Notes to Consolidated Financial Statements...................................................40-68  
**Report of Independent Public Accountants**

To the StockholdersSGI International 
We have audited the accompanying consolidated balance sheet of SGI Internationaland Subsidiaries as of December 31, 2000, and the related consolidatedstatements of operations, stockholders' deficiency and cash flows for eachof the two years in the period ended December 31, 2000. These financialstatements are the responsibility of the Company's management. Our responsibilityis to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of SGIInternational and Subsidiaries at December 31, 2000, and their resultsof operations and cash flows for each of the two years in the period endedDecember 31, 2000, in conformity with accounting principles generally acceptedin the United States of America.
The accompanying consolidated financial statements have been preparedassumingthat the Company will continue as a going concern. As discussed in Note2 to the consolidated financial statements, the Company has suffered recurringlosses from operations and it had a net capital deficiency as of December31, 2000. These matters raise substantial doubt about its ability to continueas a going concern. Management's plans in regard to these matters are alsodescribed in Note 2. The financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.
J. H. COHN LLP 
*/s/ J. H. Cohn LLP* 
San Diego, CaliforniaApril 10, 2001  
**SGI International and Subsidiaries****Consolidated Balance Sheet**
December 31,2000ASSETS Current assets: Cash$ 410,352Restricted cash deposit200,000Trade accounts receivable, lessallowance for doubtful accounts of $47,9891,048,996Inventories414,268Costs and estimated earnings inexcess of billings on contracts212,742Prepaid expenses and other currentassets78,826Total current assets2,365,184  LFC Royalty rights, net628,500LFC Process equipment, net230,225Investment in LFC Investees225,608LFC cogeneration project, net105,284LFC related notes receivable,net150,000Other LFC assets, net26,337Property, plant and equipment,net of accumulated depreciation and   amortization of $1,363,452 2,415,823Goodwill, net of accumulated amortizationof $240,585239,659Interest receivable on notes fromstockholders37,680 $ 6,424,300  LIABILITIES AND STOCKHOLDERS'DEFICIENCY Current liabilities: Accounts payable$ 1,006,575Notes payable1,673,738Accrued salaries, benefits andrelated taxes1,271,155Billings in excess of costs andestimated earnings on contracts976,867Interest payable298,893Other accrued expenses284,470Current maturities of long-termdebt4,170,386Total current liabilities9,682,084  Long-term debt, less current maturities2,259,204Total liabilities11,941,288  COMMITMENTS AND CONTINGENCIES   Minority interest454,997  Stockholders' deficiency: Convertible preferred stock, $.01par value; 20,000,000 shares authorized, 60,518  shares issued and outstanding 605Common stock, no par value; 125,000,000shares authorized, 77,049,377 shares  issued and outstanding 53,885,499Paid-in capital7,929,297Accumulated deficit(67,316,386)Notes receivable from stockholders(471,000)Total stockholders' deficiency(5,971,985) $ 6,424,300
*See notes to consolidated financial statements.*  
***SGI International and Subsidiaries******Consolidated Statements of Operations***
Years ended December 31, 20001999REVENUES:     Contract revenues $ 5,166,349$ 3,106,439  Service fees -750,000Total revenues 5,166,3493,856,439    EXPENSES:     Cost of sales 3,915,2522,574,983  Research and development 2,117,2391,651,319  Loss (gain) on LFC Investees 41,205(1,063)  Selling, general and administrative 3,670,8212,916,801  Legal and accounting 390,481563,169  Depreciation and amortization 847,3341,009,396Total expenses 10,982,3328,714,605  Loss from operations (5,815,983)(4,858,166)    NON-OPERATING INCOME (EXPENSES):     Interest expense (1,368,469)(642,054)  Gain on disposition ofassets -268,963  Other income 81,174166,451Loss before minority interestand extraordinary item (7,103,278)(5,064,806)    Minority interest in loss of consolidatedsubsidiary 16,003-Net loss before extraordinaryitem (7,087,275)(5,064,806)    Extraordinary item-gain on extinguishmentof debt -1,130,000Net loss $ (7,087,275)$ (3,934,806)   PER COMMON SHARE INFORMATION:     Loss before extraordinaryitem $ (0.11)$ (0.13)  Extraordinary item $ -$ 0.03Loss per common share basic $ (0.11)$ (0.10)    Weighted average shares outstanding 65,037,32739,057,417
*See notes to consolidated financial statements.*  
***SGI International and Subsidiaries******Consolidated Statements of Stockholders' Deficiency***
     ConvertiblePreferred Stock Totalstockholders'deficiency Common Stock Paid-inCapitalAccumulatedDeficitNotesReceivable SharesAmountShares Amount Balances at December 31, 199864,044$ 64121,568,344 $ 45,688,545 $ 8,258,140$ (56,330,653)$ -$ (2,383,327)  Issuance of common stockfor services and operating activities--271,208 39,075 ---39,075  Issuance of common stockfor cash, net--11,919,019 1,179,518 ---1,179,518  Issuance of common stockfor notes payable and interest--1,606,686 163,940 ---163,940  Issuance of common stockfor 12% convertible debentures--286,762 68,107 ---68,107  Issuance of common stockfor mandatorily redeemable preferred    stock and adjustment for accretion--15,072,730 1,413,000 -36,348-1,449,348  Issuance of convertiblepreferred stock for future interest1711- - 18,004--18,005  Conversion of preferredstock(3,674)(37)3,328,544 1,338,438 (1,338,401)---  Issuance of warrants topurchase common stock to       non-employees--- - 44,577--44,577  Interest expense relatedto issuance of warrants--- - 21,107--21,107  Amended warrants for futureinterest--- - 18,452--18,452  Net loss--- - -(3,934,806)-(3,934,806)  Notes receivable from stockholders--- - --(471,000)(471,000)  Balances at December 31,199960,54160554,053,293 49,890,623 7,021,879(60,229,111)(471,000)(3,787,004)  Issuance of common stockfor services  1,123,349 202,061 (134,636)  67,425  Issuance of common stockfor cash, net  18,939,472 3,262,665 (88,248)  3,174,417  Exercise of warrants topurchase common stock for cash  23,000 2,875    2,875  Issuance of common stockfor notes payable and interest  2,597,877 488,962    488,962  Conversion of preferredstock(23)-312,386 38,313 (38,313)  -  Imputed beneficial conversionfeature related to convertible debt      1,157,203  1,157,203  Issuance of warrants topurchase common stock to non-employees      11,412  11,412  Net loss       (7,087,275) (7,087,275)Balances at December 31, 200060,518$ 60577,049,377 $ 53,885,499 $ 7,929,297$ (67,316,386)$ (471,000)$ (5,971,985)
*See notes to consolidated financial statements.*  
**SGI International and Subsidiaries****Consolidated Statements of Cash Flows**
Years ended December 31,20001999Operating activities:    Net loss$ (7,087,275)$ (3,934,806)Adjustments to reconcile net lossto net cash used in operating activities:    Depreciation and amortization847,3341,009,396  Gain on extinguishmentof debt-(1,130,000)  Gain on disposition ofpatents-(268,963)  Common stock issued forservices67,42539,075  Non-employee compensationexpense on issuance of warrants11,41244,577  Imputed interest on warrantsissued to note holders-39,559  Amortization of beneficialconversion feature on debt523,473-  Accrued long-term interestexpense179,204-  Accrued interest income(37,680)-  Minority interest in lossof consolidated subsidiary(16,003)-  Equity in net loss (gain)of LFC Investees41,205(1,063)  Changes in operating assetsand liabilities:     Restricted cash202,500-Trade accounts receivable(500,278)(255,734)Inventories(552)482Prepaid expenses and other currentassets23,798(1,336)Accounts payable225,660608,150Accrued salaries, benefits andrelated taxes500,988630,681Billings in excess of costs andestimated earnings on contracts476,460343,996   Interest payable135,65874,929Other accrued expenses95,940204,982Net cash used in operating activities(4,310,731)(2,596,075)   Investing activities:    Purchase of property andequipment(153,533)(19,899)  Additions to LFC Processequipment-(101,988)  Cash received in purchaseof AEI assets-40,697  Cash paid in purchase ofAEI assets-(20,000)  Net proceeds from dispositionof LFC related assets-750,000  Other assets(1,482)(9,247)Net cash (used in) provided byinvesting activities$ (155,015)$ 639,563   
**SGI International and Subsidiaries****Consolidated Statements of Cash Flows (concluded)**
   Years ended December 31,20001999Financing activities:    Proceeds from issuanceof notes payable$ 1,827,540$ 825,000  Payments of notes payable(7,125)(9,500)  Payments on line of credit(400,000)-  Proceeds from issuanceof common stock, net3,177,2921,179,518  Net cash provided by financingactivities4,597,7071,995,018  Net increase in cash131,96138,506     Cash at beginning of theyear278,391239,885  Cash at end of the year$ 410,352$ 278,391   Supplemental disclosure of cashflow information:    Cash paid for interest$ 506,839$ 522,913  Supplemental disclosureof non-cash activities:    Common stock issued formandatorily redeemable preferred stock    and adjustment of accretion -1,449,348  Restructuring of convertibledebentures and notes payable to long-term-4,129,898  Common stock issued for12% convertible debentures-68,107  Convertible preferred stockissued for future interest-18,005  Common stock issued forfinders' services134,636_  Common stock issued fornotes payable and interest 488,962163,940  Conversion of preferredstock38,3131,338,438  Notes receivable from stockholdersfor minority interest-471,000  Imputed beneficial conversionfeature related to convertible debt1,157,203-  Notes payable issued forcurrent obligation68,225-  Interest payable convertedto debt-40,488  Purchase of AEI assetswith debt and assumption of liabilities-3,198,327  Transfer of assets to investmentin LFC Investees-266,813  Note payable issued foraccrued liabilities-231,408
*See notes to consolidated financial statements.*  
**SGI INTERNATIONAL AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
**Note 1. Business, Organization and Principles of Consolidation**
***Business.***SGI International,a Utah corporation, (together with its subsidiaries, hereinafter referredto as the "Company"), has its corporate office in La Jolla, California.The Company is primarily in the business of developing and marketing energy-relatedtechnologies, which includes the Liquids From Coal ("LFC") Process andthe Opti-Crude Enhancement Technology ("OCET") Process. The LFC Processis designed to convert and upgrade low-rank coal to create a higher Btumore efficient fuel to produce power and simultaneously produce low temperaturecoal tars, which contain valuable specialty chemicals. The OCET Processis designed to increase the resulting product value of oil refineries bydeasphalting crude oil as well as residual oil bottoms ("resid"), whichis produced in oil refineries. Through Assembly & Manufacturing Systems,Inc. ("AMS"), a wholly-owned subsidiary, the Company is also in the businessof supplying custom precision automated assembly equipment.
***Organization.***The Companyhas the following wholly-owned or totally-owned subsidiaries at December31, 2000: AMS; ENCOAL Corporation ("ENCOAL"); NuCoal, LLC ("NuCoal"); OCETCorporation ("OCET"); TEK-KOL Partnership ("TEK-KOL") and U.S. Clean CoalRefineries, Inc. ("USCCR"). AMS designs, manufactures and installs customautomated assembly equipment, and was acquired in October 1995. OCET wasorganized in February 1995 to research and develop the OCET Process. USCCRwas organized in July 1994 to market clean coal refinery project developmentprograms. ENCOAL, NuCoal and the remaining 50% ownership interest in TEK-KOLwere acquired in 1999 from subsidiaries of AEI Resources ("AEI") (See Notes4 and 11).
***Principles of Consolidation.***Theconsolidated financial statements include the accounts of SGI Internationaland its subsidiaries. Investments in affiliated joint ventures, owned 50%or less are stated at cost of acquisition plus the Company's equity inundistributed earnings and losses since inception. All significant intercompanytransactions have been eliminated in consolidation. 
**Note 2. Significant Accounting Policies**
***Basis of Presentation.*** The accompanyingconsolidated financial statements are prepared in conformity with accountingprinciples generally accepted in the United States of America, which contemplatescontinuation of the Company as a going concern and realization of assetsand settlement of liabilities and commitments in the normal course of business.The recovery of amounts invested in the Company's principal assets, theLFC and OCET Process assets are dependent upon the Company's ability toadequately fund its on-going development operations and any capital contributionsthat may be required for its joint venture "LFC Technologies, LLC" ("LFCTech") 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 and OCET Processesis 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 these arrangements will be profitableto the Company. If the Company is unsuccessful in its attempts to licensethe LFC or OCET Processes, or if such third parties are unsuccessful inprofitably developing and operating LFC plants, the planned business andoperations 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 or OCET Processes. 
The Company had negative working capital of approximately$7,300,000 and an accumulated deficit of approximately $67,300,000 at December31, 2000. These factors and the Company's recurring losses from continuingoperations, raise substantial doubt about the Company's ability to continueas a going concern. The Company is currently seeking additional financingthrough public or private sales of its securities to fund working capitalrequirements. The Company will also seek funding through additional strategicpartnerships, joint ventures or similar arrangements to commercialize thetechnologies.
There can be no assurance that any collaborative financingarrangements through a joint venture, and/or with strategic partners, willbe available when needed, or on terms acceptable to the Company. If adequatefunds are not available, the Company may be required to curtail or terminateone or 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 its efforts willbe successful. The consolidated financial statements do not include anyadjustments relating to the recoverability and classification of recordedassets or the amounts and classification of liabilities that might be necessaryin the event the Company cannot continue in existence.
***Estimates and Assumptions.*** The preparationof financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand disclosures made in the accompanying notes to the financial statements.Actual results could differ from those estimates.
***Concentration of Credit Risk.*** The Companyinvests any excess cash in interest bearing deposits with major banks,commercial paper and money market funds. Although certain of the cash accountsmay exceed the federally insured deposit amount, management does not anticipatenon-performance by the other parties. Management reviews the stabilityof these institutions on a periodic basis.
***Inventories.*** Inventories are stated at thelower of cost or market. The Company uses the first-in, first-out methodof determining cost.
***Accounting for Long-Lived Assets.***In accordancewith Financial Accounting Standards Board ("FASB") Statement No. 121, "Accountingfor Long-Lived Assets and Long-Lived Assets to Be Disposed Of," the Companyrecords impairment losses on long-lived assets used in operations, includinggoodwill, when events and circumstances indicate that assets might be impairedand the undiscounted cash flows estimated to be generated by those assetsare less than the carrying amounts of those assets. The LFC and OCET Processrelated assets and other long-lived assets are evaluated continually bymanagement for evidence of impairment. In performing its evaluation, managementconsiders such factors as competing technologies, current and future marketpotential for products generated from the LFC and OCET Process technologies,viability of projects or assets and progress of related projects. The Company'sestimate of undiscounted cash flows indicated that such carrying amountsare expected to be recovered. This analysis is ultimately based upon thesuccessful development, construction and operation of a commercial LFCplant as discussed in the first paragraph of this Note under "Basis ofPresentation". It is reasonably possible that the estimate of undiscountedcash flows may change in the near term which could result in the need towrite-down the LFC or OCET Process related assets to fair value.
***Depreciation and Amortization.*** Royalty rightsand the LFC cogeneration project (See Note 4 "LFC Process Related Assets")are stated at cost and are being amortized over ten years. Process demonstrationequipment is stated at cost and is being depreciated over three years.Property and equipment are stated at cost and are being amortized overthree to five years. Goodwill related to the AMS acquisition is being amortizedover ten years. Depreciation and amortization on the LFC Process relatedassets and other long-lived assets are calculated using the straight-linemethod and the depreciation and amortization periods are based on management'sestimates of the useful lives of the respective assets. Currently the assetsrelated to the ENCOAL Demonstration plant aggregating $2,121,000 are notbeing depreciated as they have not, as of December 31, 2000, been placedin service. (See Note 9 "ENCOAL Demonstration Plant").
***Revenue Recognition.*** Revenue is generallyrecognized on a percentage-of-completion method. Revenues from engineeringand consulting services are recorded as the services are performed andearned in accordance with the contracts to perform such services. Revenuesfrom manufacturing contracts are recorded based upon the ratio of costsincurred to total estimated costs. Estimated losses are recorded in theirentirety when loss contracts are identified. Contracts may extend overone or more accounting periods, and revisions in estimated costs and revenuerecognition during the course of the work are reflected during the accountingperiod in which the facts that require such revisions become known. Otherincome consists primarily of interest income and is recorded as earned.
***Billings.***Costs andearnings in excess of billings and conversely billings in excess of costsand earnings arise from the use of the percentage-of-completion methodof accounting, cost reimbursement-type contracts and the timing of billings.
***Stock-Based Compensation Awards.*** Managementrecommends and the Board of Directors authorizes warrant and option grantsto employees and other individuals on a periodic basis. Warrant grantsare not made pursuant to a qualified plan; therefore, all warrants issuedhave a non-qualified tax status. All options granted are made pursuantto the Company's 1996 Omnibus Stock Option Plan and have been made onlyto employees of the Company.
In accordance with the provisions of Statement of FinancialAccounting Standards No. 123, "Accounting for Stock-Based Compensation"("SFAS 123"), the Company has elected to follow Accounting Principles BoardOpinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") andrelated interpretations in accounting for stock based compensation awardsto employees. Under APB 25, if the exercise price of the Company's warrantsor options granted to employees equals or exceeds the fair value of theunderlying stock on the grant date, no compensation expense is recorded.Stock-based compensation awards issued to non-employees are accounted forin accordance with SFAS 123. See Note 7 "Stockholders' Deficiency" forpro forma disclosures required by SFAS 123.
***Equity Transactions.*** The values assignedto the restricted common shares issued for services, other than stock-basedcompensation awards, are recorded at the estimated fair value of the servicesrendered or the value of the restricted common shares issued, which everis more readily determinable. The common stock of the Company is currentlytraded and prices quoted on the NASD OTC Bulletin Board under the symbolSGII. In the course of accounting for the issuance of its various equitysecurities the Company frequently refers to the closing bid price of itscommon stock, as quoted on the OTC Bulletin Board. The Company believesthat the OTC Bulletin Board quoted bid price is the best indication ofthe stock's fair market value. This belief is premised on the stock's dailytrading volumes which averaged approximately 294,000 and 336,000 sharesfor 2000 and 1999, respectively.
***Income Taxes.*** Income taxes are providedfor in accordance with the provisions of SFAS 109, "Accounting for IncomeTaxes." Under this method, the Company recognizes deferred tax assets andliabilities for the expected future tax effects of temporary differencesbetween the carrying amounts of assets and liabilities used for financialreporting and income tax purposes, as well as operating loss carryforwards.A valuation allowance is recorded to reduce a deferred tax asset to thatportion that is expected to, more likely than not, be realized.
***Beneficial Conversion Feature on Notes Payable.***The beneficial conversion feature contained in certain notes payable isbeing accounted for by the Company in accordance with EITF 98-5 "Accountingfor Convertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios". Accordingly, the Company has recognizedthis beneficial conversion feature by allocating a portion of the proceedsto additional paid-in capital and as an offset to the notes payable. Furthermore,the recorded beneficial conversion feature resulting from the allocationof the proceeds will be amortized by the Company as interest expense overthe period ending on the note's earliest conversion date, which in thiscase is primarily over a one year period. The beneficial conversion featurerepresents the aggregate difference between the conversion price and thefair market value of the common stock as of the date of issuance of thenotes payable. The Company also records additional interest expense relatedto the beneficial conversion feature associated with the payment of thestated interest on the notes payable which may also contain a beneficialconversion feature.
***Net Loss per Share.*** Basic net loss per shareis computed based on the weighted average number of common shares outstandingand includes preferred stock dividends. Diluted net loss per share is notpresented since the effect of shares issuable upon the assumed conversionof preferred stock and convertible debentures and the assumed exerciseof outstanding stock options and warrants would be anti-dilutive. For purposesof computing net loss per share, preferred stock dividends include "imputeddividends" for preferred stock issued with a non-detachable beneficialconversion feature near the date of issuance. Imputed dividends representthe aggregate difference between conversion price and the fair market valueof the common stock as of the date of issuance of the preferred stock,without regard to the actual date on which the preferred stock may be converted.
***Recent Accounting Pronouncements.*** The FinancialAccounting Standards Board had issued certain pronouncements as of December31, 2000, that will become effective in subsequent periods; however, managementdoes not believe that any of these pronouncements, when they become effective,will materially affect any financial accounting measurements or disclosuresthe Company will be required to make, based on its current operations.
***Reclassification.*** Certain prior year amountshave been reclassified to conform to the fiscal 2000 presentation. Thesechanges had no impact on previously reported results of operations, cashflows or stockholders' deficiency.  
**Note 3. Composition of Certain Financial StatementCaptions** 
***Billings.*** As of December 31, 2000, billingsof approximately $2,800,000 exceeded costs incurred and estimated earningson contracts in progress of approximately $2,036,000 by $764,000. The amountsare included in the accompanying consolidated balance sheets under thefollowing captions: December 31,2000Costsand estimated earnings in excess of billings on contracts$ 213,000Billingsin excess of costs and estimated earnings on contracts(977,000)$(764,000)
***Property and Equipment***December 31, 2000ENCOAL Demonstration Plant $ 2,121,000Laboratory equipment 1,036,000Machinery and equipment 196,000Computer equipment 266,000Office furniture and fixtures 72,000Leasehold improvements 54,000Projects under construction 34,000  3,779,000Less accumulated depreciation (1,363,000)Net property and equipment $ 2,416,000
During 2000, the Company capitalized certain costs under the categoryof LFC Process equipment, related to the design and construction of equipmentwhich would be used at SGI Technical Center ("SGITC") to evaluate amongother things CDL produced from various types of coal, as well as ways toenhance the value of CDL processing and its by-products. In the fourthquarter of 2000, the Company determined that there was a more cost effectiveand efficient alternative to building this piece of equipment and discontinuedwork on the project. Accordingly, capitalized costs aggregating almost$593,000 were expensed in the fourth quarter to research and developmentexpenses. 
**Note 4. LFC Process Related Assets** 
***Notes receivable*. I**n 1985, Montana One Partners ("MOP"),a California limited partnership, was formed to develop several LFC cogenerationfacilities including the LFC-CoGen Plants in Colstrip, Montana (the "ColstripProject") and Healy, Alaska (the "Healy Project"). The Company was thesole general partner. In 1988 the MOP partners and the Company sold theirinterest in these projects, among others, to four individuals who formedRosebud Energy Corp. ("Rosebud") for certain consideration including contingentnotes receivables.
By December 31, 1997, the Company had acquired the MOP limited partnersinterests for cash, contingent notes payable and warrants to acquire commonshares of the Company. The notes payable to the MOP former limited partners("FLPs") are payable only out of the Company's collections on the contingentnotes receivable from Rosebud.
From 1996 through 1997 the Company through a number of transactions,collected or wrote-off as uncollectible, the various notes receivable fromthe Rosebud individuals, except for the Healy Project. In addition, theCompany through a series of transactions during this same period settledthe contingent notes payable aggregating approximately 76% of the amountsdue the FLPs.
The balance of notes receivable and related accounts represent amountsdue from the 1988 sale of the Healy Project to the four individuals whoformed Rosebud. The amounts due as stated previously are contingent amountspayable to the remaining FLPs and because of the contingencies on the notepayments, no gain or interest income will be recognized until the proceedsreceived are in excess of the basis of assets sold. The components of thenet carrying value of the remaining notes receivable on the accompanyingconsolidated balance sheet are as follows: December 31,20008% notes receivable$ 150,000Interest receivable251,101 401,101  Deferred gain and interest income(219,859)8% notes contingently payableto FLPs (31,242)Net carrying value$ 150,000 
***Royalty Rights.*** LFC Technology Partners("LFCTP") originally financed research and development of the LFC Processtechnology under certain research agreements entered into with the Companyfrom 1982 to 1986. As provided under these research agreements, LFCTP providedcash and issued notes to the Company in exchange for all rights in theLFC Process technology. On October 1, 1987, the Company and LFCTP enteredinto an Amended Technology Transfer Agreement (the transfer agreement),which provided for the transfer of all rights in the LFC Process technologyto the Company in exchange for three levels of royalty payments. The firstlevel of royalty payments was satisfied during 1992.
In 1992, the Company and LFCTP entered into a SettlementAgreement which provided for modifications of the second and third levelroyalty payments pursuant to which LFCTP's third level royalty paymentswere reduced to zero and the second level royalty rights amended to $10,000per month and 25% of the net cash receipts generated by the Colstrip Project.Pursuant to this agreement royalty rights aggregating $3,142,500 were recorded.Payment obligations for the amended second level royalty terminated in1994 upon the satisfaction of certain agreed upon conditions. The Companyis recognizing royalty expense as would have been required under the transferagreement or evenly over 10 years, whichever is greater. Amortization expenseof $314,250 was recorded during 2000 and 1999, accumulated amortizationtotaled $2,514,000 at December 31, 2000, and the net carrying value was$628,500. 
***LFC Cogeneration Project.*** The Company hassubstantially completed the design and engineering of an LFC facility foruse in conjunction with an electric cogeneration plant. Amounts capitalizedat December 31, 2000, relate primarily to plans and drawings for the designof such a facility. Amortization expense of $105,284 was recorded during2000 and 1999, accumulated amortization totaled $947,558 at December 31,2000, and the net carrying value was $105,284. 
**Investment in LFC Investee** 
***LFC Technologies, LLC.***EffectiveJanuary 14, 1999, the Company entered into a number of agreements withMLFC, a wholly-owned subsidiary of Mitsubishi Corporation, relating tothe formation of a joint venture with MLFC to conduct research and developmentactivities relating to the LFC Process, for MLFC to market the LFC Processoutside the United States and for the Company to market the LFC Processinside the United States. The Company and MLFC entered into (1) the LFCJoint Venture Formation Agreement which resulted in the formation of LFCTech, (2) an Operating Agreement which governs the management of LFC Tech,(3) a License Agreement for use of the technology, (4) a Services Agreementwherein the Company provided certain services to LFC Tech including solicitingpotential customers in the U.S., developing LFC projects in the U.S. andperforming engineering work and (5) a Security Agreement which grantedMLFC a security interest in all the LFC Process related patents, applications,renewals, and continuations. 
On October 28, 1999, the Company and MLFC amended theterms of their business relationship, by executing certain amendments (the"Amendments") to the various joint venture agreements that they had previouslyentered into on January 14, 1999. (All payments where noted below are netof the Company's own matching contribution required under the various LFCTech joint venture agreements.) In accordance with both the original agreementsand the Amendments: (a) LFC Tech made net payments of $750,000 to the Companyfor technical services under the Amended Services Agreement, thereby endingany further obligation for payments under this contract through 2000, (b)the Company transferred its entire interest in the LFC Process Patentsto LFC Tech in return for a net payment of $750,000, which was paid intwo tranches, the first net payment of $375,000 made upon execution ofthe Amendments and the second net payment of $375,000 was made upon theclosing of the ENCOAL Acquisition, (c) Mitsubishi Heavy Industries ("MHI")executed a Waiver and Release of a $1,130,000 invoice due it from a subsidiaryof AEI, allowing the Company to assume this obligation, and (d) MHI laterforgave the Company the payment of the $1,130,000 invoice upon the closingof the ENCOAL Acquisition. 
As a result of the Amendments and the transfer of theLFC patents to LFC Tech the Company in 1999 recorded a net gain of approximately,$269,000 and recorded the book value of its one-half interest in the patents,also $269,000, as its investment in LFC Tech. 
Effective January 4, 2001, MLFC and the Company amendedthe LFC Tech Operating Agreement. Pursuant to this amendment the partieshave terminated the LFC Joint Venture Formation Agreement, License Agreement,and Services Agreement, as the purpose for which these agreements wereestablished had been accomplished or were no longer necessary. In addition,the amended and restated Operating Agreement states that: (1) the LFC TechOperating Agreement was extended through January 4, 2011, and (2) MLFC,upon the occurrence of a certain milestone event, shall make an additionallump sum payment to the Company (the "Transfer Payment") of $3,250,000subject to its Board of Directors approval. Alternatively, in the eventthe Transfer Payment is not made then LFC Tech will make a preferentialpayment of $6,500,000 from the first royalties or licensing fees receivedby it. The milestone events contained in the Operating Agreement are: (a)the start of construction or receipt of an irrevocable commitment to startwith construction of an LFC plant with a minimum capacity of 15,000 tonsper day; (b) the receipt by MLFC of at least $4,000,000 in connection withthe admission of a new equity participant into LFC Tech, and the licensingor royalties from one or more LFC plants; or (c) such other conditionsas the parties agree.  
**Note 5. Debt** 
**Lines of Credit**
In December of 2000 the Company obtained a short termrevolving line-of-credit for AMS from a financial institution to supportAMS' short term working capital needs. The line allows maximum borrowingsof $100,000 and bears interest at prime plus 1%. The credit agreement expiresNovember 5, 2001. The line-of-credit is guaranteed by an entity controlledby an outside director. In return for this guarantee, which expires onDecember 31, 2001, the Company agreed to issue this entity 50,000 sharesof restricted common stock valued at $10,000. At December 31, 2000, theCompany had no borrowings under this line-of-credit.
The Company also maintained a line-of-credit in the amountof $400,000, for which borrowings as of December 31, 1999, were $400,000.The line-of-credit was secured by a $402,500 certificate of deposit. Borrowingsunder the line-of-credit incurred interest at 2% over the certificate ofdeposit interest rate. In May of 2000 the Company, upon maturity of the$402,500 certificate of deposit, used the proceeds to pay-off the borrowingand closed the line. 
***Notes Payable and Long-Term Debt*** 
***Current Notes Payable.*** Current notes payableconsist of the following at December 31, 2000:   12% notes, due on demand, unsecured$ 500,000Note payable at prime rate, dueApril 30, 2001, secured231,4089% notes, varying maturity dates,unsecured, payable only in stock602,3359% notes, varying maturity dates,unsecured, payable in cash or stock563,7259% and 12% notes, varying maturitydates, unsecured, to related parties (Note 12)210,000 8% bank loan secured, due November5, 2001200,000Unamortized beneficial conversionfeature on certain notes payable(633,730) $ 1,673,738
***Long-Term Debt.* Long-term debt consistsof the following at December 31, 2000:**   12% convertible debentures dueSeptember 30, 2001$ 3,421,547Prime rate, note payable due November30, 20041,980,000Interest on long-term-debt payableupon maturity179,20410%, 11%, and 12% notes due onSeptember 30, 2001723,839Non-interest bearing convertibledebenture100,00012% note to related party dueMarch 23, 2001 (Note 12)25,000 6,429,590Current maturities4,170,386 $ 2,259,204
The Company received $100,000 from a foreign corporationin 1995 in exchange for a non-interest bearing debenture with a $100,000face value. The debenture is due one year from the occurrence of certainfuture events, none of which have occurred as of December 31, 2000. Accordingly,the debenture is classified as long-term debt in the accompanying consolidatedbalance sheet. The debenture is convertible based on future events.
During 1999 the Company issued for cash five notes payableaggregating $500,000 to one foreign corporation. All notes have been extendedfrom their original due dates and bear interest at 12% per annum and aredue upon thirty days written demand. All notes payable with interest accruedthereon, are payable in cash and may be paid, at the Company's option inunrestricted common stock. As of December 31, 2000 no demand for paymenthad been made on notes.
Effective as of October 30, 1999, the Company was ableto extend or exchange approximately $4.2 million in existing debt for newsecurities of the Company including new convertible debt securities, amendedwarrants and preferred stock (the "99D Exchange Offering"). The 99D ExchangeOffering was made only to existing debt holders. The Company retired approximately$3.42 million in existing 12% convertible debentures which were requiredto be paid prior to October 31, 1999, in exchange for new 12% convertibledebentures (the "99D Debentures"), in the same amount, due September 30,2001. The 99D Debentures may be prepaid by the Company, in whole or inpart, at any time prior to September 30, 2001. Interest on the debenturesis payable quarterly in cash. The debentures are convertible at the optionof the holder subsequent to November 15, 1999, in whole or in part, atthe greater of: (i) the average of the ten day closing bid price of theCompany's common stock prior to the date the notice of conversion is receivedby the Company or (ii) $1.00.
As part of the 99D Exchange Offering the Company alsoobtained an extension to September 30, 2001, of approximately $724,000in existing 10%, 11% and 12% interest bearing notes which were requiredto be paid by October 30, 1999. Interest payments on the notes payablewill continue to be made in cash on a quarterly basis. 
In connection with the acquisition of various assets fromsubsidiaries of AEI the Company issued one long-term note payable for $1,980,000due with all associated accrued interest on November 30, 2004, and a secondshort-term note payable for $231,408 due with all associated accrued interest,after several extensions from the original date, on April 30, 2001. (SeeNote 11 "Asset Acquisition" for further information). Both notes bear interestat the prime rate in effect on January 1 of each calendar year, which was8.50% in 2000 and 8.75% in 1999. 
In January 2000 the Company sold for cash a $100,000 unsecured12% note payable to an outside director. The note is payable upon 30 dayswritten demand but no sooner than November 15, 2000. Both the principaland accrued interest thereon may be paid in cash or at the option of eitherthe Company or noteholder in restricted common stock of the Company, conditionalonly on the bid price of the Company's common stock as determined in accordancewith the conversion formula being above $0.40 per share. The note is convertibleinto common stock by dividing all principal and interest by 75% of theaverage closing bid price for the ten trading days prior to the demanddate. As of December 31, 2000, no demand for payment had been made on thenote. 
On June 30, 2000, the Company exchanged one unsecured9% note payable, originally issued in January 2000 with a face value of$31,000 due on demand, but no sooner than June 15, 2000, for a new notepayable of equal value. The new note is payable upon 30 days written demandbut no sooner than January 25, 2001. Both the principal and accrued interestthereon may be paid in cash or at the option of the Company on January25, 2001, by issuing 366,482 shares of restricted common stock. 
Effective August 1, 2000, the Company exchanged for currentobligations an unsecured 9% note payable with a face value of $68,225 dueon demand after September 30, 2000, for equal value. Interest on the noteaccrues from April 1, 2000 and shall continue until paid in full. As ofDecember 31, 2000 demand on the note had not been made. 
During July 2000, the Company issued for cash three unsecured9% notes payable with an aggregate face value of $196,235. Both the principaland interest on the notes are due one year from the date of issuance andshall, if available, be paid off through the issuance of 1,195,043 sharesof restricted common stock, otherwise they shall be paid in cash. The underlyingshares of common stock do not have any registration rights. 
On July 14, 2000, the Company issued for cash a $25,000unsecured 9% note payable to one outside director. The note is payableupon 30 days written demand after January 14, 2001. Both the principaland accrued interest thereon may be paid in cash or at the option of theCompany, on January 14, 2001, by issuing 147,059 shares of restricted commonstock. 
On August 16, 2000, the Company issued for cash an unsecured9% note payable with a face value of $136,000. Both the principal and intereston the note are due on February 16, 2001, and shall, if available, be paidoff through the issuance of 967,457 shares of restricted common stock,otherwise they shall be paid in cash. Pursuant to the terms of the note,the Company granted the investor piggy back registration rights for theunderlying common shares. 
During late July and September of 2000, the Company issuedfor cash three unsecured 9% notes payable with an aggregate face valueof $270,100. Both the principal and interest on the notes are due one yearfrom the date of issuance and shall, if available, be paid off throughthe issuance of 2,153,464 shares of restricted common stock otherwise theyshall be paid in cash. Pursuant to the terms of the note the Company grantedthe investors piggy back registration rights for the underlying commonshares 
During the three month period ended September 30, 2000,the Company issued for cash three unsecured 9% notes payable with an aggregateface value of $256,000 to one accredited investor. The notes are payableupon 30 days written demand beginning one year following their issuancedate. Both the principal and accrued interest thereon may be paid in cashor, at the option of the Company, on the first anniversary by issuing 2,728,097shares of restricted common stock. 
In November 2000 the Company amended one 12% note witha face value of $50,000, payable to an entity controlled by an outsidedirector of the Company. The principal and interest on the note which wasdue on November 15, 2000 was amended to be due and payable thirty daysafter the Company receives written notice of demand for payment. As ofDecember 31, 2000, no demand had been made. 
On November 15, 2000, the Company sold one unsecured notepayable to an outside director with a principal amount of $35,000 for cash.The note bears interest at 9% per annum and is due on demand upon fivedays written notice, but no sooner than on December 31, 2000. Both theprincipal and interest may be paid in cash or by mutual agreement in restrictedcommon stock of the Company. 
On December 13, 2000, the Company obtained a $200,000loan from a financial institution the principal of which is due and payableon November 5, 2001. The loan is collateralized by a $200,000 certificateof deposit. The loan bears interest at 8% which is payable monthly. 
During the three month period ended December 31, 2000,the Company issued for cash three unsecured 9% notes payable with an aggregateface value of $208,500 to one accredited investor. The notes are payableupon 30 days written demand but no sooner than one year following theirissuance date. Both the principal and accrued interest thereon may be paidin cash or at the option of the Company, on the due date by issuing 2,610,920shares of restricted common stock to the holder.
In conjunction with the issuance of certain convertiblenotes issued during the year ended December 31, 2000, the Company recordedthe issuance of the notes payable net of the imputed beneficial conversionfeature. This beneficial conversion feature will be amortized over thelife of each note using the interest method and result in a non-cash interestcharge. Accordingly, during 2000 the Company recorded a beneficial conversionfeature of $1,157,203 and amortized $523,473. 
Scheduled principal payments of notes payable are as follows: Years ended December 31,2001 $6,377,8542004 1,980,000Total payments $8,357,854
**Note 6. Information on Industry Segments**
The Company has three reportable segments as defined by SFAS No. 131"Disclosures About Segments of an Enterprise and Related Information".The Company manages its segments based on strategic business units thatare in turn based along technological lines. These strategic business unitsoffer products and services to different markets in accordance with theirunderlying technology. Accordingly, the Company's three business segmentsare centered on the operations associated with the LFC Process, the OCETProcess and custom automated assembly systems. The Company's operationsare primarily centered in the United States, however, through its variouscollaborative arrangements the Company will continue to market the LFCProcess technology on an international basis. The accounting policies ofthe segments are the same as those described in the summary of significantaccounting policies. The Company evaluates performance of each segmentbased on profit or loss from operations before income taxes. The Companyhas no significant intersegment sales. Reclassification of certain itemshas been made to the 1999 schedule to conform to the 2000 presentation.Additional information pursuant to the terms of SFAS 131 follows:   **Automated****Assembly****LFC Process****OCET Process****Corporate****Total**       **2000**      Revenues $ 5,161,000$ - $ 5,000$ -$ 5,166,000Net income (loss) 252,000(3,464,000)(534,000)(3,341,000)(7,087,000)Equity in operations of investee -(41,000)--(41,000)Identifiable assets, net 2,062,0003,844,000153,000365,0006,424,000Depreciation & Amortization 114,000547,000170,00016,000847,000Engineering, R&D expenditures -1,642,000 418,00057,0002,117,000Interest expense 1,000--1,367,000 1,368,000       **1999**      Revenues $ 3,086,000$ 750,000$ 20,000$ -$ 3,856,000Net income (loss) (326,000)846,000(1,143,000)(3,312,000)(3,935,000)Equity in operations of investee -1,000--1,000Identifiable assets, net 1,414,0004,425,000281,000594,0006,714,000Depreciation & Amortization 117,000458,000349,00085,0001,009,000Engineering, R&D expenditures -841,000 810,000-1,651,000Interest expense 1,000--641,000 642,000 
AMS operates in three segments of the automated assembly systems industry:high-tech, medical and automotive. The sales for 2000 and 1999 are presentedbelow:   20001999High-tech $ 588,000$ 1,107,000Medical 2,978,0001,611,000Automotive 1,595,000368,000  Total Sales $ 5,161,000$ 3,086,000
Revenue from sales of automated assembly equipment accountedfor 99% and 80% of the Company's revenues in 2000 and 1999, respectively.As is typical in the automated assembly industry, AMS relies on a limitednumber of customers for a substantial percentage of its net sales. In 2000sales revenues derived from three customers represented approximately 72%of total sales. In 1999 sales revenues derived from four customers representedapproximately 66% of total sales. AMS does not have long-term contractswith any of its customers and expects that a small number of customerswill continue to account for a substantial portion of its sales for theforeseeable future. 
**Note 7. Stockholders' Deficiency**
***Convertible Preferred Stock.*** The outstandingPreferred Stock of the Company at December 31, 2000, consisted of 60,518shares of Preferred Stock. The outstanding Preferred Stock series are:90B; 90C; P-90; PS-90; 91A; 91D; 91E; 91M; 91P; 91R; 91S; 91V; 92A; 92B;93A; 93B; 93C; 94A; 94B; 95R; 96A; 96B; 97C; 98D and 99D. The primary distinctionbetween such series of Preferred Stock relates to the dividend, conversionrights and liquidation preferences for each.
A summary of the issued and outstanding convertible preferredstock at December 31, 2000, is as follows: Preferred StockShares issuedand outstandingPreference inliquidationCommon shares issuableon conversionSeries P-90400.00$ 40,000100,000Series PS908.002,0001,000Series 903.50350306Series 9159,641.00215,2504,586Series 9212.501,25096Series 9346.504,6501,694Series 94123.9512,3955,302Series 9541.50415,000928,000Series 9625.00298,000169,500Series 971.0010,00013,500Series 9845.00-31,500Series 99170.50-204,600 60,518.45$ 998,8951,460,084
***2000 Preferred Stock Transactions.*** During2000 the Company did not issue any new series of Preferred Stock. During2000, stockholders elected to convert 23 Preferred Shares into approximately312,386 shares of common stock. 
***1999 Preferred Stock Transactions**.*During 1999 the Company issued 170.5 shares of a new series of PreferredStock, the 99D Series. This series was issued in connection with the 99DDebt Restructuring more fully described in Note 5 "Debt."****During1999 stockholders elected to convert 3,674 Preferred Shares into approximately3,329,000 shares of common stock. 
***Description of Preferred Stock Series*** 
All outstanding series of Preferred Stock are fully paidand non-assessable. The Preferred Stock has no preemptive rights to subscribefor any additional securities which may be issued by the Company. No sinkingfund or similar provision has been provided in respect to any of the outstandingseries of Preferred Stock. The rights of the holders of each series ofPreferred Stock are subordinate to those of the Company's general creditors,and every previously issued series of Preferred Stock. All of the outstandingseries of Preferred Stock are subject to adjustment in certain events,including for stock dividends, stock splits, reclassifications, consolidations,mergers, etc. The Company has never declared or paid a cash dividend onany of its outstanding Preferred Stock, and it is not likely any cash dividendswill be declared for some time. 
Except as required by mandatory provisions of Utah law,the holders of the various series of outstanding Preferred Stock have novoting rights. 
***Series 90B and 90C.*Dividends -** The Series 90B and 90C Preferred Stockare entitled to dividends of $8 per share annually, payable in quarterlyinstallments out of unreserved earned surplus, before any dividends shallbe payable on any other class of stock or any other series of PreferredStock of the Company, other than a previously issued series of PreferredStock and before any funds are set aside for the purchase of, or retirementof, the whole or any part of any series of Preferred Stock, or any otherclass of stock of the Company. Dividends are cumulative and are payablebefore dividends on any common stock are paid. *Redemption -* TheSeries 90B and 90C Preferred Stock do not have the right to require itsredemption. The Series 90 Preferred Stock has been redeemable by the Companyas a series, in whole or in part, since August 31, 1992, at any time andfrom time to time effective on 60 days prior notice, at $100 for each share,plus the amount of any unpaid cumulative dividends which have then becomepayable with respect thereto. The right of the Company to redeem the Series90B and 90C Preferred Stock is subject to compliance with Utah law, includingwithout limitation, certain retained earnings requirements. *Liquidation-* In the event of any liquidation, dissolution or winding up of theCompany, whether voluntary or involuntarily, the holders of the Series90B and 90C Preferred Stock are entitled to be paid out of the assets ofthe Company available for distribution to shareholders, prior to any distributionwith respect to any other class of stock, liquidating distributions inthe amount of $100 per share, plus all accrued and unpaid dividends upto the date fixed for distribution, whether or not such dividends havebeen earned or declared. *Conversion -*Each share of the Series 90Band 90C Preferred Stock is convertible, at the option of the holder thereofwithout further payment at any time, into 88 shares of common stock unlesspreviously redeemed. 
***Series P-90.* Dividends -**The Series P-90 Preferred Stock are entitled to dividends of $8 per shareannually, payable in quarterly installments out of unreserved earned surplus,before any dividends shall be payable on any other class of stock or anyother series of Preferred Stock of the Company, other than previously issuedseries of Preferred Stock and before any funds are set aside for the purchaseof, or retirement of, the whole or any part of any series of PreferredStock, or any other class of stock of the Company. Dividends are cumulativeand are payable before dividends on any common stock are paid. *Redemption-* The Series P-90 Preferred Stock has been redeemable by the Companyas a series, in whole or in part, since January 1, 1996, at $100 per share,plus the amount of any unpaid cumulative dividends which have then becomepayable thereto. The right of the Company to redeem this series is subjectto compliance with Utah law, including without limitation certain retainedearnings requirements. *Liquidation -* In the event of any liquidation,dissolution or winding up of the Company, whether voluntary or involuntarily,the holders of the Series P-90 Preferred Stock are entitled to be paidout of the assets of the Company available for distribution to shareholders,prior to any distribution with respect to any other class of stock, liquidatingdistributions in the amount of $100 per share, plus all accrued and unpaiddividends up to the date fixed for distribution, whether or not such dividendshave been earned or declared. *Conversion -* Each share of SeriesP-90 Preferred Stock is convertible into 250 shares of common stock ofthe Company, at the option of the holder and upon payment to the Companyat the time of conversion of $1.375 per common share. 
***Series PS-90.* Dividends -**Dividends of $20 per share annually are payable on the Series PS-90 PreferredStock, in quarterly installments out of unreserved earned surplus, beforeany dividends shall be payable on any other class of stock or any otherseries of Preferred Stock other than previously issued series of PreferredStock, and before any sum shall be set aside for the purchase of, or retirementof, the whole or any part of the Series PS-90 Preferred Stock, or any otherclass of stock. The dividends on the PS-90 Preferred Stock are cumulative,and are payable prior to the payment of any dividends on the common stock.*Redemption-* The holders of the PS-90 Preferred Stock have no right to requireredemption of their Preferred Stock. The Series PS-90 Preferred Stock hasbeen redeemable by the Company as a series, in whole or in part, sinceDecember 31, 1993, and any time and from time to time effective on 60 daysprior notice, at $250 per share of Series PS-90 Preferred Stock, plus theamount of any unpaid cumulative dividends which have become payable withrespect thereto. The right of the Company to redeem this series of PreferredStock is subject to compliance with Utah law, including without limitation,certain retained earnings requirements. *Liquidation -* In the eventof liquidation, dissolution or other termination of the Company, the holdersof the shares of the Series PS-90 Preferred Stock are entitled to $250per share, plus all accrued and unpaid dividends up to the date fixed fordistribution whether or not earned or declared. Such payments shall bemade before any payment or distribution is made to the holders of the commonstock or any other series of Preferred Stock and concurrently with the90B, 90C or P-90 series. *Conversion -* Each share of the PS-90 PreferredStock is convertible into 125 shares of common stock at the election ofthe shareholder upon payment to the Company of $1.375 per common shareat the time of conversion. 
***Series 91A, 91D and 91E.* Dividends -**Dividends of $8 per share annually will be payable on the Series 91A, 91Dand 91E Preferred Stock in quarterly installments out of unreserved earnedsurplus, before any dividends shall be payable on any other class of stockor any other series of Preferred Stock other than previously issued seriesof Preferred Stock and before any sum shall be set aside for the purchaseof, or retirement of, the whole or any part of the Series 91 PreferredStock or any other class of stock, other than any previously issued seriesof Preferred Stock of the Company. Dividends are cumulative and are payableprior to the payment of any dividends on the common stock of the Company.*Redemption-* The holders of the Series 91A, 91D and 91E Preferred Stock have noright to require redemption of the shares. The Company has been able toredeem the shares in a series, in whole or in part since December 31, 1993,at any time and from time to time effective on 60 days prior notice, at$100 per share, plus the amount of unpaid cumulative dividends which havethen become payable with respect thereto. The right of the Company to redeemthis series of Preferred Stock is subject to compliance with Utah law,including without limitation certain retained earnings requirements.*Liquidation-* In the event of the voluntary liquidation, dissolution or other terminationof the Company, the holders of the shares of the Series 91A, 91D and 91EPreferred Stock shall be entitled to a cash payment of $100 per share,plus all accrued and unpaid dividends up to the date fixed for distribution,whether or not such dividends have been earned or declared. Such paymentshall be made before any payment or distribution is made to the holdersof the common stock, or any other series of Preferred Stock other thanthe previously issued series of Preferred Stock of the Company.*Conversion-* Each share of the Series 91A, 91D and 91E Preferred Stock is convertibleinto 25 shares of common stock at the election of the shareholder withoutfurther payment. 
***Series 91M.* Dividends -**No dividends are payable on the Series 91M convertible Preferred Stock.*Redemption-* Neither the Company nor the holders have the right to cause or requireredemption of the Series 91M Preferred Stock. *Liquidation -* In theevent of the voluntary liquidation, dissolution or other termination ofthe Company, the holders of Series 91M convertible Preferred Stock areentitled to a cash payment of $2 per share. Such payment shall be madebefore any payment or distribution is made to the holders of the commonstock, or any other series of Preferred Stock other than the previouslyissued series of Preferred Stock of the Company. *Conversion -* SinceSeptember 30, 1993, each 5,000 shares of Series 91M Preferred Stock isconvertible into 300 shares of common stock of the Company, at the electionof the shareholder without further payment. The Company shall have theabsolute right to cause conversion of the 91M Preferred Shares at any time,or from time to time without additional payment upon 60 days prior writtennotice. In the event the Company elects to convert the 91M shares to commonstock, each share of Series 91M Preferred Stock shall be converted into300 shares of the Company's common stock. 
***Series 91P.* Dividends -**No dividends are payable on the Series 91P Preferred Stock. *Redemption-* Neither the Company nor the holders have the right to cause redemptionof the Series 91P Preferred Stock. *Liquidation -* In the event ofthe voluntary liquidation, dissolution or other termination of the Company,the holders of shares of the Series 91P Preferred Stock shall be entitledto a cash payment of $2.50 per share. Such payment shall be made beforeany payment or distribution is made to the holders of the common stock,or any other series of Preferred Stock other than previously issued seriesof Preferred Stock of the Company. *Conversion -* Since July 15, 1993,each 4,000 shares of Series 91P Preferred Stock is convertible into 250shares of common stock of the Company at the election of the shareholderand without further payment. The Company shall also have the absolute rightto cause conversion of the Series 91P Preferred Shares at any time or fromtime to time upon 60 days prior written notice. In such event, each shareof Series 91P Preferred Stock shall be convertible into 250 shares of commonstock. 
***Series 91R.* Dividends -**Dividends of 8% per annum will be payable on the Series 91R Preferred Stock,in quarterly installments out of unreserved earned surplus, before anydividends shall be payable on any other class of stock or any other sharesof Preferred Stock other than previously issued series of Preferred Stock,and before any sum shall be set aside for the purchase of, or retirementof, the whole or any part of the Series 91R Preferred Stock or any otherclass of stock, other than any previously issued series of Preferred Stockof the Company. Dividends payable on the Series 91R Preferred Stock arecumulative and are payable prior to the payment of any dividends on thecommon stock of the Company. *Redemption -* The holders do not havethe right to require redemption of the Series 91R Preferred Stock. TheCompany may redeem the Series 91R Preferred Stock in whole or part, atany time and from time to time effective on 60 days prior written notice,at $10,000 per Series 91R Preferred Share, plus the amount of any unpaidcumulative dividends which have then become payable with respect thereto.The right of the Company to redeem the Series 91R Preferred Shares is subjectto compliance with Utah law, including without limitation certain retainedearnings requirements. *Liquidation -* In the event of the voluntaryliquidation, dissolution or other termination of the Company, the holdersof shares of the Series 91R Preferred Stock shall be entitled to a cashpayment of $10,000 per share, plus all accrued and unpaid dividends upto the date fixed for distribution, whether or not such dividends havebeen earned or declared. Such payment shall be made before any paymentor distribution is made to the holders of the common stock, or any otherseries of Preferred Stock other than previously issued series of PreferredStock of the Company. *Conversion -* During the 60 day notice periodprovided for redemption by the Company, each share of the Series 91R PreferredStock is convertible into 167 shares of common stock without further paymentat the election of the shareholder. Since October 15, 1993, the holdersof the preferred shares have been able to demand conversion into commonstock. 
***Series 91S.* Dividends -**No dividends are payable on the Series 91S Preferred Stock. *Redemption-* Neither the Company nor the holders have the right to cause redemptionof the Series 91S Preferred Stock. *Liquidation -* In the event ofthe voluntary liquidation, dissolution or other termination of the Company,the holders of shares of the Series 91S Preferred Stock shall be entitledto a cash payment of $3.50 per share. Such payment shall be made beforeany payment or distribution is made to the holders of the common stock,or any other series of Preferred Stock other than previously issued seriesof Preferred Stock of the Company. *Conversion -* Since September30, 1993, each share of Series 91S Preferred Stock has been convertibleinto 150 shares of common stock of the Company, at the election of theshareholder. The Company also has the right to cause conversion of theSeries 91S Preferred Stock at any time, or from time to time upon 60 daysprior written notice. In such event, each share of 91S Preferred Stockshall be convertible into 150 shares of common stock. 
***Series 91V.* Dividends -**The holders of the 91V Preferred Stock have no right to dividends. *Redemption-* The holders of the Series 91V Preferred Stock do not have the rightto require the redemption of the Series 91V Preferred Stock. The Companyhas a right to cause redemption of the Series 91V Preferred Stock as aseries, in whole or in part, at any time and from time to time effectiveon 60 days prior notice, at $100 per share. The right of the Company toredeem the Series 91V Preferred Stock is subject to compliance with Utahlaw, including without limitation certain retained earnings requirements.*Liquidation-* In the event of the voluntary liquidation, dissolution or other terminationof the Company, the holders of shares of the Series 91V Preferred Stockshall be entitled to a cash payment of $100 per share. Such payment shallbe made before any payment or distribution is made to the holders of thecommon stock, or any other series of Preferred Stock other than previouslyissued series of Preferred Stock of the Company.*Conversion -* Duringthe 60 day notice period provided wherein the Company may redeem the Series91V Preferred Stock, or at any other prior time, each share of the Series91V Preferred Stock is convertible into 8 shares of common stock of theCompany without further payment at the election of the shareholder. 
***Series 92A and 92B.* Dividends -**The Series 92A and 92B Preferred Stock have no dividend rights. *Redemption-* The Series 92A and 92B Preferred Stock holders do not have the rightto require its redemption. The Company may redeem the Preferred Stock asa series, in whole or in part, at any time and from time to time effectiveon 60 days prior notice, at $100 per share. The right of the Company toredeem the shares is subject to compliance with Utah law, including withoutlimitation certain retained earnings and requirements. *Liquidation -*In the event of the voluntary liquidation, dissolution or other terminationof the Company, the holders of shares of the Series 92A and 92B PreferredStock shall be entitled to a cash payment of $100 per share. Such paymentshall be made before any payment or distribution is made to the holdersof the common stock, or any other series of Preferred Stock other thanpreviously issued series of Preferred Stock of the Company. *Conversion-* Each share of the Series 92A Preferred Stock is convertible into6 shares of common stock. Each share of the Series 92B Preferred Stockis convertible into 8 shares of common stock. Each share is convertiblewithout further payment at the election of the shareholder. 
***Series 93A, 93B and 93C.* Dividends -**The Series 93A, 93B and 93C Preferred Stock have no dividend rights. *Redemption-* The holders of the Series 93A, 93B and 93C Preferred Stock have nooption or right to require redemption of their shares. The Series 93A,93B and 93C Preferred Stock is redeemable by the Company as a series, inwhole or in part, effective on 60 days prior notice, at $100 per share.*Liquidation-* In the event of any liquidation, dissolution or winding up of theCompany, whether voluntary or involuntary, the holders of the Series 93A,93B and 93C Preferred Stock are entitled to be paid out of the assets ofthe Company available for distribution to shareholders, liquidating distributionsin the amount of $100 per share. The liquidation preference shall be payablebefore any payment or distribution is made to the holders of the commonstock, or any other series of Preferred Stock other than previously issuedseries of Preferred Stock. *Conversion -* Each share of the Series93A, 93B and 93C Preferred Stock is convertible, at the option of the holderwithout further payment, into either 15 or 38 shares of the Company dependingupon the due date and interest rate on the promissory note purchased inconnection with the private placement under which the shares of these threeseries of Preferred Stock were issued. 
***Series 94A and 94B.* Dividends -**The Series 94A and 94B Preferred Stock have no dividend rights. *Redemption-* The holders of the Series 94A and 94B Preferred Stock have no optionor right to require redemption of their shares. The Series 94A and 94BPreferred Stock is redeemable by the Company as a series, in whole or inpart, effective on 60 days prior notice, at $100 per share. *Liquidation-* In the event of any liquidation, dissolution or winding up of theCompany, whether voluntary or involuntary, the holders of the Series 94Aand 94B Preferred Stock are entitled to be paid out of the assets of theCompany available for distribution to shareholders, liquidating distributionsin the amount of $100 per share. The liquidation preference shall be payablebefore any payment or distribution is made to the holders of the commonstock, or any other series of Preferred Stock other than previously issuedseries of Preferred Stock. *Conversion -* Each share of the Series94A and 94B Preferred Stock is convertible, at the option of the holderwithout further payment, into from 25 to 45 shares of the Company dependingupon the due date and interest rate on the promissory note purchased inconnection with the private placement with which the shares of these seriesof Preferred Stock were issued. 
***Series 95R.* Dividends -**No dividends are payable on the Series 95R Preferred Stock. *Redemption-* The holders of the Series 95R Preferred Stock have no option or rightto require redemption. The Series 95R preferred shares are redeemable bythe Company as a series effective on 60 days prior notice, at $10,000 pershare. *Liquidation -* In the event of any liquidation, dissolutionor winding up of the Company, whether voluntary or involuntary, the holdersof the Series 95R Preferred Stock are entitled to be paid out of the assetsof the Company available for distribution to shareholders, liquidatingdistributions in the amount of $10,000 per share for each share of Series95R Preferred Stock. Such liquidation payments are to be made before anypayment or distribution is made to the holders of the common stock, orany other series of Preferred Stock other than previously issued seriesof Preferred Stock. *Conversion -* Each share of the Series 95R PreferredStock has been convertible since November 1, 1997, at the option of theholder without further payment, into common stock with a bid based marketvalue of (i) $18,000; or (ii) $16,500. Alternatively, each share of Series95R Preferred Stock can be converted into 12,500 shares of common stock,at the option of the holder.
***Series 96A and 96B.* Dividends -**The Series 96A and 96B Preferred Stock have no dividend rights. *Redemption-* Neither the holders of the Series 96A or 96B Preferred Stock northe Company have any option or right to require or cause redemption. *Liquidation-* In the event of any liquidation, dissolution or winding up of theCompany, whether voluntary or involuntary, the holders of the Series 96Aand 96B Preferred Stock are entitled to be paid out of the assets of theCompany available for distribution to shareholders, liquidating distributionsin the amount of $10,000 and $13,000 per share, respectively. The liquidationpreference shall be payable before any payment or distribution is madeto the holders of the common stock, or any other series of Preferred Stockother than previously issued series of Preferred Stock. *Conversion -*Eachshare of the Series 96A Preferred Stock has been convertible, at the optionof the holder without further payment since April 30, 1998, into 13,500common shares. Each share of Series 96B Preferred Stock has been convertibleat the option of the holder without further payment since August 30, 1998,into 3,000 shares of common stock. 
***Series 97C.*Dividends-** No dividends are payable on the Series 97C PreferredStock. *Redemption -* The holders of the Series 97C Preferred Stockhave no option or right to require redemption. The Series 97C preferredshares are redeemable by the Company as a series, effective on 60 daysprior notice, at $10,000 per share. *Liquidation -* In the event ofany liquidation, dissolution or winding up of the Company, whether voluntaryor involuntary, the holders of the Series 97C Preferred Stock are entitledto be paid out of the assets of the Company available for distributionto shareholders, liquidating distributions in the amount of $10,000 pershare for each share of Series 97C Preferred Stock. Such liquidation paymentsare to be made before any payment or distribution is made to the holdersof the common stock, or any other series of Preferred Stock other thanpreviously issued series of Preferred Stock. *Conversion -* Each shareof the Series 97C Preferred Stock has been convertible since August 30,1998, at the option of the holder without further payment, into 13,500shares of common stock. 
***Series 98D.* Dividends -**The Series 98D Preferred Stock has no dividend rights. *Redemption -*The Series 98D Preferred Stock is not redeemable by any party. *Liquidation-* The Series 98D Preferred Stock has no liquidation preference. *Conversion-* Each share of the Series 98D Preferred Stock is convertible into700 shares of common stock of the Company at the option of the holder,at any time after November 15, 1998, for a period of two years from October30, 1998. As of October 30, 2000, the Series 98D Preferred Stock are convertibleby action of the Company into common stock. 
***Series 99D.* Dividends -**The Series 99D Preferred Stock has no dividend rights. *Redemption -*The Series 99D Preferred Stock is not redeemable by any party. *Liquidation-* The Series 99D Preferred Stock has no liquidation preference. *Conversion-* Each share of the Series 99D Preferred Stock is convertible at theoption of the holder, any time after November 15, 1999, but only if theten business day average closing bid price of the Company's common stockis $0.75 per share or greater at the time of conversion. The 99D PreferredStock may by action of the Company be converted into common stock on October30, 2001. Dividends on all preferred shares are only payable when the Companyhas sufficient accumulated earnings. 
Cumulative dividends of approximately $82,000 were inarrears under the Series PS90, P-90, 90 and 91 preferred share agreementsat December 31, 2000.  
**Common Stock** 
***2000 Common Stock Transactions.***
In January 2000, the Company exchanged one 12% note payablein the amount of $100,000 due in November 2000 for approximately 367,000shares of common stock. In connection therewith, the Company also issued46,192 shares of common stock for accrued interest of $12,600. No gainor loss was recorded on the transaction as the fair value of the securitiesexchanged were equal to one another.
During January and February 2000, the Company raised approximately$286,000 through the issuance of three short-term 9% notes payable. Thenotes and accrued interest thereon were unsecured and payable in cash orat the Company's option in restricted common stock, upon 30 days writtendemand but no sooner than March 14, 2000. Prior to March 31, 2000, demandfor payment was made on each of these three notes payable and the Companyexchanged approximately 1,205,000 shares of restricted common stock forthe notes and associated accrued interest. 
During the quarter ended March 31, 2000, the Company issuedapproximately 5,337,000 shares of restricted common stock to accreditedinvestors for approximately $1,209,000 in cash. In connection therewiththe Company issued 98,500 shares of restricted common stock valued at approximately$26,000 to two placement agents for services rendered. 
During the quarter ended March 31, 2000, the Company,as provided in their related consulting agreements, issued approximately129,000 restricted common shares to four consultants for services rendered,valued at approximately $14,500. 
During the quarter ended June 30, 2000, the Company raisedapproximately $834,000 in cash through the issuance of approximately 4,457,000restricted common shares to accredited investors. 
During the quarter ended June 30, 2000, the Company, inaccordance with certain consulting and private placement agreements, paidcash of approximately $16,000 and issued 182,271 shares of restricted commonstock valued at $46,000 as compensation for services rendered. 
During the quarter ended June 30, 2000, the Company, asprovided in their related consulting agreements, issued approximately 50,000restricted common shares to two consultants for services rendered, valuedby the parties at approximately $10,000. 
During the quarter ended September 30, 2000, the Companyraised approximately $438,000 through the issuance of approximately 2,630,000restricted common shares to accredited investors. 
During the quarter ended September 30, 2000, the Companyin accordance with two agreements for consulting and private placementservices, paid cash of approximately $28,000 and issued 417,552 sharesof restricted common stock valued at approximately $73,000 for servicesrendered. 
During the quarter ended December 31, 2000, the Companyraised approximately $781,000 in cash, through the issuance of 6,515,000restricted common shares to accredited investors. In addition, the Companygranted the holders piggyback registration rights. In connection therewiththe Company incurred finders' fees of $18,250 in cash and issued an aggregateof 141,080 shares of restricted common stock valued at $15,980. The Companyaccrued an additional $7,100 in finders' fees. 
During the quarter ended December 31, 2000, the Company,as provided in their related consulting agreements, issued approximately105,000 restricted common shares to consultants for services rendered.The shares were valued at $17,500. 
During the quarter ended December 31, 2000, two 9% notespayable with an aggregate face value of $84,000 and accrued interest of$3,790 became due and payable. The Company, pursuant to the terms of thesenotes, paid both the principal and accrued interest thereon by issuingto the holder of those notes 977,068 shares of restricted common stock.  
**1999 Common Stock Transactions.** 
During the quarter ended March 31, 1999, the Company issued60,000 restricted common shares for services rendered. The shares werevalued at approximately $15,000. 
During the quarter ended June 30, 1999, the Company raised$560,500 through the issuance of 5,142,794 restricted common shares tothirteen accredited investors. In connection therewith the Company issuedan aggregate of 211,208 shares of restricted common stock valued at $24,075as compensation for placement agent services. 
During the quarter ended September 30, 1999, the Companyraised approximately $339,000 through the issuance of 3,666,602 restrictedcommon shares to accredited investors and two officers/directors of theCompany (Also see Note 12 "Related Party Transactions"). In addition, theCompany granted purchasers of these restricted securities piggy-back registrationrights. 
During the quarter ended December 31, 1999, the Companyraised approximately $195,000 through the issuance of 2,584,833 restrictedcommon shares. 
***Warrants and Options.*** As of December 31,2000, the Company had outstanding warrants and options entitling the holdersthereof to purchase 8,183,498 shares of common stock of the Company atexercise prices which range from $0.08 to $10.00 and with varying expirationdates. The exercise price of the warrants and options are generally subjectto adjustment in the event of stock splits, stock dividends and similarevents. Some outstanding warrants expire only on the occurrence of certainconditions precedent, which are not dates certain. The warrants and optionsare not divided into any series or class, and there was no public marketfor either the warrants or options as of December 31, 2000. The warrantsand options do not confer upon the holders any voting or dividend rightsor any other rights of a stockholder of the Company. (See Note 8 "StockOption and Performance Incentive Program" for additional information onthe issuance of stock options in accordance with the Company's 1996 OmnibusStock Option Plan.) 
The following table summarizes disclosures required bySFAS 123 for warrant and option activity during 2000 and 1999: 
***Common shares underlying outstanding warrants andoptions***  UnderlyingCommonSharesWeightedaverageexercise price  Balance, December 31, 19986,518,599$ 1.61Granted2,058,5000.13Expired(877,199)1.11Balance, December 31, 19997,699,9001.21Granted1,688,4910.29Exercised(23,000)0.13Expired(1,181,893)2.10Balance, December 31, 20008,183,498$ 0.90 
***2000 Warrant Transactions*** 
During the quarter ended March 31, 2000, the Company issued warrantsand incentive stock options, at fair market value to employees of the Company.The exercise price was not lower than the closing bid price on the grantdate. The warrants and incentive options are exercisable for a total of1,244,001 and 149,990 shares of common stock, respectively, between $0.16and $0.37 per share, the closing bid prices on the grant dates. The optionsare exercisable upon effective registration under the Securities Act of1933 or the common shares underlying the options are issuable under anexemption from the registration requirements under the Securities Act.The options shall expire on April 1, 2004. The warrants are exercisableone year from the date of grant and expire on December 31, 2005. 
On March 2, 2000, the Company, as provided in related consulting agreements,granted four warrants to purchase an aggregate of 20,000 common sharesto four consultants for services rendered. In connection therewith, theCompany recorded compensation expense of $4,500. The exercise price wasnot lower than the closing bid price on the grant date. The warrants areexercisable one year from the grant date at $0.37 per share and expireon December 31, 2004.
On June 8, 2000, the Company, as provided in a related consulting agreement,granted one warrant to purchase an aggregate of 48,000 common shares toone consultant for services rendered. In connection therewith, the Companyrecorded compensation expense of approximately $7,000. The exercise pricewas not lower than the closing bid price on the grant date. The warrantis exercisable one year from the grant date at $0.225 per share and expireson December 31, 2005. 
On July 11, 2000, the Company, in accordance with its related serviceagreements, issued three warrants to purchase an aggregate of 225,000 commonshares at $0.22 per share to three officer/directors of the Company. Theexercise price was not lower than the closing bid price on the grant date.The warrants are exercisable one year from the date of grant and expireon December 31, 2005. 
In November 2000, the Company as provided in a related employment arrangement,granted one warrant to purchase an aggregate of 1,500 common shares. Inconnection therewith, the Company granted the holder thereof piggybackregistration rights. The exercise price was greater than the closing bidprice on the grant date and expires on December 31, 2005. The warrant isexercisable one year from the date of grant at $0.195 per share. 
***1999 Warrant Transactions*.**During the quarter ended June30, 1999, the Company granted two warrants to purchase 200,000 shares ofcommon stock to the holder of five notes payable aggregating $500,000 foraccrued interest through June 27, 1999, valued at $21,107. The warrantsare exercisable one year from the date of grant. The exercise prices werenot lower than the closing bid price on the grant date and expire on December31, 2004. One warrant to purchase 150,000 shares of common stock may beexercised at $0.16 per share and the other warrant to purchase 50,000 sharesof common stock may be exercised at $0.18 per share. 
On April 1, 1999, the Company, as provided in related service or consultingagreements, granted twelve warrants to purchase an aggregate of 135,000common shares to five directors and seven consultants for services rendered.In connection therewith, the Company recorded compensation expense to non-employeesof $9,720. The exercise prices were not lower than the closing bid priceon the grant date and expire on December 31, 2004. The warrants are exercisableat $0.125 per share. 
On April 8, 1999, the Company, as provided in a related consulting agreement,granted one warrant to purchase an aggregate of 48,000 common shares, toone consultant for services rendered. In connection therewith, the Companyrecorded compensation expense of approximately $2,160. The exercise pricewas not lower than the closing bid price on the grant date and expireson December 31, 2004. The warrant is exercisable at $0.08 per share. 
On April 15, 1999, the Company, as provided in a related consultingagreement, granted one warrant to purchase an aggregate of 50,000 commonshares to one consultant for services rendered. In connection therewith,the Company recorded compensation expense of $4,725. The exercise pricewas not lower than the closing bid price on the grant date and expireson December 31, 2004. The warrant is exercisable at $0.105 per share. 
On May 18, 1999, the Company, as provided in related service or consultingagreements, granted five warrants to purchase an aggregate of 358,000 commonshares to five officers and directors for services rendered. In connectiontherewith, the Company recorded compensation expense of $2,160 for thewarrants granted to outside directors. The exercise price was not lowerthan the closing bid price on the grant date and expires on December 31,2004. The warrants are exercisable at $0.1429 per share. 
On August 18, 1999, the Company, as provided in a related consultingagreement, granted one warrant to purchase an aggregate of 60,000 commonshares for financial consulting services. In connection therewith, theCompany recorded compensation expense of approximately $5,400. The exerciseprice was not lower than the closing bid price on the grant date and expireson December 31, 2002. The warrant is exercisable at $0.1375 per share. 
On August 20, 1999, the Company, as provided in a related service agreement,granted one warrant to one employee to purchase an aggregate of 5,000 commonshares. The exercise price was not lower than the closing bid price onthe grant date and the warrant expires on December 31, 2003. The warrantis exercisable at $0.136 per share. 
On October 22, 1999, the Company, as provided in a related consultingagreement, granted one warrant to purchase an aggregate of 70,000 commonshares to one consultant for consulting services. The exercise price wasgreater than the closing bid price on the grant date and expires on December31, 2004. The warrant is exercisable at $0.1096 per share. 
Prior to October 30, 1999, and in conjunction with the issuance of the99D Debentures and amended notes, the Company amended existing warrantsrepresenting 463,300 shares of underlying common stock set to expire onDecember 31, 1999, with an exercise price of $1.20 per share to expireon December 31, 2001, with a new exercise price of $0.30 per share. Inconnection therewith, the Company recorded prepaid interest of $18,452which is being amortized over the two year extension of the debt. 
As provided in their related service agreements, the Company on November1, 1999, granted five warrants to purchase an aggregate of 430,000 commonshares to five employees for services rendered. The exercise prices werenot lower than the closing bid price on the grant date and expire on December31, 2004. The warrants are exercisable at $0.088 per share.  
The following table provides the weighted-average exercise price andthe weighted-average remaining contractual life for outstanding warrantsand options at December 31, 2000, grouped into four exercise price ranges:   Warrants and Options OutstandingWarrants and Options ExercisableNumberOutstandingat 12/31/00Wt. Avg.RemainingLife (Years)Wt. Avg.ExercisePriceNumberExercisableat 12/31/00Wt. Avg.RemainingLife (Years)Wt. Avg.ExercisePriceRange $ 0.08- $ 0.232,720,0004.0$ 0.142,037,0003.7$ 0.12$ 0.26- $ 0.883,139,5713.10.462,136,8002.20.50$ 1.03 - $ 2.441,721,9501.91.261,721,9501.91.26$ 4.25- $10.00601,9773.25.60601,9773.25.608,183,4986,497,727 
***Pro Forma Information.***As of December31, 2000, the Company has outstanding warrants and options as describedabove. The Company has elected to follow APB 25 and related interpretationsin accounting for the warrants and options. As the exercise price of thewarrants and options issued by the Company to employees equaled the marketprice of the underlying stock on the grant dates, no compensation expensewas recorded in 2000 and 1999 under APB 25. 
Pro forma information regarding net loss and net loss per share is requiredby SFAS 123 and has been determined as if the Company had accounted forthe warrants and options granted subsequent to December 31, 1994, underthe fair value method of SFAS 123. The fair value for these options wasestimated at the grant date using a Black-Scholes option pricing modelwith the following assumptions for 2000 and 1999: risk-free interest rateof approximately 6%; expected volatility factor ranging from .737 to 1.721;expected life of the option of 2.0 to 3.0 years; and an expected dividendyield of zero.
The Black-Scholes option valuation model was developed for use in estimatingthe fair value of traded options which have no vesting restrictions andare fully transferable. In addition, option valuation models require theinput of highly subjective assumptions including the expected stock pricevolatility. Because the Company's warrants and options have characteristicssignificantly different from those of traded options, and because changesin the subjective input assumptions can materially affect the fair valueestimate, in management's opinion, the existing models do not necessarilyprovide a reliable single measure of the fair value of the Company's warrantsand options. For purposes of pro forma disclosures, the estimated fairvalue of the warrants and options are expensed during the grant year. TheCompany's historical and pro forma information follows (in thousands, exceptfor net loss per share information): Years ended December 31,20001999Net loss:  Historical$ (7,087)$ (3,935)Pro Forma(7,414)(4,056)Net loss per share basic:  Historical $ (.11)$ (.10)Pro Forma(.11)(.10)
In 1995 the Company granted warrants to employees forthe purchase of 3,530,000 OCET common shares at $1.00 per share, and canceleda warrant for 850,000 of those shares in January 1996. As part of the issuance,the exercise price of these warrants could be satisfied through the issuanceof a non-recourse note receivable. There is no current market for OCETcommon stock. At December 31, 1999, warrants for the purchase of 471,000OCET common shares were exercised by certain holders thereof in exchangefor $471,000 in non-recourse notes receivable which remained outstandingas of December 31, 2000, and are classified as a separate component ofstockholders' deficiency. The notes receivable bear interest at 8% simpleinterest per annum and mature on December 31, 2004. In addition, the makersof the notes receivable, to secure payments under the notes, have pledgedthe OCET common shares as collateral. The Company has the option in anevent of default as defined therein to foreclose and take possession ofthe collateral. All remaining OCET warrants expired on December 31, 1999. 
**Note 8. Stock Option and Performance Incentive Program** 
In June 1997, the stockholders approved the 1996 OmnibusStock Option Plan (the "1996 Stock Plan") pursuant to which a maximum aggregateof 2,000,000 shares was reserved for grant. Under the Stock Plan, employeesmay be given an opportunity to purchase, by way of option or stock purchaserights, common stock of the Company. The 1996 Stock Plan also providesfor the use of stock appreciation rights and long term performance awardsas employee incentives. All options granted become fully vested to employeeswith one year of service. The terms and conditions of each award are atthe discretion of the Board of Directors or any duly authorized committee.As of December 31, 2000, and 1999, the Company had outstanding optionsto purchase an aggregate of 1,885,270 and 1,792,000 common shares, respectively,all of which had been registered with the Securities and Exchange Commission . The Company applies APB 25 and related interpretations in accountingfor its plan. In accordance with SFAS 123, as more fully described in Note7 "Stockholders' Deficiency," the options have been aggregated with thewarrants for the fair value pro forma disclosure required. 
In March 2000, the Company granted incentive stock optionsto purchase 149,990 shares of common stock to employees pursuant to the1996 Stock Plan. The options are exercisable one year from date of issuanceat $0.37, and upon effective registration under the Securities Act of 1933or when the common shares underlying the options are issuable under anexemption from the registration requirements under the Securities Act of1933. All the options issued in 2000 expire in March 2005. 
During 1999, the Company granted additional incentivestock options to employees pursuant to its 1996 Stock Plan. The incentivestock options are exercisable for a total of 685,000 shares of common stockat $0.125 per share, the closing bid price on the grant date, to employeesof the Company. The options shall expire on April 1, 2004.  
**Note 9. Encoal Demonstration Plant** 
The Company intends to obtain financing for improvementsto the ENCOAL Demonstration plant estimated at $13,700,000. This financingis for capital improvements and for start-up expenditures which are necessaryto set the plant on more of a commercial footing and to position it asa reference plant for potential future commercial LFC facilities. The Companybelieves, due to the plant's special nature, that financing for these improvementswill not likely be obtained through conventional methods and that a strategicpartner or financier capable of utilizing Internal Revenue Code Section29 tax credits will be required. Due to the tax laws surrounding the realizationof these tax credits the financing of the ENCOAL Demonstration plant'srequired improvements will require that the Company sell or lease the plantdirectly to the financier in order to facilitate the transaction. Followingany such transaction the Company expects it will continue to be involvedwith various aspects of the project, including in the supervision of theimprovements. In this case the Company will not be required to make anyof the improvements discussed earlier or assume the repayment of the financingassociated with the improvements. There is no assurance that the Companywill be able to obtain this financing, or if available, the terms willbe acceptable. Accordingly, the Company is continuing to report the ENCOALDemonstration plant as part of Property, Plant and Equipment with a netrealizable value of $2,121,000. 
**Note 10. Minority Interest** 
At December 31, 2000, the Company reported minority interestin the consolidated balance sheet of $454,997. This minority interest resultedfrom the exercise of two warrants held by former employees of the Companyto acquire 471,000 shares of OCET in return for two notes payable in theprincipal amount of $471,000. The original minority interest balance hasbeen reduced by the allocation of losses to the minority stockholders.(See Note 7 "Stockholders' Deficiency" for more information.) For financialreporting purposes, the assets, liabilities and earnings of OCET are consolidatedwith the Company's financial statements and the notes receivable resultingfrom the transaction are shown as a reduction of stockholders' equity. 
**Note 11. Asset Acquisition** 
On December 9, 1999, the Company entered into an agreement(the "Amended Acquisition Agreement") with Bluegrass Coal Development Company("Bluegrass") and Americoal Development Company ("Americoal"), both wholly-ownedsubsidiaries of AEI, to purchase (1) Bluegrass' 50% interest in the LFCTechnology as well as Bluegrass' interest in the TEK-KOL partnership; (2)the ENCOAL corporation, which owns the ENCOAL LFC demonstration plant;certain existing permits necessary to build a commercial sized LFC plantnear Gillette, Wyoming; among other tangible and intangible LFC assetsand (3) NuCoal, LLC which owns certain design and engineering drawingsfor the construction of a commercial LFC plant. The Company has accountedfor this purchase as an acquisition of assets. 
The aggregate purchase price recorded by the Company wasapproximately $3,218,000 consisting of a $1,980,000 promissory note duein five years with interest thereon at the prime rate, the assumption ofa $1,130,000 invoice due MHI by Bluegrass, the assumption of various otherliabilities aggregating approximately $88,000 and $20,000 in acquisitionrelated costs. The purchase price was allocated as follows: (a) approximately$735,000 for current assets consisting mainly of accounts receivable andinventory, (b) approximately $2,135,000 for the ENCOAL Demonstration Plantand LFC related equipment, (c) approximately $224,000 for engineering drawingsand (d) $124,000 for the remaining LFC technology rights. 
In addition, the Company agreed to (a) the execution ofa promissory note payable of $231,408 with interest thereon at the primerate, due after several extensions, on April 30, 2001, for various employeerelated expenses payable to AEI by the Company prior to the closing date.The note payable is secured by future royalties from the licensing of theLFC technology. 
Further, subsequent to the closing date and prior to theend of the first quarter of 2000, the Amended Acquisition Agreement requiresthe Company to provide AEI (a) with a release, which the Department ofEnergy ("DOE") has already provided, from the attendant obligations pursuantto the ENCOAL Demonstration Plant Cooperative Agreement with the DOE wherebythe Company and the DOE agree to discharge and release AEI its successors,assigns and affiliates, with the Company becoming solely liable for theperformance and terms thereunder, (b) a release and discharge from Vulcanand Triton LLC of Bluegrass, AEI, WCT (collectively "AEI") and their affiliatesfrom a $10,000,000 bonding obligation and all indemnities which AEI hasprovided, (c) an assignment of the "ENCOAL Use and Indemnification Agreement"by Triton LLC to the Company, (d) a release of all duties, obligations,covenants and liabilities of AEI pursuant to the ENCOAL Use and IndemnificationAgreement and (e) the release of AEI and assignment to the Company of variousother permits and their attendant obligations related to the operationof the ENCOAL plant. Pursuant to the terms of the Amended Acquisition Agreementthe Company has pledged the stock of ENCOAL and the membership interestin NuCoal, which are being held by an independent third party, and theCompany may not operate, test or modify the ENCOAL plant until the conditionsset forth in items (a), and (b) above have been met. Subsequent to December9, 1999, the Company is responsible for reasonable and necessary costsand expenses for the ENCOAL facilities. In the event the Company is unableto complete or obtain a waiver on any of the foregoing, AEI may, pursuantto the security agreements, retake possession of the assets pledged ascollateral. The obligations described in (a), (c), and (e) above have beensatisfied as of December 31, 2000 and the Company has obtained an extensionfrom AEI to April 30, 2001, in which to satisfy the conditions of the originalagreement.  
**Note 12. Related Party Transactions** 
The Company has entered into the following transactionswith related parties: 
The Company sold 200 Series P-90 preferred shares for$22,000 to two officers in 1990. Each preferred share is convertible into250 restricted common shares upon payment of a price that was reduced from$15.00 per share to $1.375 per share in 1995. These shares are still outstandingas of December 31, 2000. 
During 1999, the Company issued for cash one 12% notepayable with a face value of $50,000 to an entity controlled by one outsidedirector. The principal and interest on the note payable after severalextensions are both due and payable thirty days after the Company receiveswritten notice of demand for payment. As of December 31, 2000, no demandhad been made. 
As of December 31, 2000, the Company owed certain officers/directorsapproximately $797,000 for deferred compensation. This amount has beenincluded with accrued salaries and benefits in the Company's consolidatedbalance sheet. 
During 1999, the Company issued one 12% note payable witha face value of $25,000 and a warrant to purchase 17,500 shares of commonstock to one outside director for $25,000. The note bears simple interestwhich is payable quarterly, at the Company's option, in cash or restrictedcommon stock. In the event the Company elects to distribute common stock,the price of the common stock used to determine the number of shares tobe issued will be the greater of (a) the average stock price for the lastten trading days of each quarter or (b) $0.25 per share. The principalof the note payable is due on April 23, 2001, in cash. The warrant is exercisableat a price of $0.12 per share. The exercise price was not lower than theclosing bid price on the grant date and expires on December 31, 2004. Inaddition, the Company issued 524,790 shares of restricted common stockto this director in return for $85,000 in cash. In October 1999, the Companyissued 5,261 shares of restricted common stock for interest on this notevalued at $1,315. 
In January 2000, the Company issued for cash a $100,000unsecured 12% note payable to outside director. The note is payable upon30 days written demand but no sooner than November 15, 2000. Both the principaland accrued interest thereon may be paid in cash or at the option of eitherthe Company or noteholder in restricted common stock of the Company, conditionalonly on the bid price of the Company's common stock as determined in accordancewith the conversion formula being above $0.40 per share. The note is convertibleinto common stock by dividing all principal and interest by 75% of theaverage closing bid price for the ten trading days prior to the demanddate. As of December 31, 2000, no demand for payment had been made on thenote. 
On July 14, 2000, the Company issued for cash a $25,000unsecured 9% note payable to an outside director. The note is payable upon30 days written demand after January 14, 2001. Both the principal and accruedinterest thereon may be paid in cash, or at the option of the Company,on January 14, 2001, by issuing 147,059 shares of restricted common stock. 
On November 15, 2000, the Company issued one unsecurednote payable to an outside director with a face value of $35,000 for cash.The note bears interest at 9% per annum and is due on demand upon fivedays written notice, but no sooner than on December 31, 2000. Both theprincipal and interest may be paid in cash or by mutual agreement in restrictedcommon stock of the Company. 
On December 10, 2000, as a condition for obtaining a $100,000line-of-credit for AMS with a bank, 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 accrued a $10,000liability, payable by issuing to this entity 50,000 shares of restrictedcommon stock of the Company.  
**Note 13. Commitments and Contingencies** 
(a) The Company leases its corporate offices under anoperating lease agreement which provides for annual escalation of rentalpayments and expires in December 2005. The Company leases office spacein Gillette, Wyoming and Denver, Colorado under operating leases whichexpire in July 2001. The Company's OCET subsidiary leases its laboratoryfacilities under an operating lease agreement which provides for annualescalation of rental payments and expires in May 2003. AMS leases its manufacturingfacility under an operating lease agreement which is currently on a monthlybasis. Under the terms of the lease agreements, the lessee pays taxes,maintenance and insurance. All of these leases are accounted for as operatingleases. As of December 31, 2000, the Company had no other significant leasecommitments except as set forth in (c) below. Total rent expense relatingto leased facilities was approximately $475,000 and $442,000 in 2000 and1999, respectively. Future minimum annual operating lease commitments aggregatedapproximately $1,317,000 as of December 31, 2000, of which $334,000 ispayable in 2001; $324,000 is payable in 2002; $263,000 is payable in 2003;$200,000 is payable in 2004; and $196,000 is payable in 2005. 
(b) As required in the LFC Tech Operating Agreement, theCompany may be required from time to time to make contributions to LFCTechnologies, LLC, the Company's new joint venture with a subsidiary ofMitsubishi Corp.
(c) The Company's ENCOAL subsidiary is currently leasingthe property on which the ENCOAL Demonstration plant resides. Under thecombined operating lease and services agreement the Company is requiredto pay a minimum monthly fee of $37,000. During 2000, the Company incurredapproximately $296,000 in charges associated with this agreement. The Companyanticipates having to make this payment until the sale of the ENCOAL Demonstrationplant is completed.  
**Note 14. Income Taxes** 
The significant components of the Company's deferred taxassets and liabilities are: 2000Deferred tax assets:Net operating losscarryforwards$ 22,817,000Depreciation and amortization46,000Research and developmentcredits390,000Accrued interest205,000Deferred payroll460,000Other20,00023,938,000Deferred tax liabilitiesother(108,000)Net deferred tax assets23,830,000Deferred tax assetsvaluation allowance(23,830,000)$ -
Due to uncertainties related to, among other things, the extent andtiming of the Companys future taxable income and its ability to realizethe potential benefits of the not operating loss carryforwards, the companyincreased its valuation allowance by approximately $2,020,000 and $777,000to offset increases in its deferred tax assets during the years ended December31, 2000 and 1999, respectively, and accordingly, no credits for incometaxes are included in the accompanying consolidated statements of operations.
At December 31, 2000, the Company had net operating lossesavailable for carryforward for federal and state tax purposes of approximately$64,094,000 and $11,885,000, respectively. Federal and state loss carryforwardsof $368,000 and $3,879,000, respectively, expired in 2000 and will notbe available for carryforward into 2001. The difference between federaland state loss carryforwards is primarily attributable to the 50% limitationof California loss carryforwards. The Company also has research creditcarryforwards of approximately $390,000 which will begin to expire in 2004unless previously utilized. 
At December 31, 2000, the Company had net operating losscarryforwards for federal and state tax purposes expiring as follows:  Year ExpiresFederalState2001$ 849,000$ 1,979,00020021,151,0002,215,00020031,217,0002,710,00020046,984,0001,867,00020052,288,0003,114,00020063,750,000-20078,111,000-20085,723,000-20095,057,000-20104,614,000-20114,654,000-20124,385,000-20135,383,000-20143,697,000-20156,231,000-Total loss carryforwards$64,094,000$11,885,000
**Note 15. Extraordinary Item** 
In December 1999 the Company recorded an extraordinarygain on the extinguishment of a $1,130,000 debt. The extraordinary gainon extinguishment of debt is related to the assumption of a $1,130,000liability to MHI which the Company assumed with its acquisition of variousassets from AEI (See Note 4 "LFC Process Related Assets"). This liabilitywas subsequently forgiven by MHI in accordance with the restructured LFCTech joint venture agreements with MLFC. The Company recorded the extraordinarygain on its 1999 consolidated statement of operations on a gross basis,as no tax liability was incurred due to sufficient state and federal losscarryforwards.  
**Note 16. Subsequent Events** 
During the first quarter of 2001, the Company raised approximately$625,000 through the issuance of approximately $196,000 in short-term convertiblenotes payable and approximately 4,300,000 shares of restricted common sharesto accredited investors. 
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 option 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.
The Company and subsidiaries of AEI specifically, Bluegrassand Americoal, have amended effective March 31, 2001 (the "Eighth Amendment"),certain terms and conditions of the Amended Acquisition Agreement betweenthe parties, dated December 9, 1999. The Eighth Amendment essentially providedthe Company with an extension of the March 31, 2001 date to April 30, 2001in 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 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS****ON ACCOUNTING AND FINANCIAL DISCLOSURE** 
None
**PART III**
 
The information required by this Part III will be providedin the Company's definitive proxy statement for the Company's 2001 AnnualMeeting of Shareholders (involving the election of Directors), which definitiveproxy statement will be filed pursuant to Regulation 14A no later thanApril 30, 2001, and is incorporated herein by this reference to the followingextent:  
**ITEM 9. DIRECTORS EXECUTIVE OFFICERS, PROMOTERS ANDCONTROL PERSONS** 
The information called for by this Item will be set forthunder the captions "Election of Directors - Information about Nomineesand Executive Officers" and "Section 16(A) Beneficial Ownership ReportingCompliance" in the Company's Definitive Proxy Statement.  
**ITEM 10. EXECUTIVE COMPENSATION** 
The information called for by this Item will be set forthunder the captions "Information Concerning Board of Directors - Compensationof Directors," and "Executive Compensation" in the Company's DefinitiveProxy Statement.  
**ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL****OWNERS AND MANAGEMENT** 
The information called for by this Item will be set forthunder the caption "Security Ownership of Certain Beneficial Owners andManagement" in the Company's Definitive Proxy Statement.  
**ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS** 
The information called for by this Item will be set forthunder the caption "Certain Relationships and Related Transactions" in theCompany's Definitive Proxy Statement.  
**ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K** 
(a) Exhibits 
The following documents are filed as exhibits to thisForm 10-KSB. 
2.1 Merger Agreement between VDIand Genesis.(2)3.1.1 Articles of Incorporation,as amended.(1)3.1.2 Restated Articles of Incorporation.(4)3.1.3Articlesof Amendment to the Articles of Incorporation of SGI International.(19)3.1.4 Amended Articles of Amendment to theArticles of Incorporation of SGI International.(23)3.2.1 By-laws, as amended.(2)(3)3.2.2 Amended and Restated By-laws.(4)3.2.3 By-Laws, as Amended (9/20/90).(7)4.1 Form of Warrants - Series A through H.(4)4.2 Form of Amended Warrants.(8)4.3 Form of Amended Warrants.(9)4.4 Form of Warrants - Series I, M, S and P.(4)4.5 Form of Series 90B Units (Promissory Note and PreferredStock).(7)4.6 Form of Series 90C Units (Promissory Note and PreferredStock).(7)4.7 Form of Series 90D Units (Promissory Note and PreferredStock).(7)4.8 Form of Series P90 Preferred Stock.(7)4.9 Form of Series PS90 Preferred Stock.(7)4.10 Form of Series 91A Units (Promissory Note and PreferredStock).(10)4.11 Form of Series 91D Units (Promissory Note and PreferredStock).(10)4.12 Form of Series 91E Units (Promissory Note and PreferredStock).(10)4.13 Form of Series 91V Units (Promissory Note and PreferredStock).(10)4.14 Form of Series 91P Preferred Stock.(10)4.15 Form of Series 91R Preferred Stock.(10)4.16 Form of Series 91S Preferred Stock.(10)4.17 Form of Series 91T Preferred Stock.(10)4.18 Form of Series 91M Preferred Stock.(11)4.19 Form of Series 92A Preferred Stock.(11)4.20 Form of Series 92B Preferred Stock.(11)4.21 Form of Series 93A Units (Promissory Note and PreferredStock).(12)4.22 Form of Series 93B Units (Promissory Note and PreferredStock).(12)4.23 Form of Series 93C Units (Promissory Note and PreferredStock).(12)4.24 Form of Series 94A Units (Promissory Note and PreferredStock).(13)4.25 Form of Series 94B Units (Promissory Note and PreferredStock).(13)4.26 Form of Series 95R Convertible Preferred Stock.(14)4.27 Form of Series 96A Convertible Preferred Stock.(15)4.28 Form of Series 96B Convertible Preferred Stock.(15)4.29 Certificate of Secretary re: Designation of Series97C Preferred Stock.(16)4.30 Form of Common Stock Certificate.(16)4.31 Form of Warrant Certificate re: Existing Warrants.(17)4.32 Form of Stock Purchase Warrant re: 97D and 97F PreferredStock.(17)4.33 Form of Stock Purchase Warrant re: Series 97B PreferredStock.(16)4.34 Form of Stock Purchase Warrant re Series 97G PreferredStock.(16)4.35 Agreement between the Registrant and AEM dated December11, 1997.(16)4.36 Form of Series 98A Stock Purchase Warrant.(18)4.37 Amended Certificate of Secretary re: Designationof Series 98D Preferred Stock.(18)4.38 Form of Series 98D Convertible Preferred Stock.(18)4.39 Certificate of Secretary re: Designation of Series96B Preferred Stock. (19)4.40 Amended Certificate of Secretary re: Designationof Series 97B Preferred Stock. (19)4.41 Form of Promissory Notes payable to Settondown CapitalInternational, Ltd.(20)4.42 Promissory Note dated April 14, 1999, for $50,000.(21)4.42.1 Amended Promissory Note dated April 14, 1999 for$50,000. (23)4.43 Promissory Note dated April 23, 1999, for $25,000.(21)4.44 Form of Extension Agreement dated June 24, 1998.(21)4.45 Form of Note Extension Agreement dated March 24,1999.(21)4.46 Amended Certificate of Secretary re: Designationof Series 99-D Preferred Stock.(22)4.47 Form of Restricted Stock Purchase Agreement.(22)4.48 Form of Series 99-D Convertible Preferred Stock.(22)4.49 Form of Series 99-D Convertible Debentures.(22)4.50 Form of Amended Stock Purchase Warrant re: Series99-D Offering dtd August 27, 1999.(22)4.51 Form of Non Recourse Promissory Notedated December 31, 1999.(25)4.52 Promissory Note dated November 15, 2000,for $35,000. (23)4.53 Guarantee Agreement dated December 10,2000 (23)4.54 Form of Promissory Notes in 2000. (26)4.55 Form of Promissory Note with RegistrationRights. (27)4.56 Form of Promissory Note without RegistrationRights. (27)4.57 Form of Promissory Note payable in cashor stock. (27)4.58 Form of July 2000 Warrant. (27)4.59 Promissory Note dated January 26, 2000,for $100,000. (29)10.1 Lease of executive offices (LJF).(7)10.2 Second Amended lease of executive offices. (26)10.3 Participation Agreement (including ParticipationAgreement, Confidentiality Agreement and Addendum).(4)10.4 Partnership Agreement, dated as of 9/30/89.(6)10.4.1 First Amendment to Partnership Agreement datedas of 12/1/91.(10)10.4.2 Second Amendment to Partnership Agreement datedas of 5/1/95.(14)10.5 Accounting Procedures.(6)10.6 Technology Transfer Agreement (SGI/OCET) dated 3/17/95.(14)10.6.1 First Amendment to Technology Transfer Agreementdated as of 5/15/95.(14)10.6.2 Second Amendment to Technology Transfer Agreementdated as of August 25, 1996. (15)10.7 LFC Joint Venture Formation Agreement dated January14, 1999, between Registrant and MLFC Corporation. (19)10.8 Amended Operating Agreement dated January 14, 1999,between Registrant and MLFC Corporation. (19)10.9 Amended License Agreement dtd January 14, 1999,between Registrant and LFC Technologies, LLC. (19)10.10 Amended and Restated Services Agreement dated January14, 1999, between Registrant and MLFC Corporation    and LFC Technologies, LLC. (19)10.11 Form of Agreement and Assignment bySGI International to LFC Technologies, LLC.(22)10.12 LFC Technologies, LLC Second Amendmentto the License Agreement.(22)10.13 Addendum to Amended and Restated ServiceAgreement.(22)10.14 Transfer and Development Agreement.(22)10.15 Consulting Agreement dated October 5,1999, between Registrant and Elon A. Place.(28)10.16 Form of OCET Stock Pledge Agreementbetween the Registrant and the holders thereof.(25)10.17 1996 Omnibus Stock Option Plan. (24)10.18 2001 Non-Qualified Stock Plan. (28)10.19 Amendment to OCET lease. (26)22.1 Subsidiaries.(25)22.2 Consent of J.H. Cohn LLP, Independent Public Accountants.(23)99.1 Other Notes (Healy Alaska).(5) 
(1) Incorporated by reference to the Registrant'sRegistration Statement on Form S-14 (File No. 2-93124) (the "RegistrationStatement") filed on September 6, 1984.(2) Incorporated by reference to AmendmentNo. 2 to the Registration Statement filed on April 24, 1985.(3) Incorporated by reference to Report onForm 10-K (File No. 2-93124) for the year ended December 31, 1985.(4) Incorporated by reference to Report onForm 10-K (File No. 2-93124) for the year ended December 31, 1987.(5) Incorporated by reference to Report onForm 10-Q (File No. 2-93124) for the quarter ended June 30, 1988.(6) Incorporated by reference to Report onForm 10-Q (File No. 2-93124) for the quarter ended March 31, 1990.(7) Incorporated by reference to Report onForm 10-K (File No. 2-93124) for the year ended December 31, 1990.(8) Incorporated by reference to Exhibit 4in Registration Statement on Form S-8 (File No. 2-93124) filed on December1990.(9) Incorporated by reference to Exhibit 4in Registration Statement on Form S-8 (File No. 2-93124) filed on March1, 1991.(10) Incorporated by reference to Report onForm 10-K (File No. 2-93124) for the year ended December 31, 1991.(11) Incorporated by reference to Report onForm 10-K (File No. 2-93124) for the l year ended December 31, 1992.(12) Incorporated by reference to Report onForm 10K (File No. 2-93124) for the year ended December 31, 1993.(13) Incorporated by reference to Report onForm 10K (File No. 2-93124) for the year ended December 31, 1994.(14) Incorporated by reference to Report onForm 10-K (File No. 2-93124) for the year ended December 31, 1995.(15) Incorporated by reference to Exhibit4 in Registration Statement on Form S-8 (File No. 2-93124) filed on December26, 1996.(16) Incorporated by reference to Exhibit4 in Registration Statement on Form S-2 (File No. 2-93124) filed on January23, 1998.(17) Incorporated by reference to Report onForm 10-Q (File No. 2-93124) for the quarter ending September 30, 1997.(18) Incorporated by reference to Report onForm 10-Q (File No. 2-93124) for the quarter ending September 30, 1998.(19) Incorporated by reference to Exhibit4 and 10 in Registration Statement on Form S-2 (File No. 2-93124) filedon February 4, 1999.(20) Incorporated by reference to Report onForm 10-QSB (File No. 2-93124) for the quarter ending March 31, 1999.(21) Incorporated by reference to Report onForm 10-QSB (File No. 2-93124) for the quarter ending June 30, 1999.(22) Incorporated by reference to Report onForm 10-QSB (File No. 2-93124) for the quarter ending September 30, 1999.(23) Filed herewith.(24) 1997 Proxy Statement.(25) Incorporated by reference to Report onForm 10-KSB (File No. 2-93124) for the year ending December 31, 2000.(26) Incorporated by reference to Report onForm 10-QSB (File No. 2-93124) for the quarter ending June 30, 2000.(27) Incorporated by reference to Report onForm 10-QSB (File No. 2-93124) for the quarter ending September 30, 2000.(28) Incorporated by reference to the Registrant'sRegistration Statement on Form S-8 (File No. 2-93124) (the "RegistrationStatement") filed on February 15, 2001.(29) Incorporated by reference to Report onForm 10-QSB (File No. 2-93124) for the quarter ending March 31, 2000(b) Reports on Form 8-K.
On October 10, 2000, and then again on December 15, 2000,the Company reported on its Current Report on form 8-K, filed with theSecurities and Exchange Commission, that it had amended (the "Amendments"),certain terms and conditions of the Amended and Restated Acquisition Agreement(the "Acquisition Agreement") between itself and certain subsidiaries ofAEI Resources, dated December 9, 1999. The Amendments essentially provideSGI with an extension of the date, to March 31, 2001, in which to satisfyvarious terms and conditions more fully described in the Acquisition Agreement.
**SIGNATURES** 
Pursuant to requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorizedon this 10th day of April 2001. 
SGI INTERNATIONAL 
By: */S/MICHAEL L. ROSE*     Michael L. Rose, CEO 
Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed below by the following personson behalf of the Registrant and in the capacities and on the dates indicated. 
SIGNATURES                                          TITLE                                                   DATE 
*S/MICHAEL L. ROSE    *                           President and Chief Executive                 April 10, 2001Michael L. Rose                                         Officer, Director
*/S/GEORGE E. DONLOU   *                      Vice President Finance/                         April 10, 2001George E. Donlou                                       Controller
*/S/JAMES W. MAHLER                           *Executive Vice President,                       April 10, 2001James W. Mahler                                        Director
*/S/JOHN R. TAYLOR *                               Senior Vice President,                            April 10, 2001John R. Taylor                                            Director
*/S/ERNEST P. ESZTERGAR*                    Senior Vice President Technology,         April 10, 2001Ernest P. Esztergar                                     Director
*/S/RICHARD B. BEIN *                              Director                                                April 10, 2001Richard B. Bein
*/S/EDWARD D. DOHERTY*                      Director                                                April 10, 2001Edward D. Doherty
*/S/WILLIAM A. KERR                            *Director  *                                              *April 10, 2001William A. Kerr
*/S/BEN W. REPPOND                            *Director *                                              *April 10, 2001Ben W. Reppond
*/S/JEFFREY L. SMITH                           *Director *                                              *April 10, 2001Jeffrey L. Smith 

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