As filed with the Securities and Exchange Commission on January 23, 1998.
Registration No._________

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

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FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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SGI INTERNATIONAL
(Exact name of Registrant as specified in its charter)

Utah 33-0119035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1200 Prospect Street, Suite 325, La Jolla, CA 92037
TEL (619) 551-1090 / FAX (619)551-0247
(Address, including zip code, telephone number and
facsimile number, including area code, of registrant's
principal executive offices)

Joseph A. Savoca, Chief Executive Officer
President and Chairman of the Board
SGI International
1200 Prospect Street, Suite 325, La Jolla, CA 92037
(619) 551-1090 (Name, address and telephone number
of agent for service)

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

Copies to:
FISHER THURBER, LLP
TIMOTHY J. FITZPATRICK, ESQ.
DAVID A. FISHER, ESQ.
4225 Executive Square, Suite 1600
La Jolla, CA 92037-1483
Tel. (619) 535-9400
Fax (619) 535-1616

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Approximate date of commencement of proposed sale to
the public: As soon as practicable after the Registration
Statement has become effective.

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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|

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CALCULATION OF REGISTRATION FEE

Title of each class of Proposed Maximum Proposed Maximum Amount of
Securities to be Amount to be Offering Price per Aggregate Offering Registration
registered registered (1)(2) Unit(3) Price (3) Fee

Common Stock, no par
value, which may be sold
by selling shareholders..... 139,714 $0.99 $ 138,317 $ 41.91

Common Stock, no par
value, underlying
outstanding Convertible
Preferred Stock............. 7,093,003 $0.99 $7,022,073 $2,127.90

Common Stock, no par
value, outstanding
underlying Warrants......... 1,411,360 $0.99 $1,397,246 $ 423.41
TOTAL....................... . . . . . . . . . . . . . . . . . . . . . . . $2,593.22
============================ ==================== ======================= =========================== ==================

(1) Pursuant to Rule 416 under the Securities Act of 1933, this Registration
Statement covers such additional indeterminate number of shares of common
stock as may be issued by reason of adjustments in the number of shares of
common stock issuable pursuant to anti-dilution provisions contained in the
existing warrants and convertible preferred stock. Because such additional
shares of common stock will, if issued, be issued for no additional
consideration, no additional registration fee is required.

(2) The number of shares of common stock registered herein underlying certain
convertible preferred stock is indeterminate and is estimated to include
the shares of common stock required to fulfill the conversion rights of
preferred stock which is convertible into a given number of common shares
in part based upon conversion formulae, referencing fluctuating market
prices and is also estimated to satisfy contractual obligations of the
Company requiring the registration of various amounts up to 230% of the
number of shares of Common Stock issuable upon conversion of the Company's
Series 97-D and 97-F Convertible Preferred Stock.

(3) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) of the Securities Act of 1933,
based on the average of the bid and ask prices of the Company's common
stock on the OTC Bulletin Board on January 20, 1998.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREFORE BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

Subject to Completion dated January 23, 1998

PROSPECTUS
SGI INTERNATIONAL
1,411,360 Shares of Common Stock underlying outstanding
warrants 7,093,003 Shares of Common Stock underlying outstanding
convertible preferred stock
139,714 Shares of outstanding Common Stock

This Prospectus (the "Prospectus") relates to the public offering, which is
not being underwritten, and the resale by the holders of (i) an aggregate of
1,411,360 shares ("Warrant Shares") of common stock no par value ("Common
Stock") issuable upon exercise of certain outstanding warrants to purchase
Common Stock of the Company ("Existing Warrants"); (ii) an aggregate of
7,093,003 shares of common stock issuable upon conversion of various series of
outstanding convertible preferred stock issued in 1996 and 1997 including shares
of Common Stock issuable upon exercise of outstanding warrants which were issued
in connection therewith; and shares of Common Stock issued to the placement
agents for the Company in connection therewith (the "Preferred Shares"). This
Prospectus also relates to the resale which is not being underwritten by the
holders of an aggregate of 139,714 shares of outstanding common stock ("Selling
Shares"). The Warrant Shares, Preferred Shares and Selling Shares are referred
to herein as the "Securities." The Securities may be offered by certain
shareholders of the Company (the "Selling Security Holders") from time to time
in transactions in the over-the-counter market through the OTC Bulletin Board,
in privately negotiated transactions, through the writing of options on the
Securities, or through a combination of such methods of sale, at fixed prices
that may be changed, at market prices prevailing at the time of sale, at prices
relating to such prevailing market prices, or at negotiated prices. The Selling
Security Holders may effect such transactions by selling the Securities to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the Selling Security Holders
and/or the purchasers of the Securities for whom such broker-dealers may act as
agents or to whom they may sell as principals, or both (which compensation as to
a particular broker-dealer might be in excess of customary commissions). See
"Selling Security Holders" and "Plan of Distribution."

The Company shall receive the proceeds from the exercise (if any) of the
Existing Warrants. None of the proceeds from the sale of the Securities by the
Selling Security Holders will be received by the Company. The Company has agreed
to bear all expenses (other than selling commissions and fees and expenses of
counsel and other advisers to the Selling Security Holders) in connection with
the registration and sale of the Securities being offered by the Selling
Security Holders. The Securities offered hereby were restricted securities under
the Securities Act prior to their registration hereunder. This Prospectus has
been prepared so that future sales of common stock by the Selling Security
Holders will not be restricted under the Securities Act of 1933 (the "Securities
Act"). See "Selling Security Holders."

The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol "SGII." On January 20, 1998, the last reported bid and ask prices for the
Common Stock were $.9687 and $1.02, respectively.

THE SECURITIES OFFERED ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS."

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

The date of this Prospectus is January __, 1998

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street NW, Judiciary Plaza, Washington, DC 20549, and at the
Commission's regional offices: Chicago Regional Office, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661; and New York Regional Office, Suite
1300, 7 World Trade Center, New York, New York 10048. Copies of such materials
can also be obtained at prescribed rates from the Public References Section of
the Commission at 450 Fifth Street NW, Judiciary Plaza, Washington, DC 20549.
The Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The Commission's web site is located at http://www.sec.gov.

This Prospectus constitutes a part of a Registration Statement on Form S-2
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act. This Prospectus omits certain of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Securities offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed as a part thereof. Statements contained in this Prospectus
concerning the contents of any contract or any other document referred to are
not necessarily complete, and reference is made in each instance to the complete
copy of such contract or document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference to
such exhibit. The Registration Statement, including all exhibits and schedules
thereto, may be inspected without charge at the Commission's principal office in
Washington, DC, and copies of all or any part thereof may be obtained from such
office after payment of fees prescribed by the Commission.

Information contained herein is subject to completion or amendment. These
securities may not be sold nor may offers to buy be accepted prior to the time
the Registration Statement becomes effective. This Prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.

INFORMATION INCORPORATED BY REFERENCE

The Company regularly files documents with the Securities and Exchange
Commission to comply with applicable government regulations, including Form 10-Q
and Form 10-K. The Company will provide without charge to each person, including
any beneficial owner, to whom this Prospectus is delivered, a copy of the Form
10-K for the year ended December 31, 1996, and the 10-Q for the quarter ended
September 30, 1997, and upon written or oral request of such person, a copy of
any and all of the other documents that have been filed with the Securities and
Exchange Commission and incorporated by reference in this Prospectus (other than
exhibits to such documents which are not specifically incorporated by reference
herein). Such requests should be directed to SGI International, Attn: George
Donlou, Controller, at its principal offices located at 1200 Prospect Street,
Suite 325, La Jolla, CA 92037 (619) 551- 1090.

The following documents previously filed with the Commission, except as
superseded or modified herein, are hereby incorporated by reference into this
Prospectus: (i) the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996; (ii) the Company's Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997; (iii)
the Company's definitive Form 14a (Proxy) dated May 23, 1997; (iv) the Company's
Form 8-K dated November 24, 1997; (v) the Company's 1934 Act Registration
Statement on Form 8-A; and (vi) each additional exhibit from all of the
Company's prior 1933 Act filings.

Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as
modified or superseded, to constitute a part of this Prospectus.

No person is authorized in connection with any offering made hereby to give
any information or make any representation not contained or incorporated by
reference in this Prospectus, and any information not contained or incorporated
herein must not be relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, by any person in any jurisdiction in which it is unlawful for such
person to make such offer or solicitation. Neither the delivery of this
Prospectus at any time nor any sale made hereunder shall, under any
circumstances, imply that the information herein is correct as of any date
subsequent to the date hereof.

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

FORWARD-LOOKING STATEMENTS

This Prospectus contains forward-looking statements. When included in this
Prospectus, the words "expects," "intends," "anticipates," "plans," "projects"
and "estimates," and analogous or similar expressions are intended to identify
forward-looking statements. Such statements, which include statements contained
in "Prospectus Summary," "Risk Factors," "Business" and elsewhere are inherently
subject to a variety of risks and uncertainties that could cause actual results
to differ materially from those reflected in such forward-looking statements.
For a discussion of certain of such risks, see "Risk Factors." These
forward-looking statements speak only as of the date of this Prospectus. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward- looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.

PROSPECTUS SUMMARY

The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information, including "Risk
Factors," and the financial statements incorporated by reference herein
appearing elsewhere in this Prospectus or incorporated by reference herein.
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Existing Warrants.

The Company is in the business of developing and marketing energy-related
technologies. The Company has developed a patented technology which it refers to
as the LFC Process. The LFC Process is intended to convert and upgrade low-rank
coal into a coal substitute and a hydrocarbon liquid. The LFC Process is
intended to produce two products called process derived fuel ("PDF") and coal
derived liquids ("CDL"), and at the same time reduce the PDF's pollution
potential when it is subsequently burned for fuel. The Company believes the LFC
Process could upgrade a significant portion of the world's abundant low-rank
coal reserves into coal and petroleum-based products which could provide
cost-effective compliance with certain environmental legislation and regulations
including the United States Clean Air Act ("Clean Air Act") and other current
and possibly future U.S. and international environmental regulations or
concerns.

The LFC Process involves heating coal under carefully controlled conditions
to refine it into alternative fuels. The Company believes many existing users of
coal in the U.S., such as electric utilities, face costly capital expenditures
to modify their coal-powered electricity producing facilities to comply with the
Clean Air Act. In the opinion of the Company, the Clean Air Act impacts over 100
coal fired electrical generating plants in the U.S. and, by the year 2000,
requires many major U.S. power plants to achieve specified reductions in
pollution. The Company believes countries outside the United States who
currently generate much of their electricity from burning coal, and who have
substantial low rank coal reserves, could use the LFC Process to provide a more
cost-effective and less environmentally damaging fuel source for the production
of power.

In 1989 the Company contributed the LFC Process to the TEK-KOL Partnership
("TEK-KOL"). TEK-KOL currently consists of the Company and a subsidiary of
Zeigler Coal Holding Company ("Zeigler"). Zeigler is a coal producing company in
the United States. The LFC Process has been used to produce PDF and CDL for test
burning at the "Clean Coal Demonstration Plant" ("Demonstration Plant") owned by
Zeigler in Gilette, Wyoming. To date the Demonstration Plant has produced
approximately 114,900 tons of PDF and 116,100 barrels of CDL, and has shipped
over 83,500 tons of PDF to seven electric utilities in six states, and 104,000
barrels of CDL to eight industrial users in seven states. The purpose of the
Demonstration Plant, which was originally intended to operate for two years, was
to demonstrate the validity of the LFC Process. The Demonstration Plant was
constructed pursuant to an agreement between the U.S. Department of Energy and
ENCOAL Corporation, a Shell Mining Company subsidiary, as part of the U.S.
government's "Clean Coal Technology Program." The Company believes the operation
of the Demonstration Plant from 1995 through the third quarter of 1997 when its
operations were suspended, has provided invaluable design data and engineering
parameters to assist in the commercial scale development of the LFC Process.

The LFC Process is still in development. PDF produced at the Demonstration
Plant has only been shipped to customers for testing, while CDL has been sold
commercially. Although the Company believes it has completed development of the
LFC Process, additional development to test and demonstrate aspects and uses of
the LFC Process is necessary before the value (if any) of its use on a large
scale commercial basis can be verified. There can be no assurance these
development issues will be successfully concluded or that the LFC Process will
be licensed or sold commercially, or if sold, will generate revenue or profits
for the Company.

The Company intends to license the LFC Process to electric utilities, coal
producers, steel companies, foreign governments or agencies thereof, or
affiliates of these parties. The Company believes that licensing the LFC Process
will lead to its optimum use because of the substantial capital expenditures and
time required to construct and operate a plant using the LFC Process.

Company has another wholly owned operating subsidiary, Assembly and
Manufacturing Systems, Inc. ("AMS"). AMS designs and produces custom automated
assembly equipment primarily for manufacturers in the biomedical, automotive,
electronics and computer industries.

The Offering

Securities Offered(1)(2)................................ 8,644,077 shares of Common Stock

Common Stock outstanding as of
January 16, 1998(3)(4)................................... 9,522,786

Common Stock outstanding after this offering(3)(4)...... 18,166,863

Use of Proceeds......................................... The Company will not
receive any of the proceeds from the conversion of the Preferred Shares or from
the sale of the Selling Shares. To the extent any of the Existing Warrants are
exercised the net proceeds received by the Company will be used for research
and development, working capital and general corporate purposes. The use of
proceeds is subject to change based on the extent to which Existing Warrants
are exercised, future occurrences, LFC and OCET development requirements and
other factors. See "Use of Proceeds."

OTC Bulletin Board Symbol............................... SGII

Risk Factors............................................ This offering involves
a high degree of risk, including without limitation substantial risk resulting
from the Company's lack of revenue, uncertain availability of required
additional capital, as well as the risks associated with developing
technologies and uncertain markets and legislative impacts. See "Risk Factors."

- --------
(1) For a description of the voting and other rights of the Common Stock see
"Description of Securities--Common Stock."

(2) Includes: (i) 524,437 shares of Common Stock issuable upon exercise of the
Existing Warrants; (ii) up to 7,093,003 shares of Common Stock issuable upon
conversion of outstanding Preferred Stock; and (iii) up to 886,923 shares of
Common Stock issuable upon exercise of the arrants issued in connection with
the Preferred Share Warrants registered hereby.

(3) Does not include: (i) 2,000,000 shares of Common Stock reserved for
issuance under the Company's stock-based compensation plans of which
options to acquire 441,000 shares have been granted as of the date of this
Prospectus; (ii) 2,763,746 shares of Common Stock issuable upon exercise of
other outstanding warrants not registered herein; (iii) up to 2,901,056
shares of Common Stock issuable upon conversion of various series of
outstanding Preferred Stock not registered herein; and (iv) up to 813,811
shares of Common Stock issuable upon conversion of outstanding convertible
debentures not registered herein.

(4) Includes estimated numbers of shares which may be issued upon conversion of
outstanding Preferred Stock.

SUMMARY CONSOLIDATED FINANCIAL DATA

The Summary Consolidated Financial Data set forth below should be read
in connection with the financial statements included in the materials
incorporated by reference herein.

Consolidated Statement of Operations Data:

Nine months ended
Years ended December 31, September 30,
---------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
----- ------ ------ ------ ------ ------ ------

Revenues............... $ 693,118 $ 809,910 $ 552,503 $ 900,306(1) $ 4,244,268(2) $ 3,184,649 $ 3,809,650

Net Loss............ $(4,915,472) $(6,116,388) $(5,844,121) $(6,824,940)(1) $(4,259,365)(2) $(3,209,511) $(3,946,944)

Imputed Dividends (3) -- -- -- -- -- -- $ 381,073

Net loss Per Common
Share .............. $(3.14) (3.62) (3.02) (2.46)(1) (0.80)(2) (0.63) (0.63)

Weighted Average
Common Shares
Outstanding......... 1,564,124 1,691,675 1,933,032 2,744,084 5,357,010 5,115,776 6,851,470

Consolidated Balance Sheet Data:

Nine Months ended
September 30, 1997
-------------------
December 31, 1996 Actual As Adjusted(4)
----------------- ------ -------------
Current Assets........................ $ 2,295,167 $2,049,434 $6,179,020
Working capital (deficiency)(5)........ (4,015,187) (4,976,751) (847,165)
Total assets............................ 6,628,678 6,177,973 10,307,559
Long-term debt, less
current portion........................... 123,750 116,625 116,625
Total liabilities....................... 6,434,104 7,142,810 7,142,810
Shareholders' equity
(deficit)(3).............................. 194,574 (964,837) 3,164,749

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

(1) The Company acquired AMS effective October 30, 1995. AMS recorded revenue
of $867,000 and income from operations of $238,000 for the period October 31,
1995 through December 31, 1995.

(2) AMS recorded revenue of $3,939,000 and income from operations of $498,000
for the twelve months ended December 31, 1996.

(3) No cash dividends have been declared or paid on the Company's common stock
since inception.

(4) Assumes exercise of all Existing Warrants, Preferred Share Warrants and
conversion of all Convertible Preferred Stock, and inclusive of all proceeds to
be received upon exercise of the Warrants. See "Use of Proceeds."

(5) Working Capital is defined as current assets minus current liabilities.
Current liabilities represented include only obligations due within twelve
months.

RISK FACTORS

The purchase of the securities offered hereby involves a high degree of
risk. This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors, including but not limited to those set forth in the following risk
factors and elsewhere in the Prospectus. Further, any such forward-looking
statements speak only as of the date on which a statement was made, and the
Company undertakes no obligation to update any forward-looking statements to
reflect events or circumstances after the date on which such statement is made
or to reflect the occurrence of unanticipated events. Prospective purchasers of
these securities should carefully review and consider the risk factors set forth
below, as well as the other information contained herein.

Limited Operating Revenues; Accumulated Deficit; Expectation of Future Losses

The Company has experienced operating losses in each fiscal period since
its inception in 1980. As of September 30, 1997, the Company had a deficit
accumulated of approximately $46.4 million and a working capital deficiency of
approximately $5.0 million. The Company's operations may result in substantial
and continuing losses for the indefinite future. Except for the operation of
Assembly and Manufacturing Systems, Inc. ("AMS"), a wholly-owned subsidiary
which it acquired in October, 1995, the Company has generated only nominal
revenues from operations. The development of the Company's LFC Process and OCET
Process will require the commitment of substantial resources for the underlying
technology to be finalized and licensed to third parties, or for a sale of such
technologies, and to establish marketing, sales and administrative capabilities.
There can be no assurance the Company will be successful in any of these
endeavors. There can be no assurance the Company will enter into agreements with
third parties for product development and commercialization, or will
successfully market or license the LFC Process or the OCET Process. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, manufacture and market its proprietary technologies. There can be no
assurance the Company will be able to accomplish these tasks. Significant delays
in any of these matters could have a material adverse impact on the Company's
business, financial condition and results of operations.

Going Concern Assumption

The Company's independent auditors' report on the Company's financial
statements as of December 31, 1996 and for the years ended December 31, 1995 and
1994 contains an explanatory paragraph indicating the Company had recurring
operating losses that raise substantial doubt about its ability to continue as a
going concern. The Company will require substantial additional funds in the
future, and there can be no assurance that any independent auditors' report on
the Company's future financial statements will not include a similar explanatory
paragraph if the Company is unable to raise sufficient funds or generate
sufficient cash from operations to cover the cost of its operations. The
existence of the explanatory paragraph may have a material adverse effect on the
Company's business, financial condition and results of operations.

Future Capital Requirements Uncertain; No Assurance of Future Funding

The Company will be required to make substantial expenditures to conduct
existing and planned research and development, and to market its proposed LFC
Process and OCET Process. The Company's future capital requirements will depend
upon numerous factors, including the amount of revenues generated from AMS
operations, the cost of the Company's sales and marketing activities and the
progress of the Company's research and development activities, none of which can
be predicted with certainty. However, the Company will seek additional funding
during the next few months and could seek additional funding after such time.
There can be no assurance any additional financing will be available on
acceptable terms, or at all, when required by the Company. Moreover, if
additional financing is not available, the Company could be required to reduce
or suspend its operations, seek an acquisition partner or sell

securities on terms that may be highly dilutive or otherwise disadvantageous
to investors. The Company has experienced in the past, and may continue to
experience, delays in its LFC Process product development due to working
capital constraints. Any such difficulties or delays could have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company has a line of credit with a financial institution for
approximately $400,000 and has borrowings of $400,000 as of the date of this
Prospectus. The Company does not anticipate being able to secure any additional
bank financing in the foreseeable future. The Company intends to finance the
development and marketing of its proposed LFC Process and OCET Process through
licensing agreements, strategic alliances and other arrangements with third
parties. There can be no assurance such license, marketing, strategic, or other
collaborative arrangements will be obtained, or that additional funds will be
available when needed, or on terms acceptable to the Company. If adequate funds
are not available, the Company may be required to relinquish rights to certain
of its technologies or potential products the Company would not otherwise
relinquish. The Company's future cash requirements will be affected by results
of research and development, collaborative relationships, if any, changes in the
focus and direction of the Company's research and development, competitive and
technological advances, and other factors.

Risk Involved in Commercializing Technology

There can be no assurance that either the LFC Process or OCET Process will
complete development; will ultimately prove to be commercially viable; that the
Company will locate project participants or secure agreements to construct,
finance, develop and operate LFC Process plants or OCET Process plants; that the
market for the products produced by LFC Process plants will be such that any of
such plants will be economical, and even if economical, profitable; and that
future governmental and tax regulations, if enacted, would not significantly and
adversely impact the ability of the Company to market the LFC Process, the OCET
Process or other technologies to be developed by the Company. See "Business."

Risks Associated with International Development

The Company believes there are significant growth opportunities in the next
several years for the LFC Process in markets outside of the United States. The
Company is actively pursuing projects in Russia, Indonesia and China. There can
be no assurance the Company will license, sell or otherwise generate revenue
from the LFC Process in any of these foreign countries. Additionally, other
countries may be identified as attractive development prospects in the future.
Doing business in foreign countries exposes the Company to many risks that are
not present in the United States, including political, military, privatization,
currency exchange and repatriation risks, and higher credit risks that may be
associated with potential customers. In addition, it is possible that legal
obligations may be more difficult for the Company to enforce in foreign
countries and that the Company may be at a disadvantage in any legal proceeding
within the local jurisdiction. Local laws may also limit the ability of the
Company to hold a majority interest in some of the projects that it may develop.

Uncertainty of Community Support

Development, construction and operation of LFC Process or OCET Process
production facilities require numerous environmental and other permits. The
process of obtaining these permits can be lengthy and expensive. In addition,
local opposition to a particular project can substantially increase the cost and
time associated with developing a project, and can potentially render a project
unfeasible or uneconomic. The Company may incur substantial costs or delays or
may be unsuccessful in developing LFC Process and/or OCET Process production
facilities as a result of such opposition.

Federal Regulation of Air Emissions

The Company believes a significant factor creating demand for the LFC
Process in the United States is the Clean Air Act, as amended by the Clean Air
Act Amendments of 1990 (the "Clean Air Act"). The Clean Air Act specifies
certain air emission requirements for electrical utility companies and
industrial fuel users. The Company believes that compliance with such
regulations by these coal users can be fully or partially met through the use of
clean-burning fuel technologies such as the LFC Process being developed by the
Company. A full or partial repeal of the Clean Air Act could have a material
adverse effect on the Company. The Company is unable to predict future
regulatory changes and their impact on the demand for the Company's products.
See "Business - Government Regulation."

No Established Market for LFC Process or OCET Process Products

Although the Company believes a substantial market will develop both
domestically and internationally for the LFC Process and the OCET Process, an
established market does not currently exist. Since no established market exists,
the availability of accurate and reliable demand, pricing information and
transportation alternatives are not fully known. The future success of the
Company will be determined by its ability to establish a market for the LFC
Process among potential customers such as electrical utility companies and
industrial coal users and for the OCET Process by oil refineries and others.
Many of such potential users of the Company's fuel products will be able to
choose among alternative fuel supplies. Although the Company believes the LFC
Process has been demonstrated successfully on a test basis at the Demonstration
Plant, the market viability of the LFC Process will not be known until third
parties such as electric utilities or coal mining companies with substantial
resources or partners construct one or more commercial-scale LFC Process
production facilities, either in the United States or internationally, that
produce PDF and CDL that meet certain minimum performance specifications. Until
the LFC Process and the OCET Process are completed, the Company may be unable to
attract licenses or other parties to build and operate either an LFC Process
plant or an OCET Process plant. See "Business - LFC Process."

Continued Participation of Bluegrass and the ENCOAL Corporation

Bluegrass Coal Holding Company ("Bluegrass") is a wholly owned subsidiary
of Zeigler Coal Holdings. Bluegrass, formerly known as SMC Mining Company, is
the Company's sole partner in TEK-KOL. The ENCOAL Corporation is a wholly owned
subsidiary of Bluegrass. ENCOAL is the licensee of a LFC Process license from
TEK-KOL, and is the owner of the Demonstration Plant, which ENCOAL constructed
and operated through September 30, 1996, pursuant to a Cooperative Research and
Development Agreement with the U.S. Department of Energy. ENCOAL has expended
substantial funds in the operation and maintenance of the Demonstration Plant.
There are no assurances ENCOAL will continue to expend funds or restart the
Demonstration Plant. The determination by ENCOAL to suspend operations of the
Demonstration Plant in the fourth quarter of 1997 may have a material adverse
impact on the business and operations of the Company. In the event Bluegrass
were to withdraw from, terminate, or offer to sell its interest in TEK-KOL, it
could have a material adverse impact on the business and operations of the
Company. Zeigler has made public announcements that it is interested in a sale
of its business. See "Business - LFC Process Demonstration Plant."

Patents and Proprietary Rights

The Company's success will depend, in large part, on the Company's ability
to obtain patent protection for the proposed LFC Process and OCET Process, both
in the United States and in foreign countries. The Company currently has three
patents issued, and one additional patent application pending in the United
States for the LFC Process and one patent pending for the OCET Process. There
have been foreign counterparts to certain of these applications filed in other
countries on behalf of the Company. There can be no assurance patents will issue
from any of the pending applications, or for patents that have been issued or
may be issued, or that the claims allowed will be sufficiently broad to protect
the Company's technology. In addition, there can be no assurance any patents
issued to the Company will

not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide adequate proprietary protection to the Company. In
addition, any patents obtained by the Company will be of limited duration.
All United States patents issuing from patent applications filed June 8, 1995,
or thereafter will have a term of 20 years from the date of filing. All United
States patents in force before June 8, 1995 will have a term of the longer of:
(i) 17 years from the date of issuance; or (ii) 20 years from the date of
filing. All United States patents issuing from patent applications applied for
before June 8, 1995 will have a term equal to the longer of: (i) 17 years from
the date of issuance; or (ii) 20 years from the date of filing. All United
States design patents have a 14 year life from the date of issuance. Further,
U.S. patents do not provide any remedies for infringement that occurred
before the patent is granted.

The commercial success of the Company may also depend upon avoiding
infringing patents issued to competitors. If competitors prepare and file patent
applications in the United States that claim technology also claimed by the
Company, in accordance with the requirements of the TEK-KOL Agreement, the
Company may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office ("PTO") to determine the priority of invention,
which could result in substantial cost, even if the outcome is favorable to the
Company. An adverse outcome could subject the Company to significant liabilities
to third parties, and could require the Company to license disputed rights from
third parties or cease using all or part of the licensed technology. A U.S.
patent application is maintained under conditions of confidentiality while the
application is pending in the PTO, so the Company cannot determine the
inventions being claimed in pending patent applications filed by its competitors
in the PTO.

The Company also attempts to protect its proprietary and its licensed
technology and processes by seeking to obtain confidentiality agreements with
its contractors, consultants, employees, potential collaborative partners,
licensees, licensors and others. There can be no assurance these agreements will
adequately protect the Company, will not be breached, the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors.

There can be no assurance others will not independently develop similar or
more advanced technologies or designs around aspects of the Company's technology
which may be patented, or duplicate the Company's trade secrets. In some cases,
the Company may rely on trade secrets to protect the Company or its inventions.
There can be no assurance trade secrets will be established, secrecy obligations
will be honored, or that others will not independently develop similar or
superior technology. To the extent consultants, key employees, or other third
parties apply technological information independently developed by them or by
others to Company projects, disputes may arise as to the proprietary rights to
such information, which may not be resolved in favor of the Company. See
"Business - Patents and Proprietary Technology."

Dependence on Others

Prior to the acquisition of AMS the Company realized only nominal revenues
from operations. Without the financial participation and services of others, the
Company does not and is not expected to have sufficient capital, personnel,
experience or resources to finance, design, engineer, construct or operate
either an LFC Process or an OCET Process production plant.

Success in commercialization of the LFC Process and OCET Processes is
dependent upon the Company's ability to enter into satisfactory arrangements
with other partners, financiers or customers to construct, develop, operate and
manage LFC Process and OCET Process plants, and upon the ability of these third
parties to perform their responsibilities. The resources required to profitably
develop, construct and operate an LFC Process plant are likely to require
$100-$400 million dollars or more, several years of construction and expertise
in major plant development and operations. The Company believes that if such
agreements can be completed, the parties to any such arrangements would have an
economic motivation to succeed in performing their contractual responsibilities.
The amount and timing of resources to be devoted to these activities by such
third parties will likely not be within the control of the Company. There can be
no assurance any licenses, joint venture agreements or other arrangements will
be available on terms acceptable to the Company, if at all; that such parties
will perform their obligations as expected; that any revenue will

be derived from such arrangements; or that, if revenue is generated, any of
said arrangements will be profitable to the Company. If the Company is
unsuccessful in its attempts to license the LFC Process or OCET Process it will
have a material adverse impact on the business and operations of the Company.
See "Business."

Electric Utility Regulatory Changes

The domestic electric utility industry is in the early stages of
deregulation, similar to that which occurred with the natural gas utility
industry. The National Energy Policy Act of 1992 exempts a new class of
facilities from certain federal utility regulation and liberalizes access for
non-utility generators to the utility power transmission grid. It also initiated
competition in the wholesale electric market. In addition, many states are
considering the elimination of many of the regulations that currently limit
the ability of parties to sell within specific geographic boundaries, which
were previously reserved for the local independent electric utility, municipal
electricity utility or rural cooperative. The Company believes these regulatory
changes will result in utilities and other power generators striving to reduce
costs. This will result in increased competition in the electric wholesale and
retail markets and increase pressures on all suppliers to electric utilities to
reduce costs. These factors may make it more difficult to obtain the pricing
needed to sell LFC Process products into the U.S. utility market.

Competition and Technology Obsolescence

The principal market for PDF and CDL is the energy industry, which is
intensely competitive. There are many utility companies, coal companies and
other companies engaged in research into ways to clean or convert coal into a
more acceptable fuel or other commercially viable product. Many of the Company's
existing or potential competitors have substantially greater financial,
technical and human resources than the Company and may be better equipped to
develop, test and license coal related technologies. In addition, some of these
companies have extensive experience in operating coal technology plants. These
companies may develop and introduce coal related technologies competitive with
or superior to those of the Company prior to any market acceptance for the LFC
Process or other technologies developed by the Company or its subsidiaries.

The relative speed with which the Company markets the LFC Process and
enters into license or other agreements with third parties who, thereafter,
construct, own and operate a plant using the LFC Process which is successful in
supplying processed coal products, are expected to be important competitive
factors. The Company expects that competition will be based, among other things,
on how economically, if at all, the LFC Process coal products can be produced,
their quality, compliance with environmental standards, transportation costs,
government incentive programs, comparison to energy generating alternatives, and
the strength of any patents on the LFC Process or other potential technologies.

These factors indicate significant long-term competition for the Company.
There can be no assurance developments by these various competitors will not
render the Company's or its affiliates' technologies and processes obsolete or
noncompetitive. See "Business - Competition."

Customer Concentration; Dependence on Few Customers

Since AMS typically builds one significant system for each of a small
number of customers annually many of its customers in any one fiscal period may
be responsible for ten percent or more of its revenues for that fiscal year.
Since most of the systems developed and sold by AMS are for a unique application
such a concentration of revenues does not necessarily indicate AMS will receive
any revenues from a prior customer in a subsequent period.

accounting for approximately 27.5% of sales, while Eaton Corporation represented
approximately 12.7% of sales. AMS expects that a small number of customers will
continue to account for a substantial portion of its sales for the foreseeable
future. Assembly does not have long term contracts with any of its customers,
and there can be no assurance they will continue to purchase AMS's products. Due
to the small number of annual projects entered into by AMS a significant
performance problem with AMS project could have a material adverse effect on
AMS. For the year ending December 31, 1996, AMS had four major customers, Alza
Corporation representing 16.3%; Motorola Inc. representing 11.3%; Nacom
representing 19.1%; and TRW Safety Systems representing 30.8% of AMS's sales,
who were different from the major customers in the same period in 1997, and who
accounted for approximately 75% of its sales. There can be no assurance that
revenue from customers that accounted for significant revenue in past periods,
individually or as a group will continue, or if continued, will reach or exceed
historical levels in any period. See "Business - AMS Major Customers."

Dependence Upon Key Personnel

The Company's success in developing the LFC Process, the OCET Process and
additional marketable products and processes and achieving a competitive
position will depend, in large part, on its ability to retain qualified
scientific and management personnel and, in particular, Dr. Ernest Esztergar and
Joseph Savoca, President and CEO, respectively. There can be no assurance that
the Company will be able to retain such personnel. The loss of either or both of
these individuals could have a material adverse impact on the business and
operations of the Company. The Company's potential growth and any expansion into
areas and activities requiring additional expertise, such as expanded programs
for the LFC Process and OCET Process research, testing, engineering and
marketing, would be expected to place increased demands on the Company's human
resources. These demands are expected to require the addition of new management
and scientific personnel and the development of additional expertise by existing
management personnel. The failure to acquire such services or to develop such
expertise could have a material adverse effect on the Company's prospectus for
success. In addition, the Company relies on consultants and advisors to assist
the Company from time to time in reviewing its marketing, management, and
research and development strategies. Most, if not all, of the Company's
consultants 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 contribute to the Company.

Environmental and Other Government Laws, Regulations and Project Approvals

Potential LFC Process and/or OCET Plants are now and will likely in the
future be subject to federal, state and local environmental and other laws and
regulations. These laws and regulations include, but are not limited to, the
Clean Air Act and various regulatory provisions of the United States Department
of Energy, the Environmental Protection Agency, the United States Treasury
Department and Internal Revenue Service, as well as the laws and regulations of
other countries and international treaties.

The Company's operations may be directly affected by various laws, or
indirectly affected as a result of market changes in response to laws and
regulations, or market participants' economic behavior in response to laws and
regulations. For example, electric utilities under the recent amendments to the
Clean Air Act may have various options from which to comply with more stringent
standards required under said Act. These utilities may choose to concentrate and
invest their funds in other areas such as advanced and improved scrubbers for
smokestacks to extract pollutants from their existing power plants in order to
reduce emissions rather than purchase processed fuels, such as the products
which could be produced using the LFC Process. There is no assurance the Company
will be in a position to offer competitive products and incentives for utilities
or others to purchase LFC Process products as a method of complying with
regulatory constraints, including the amended Clean Air Act and other
regulations.

Moreover, there can be no assurance future tax policy of the U.S. or other
countries will not negatively impact the Company's prospects and revenue, if
any. For example, the U.S. Government, through the Department of Energy and

other offices of the executive branch, could choose to implement tax and other
policy directives to encourage the production and use of other fuel sources, for
example, natural gas, and discourage the production and use of coal.

It is likely LFC Process Plants will continue to be subject to the
application of various environmental regulations designed to ensure, among other
things, environmentally compatible plant operations. Failure to comply with
applicable regulatory requirements can result in fines, suspensions of
regulatory approvals, operating restrictions, criminal prosecution and other
negative consequences. Furthermore, additional government regulation may be
established in the future, which could prevent or delay the commercialization of
LFC Process and/or OCET Process. See "Business Government Regulation."

Risk of Hazardous Material Contamination

Future LFC Process Plants and the Demonstration Plant in Wyoming involve
the use of certain hazardous materials. Although the Company believes the safety
procedures which have been employed by ENCOAL for handling and
disposing of such materials, as well as those which could be employed by any
licensees of the LFC Process, comply with the standards prescribed in applicable
state and federal laws and regulations, the risk of an accidental contamination
or injury from these materials cannot be completely eliminated.

Dilution

The Company has a substantial number of outstanding options, warrants and
other convertible securities. The exercise of the options or warrants or
conversion of any significant number of these convertible securities would
result in substantial additional dilution. In addition, as long as options,
warrants or convertible securities are outstanding, the terms upon which the
Company will be able to obtain equity capital may be adversely affected.

No Dividends Paid on Common or Preferred Stock

The Company has never paid any cash dividends on its Common Stock or
Preferred Stock and does not anticipate the payment in the near future of any
cash dividends. Payment of dividends on the Common Stock or Preferred Stock is
within the discretion of the Board of Directors, is subject to state law, and to
preferences of other outstanding securities of the Company, and will depend upon
the Company's earnings, if any, its capital requirements, financial condition
and other relevant factors.

Market Value of Company's Securities

The Company will be required to obtain additional funds from investors in
consideration for the sale and issuance of its debt or equity securities to
continue in business. In the event the market price of the publicly traded
Common Stock of the Company decreases below a certain amount, the Company may be
unable to sell additional equity of the Company, or if it is able to sell
securities, it may not obtain sufficient consideration from the sale of its
securities to provide adequate funding to continue its operations.

Current Registration Statement and State Blue Sky Compliance or Exemption
Required for Exercise of Existing Warrants and Conversion of Convertible
Preferred Stock.

The Company will be able to issue registered shares of Common Stock upon
exercise of all of the Existing Warrants and/or the conversion of any of the
Preferred Stock only if there is a then current prospectus relating to such
Common Stock under an effective registration statement filed with the Securities
and Exchange Commission or an applicable

exemption is available, and only if such Common Stock is qualified for sale or
exempt from qualification under applicable state securities laws of each
jurisdiction in which the various holders of the Existing Warrants and the
Preferred Stock reside. Subject to its other contractual obligations, the
Company reserves the right in its sole discretion to determine not to register
or qualify such Common Stock in any jurisdiction where the time and expense do
not justify such registration or qualification. The Existing Warrants and the
Preferred Stock may be deprived of any value in the event the Company does not
satisfy or the Company chooses not to satisfy any such state and federal
requirements. Although it is the present intention of the Company to satisfy
such requirements, there can be no assurance the Company will be able to do so.

Anti-Takeover Provisions and Inadequate Assets for Liquidation Preference of
Preferred Stock

Certain provisions in the Articles of Incorporation and Bylaws of the
Company may be deemed to have an anti-takeover effect and may delay or prevent a
tender offer or takeover attempt that may be favorable to the interests of the
shareholders. Such provisions may also adversely effect market prices of the
Common Stock. These provisions include classification of the Company's Board of
Directors into three classes, each of which serves for a different three-year
period, advance notice procedures for shareholder nominations for the election
of directors and business to be brought by shareholders for an annual meeting.
Such advance notice procedures must be given in the manner provided by the
Bylaws. Amendment or repeal of the classification of directors and advance
notice provisions requires the vote of 70% of all shares entitled to vote for
directors. In addition, the Articles of Incorporation require the affirmative
vote of 70% of the voting power of the outstanding shares of capital stock for
certain business combinations, including mergers, consolidations, sales,
leases, transfers, reclassification and recapitalizations. Amendment or repeal
of the 70% vote requirements for business combinations requires the vote of 70%
of all voting shares.

The Company's Board of Directors is authorized to issue up to 20,000,000
shares of preferred stock. The Board of Directors has the power to establish the
dividend rates, liquidation preferences, voting rights, redemption and
conversion terms and privileges with respect to any series of preferred stock.
The issuance of any series of preferred stock having rights superior to those of
the Common Stock may result in a decrease in the value or market price of the
Common Stock, and could further be used by the Board as a device to prevent a
change in control of the Company. Holders of outstanding preferred stock
currently have, and future holders of preferred stock may have, the right to
receive dividends, and certain preferences in liquidation and conversion rights.
The issuance of preferred stock could, under certain circumstances, have the
effect of delaying, deferring or preventing a change in control of the Company
without further vote or action by the shareholders and could adversely affect
the voting and other rights of the holders of Common Stock. In the event of a
sale, dissolution or bankruptcy of the Company, such preferred shareholders
would have a preference over the common shareholders as to any assets remaining
after distribution to creditors. Without a substantial change in the Company's
current financial situation, as of September 30, 1997 there will not be enough
assets upon liquidation to pay any portion of the preferences of any of the
outstanding series of preferred stock, or to provide any distribution to common
shareholders. See "Description of Certain Provisions of the Articles of
Incorporation and Bylaws with Possible Anti-Takeover Effect."

Market for LFC Process Plant Products

The Company believes the potential market for processed coal to be produced
by LFC Process plants includes utilities, independent power producers, certain
manufacturers of steel using new technologies, and other industrial enterprises
which use coal, both in and outside of the United States. The potential market
for the coal-derived liquid fuels includes industrial fuel users, refineries and
makers of chemical products in the United States and foreign countries. The
Company's ability to market the LFC Process to any significant portion of these
markets in the future will be dependent upon various factors, including such
user's current and future commitment to such coal or oil based energy, changes
in the cost of delivered coal and oil, and the difference between the costs of
coal generated power versus other energy sources. These other sources include
but are not limited to natural gas and petroleum based products, hydroelectric,
solar, wind, geothermal, waste heat, solid waste and nuclear power generation
facilities. The Company's

ability to market the LFC Process will also be impacted by regulatory efforts
to reduce acid rain and other emissions; regulatory incentives to utilize coal
based energy sources; and the reliability and cost effectiveness of LFC Process
Plant products relative to gas and other energy sources currently existing or
developed in the future. There can be no assurance LFC Process plant products
will achieve market acceptance at any level sufficient to provide profits to
the Company. See "Business - Markets."

CONSOLIDATED FINANCIAL DATA

The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of, the end of the years
in the five-year period ended December 31, 1996, are derived from the audited
consolidated financial statements of the Company. The selected data presented
below for the nine months ended September 30, 1996, and 1997, are derived from
the unaudited consolidated financial statements of the Company. The unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments, which the Company considers necessary for a fair
statement of the financial position and results of operation for these periods.
Operating results for the nine months ended September 30, 1997, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," and the financial statements and the related notes thereto which are
incorporated by reference in this Prospectus.

Nine months ended
September 30,
------------------
Years ended December 31, (Unaudited)
-----------------------------------------------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------ -----

Statement of
Operations Data:
Revenues............. $ 693,118 $ 809,910 $ 552,503 $ 900,306(1) $ 4,244,268(2) $ 3,184,649 $ 3,809,650

Net Loss............. (4,915,472) (6,116,388) (5,844,121) (6,824,940)(1) (4,259,365)(2) (3,209,511) (3,946,944)

Imputed Dividends(3). -- -- -- -- -- -- (381,073)

Net Loss Per Share
Applicable to
Common Stock......... $ (3.14) $ (3.62) $ (3.02) $ (2.46)(1) $ (0.80)(2) $ (0.63) $ (0.63)

Weighted Average
Shares Outstanding... 1,564,124 1,691,675 1,933,032 2,744,084 5,357,010 5,115,776 6,851,470

Balance Sheet Data:

Current Assets....... $ 1,727,940 1,331,381 717,406 944,910 2,295,167 2,204,284 $ 2,049,434
Working capital
(deficit)............ 303,876 (917,979) (3,348,255) (2,369,079) (4,015,187) (4,289,386) (4,976,751)

Total assets......... 10,886,581 9,240,338 8,198,362 6,592,086 6,628,678 7,580,742 6,177,973

Long-term debt, less
current portion...... 4,292,622 4,637,997 3,575,835 4,631,250 123,750 126,125 116,625

Stockholders' equity
(deficit)(3)......... 4,889,895 2,350,981 556,866 (1,629,578) 194,754 960,947 (964,837)

(1) The Company acquired AMS effective October 30, 1995. AMS recorded revenue
of $867,000 and income from operations of $238,000 for the period October 31,
1995 through December 31, 1995.

(2) AMS recorded revenue of $3,939,000 and income from operations of $498,000
for the twelve months ended December 31, 1996.

(3) No dividends have been declared since inception. Imputed dividends
represents the aggregate difference between the conversion price and the
fair market value of 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 DEVELOPMENTS

During October, 1997, the Company was able to extend, exchange or convert
approximately $4.8 in existing debt for new securities of the Company, including
Common Stock, warrants and revised, amended or new debt securities, and also
paid approximately $400,000 in existing debt. The Company retired approximately
$250,000 in existing 10%, 11% and 12% interest accruing notes which were
required to be paid by October 31, 1997 in exchange for $250,000 of 12%
debentures due September 30, 1998 with interest payments due quarterly on the
replacement notes. The Company obtained an extension to September 30, 1998 of
approximately $3,420,000 of debt which was required to be paid by October 31,
1997, and in connection therewith issued rights to acquire warrants to purchase
an aggregate of 152,500 shares of Common Stock on or before December 31, 1999,
at an exercise price of $1.20 per share for each quarterly period the debt
remains unpaid. The Company also obtained an extension to September 30, 1998 of
approximately $727,000 of debt which was required to be paid by October 31,
1997. In connection therewith and in part as consideration for all interest due
through the maturity of the extended notes the Company issued 95,439 shares of
Common Stock.

All of the securities issued in connection with these debt restructurings
were issued to existing security holders of the Company in reliance upon
exemptions from registration pursuant to the Securities Act provided by Sections
3(a)(9) and 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder. All of these debt holders were "Accredited Investors" as that term
is defined in Regulation D.

On January 8, 1998, the Company entered into two Series 97-G Convertible
Preferred Stock Subscription Agreements (the "Series 97-G Agreements") with one
investor and one placement agent ("Series 97-G Holders"). Pursuant thereto, and
for the total consideration of $500,000 the Company issued (i) 550 shares of
Series 97-G Preferred Stock; (ii) warrants to purchase a total of 25,000 shares
of Common Stock of the Company, and (iii) 194,502 shares of restricted Common
Stock. The Series 97-G Preferred Stock, the warrants and the restricted Common
Stock were issued pursuant to the provisions of Regulation S under the
Securities Act to non U.S. Persons who qualified as "Accredited Investors" as
that term is defined in Regulation D.

Dividends. The Series 97-G Preferred Stock has a right to cumulative
dividends, at a per share rate equal to 8% of the 97-G preferred shares
liquidation preference of $1,000 per share. The Series 97-G dividends are
payable solely in Common Stock.

Redemption. The Series 97-G Holders may not require its redemption. The
Company may redeem the Series 97-G Preferred Stock at 130% of the liquidation
preference of $1,000, plus the amount of any accrued and unpaid dividends.

Liquidation. The Series 97-G Holders are entitled to be preferentially paid
out of the assets of the Company available for distribution to shareholders,
liquidating distributions in the amount of $1,000 per share. The liquidation
preference with respect to Series 97-G Preferred Stock are payable before any
payment or distribution is made to the holders of the Common Stock, or any other
series of Preferred Stock other than all previously issued series of Preferred
Stock.

Conversion. Each share of Series 97-G Preferred Stock is convertible, at
the option of the holder thereof, at any time 41 days after the Series 97-G
Agreement closing date of January 8, 1998. Each share is convertible into the
number of shares of Common Stock derived by dividing the conversion rate by the
conversion price. The conversion rate is the liquidation preference of $1,000
per share of Series 97-G Preferred Stock. The conversion price is determined
based on the date the conversion notice is received ("Conversion Date") and is
equal to the lesser of (a) the average closing bid price of the Common Stock
over the five day trading period prior to the closing date of January 8, 1998 or
(b) 75% of the average of the closing bid price of the Common Stock on the five
trading days ending on the date proceeding the Conversion Date. There are
monetary penalties to the Company if Common Stock is not delivered to the Series
97-G Holder within five days of the Company's receipt of a notice of conversion
and the certificates representing the Preferred Stock to be converted.

The Holder is precluded from converting any portion of the Preferred Stock
which would cause the holder to be deemed to be the beneficial owner of 4.99% or
more of the issued and outstanding Common Stock.

On January 14, 1998, the Company granted incentive stock options exercisable
for a total of 225,000 shares of Common Stock at $0.843 per share to employees
of the Company. The options were granted in reliance upon the exepmtions from
registration pursuant to Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.

BUSINESS

The following discussion contains forward-looking statements which involve
risks and uncertainties. Such forward- looking statements include, but are not
limited to, statements regarding future events and the Company's plans and
expectations. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements as a result of certain
factors including, but not limited to, those discussed in "Risk Factors," as
well as those discussed elsewhere in the Prospectus or incorporated herein by
reference. See "Forward-Looking Statements."

Overview

The Company is in the business of developing and marketing energy-related
technologies. The Company has developed a patented technology which it refers to
as the LFC Process. The LFC Process is intended to convert and upgrade low-rank
coal into a coal substitute and a hydrocarbon liquid. The LFC Process is
intended to produce two products called process derived fuel and coal derived
liquids, and at the same time reduce the PDF's pollution potential when it is
subsequently burned for fuel. The Company believes the LFC Process could upgrade
a significant portion of the world's abundant low-rank coal reserves into coal
and petroleum-based products which could provide cost-effective compliance with
certain environmental legislation and regulations including the Clean Air Act
and other current and possibly future U.S. and international environmental
regulations or concerns.

The LFC Process involves heating coal under carefully controlled conditions
to refine it into alternative fuels. The Company believes many existing users of
coal in the U.S., such as electric utilities, face costly capital expenditures
to modify their coal-powered electricity producing facilities to comply with the
Clean Air Act. In the opinion of the Company, the Clean Air Act impacts over 100
coal fired electrical generating plants in the U.S. and, by the year 2000,
requires many major U.S. power plants to achieve specified reductions in
pollution. The Company believes for countries outside the United States who
currently generate much of their electricity from burning coal, and who have
substantial low rank coal reserves, could use the LFC Process to provide a more
cost-effective and less environmentally damaging fuel source for the production
of power.

In 1989 the Company contributed the LFC Process to TEK-KOL. TEK-KOL
currently consists of the Company and a subsidiary of Zeigler. Zeigler is a coal
producing company in the United States. The LFC Process has been used to produce
PDF and CDL for test burning at the Demonstration Plant owned by Zeigler in
Gilette, Wyoming. To date the Demonstration Plant has produced approximately
114,900 tons of PDF and 116,100 barrels of CDL, and has shipped over 83,500 tons
of PDF to seven electric utilities in six states, and 104,000 barrels of CDL to
eight industrial users in seven states. The purpose of the Demonstration Plant,
which was originally intended to operate for two years, was to demonstrate the
validity of the LFC Process. The Demonstration Plant was constructed pursuant to
an agreement between the U.S. Department of Energy and ENCOAL Corporation, a
Shell Mining Company subsidiary, as part of the U.S. government's "Clean Coal
Technology Program." The Company believes the operation of the Demonstration
Plant from 1995 through the third quarter of 1997 when its operations were
suspended, has provided invaluable design data and engineering parameters to
assist in the commercial scale development of the LFC Process.

The OCET Corporation, a wholly owned subsidiary of the Company, is also
developing another energy-related technology referred to as the OCET Process.
The OCET Process is designed to deasphalt crude oil resid produced in oil
refining in order to increase the efficiency of crude oil refineries. The OCET
Process is still in the development stage, and will require substantial
research and development before it is ready (if ever) for commercial use. The
Company has another wholly owned operating subsidiary, AMS. AMS designs and
produces custom automated assembly equipment primarily for manufacturers in the
biomedical, automotive, electronics and computer industries.

TEK-KOL Partnership

TEK-KOL owns all right, title and interest in the LFC Process. The partners
in TEK-KOL are the Company and a subsidiary of Zeigler. TEK-KOL was established
in 1989 and the original partner was the Shell Mining Company ("SMC"). In 1992,
all of the assets of SMC were purchased by Zeigler. The TEK-KOL Partnership
Agreement, as amended, currently provides for the distribution of 75% of certain
TEK-KOL cash receipts to the Company and 25% to Zeigler, until the Company
receives $2 million. Thereafter, cash from operations, (if any) is to be
distributed 50% to the Company and 50% to Zeigler. TEK-KOL is marketing the LFC
Process to obtain licensees, joint venture partners, strategic and other
relationships. Except for the license issued to SMC for the Demonstration Plant
and other plants, as of the date of this Prospectus, the Company does not have
any agreements to license the LFC Process.

LFC Process

The LFC Process is specifically designed to process subbituminous
(low-rank) or a lignite coal which have a high moisture content. PDF is designed
to be a cleaner value solid with a higher BTU, or heat value, than the coal it
was refined from, and with significantly lower moisture. PDF has higher ash, a
higher fixed carbon and lower organic sulfur than the parent coal. CDL is a
low-sulfur hydrocarbon liquid. Based on operations at the Demonstration Plant,
the Company believes each ton of coal should produce approximately one-half ton
of PDF and one-half barrel of CDL, although differing raw material and operating
conditions may effect these estimates.

To process the coal, the LFC Process uses a drying/partial pyrolsis
technology, which uses low rank coal as a feedstock. Pyrolsis is a process
whereby organic compounds are subjected to very high temperatures. The LFC
Process is a mild gasification technology that employs a series of pyrolysis
zones to produce solids and gas, and a condensation system to produce liquids.
The LFC Process has been used at the Demonstration Plant which has produced and
shipped to customers product for test burning over a hundred tons of PDF and
over a hundred thousand barrels of CDL. The Company believes the operation of
the Demonstration Plant has provided key operational and engineering design data
for the LFC Process which it believes may assist in completing the final stages
of development of the LFC Process.

The Company believes four key factors in the LFC Process differentiate it
from other coal cleaning, liquefaction, or gasification technologies. First, the
process simultaneously produces solids and liquids. Second, the control system
regulates the coal heating rate and temperature level to control the governing
kinetics of gasification and stabilization reactions. Third, the PDF can be
stabilized and is less likely to self-ignite. Fourth, for the purpose of
controlling the gasification conditions (to obtain the desired co-products),
computer models of coal reaction kinetics, sensors, and servomechanisms can be
incorporated into the control system.

The Company's marketing efforts 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 compared to higher-rank bituminous coals. Low-rank coals
generally have higher water content which makes them more expensive to transport
to distant markets. Additionally their lower heat value can make them a less
efficient boiler fuel. The Company estimates the transportation cost component
of the coal's delivered price can be over 3-5 times the cost of the coal at the
mine. SGI expects PDF and CDL can reduce transportation costs by removing water,
and economically producing lower sulfur, lower water content, cleaner burning
coals along with potentially valuable co-product oils and liquids, and therefore
such refineries' products will be able to compete against high-grade coals.
There can be no assurance these objectives will be achieved.

LFC Process Demonstration Plant

In 1989, ENCOAL Corporation, which at the time was a Shell Mining Company
subsidiary, and the U.S. Department of Energy ("DOE") jointly committed to fund
one-half each of the costs to construct, own and operate, for
two years, a "Clean Coal Demonstration Plant" using the LFC Process at the
Buckskin Mine near Gilette, Wyoming. Several amendments of the original
agreement with the DOE extended the operations and funding of the Demonstration
Plant to March, 1997. TEK-KOL licensed the LFC Process to SMC Mining for use at
the Demonstration Plant. Construction of the Demonstration Plant began in 1990
and was completed in 1995 when it began shipping PDF and CDL to customers for
test burning. The Demonstration Plant was not expected to, and did not, produce
any licensing royalties to the Company.

In November 1992, Zeigler Coal Holding Company ("Zeigler") purchased Shell
Mining Company and its assets, including ENCOAL Corporation and the
Demonstration Plant. Zeigler operated the Demonstration Plant through the third
quarter of 1997 at which time the operations of the Demonstration Plant were
suspended. Suspending operations of the Demonstration Plant may have a material
adverse impact on the marketing of the LFC Process.

In late 1996 and early 1997, an affiliate of Zeigler applied for various
air quality, industrial siting, land quality and land swap permits with the
state of Wyoming and certain agencies of the U.S. government in contemplation of
construction of an LFC Process plant. Mitsubishi International Corporation and a
Zeigler subsidiary executed an engineering, procurement and construction
agreement on December 30, 1996 for the construction of a $460 million LFC
Process plant. Although this agreement was subsequently terminated, Zeigler is
continuing to develop an LFC Process plant at that location. There can be no
assurance the development of any plant will be developed by Zeigler or others.
The termination of this agreement to construct an LFC Process plant may have a
material adverse impact on the business and operations of the Company.

Test burns to date, based on the Company's analysis, indicate PDF is a
viable fuel which can be used with minimal modification of the coal burning
equipment. The Company believes PDF can be a means for helping utilities meet
the requirements of the Clean Air Act. There can be no assurance these test
results will be duplicated in a future commercial facility, if any, using the
LFC Process.

Markets

The Company believes the principal markets for PDF will be the electric
utility market where utilities may burn coal to generate electricity, and in the
non-coking coal metallurgical market which produce steel and metals. TEK-KOL
currently believes future PDF production from an LFC Process plant could be sold
into the utility market and the metallurgy market. There can be no assurance the
Company's beliefs will prove to be accurate.

CDL from the Demonstration Plant has been sold into the residual fuel oil
market. While the Company has completed development work to determine CDL's
composition, significant additional development is required. The Company
believes CDL may have more potential when further refined into separate
products. No assurance can be given that any market for PDF and CDL will
develop.

PDF Electric Utility Markets. The Company believes power plants operated by
utilities meeting the following criteria will be the "best potential" markets
for PDF. Boilers requiring low ash-fusion coal (primarily cyclone and wet bottom
boilers); boilers using high-Btu fuel; utilities desiring to switch to
low-sulfur coal to meet Clean Air Act compliance levels; and utilities with
acceptable transportation economies. There can be no assurance any of these
utilities would elect to use PDF once development is completed.

A number of factors could have a material impact on the size and value of
the utility market for PDF. The Company believes the potential impact of the
Clean Air Act on the utility industry could present marketing opportunities for
PDF. If environmental regulations become stricter, the desirability of PDF may
increase. The Company believes

the potential for reduced emissions increases the likelihood PDF could be
marketed successfully. A full or partial repeal of the Clean Air Act would
likely have a material adverse impact on the Company and the market for PDF in
the United States.

PDF Metallurgical Markets. While the Company believes the U.S. electric utility
market is the largest potential market for PDF, based on the current economics
of coal-burning utilities, the Company also believes a relatively small
but potentially growing market for non-coking metallurgical coals could provide
an opportunity for sales of PDF. Potential PDF metallurgical markets could occur
in the steel industry, where the Company believes a demand for coke substitutes
is increasing. In steel making, the Company believes environmental constraints
on coke production and the lower limits on permissible emissions may motivate
development of new technologies to replace the traditional combination of blast
furnaces and coke ovens.

The Company believes PDF's characteristics may make it an acceptable
replacement for coke. Limited testing has been conducted utilizing CDL as a
blast furnace injectant. A world wide reduction in coke production may also
provide an additional market for CDL as a replacement for coal tars produced
during the coking process. There can be no assurance such markets will develop,
or the Company's technologies will prove to be commercially valuable in
connection therewith.

The Company also believes that certain emerging technologies, including
COREX, HIsmelt, AISI direct steel making, FAST Met and other methods using
coal-based technologies to produce clean iron units offer opportunities for PDF.
Preliminary discussions with potential steel manufacturers in Northern Indiana
along Lake Michigan have been made by the Company. To date, no steel
manufacturing plant has licensed or signed a letter of intent to use the LFC
Process.

CDL Markets. The Company believes current industrial residual fuel oil
markets in the U.S. will not pay enough for CDL as a residual fuel to make it
worthwhile to sell into that market. Enhanced CDL-derived products are being
developed by the Company with the goal of providing increased economic returns.
While these enhanced CDL products are not yet completely defined, progress has
been made in developing upgraded CDL products. Portions of the upgrading process
have been identified by the Company and include centrifugation to remove
entrained solids, distillation to collect crude cresylic acids, as an asphalt
additive and the sale of the remaining crude CDL to fuel oil markets. The
Company will require significant additional funding to further its research,
development and testing before enhanced CDL products could be available for
commercial use.

CDL upgrading efforts are currently focused on domestic and international
markets that the Company believes may be more commodity based, and less
sensitive to limited numbers of fixed end users. These CDL markets are aimed at
transportation fuels combined with specialty chemicals with potential large
volume acceptance. There can be no assurance the Company will develop any
upgraded CDL products, that any markets will accept or use CDL, or that it will
produce revenues or profits for the Company.

OCET Process and Strategy

Another energy-related technology which is being developed by the Company
through its wholly-owned subsidiary, the OCET Corporation, is the OCET Process.
The OCET Corporation ("OCET") is a development stage Delaware corporation which
is a wholly-owned subsidiary of the Company. OCET is developing a technology
which it believes can deasphalt petroleum residium, or resid, so it can be more
easily or further refined (the "OCET Process").

In laboratory tests both petroleum resid and heavy crudes have been
successfully deasphalted using lab scale continuous prototype processing
equipment. The results of these laboratory tests have demonstrated the ability
in testing conditions to produce deasphalted oil which OCET believes is
comparable in quality and yield to that produced by commercial solvent
deasphalting processes. There can be no assurance the results of such laboratory
tests will be proved in actual commercial scale developments, or that any
commercial use will be made of the OCET Process.

The Company's principal efforts to commercialize the OCET Process are
intended to focus on licensing the technology to oil refineries, steel
manufacturers and other parties with related interests. Construction and
operation of a commercial scale facility using the OCET Process is dependent
upon funding from the oil refinery, steel manufacturer or other third parties.
OCET believes there has been a shift of crude oils over time to being higher in
resid volume and contaminant levels, and therefore the need for some successful
deasphalting technology has increased.

The proposed OCET Process uses a solvent additive to destabilize the crude
oil, followed by electrochemical processing to separate the asphaltines, metals
and unwanted contaminants contained in the resid in order to produce a higher
quality liquid which OCET believes could be used in refinery processes. The
electrochemical processing distinguishes the OCET Process from other
deasphalting processes known to the Company, and OCET believes will provide an
additional method for controlling the rate, selectivity and efficiency of the
separation. The OCET Process as currently structured does not require high
temperatures or pressures, and OCET believes that both capital and operating
costs to separate the resid could be lower than other competing processes. There
can be no assurance these cost savings will be achieved.

OCET and SGI are currently in the process of attempting to construct a
model process development unit which would be capable of measuring OCET Process
performance. Concurrently analytical methods are also being developed in an
effort to analyze feedstocks to measure and optimize process performance. OCET
will require substantial additional funding to complete such a development unit,
and to date has no commitments for such funding.

OCET believes the market potential for the OCET Process and related
technologies could be significant. OCET believes domestic and worldwide demand
for crude oil and refining products is expected to increase, and worldwide
refining capacity is also expected to increase. OCET believes new oil refineries
will be called upon to meet increased worldwide demand for lighter products, to
upgrade residual fuel, to supply transportation fuels with reduced lead and to
supply both distillate and residual fuels with decreased sulfur levels to
decrease pollution.

The target application for the OCET Process has been the upgrading of
refinery resid to produce high quality lube oil blend stock, feedstocks for
refinery catalytic upgrading processes, hydrocracking or hydrotreating and
boiler grade coker feed because the liquid product could be reduced in
asphaltines, metals, sulfur, nitrogen, carbon residue and other contaminants.
OCET believes there are other potential markets, including deasphalting heavy
crude oil at the well site, upgrading crude oil before introduction into the
crude distillation tower at the refinery, near complete removal of metals from
deasphalted oils, removal of sulfur compounds from diesel and gasoline,
viscosity reduction as oil is being produced out of the ground, used motor oil,
for removal of metals and other contaminants for recycling, removal of
hydrocarbons from wastewater and removal of metals such as selenium from
wastewater.

On April 14, 1997 OCET and the U.S. Department of Energy executed a
Cooperative Research and Development Agreement ("CRADA") to jointly analyze
certain parameters of the OCET Process. The CRADA is intended to allow petroleum
experts in the DOE to consult with SGI while protecting SGI's proprietary
information.

The proposed OCET Process is expected to compete with alternative methods
for conversion of resid including thermal processes, solvent extraction
processes and catalytic processes. The primary method for upgrading resid is
delayed coking, which exposes resid to high enough temperatures to break apart
some of the chemical bonds to produce gases, liquids and solid coke.

There can be no assurance the OCET Process will be determined to be
commercially viable, or will be developed to the point it can be determined to
be commercially viable, or if it is there will be a market for the OCET Process,
or, if a market develops, OCET will license its technology or otherwise produce
revenue from the OCET Process or any other enterprise or technology development.

The OCET Process is still in development and has not been licensed or used
in either a pilot plant or on a commercial scale. The OCET Process will require
significant additional research and development, including substantial
additional funding to finish development of the process and demonstrate its
potential (if any) for commercial use. There

can be no assurance such efforts will be successfully completed. At the
present time, OCET has no agreements with any oil refinery or other party to
use the OCET Process in a commercial or even large scale testing facility.

Patents and Proprietary Technology

To date, TEK-KOL has five issued patents and one patent pending in the
United States, which relate to various aspects of the LFC Process. Patent
#5,601,692 was issued in February, 1997. Patent #5,401,364 was issued in March,
1995; Patent #5,372,497 was issued in December, 1994; Patent #5,582,807 was
issued in December, 1996; Patent #5,547,548 was issued in August, 1996. TEK-KOL
filed a patent in October, 1995 for a lean fuel combustion control method which
is pending. OCET filed a patent application in September, 1994 for the OCET
Process. AMS owns one patent jointly with Ethicon, a customer, however, AMS does
not believe this patent is critical for the operation of its business.

TEK-KOL has non-exclusive worldwide rights to license the use of the MK
Dust Control System pursuant to the License Agreement with Shell Mining. There
can be no assurance any additional patents will be issued to TEK-KOL as a result
of TEK-KOL's pending applications, or, if issued, such patents combined with the
existing TEK-KOL patent will be sufficiently broad to afford protection against
competitors using similar technology. The Company's success will depend in large
part on its ability and that of TEK-KOL to obtain patents for the LFC Process
and related technologies, if any, to defend patents once obtained, to maintain
trade secrets and to operate without infringing upon the proprietary rights of
others, both in the United States and in foreign countries. TEK-KOL also has
foreign patents pending for certain elements of the LFC Process.

There can be no assurance any patents issued to TEK-KOL or the Company will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. Litigation over
patent or other intellectual property claims could result in substantial costs
to the Company. The Company is required by the TEK-KOL Partnership Agreement to
contribute to the costs of prosecuting and defending all infringement claims
necessary to enforce TEK-KOL's rights or to determine the scope and validity of
others' proprietary rights. U.S. patents do not provide any remedies for
infringement occurring before a patent is granted. Because patent rights are
territorial, the Company or TEK-KOL may hot have an effective remedy against use
of their patented technology in any country in which TEK-KOL or the Company does
not, at the time, have an issued patent.

The commercial success of the Company may also depend upon avoiding the
infringement of patents issued to competitors. TEK-KOL owns all of the
technology relating to the LFC Process. If competitors prepare and file patent
applications in the United States claiming technology also claimed as
proprietary by TEK-KOL or the Company, the Company may be forced to contribute
to the cost of participating in interference proceedings declared by the PTO to
determine the priority of the invention. Such proceedings could result in
substantial costs to the Company, even if the outcome is favorable to the
Company. An adverse outcome of such proceedings could subject the Company to
significant liabilities to third parties and could require TEK-KOL and/or the
Company to license disputed rights from third parties or cease using the
infringing technology. Although the Company believes its current and proposed
activities do not and will not infringe upon patents for competing technologies,
there can be no assurance the Company's belief would be affirmed in any
litigation over any patent or that the Company's future technological
developments will be outside the scope of these patents. A U.S. patent
application is maintained under conditions of confidentiality while the
application is pending in the PTO, so the Company cannot determine the
inventions being claimed in pending patent applications filed by its
competitors. If competitors infringe on TEK-KOL or Company patents which are
pending but not yet issued, TEK-KOL and the Company will not be able to pursue
infringement claims against them unless the infringement continues after such
patents are issued.

The Company also relies on certain proprietary information which may not be
patentable. Although the Company has taken steps to protect its proprietary
information, in part through the use of confidentiality agreements with certain
employees, consultants and contractors, there can be no assurance these
agreements will not be breached, the Company

would have adequate remedies for any breach, or the Company's proprietary
information will not otherwise become known or be independently developed or
discovered by others including its competitors.

Governmental Regulation

The LFC Process, as it is proposed to be used in the operation of a coal
refinery plant will likely be subject to numerous federal and state regulations.
Any United States LFC Process production plants which may be constructed may be
owned and operated by others since the Company does not now have and is not
expected in the future to have the financing necessary to develop, construct or
operate such plants. LFC Process plants will likely require numerous permits,
approvals and certificates from appropriate federal, state and local
governmental agencies before construction of any such facility may begin, and
will be subject to periodic maintenance or review requirements once any such
facilities begin production. Such permits and regulations include: (i) air
quality; (ii) wastewater discharge; (iii) land quality; and (iv) hazardous
waste treatment storage and disposal. There can be no assurance that such
approval will be granted to any licensees of the LFC Process in the event a
plant is proposed to be constructed and operated using the LFC Process. In
addition, there can be no assurance future domestic or international
governmental regulations will not change and the necessary permits
and approvals for any future commercial-scale production facilities will not be
prohibitively expensive or difficult to obtain. Any failure by any licensee of
the LFC Process to obtain required regulatory approvals, or any substantial
delay in obtaining such approval, could have a material adverse effect on the
Company.

Mine Health and Safety Administration ("MHSA") regulations and approvals
may be applicable to any use of the LFC Process at a plant constructed for such
use. The Demonstration Plant in Wyoming has operated under the oversight of the
MHSA since construction began. The Company believes the ideal location for an
LFC Process plant will be on the grounds of or adjacent to a coal mine to
minimize transportation costs.

The Clean Air Act and amendments specify certain air emission requirements
for electrical utility companies and industrial coal users. The Company believes
the Clean Air Act is now, and will in the future be, a significant factor in
creating demand and a market for the LFC Process. The Company believes electric
utilities and industrial coal users who use the LFC Process will be subject to
the Clean Air Act, and compliance with such regulations could be fully or
partially met through the use of the LFC Process. Beginning on January 1, 2000,
Phase II of the Clean Air Act imposes a permanent cap on sulfur dioxide
emissions and requires nitrogen oxide reductions. A full or partial repeal of
the Clean Air Act could have a material adverse impact on the Company. The
Company is unable to predict future regulatory changes and their impact on the
demand for the LFC Process. See "Risk Factors - Environmental and Other
Governmental Laws, Regulations and Project Approvals."

Competition

The principal markets for PDF and CDL are in the energy industry, which is
intensely competitive. There are many companies engaged in research into ways to
clean or convert coal into a more acceptable fuel or other commercially viable
products. Many of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than the Company
and may be better equipped to develop, test and license coal refining
technologies. In addition, some of these companies have extensive experience in
operating refining plants and many of these companies have extensive experience
in operating coal burning plants. These companies may develop and introduce coal
refining technologies competitive with or superior to those of the Company prior
to any market acceptance for the LFC Process or other technologies developed by
the Company or its subsidiaries.

The relative speed with which the Company markets the LFC Process and
enters into license or other agreements with third parties who, thereafter
construct, own and operate a plant using the LFC Process and their success in
supplying processed coal products, are expected to be important competitive
factors. The Company expects principal competitive factors may include, among
other things, how economically LFC Process coal products can be produced,

at what quality levels and demand for such products develops, compliance with
environmental standards, the transportation costs, cost comparisons to energy
fuels, and the strength of any patents on the LFC Process or other related
technologies.

The demand, if any, by coal-fired electrical generation facilities for
processed coal products derived from using the LFC Process may also be
materially impacted by several competing fuels and other costs, such as natural
gas and alternative energy sources including but not limited to hydroelectric
power, synthetic fuels, solar power, wind power, wood, geothermal, waste heat,
solid waste and nuclear sources. The Company believes other competitive factors
which may influence competition for the Company include the availability and
cost of delivered coal, the difference between the costs of other energy
alternatives and coal prices and availability, regulatory efforts to reduce
pollution and other emissions, regulatory incentives, if any, to utilize clean
coal based energy sources and the reliability and cost effectiveness of the LFC
Process relative to other competing technologies.

The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the period between development and testing of the LFC Process and any possible
introduction of the technology into the commercial market place.

The Company is aware of several entities in the U.S. and foreign countries
which are engaged in producing clean- burning coal. These include the Rosebud
SynCoal Partnership, owned by indirect subsidiaries of Montana Power Company and
Northern States Power Company which processes approximately 1,430 tons of feed
coal a day at its plant in Colstrip, Montana. Also, KFX, Inc., a public company,
is engaged in producing a clean coal product, Carbontec, which produces upgraded
coal at a pilot plant; Custom Coals, International, which makes a clean coal
product; Puron Co.; Cyprus, a coal company, and SOSOI/FT. There can be no
assurance the Company will be able to compete successfully.

Employees

As of the date of this Prospectus the Company including OCET employs 20
full-time employees and AMS employs approximately 33 full-time employees. None
of the Company's or AMS's employees are represented by a labor union or bound by
a collective bargaining agreement. The Company and AMS believe that they
maintain positive relations with their employees.

Properties

The Company leases 5,500 square feet of office space at 1200 Prospect
Street, Suite 325, La Jolla, California 92037. The term of the lease expires in
December, 2000. In addition, the Company leases 5,080 square feet of laboratory
space at 11588-20 and 21 Sorrento Valley Road, San Diego, California 92121
pursuant to a lease which expires in May, 2000. AMS leases 20,000 square feet of
office and manufacturing space at 2222 Shasta Way, Simi Valley, California
93065, which includes 15,000 square feet of manufacturing space. The term of the
lease expires in October, 1998. The Company and AMS believe their current
facilities will be adequate for their respective expected needs for the
foreseeable future.

Legal Proceedings

The Company and its subsidiaries are from time to time involved in
litigation arising in the ordinary course of their respective businesses. In the
opinion of the Company none of the pending litigation, if adversely decided,
should have a material adverse effect on the Company.

ASSEMBLY AND MANUFACTURING SYSTEMS, INC.

Overview

Assembly and Manufacturing Systems, Inc. ("AMS"), a wholly-owned subsidiary
of the Company, is a supplier of custom made precision assembly equipment. AMS
designs and builds custom, automated assembly systems marketed principally to
manufacturers in three principal industries: automotive, medical, and computer
and communications. These assembly systems integrate multiple manufacturing
functions often into a single custom production line built to the customer's
specifications.

Assembly functions integrated into products manufactured by AMS include:
material and component handling, dispensing and placement of film or liquid
adhesives, sealants or customer-formulated materials such as pharmaceuticals,
marking and encoding, assembly of components, riveting, swagging, inspection
functions including machine vision inspection, testing, data collection and
analysis. Completed AMS assembly systems may be from bench
top size to almost a hundred feet in length, and may incorporate all 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 is an ongoing
consolidation and growth in the fragmented automation assembly market.

Generally automation system functions integrated into products manufactured
by AMS are computer controlled through custom software written by AMS, and
incorporate control, data handling, reporting and safety functions. The
completed automation systems are generally tested and accepted by the customer
at AMS prior to shipment and installation at the customer's site.

AMS believes that a majority of its current customers and future customers
purchase automation systems for several reasons including support of new product
introductions and start-up, labor cost reductions, increase in capacity,
increase in quality, and favorable return on investment and payback. To reduce
costs and improve productivity on current products and to increase its quality
and improve facilities, AMS customers choose to automate production of their
products.

AMS believes it offers customers a number of competitive advantages over
its competitors including successful project execution, competitive pricing,
systems which meet specified performance criteria, engineering and manufacturing
expertise and experience and innovative machine concepts. The typical AMS
contract price is approximately $500,000.

Marketing and Sales

AMS employs three sales professionals and two to three applications
engineers and their support staff are involved in directly marketing its
services to potential customers. AMS relies primarily on personal contact by its
executive and sales personnel to secure new customers and market its products.
AMS regularly participates in local, regional and national trade show meetings
in its key industry groups. AMS believes personal contact by its sales and
engineering staff is critical to retain new customers.

AMS has targeted large, established manufacturing companies in the
automotive, medical, and computer and communications industries as prospective
clients. AMS targets companies that need small manufactured equipment and
devices, requiring mechanical or electric mechanical assembly and test, or
inspection with material handling, as key accounts. To assist in marketing its
products and services, AMS also works to develop new applications for target
customers for their various manufacturing needs.

As part of its current marketing focus, AMS is targeting Fortune 1000 businesses
with assembly contracts in the range of $750,000 to $1.5 million per project to
increase its market share and economies of scale.

Major Customers

Since AMS typically builds one significant system each for a small number
of customers annually. Most of its customers in any one fiscal period may be
responsible for ten percent or more of its revenues for that fiscal year. Since
most of the systems developed and sold by AMS are for a unique application such
a concentration of revenues does not necessarily indicate AMS will receive any
revenues from a prior customer in a subsequent period.

For the nine months ended September 30, 1997, two customers, Eaton
Corporation and Pairgain Technologies, together represented approximately 40.2%
of AMS's sales. Pairgain Technologies was the single largest customer accounting
for approximately 27.5% of sales, while Eaton Corporation represented
approximately 12.7% of sales. AMS expects that a small number of customers will
continue to account for a substantial portion of its sales for the foreseeable
future. AMS does not have long term contracts with any of its customers, and
there can be no assurance any previous customer will continue to purchase AMS's
products. Due to the small number of annual projects attempted by AMS
a significant performance problem with any one AMS project could have a material
adverse effect on AMS. For the year ending December 31, 1996, AMS had four major
customers who were different from the major customers in the same period in
1997, and who accounted for approximately 75% of its sales: Alza Corporation
representing 16.3% of AMS annual sales; Motorola Inc. representing 11.3%; Nacom
representing 19.1%; and TRW Safety Systems representing 30.8%. There can be no
assurance revenue from customers who accounted for significant revenue in past
periods, individually or as a group will continue, or if continued, will reach
or exceed historical levels in any period. See "Risk Factors - Major Customer
Concentration; Dependence on Few Customers."

Manufacturing

All design, engineering, fabrication, assembly and testing of AMS's
products are carried out at its facility in Simi Valley, California. Proprietary
software and in-house procedures are used to ensure the quality and timeliness
of project execution, and AMS's custom automation related software incorporate
control, data handling, reporting and safety features. AMS also uses
state-of-the-art computer-aided design practices to create the customized
assembly processes for its customers.

To manufacture certain of its automation equipment, AMS uses subcontractors
for common industrial services such as machining, fabrication of welded
structures, painting and power coating on an as-needed basis. Manufacturing
operations include purchasing, receiving, cutting, machining, grinding,
electrical fabrication and testing, machine assembly as well as testing and all
other functions required to complete the automated assembly product. When
needed, AMS also employs a number of subcontractors for special assembly
operations including welding, power coating, wire electric discharge machining
and other unique operations.

AMS has implemented certain quality control procedures for its
manufacturing facility. AMS's quality control personnel regularly monitor the
manufacturing process and have initiated numerous procedures which assist in
quality control. AMS believes new customers, particularly Fortune 1000 customers
with large assembly projects, may impose additional quality control standards.
It is possible such customer or other quality control standards may require
additional substantial expenditures over a long period of time, or that AMS may
determine that such expenses are not cost-effective.

Raw Materials

The primary raw materials used by AMS in its assembly systems include such
items as stock steel shapes, aluminum extrusions, billet and plate software.
These raw material items are converted by AMS into the needed support structures
and are custom-machined in house to be incorporated into the automated assembly
systems purchased by AMS customers. Raw materials used by AMS are generally
standard industry materials which AMS believes can be provided from multiple
sources of supply. AMS believes the most critical machine subsystems such as
computers, vision systems,

part feeders, conveyors and robots are also common and have multiple sources
of supply. Up to approximately 75% of the AMS assembly system components are
purchased off the shelf. AMS does not have any contracts with any of its raw
material suppliers, and believes numerous suppliers would be available in the
event its current suppliers were not available.

Competition

The Company believes competition in the automotive assembly industry is
fragmented, and that no single competitor dominates the industry. While AMS
competes with at least 85 other companies which are engaged in the automation
assembly business, AMS believes the majority of these competitors provide
assembly equipment for smaller projects, and cannot handle the larger projects
(over $250,000 in price) for which AMS is currently competing. AMS's principal
competitors in the 1997 fiscal year include Remmele Corp., Vanguard Automation,
and Bosch-Weldun Automation. Many of AMS's competitors have substantially
greater financial, marketing and technological resources than AMS.

The automation industry is characterized by rapid technological change, and
competitors may develop their automation products more rapidly than AMS. AMS
believes competition among automation companies is based primarily on price, the
speed and quantity of products produced, timely delivery, product quality,
safety, product innovation and assistance in marketing and customer service. The
competitive position of AMS will depend in part on AMS's ability to remain
current in automation manufacturing and to increase the innovation, speed and
reliability of its automated assembly processes. There can be no assurance AMS
will be able to compete successfully.

Backlog

As of September 30, 1997, AMS had a backlog of orders of approximately $1.7
million, compared to a backlog as of December 31, 1996 of approximately $2.8
million.

Liability Insurance

The automotive, medical, computer, communications and other products expose
AMS to possible product liability claims, if among other things, the use of such
products results in personal injury, death or property damage. AMS maintains
product liability insurance in the principal amount of $2 million through April,
1998. There can be no assurance such insurance will be adequate in terms and
scope to protect AMS against material adverse effects in the event of a
successful claim, or that such insurance will be renewed with acceptable terms
and conditions.

USE OF PROCEEDS

The Company will not receive any proceeds from conversion of the Preferred
Shares or from the sale of the Selling Shares. If all of the Existing Warrants
are exercised, the Company would receive approximately $3.9 million before
deducting expenses of this offering. The exercise prices of the Existing
Warrants range from $1.03 to $5.75 per share. To the extent the exercise price
of any of the Existing Warrants exceeds the public sale price of the Company's
Common Stock on the OTC Bulletin Board, the Company believes it is unlikely
these Existing Warrants will be exercised. There is no minimum number of
Existing Warrants which are required to be exercised or a minimum number of
Warrant Shares which are required to be sold herein. Accordingly, only a limited
number of Existing Warrants may be exercised and as a result the corresponding
proceeds to the Company may be limited. If received, the Company would utilize
those funds for administrative, general operating expenses, and expenditures
related to development of the LFC and OCET Processes.

The Company cannot precisely determine the cost, timing and amount of funds
required for specific uses at this time. The use of proceeds is subject to
change based on future occurrences, competitive market forces and other
conditions. The rate of commercialization of the LFC and OCET processes, and the
availability of alternative methods of financing will also impact the allocation
and timing of the Company's use of proceeds. The Board of Directors has broad
discretion in determining how the proceeds resulting from the exercise of the
Existing Warrants, if any, will be applied.

SELLING SECURITY HOLDERS

The following table sets forth certain information, as of the date hereof,
with respect to the beneficial ownership of the Company's Warrant Shares and
Preferred Shares (collectively the "Resale Securities") registered herein by
each Selling Security Holder named below. The shares of Common Stock are being
registered to permit public secondary trading of the Resale Securities, and the
Selling Security Holders may offer the Resale Securities for resale from time to
time. Except as described below, none of the selling Security Holders has had
any position, office or other material relationship with the Company within the
past three years. The following table assumes each Selling Security Holder sells
all of the Resale Securities held by such Selling Security Holder in this
offering. The Company is unable to determine the exact number of Resale
Securities that will actually be sold.

Existing Warrant Holders Warrant Shares Offered Hereby (1)(2)
- ----------------------------------------------------------------------------

Adams, Jack W..........................................................18,000

AEM Corporation........................................................37,714

Albert, Mr. & Mrs. Harry, Trustees
The Albert Family Living Trust..........................................3,000

Avalon Capital Limited..................................................8,000

Bangham, June B., Trustee
June B. Bangham Trust...................................................3,000

Boe, Charles
Minshew, Janelle........................................................3,000

Breault, Jeffrey.......................................................20,000

Brockmueller, Henry & Betty, Trustees
1981 Brockmueller Rev. Liv. Trust.......................................6,000

Continental Capital....................................................22,223

Cuttyhunk Fund, Ltd....................................................12,000

Davis, William.........................................................20,000

Day, Patrick & Geraldine, Trustees
Day Family Trust........................................................6,000

Dominion Capital Fund..................................................30,000

Endeavour Capital Fund.................................................10,000

Farquhar, Thomas H......................................................6,000

Feeney, Terry..........................................................61,539

FT Trading.............................................................10,000

Ganesh Asset Management................................................5,000

Goldau, Ernest.........................................................3,000

Hatch, Robert.........................................................25,000

Hess, Frederic & Rita, Trustees
Frederic & Rita Hess Liv Trust
Dtd 10/13/89...........................................................3,000

Hezlep III, Herbert, Trustee
Herbert Hezlep III Family Trust.......................................12,000

Hoover, Thomas........................................................87,500

Hurford, John B........................................................6,000

Keiser, Gordon L., Trustee
Gordon L. Keiser Trust U/T/D 2/14/94...................................3,000

Lard, Whitney..........................................................3,000

Mahrdt, Clark..........................................................3,000

Millenco L.P.........................................................615,384

Montag, Jeffrey.......................................................30,000

Newport Capital.......................................................60,000

Pefley, Gordon V. & Betty-Jane,
JTWROS................................................................18,000

Orndorff, Owen........................................................40,000

Roberts, Lee R........................................................40,000

Rushall, Lawrence, Trustee
The Rushall 1970 Trust
U/A Dtd 01/2/70........................................................3,000

Senkus, Randy.........................................................20,000

Settondown Capital....................................................30,000

Shepherd, Mark........................................................10,000

Sherda, Betty, Trustee
Betty Sherda Trust U/T/D 2/14/94.......................................3,000

Smith, Jeffrey L......................................................50,000

Smith, Lester A.,Trustee
Lester A. Smith Family Trust...........................................3,000

Thomas, Edward........................................................37,000

Trieschmann, Ralph....................................................25,000

Total..............................................................1,411,360

(1) Expiration dates of the Existing Warrants range from 60 days following the
effective date of the Registration Statement of which this Prospectus is a
part through December 31, 2006. Exercise prices for the Existing Warrants
vary from $1.03 to $5.75 per share. The holders of the Warrants may own
additional warrants not included herein, and may own additional Common
Stock and/or Preferred Stock, and/or notes of the Company.

(2) All of the holders of the Existing Warrants listed herein own less than 1%
of the issued and outstanding Common Stock of the Company, with the
exception of Millenco L.P. which, assuming exercise of its Existing
Warrants as of the date of this Prospectus, would own approximately 5.63%.

Preferred Shareholders Preferred Shares
Offered Hereby (1)(2)(3)
- ----------------------------------------------------------------------------

Adams, Jack W..........................................................18,000

Albert, Mr. & Mrs. Harry, Trustees
The Albert Family Living Trust..........................................3,000

Avalon Capital Ltd....................................................566,496

Bangham, June B., Trustee
June B. Bangham Trust...................................................3,000

Boe, Charles
Minshew, Janelle........................................................3,000

Brockmueller, Henry & Betty, Trustees
1981 Brockmueller Revocable Living Trust................................6,000

Cuttyhunk Fund, Ltd...................................................849,744

Day, Patrick & Geraldine, Trustees
Day Family Trust........................................................6,000

Dominion Capital Fund Ltd...........................................2,124,360

Endeavour Capital Fund................................................708,120

Farquhar, Thomas H......................................................6,000

Feeney, Terry.........................................................157,614

FT Trading............................................................708,120

Ganesh Asset Management................................................33,990

Goldau, Ernest..........................................................3,000

Hess, Frederic & Rita, Trustees
Frederic L. & Rita R. Hess Living
Trust Dtd 10/13/89......................................................3,000

Hezlep III, Herbert, Trustee
Herbert Hezlep III Family Trust........................................12,000

Hurford, John B.........................................................6,000

Keiser, Gordon L., Trustee
Gordon L. Keiser Trust U/T/D 2/14/94....................................3,000

Lard, Whitney...........................................................3,000

Mahrdt, Clark...........................................................3,000

Millenco, L.P.......................................................1,576,138

Pefley, Gordon V. & Betty-Jane, JTWROS.................................18,000

Rushall, Lawrence, Trustee
The Rushall 1970 Trust U/A Dtd 01/02/70.................................3,000

Settondown Capital....................................................263,421

Sherda, Betty, Trustee
Betty Sherda Trust U/T/D 2/14/94........................................3,000

Smith, Lester A., Trustee
Lester A. Smith Family Trust............................................3,000

Total...............................................................7,093,003

(1) Avalon Capital Ltd.; FT Trading; Cuttyhunk Fund, Ltd.; Endeavour Capital
Fund; Dominion Capital Fund Ltd.; Settondown Capital and Ganesh Asset
Management, pursuant to registration rights agreements are registering 200%
of the number of Preferred Shares, and Millenco L.P. and Terry Feeney are
registering 230% of the number of Preferred Shares issuable upon conversion
of the Preferred Stock in accordance with the conversion formula for these
Preferred Shares.

(2) All of the holders of the Preferred Shares listed herein, assuming
conversion of the Preferred Shares on January 16, 1998, own less than 1% of
the Company's Common Stock, with the exception of the following parties:
(1) Avalon Capital, Ltd. would own approximately 3.41%; (2) Cuttyhunk Fund
Ltd. would own approximately 5.11%; (3) Dominion Capital Fund Ltd. would
own approximately 12.79%; (4) FT Trading would own approximately 4.26%; (5)
Endeavour Capital Fund would own approximately 4.26%; (6) Settondown
Capital would own approximately 1.59%; and (7) Millenco L.P. would own
approximately 9.49% of the outstanding Common Stock of the Company.

(3) The holders of the Preferred Stock may own additional Preferred Stock, the
underlying shares of which are not included, and may also own warrants,
common stock, and/or notes of the Company.

Number
Shares of Common Stock Offered Herein
- -------------------------------------------------------------------------

AEM Corporation....................................................25,714

Continental Capital...............................................112,000

The Taxin Network...................................................2,000

Total.............................................................139,714

PLAN OF DISTRIBUTION

The Warrants may be exercised by surrendering properly endorsed
certificates therefor to the Company's Controller accompanied by payment in full
of the exercise price for each share of Common Stock as to which the Warrants
are being exercised and any applicable transfer or other taxes. Payment of the
exercise price for the Warrants may be made by tendering cash or a cashier's
check.

The Preferred Stock may be converted into Common Stock of the Company at
the election of the holder by providing proper notice thereof and the
certificate for the Preferred Stock to be converted in whole or in part to the
Company's Controller.

The Company must have on file a current registration statement with the
Securities and Exchange Commission pertaining to the Warrants in order for a
holder to exercise them. The Warrant Shares must also be registered or exempt
for sale under the securities laws of the state in which the holder resides. The
Company intends to use its best efforts to keep the Registration Statement
incorporating this Prospectus current, but there can be no assurance such
Registration Statement (or any other registration statement filed by the Company
covering the Securities) can be kept current. In the event a registration
statement including the Warrant Shares is not kept current, or if the Warrant
Shares are not registered or exempt for sale in the state in which a holder
resides the Warrants may be deprived of some or all of their value.

The Company will not be required to pay a fee to any selling agent with
respect to any exercise of the Warrants.

The Common Stock offered by the Selling Security Holders are not being
underwritten. The Selling Security Holders will act independently of the Company
in making decisions with respect to the timing, manner and size of each sale.
The Common Stock offered hereby may be sold by the Selling Security Holders from
time to time in transactions (which may include block transactions) in the
over-the-counter market, in negotiated transactions, or a combination of such
methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The Selling Security
Holders may effect such transactions by selling the Common Stock directly to
purchasers or through broker-dealers that may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Security Holders and/or the purchasers of the
Securities for whom such broker-dealers may act as agents or to whom they sell
as principals, or both (which compensation as to a particular broker-dealer
might be in excess of customary commissions).

The Selling Security Holders and any broker-dealers that act in connection
with the sale of the Common Stock as principals may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act and any
commission received by them and any profit on the resale of such Common Stock as
principals might be deemed to be underwriting discounts and commissions under
the Securities Act. The Selling Security Holders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the Common Stock against certain liabilities, including liabilities arising
under the Securities Act. The Company will not receive any proceeds from the
sales by the Selling Security Holders, although the Company will receive
proceeds from the exercise of the Warrants. Sales of the Securities by the
Selling Security Holders, or even the potential of such sales, could have an
adverse effect on the market price of the Company's outstanding Common Stock.

At the time a particular offer of Common Stock is made, except as herein
contemplated, by or on behalf of a Selling Security Holder or the Company
including following exercise of Warrants, to the extent required, a prospectus
will be distributed which will set forth the number of shares of Common Stock
being offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for Common Stock purchased from the Selling Security Holder and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.

In order to comply with the securities laws of certain states, if
applicable, the Common Stock may be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may

not be sold unless it has been registered or qualified for sale in the
applicable state or an exemption from the registration or qualification
requirement is available and is complied with.

Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Common Stock may not simultaneously engage in
market making activities with respect to the securities of the Company for a
period of at least one, and possibly five, business days prior to the
commencement of such distribution. In addition and without limiting the
foregoing, each Selling Security Holder will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, Rules 101, 102 and 107, which provisions may limit the
timing of purchases and sales of shares of the Company's Common Stock by the
Selling Security Holders.

The Warrants and Preferred Stock were originally issued to certain Selling
Security Holders pursuant to an exemption from the registration requirements of
the Securities Act provided by Sections 3(b) and 4(2) thereof. The Company
agreed to register the Warrant Shares, Preferred Stock Shares and the Selling
Shares under the Securities Act and to indemnify and hold such Selling Security
Holders harmless against certain liabilities under the Securities Act that could
arise in connection with the sale by such Selling Security Holders of such
Common Stock. In connection therewith the Company has agreed to pay all
reasonable fees and expenses except for fees and expenses for counsel to the
Selling Security Holders and any underwriting discounts and commissions.

DESCRIPTION OF SECURITIES

The authorized capital stock of the Company consists of 95,000,000 shares
of capital stock, of which 75,000,000 shares are shares of common stock, no par
value ("Common Stock"), and 20,000,000 shares may be shares of preferred stock,
par value $0.01 per share (the "Preferred Stock"). Preferred Stock is issuable
in one or more series. As of September 30, 1997, 8,002,042 shares of Common
Stock were issued and outstanding, and 89,254 shares of convertible Preferred
Stock were issued and outstanding. The following summary description of the
capital stock of the Company does not purport to be complete and is subject to,
and is qualified in its entirety by, reference to the Articles of Incorporation,
amendments thereto, Certificates of Secretary specifying the rights, preferences
and privileges on each series of outstanding Preferred Stock, and the Bylaws of
the Company, copies of all of which are on file with the SEC or available for
inspection at the Company's offices.

Common Stock

The holders of Common Stock are entitled to one vote for each share on all
matters requiring shareholder action. The holders of a majority of shares of
Common Stock represented at a meeting of shareholders can elect all of the
directors to be elected at such meeting. In addition, subject to the preferences
that may be applicable to any then outstanding shares of Preferred Stock, the
holders of Common Stock are entitled to such dividends as may be declared from
time to time by the Board of Directors from funds legally available, and upon
liquidation, will be entitled to receive pro rata all assets of the Company
available for distribution to such holders. The Common Stock has no preemptive
or other subscription rights, no cumulative voting rights, and there are no
conversion rights, redemption or sinking fund provisions with respect thereto.

Preferred Stock

The Preferred Stock may be issued in series, and shares of each series will
have such rights and preferences as are fixed by the Board of Directors in the
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock, the Board of Directors may, without further
action by the holders of Common Stock, fix the number of shares constituting
that series, and fix the dividend rights, dividend rate, conversion rights,
voting rights (which may be greater or lesser than the voting rights of the
Common Stock), rights and terms of redemption (including any sinking fund
provisions), and the liquidation preferences of that series of Preferred Stock.

The Board of Directors may issue one or more series of Preferred Stock
without action of the shareholders of the Company. Accordingly, the issuance of
Preferred Stock may adversely affect the rights of the holders of the Common
Stock. In addition, the issuance of Preferred Stock may be used as an
"anti-takeover" device without further action on the part of the shareholders.
Issuance of Preferred Stock may dilute the voting power of a holder of Common
Stock (such as by issuing Preferred Stock with super-voting rights), may
discourage bids for the Company's Common Stock, and may render more difficult
the removal of current management, even if such removal may be in the best
interests of the shareholders.

Outstanding Preferred Stock

The outstanding Preferred Stock of the Company at September 30, 1997
consisted of 89,254 shares of Preferred Stock, which were issued in 24 series.
The outstanding Preferred Stock series are: 90-B; 90-C; P-90; PS-90; 91-A; 91-C;
91-D; 91-E; 91-M; 91-P; 91-R; 91-S; 91-V; 92-A; 92-B; 93-A; 93-B; 93-C; 94-A;
94-B; 95-R; 96-A; 96-B; 97-C and 97-D. Subsequent to September 30, 1997,
the Series 97-F and 97-G Preferred Stock was issued. The primary distinction
between such series of Preferred Stock relates to the dividend and liquidation
preferences for each.

All outstanding series of Preferred Stock are fully paid and nonassessable.
The Preferred Stock has no preemptive rights to subscribe for any additional
securities which may be issued by the Company. No sinking fund or similar
provision has been provided in respect to any of the outstanding series of
Preferred Stock. The rights of the holders of

each series of Preferred Stock are subordinate to those of the Company's general
creditors, and every previously issued series of Preferred Stock. All of the
outstanding series 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 on any of its outstanding Preferred Stock, and it is not likely any
dividends will 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 no voting rights.

Series 90-B and 90-C

Dividends. The Series 90-B and 90-C Preferred Stock are entitled to
dividends of $8 per share annually, payable in quarterly installments out of
unreserved earned surplus, before any dividends shall be payable on any other
class of stock or any other series of Preferred Stock of the Company, other than
a previously issued series of Preferred Stock and before any funds are set aside
for the purchase of, or retirement of, the whole or any part of any series of
Preferred Stock, or any other class of stock of the Company. Dividends are
cumulative and are payable before dividends on any Common Stock are paid.

Redemption. The Series 90-B and 90-C Preferred Stock do not have the right
to require its redemption. The Series 90 Preferred Stock is redeemable by the
Company as a series, in whole or in part, after August 31, 1992, at any time and
from 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 become
payable with respect thereto. The right of the Company to redeem the Series 90-B
and 90-C Preferred Stock is subject to compliance with Utah law, including
without limitation, certain retained earnings requirements.

Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntarily, the holders of the Series 90-B
and 90-C Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, prior to any distribution
with respect to any other class of stock, liquidating distributions in the
amount 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.

Conversion. Each share of the Series 90-B and 90-C Preferred Stock is
convertible, at the option of the holder thereof without further payment at any
time, into 88 shares of Common Stock unless previously redeemed.

Series P-90

Dividends. The Series P-90 Preferred Stock are entitled to dividends of $8
per share annually, payable in quarterly installments out of unreserved earned
surplus, before any dividends shall be payable on any other class of stock or
any other series of Preferred Stock of the Company, other than previously issued
series of Preferred Stock and before any funds are set aside for the purchase
of, or retirement of, the whole or any part of any series of Preferred Stock, or
any other class of stock of the Company. Dividends are cumulative and are
payable before dividends on any Common Stock are paid.

Redemption. The Series P-90 Preferred Stock is redeemable by the Company as
a series, in whole or in part, after January 1, 1996 at $100 per share, plus the
amount of any unpaid cumulative dividends which have then become payable
thereto. The right of the Company to redeem this series is subject to compliance
with Utah law, including without limitation certain retained earnings
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 paid out of the assets of the Company
available for distribution to shareholders, prior to any distribution with
respect to any other class of stock, liquidating distributions in the amount 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.

Conversion. Each share of Series P-90 Preferred Stock is convertible into
250 shares of Common Stock of the Company, at the option of the holder and upon
payment to the Company at 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 Preferred Stock, in quarterly installments out of unreserved earned
surplus, before any dividends shall be payable on any other class of stock or
any other series of Preferred Stock other than previously issued series of
Preferred Stock, and before any sum shall be set aside for the purchase of, or
retirement of, the whole or any part of the Series PS-90 Preferred Stock, or any
other class 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
require redemption of their Preferred Stock. The Series PS-90 Preferred Stock is
redeemable by the Company as a series, in whole or in part, after December 31,
1993, and any time and from time to time effective on 60 days prior notice, at
$250 per share of Series PS-90 Preferred Stock, plus the amount of any unpaid
cumulative dividends which have become payable with respect thereto. The right
of the Company to redeem this series of Preferred Stock is subject to compliance
with Utah law, including without limitation, certain retained earnings
requirements.

Liquidation. In the event of liquidation, dissolution or other termination
of the Company, the holders of the shares of the Series PS-90 Preferred Stock
are entitled to $250 per share, plus all accrued and unpaid dividends up to the
date fixed for distribution whether or not earned or declared. Such payments
shall be made before any payment or distribution is made to the holders of the
Common Stock or any other series of Preferred Stock and concurrently with the
90-B, 90-C or P-90 series.

Conversion. Each share of the PS-90 Preferred Stock is convertible into 125
shares of Common Stock at the election of the shareholder upon payment to the
Company of $1.375 per common share at the time of conversion.

Series 91-A, 91-C, 91-D and 91-E

Dividends. Dividends of $8 per share annually will be payable on the Series
91-A, 91-C, 91-D and 91-E Preferred Stock in quarterly installments out of
unreserved earned surplus, before any dividends shall be payable on any other
class of stock or any other series of Preferred Stock other than previously
issued series of Preferred Stock and before any sum shall be set aside for the
purchase of, or retirement of the whole or any part of the Series 91 Preferred
Stock or any other class of stock, other than any previously issued series of
Preferred Stock of the Company. Dividends are cumulative and are payable prior
to the payment of any dividends on the Common Stock of the Company.

Redemption. The holders of the Series 91-A, 91-C, 91-D and 91-E Preferred
Stock have no right to require redemption of the shares. The Company may redeem
the shares in a series, in whole or in part after 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 have then become payable with
respect thereto. The right of the Company to redeem this 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 termination of the Company, the holders of the shares of the Series 91-A,
91-C, 91-D and 91-E Preferred 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
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than the
previously issued series of Preferred Stock of the Company.

Conversion. Each share of the Series 91-A, 91-C, 91-D and 91-E Preferred
Stock is convertible into 25 shares of Common Stock at the election of the
shareholder without further payment.

Series 91-M

Dividends. No dividends are payable on the Series 91-M convertible Preferred
Stock.

Redemption. Neither the Company nor the holders have the right to cause or
require redemption of the Series 91-M Preferred Stock.

Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of Series 91-M convertible
Preferred Stock are entitled to a cash payment of $2 per share. Such payment
shall be made before any payment or distribution is made to the holders of the
Common Stock, or any other series of Preferred Stock other than the previously
issued series of Preferred Stock of the Company.

Conversion. On or after September 30, 1993, each 5,000 shares of series 91-M
Preferred Stock is convertible into 300 shares of Common Stock of the Company,
at the election of the shareholder without further payment. The Company shall
have the absolute right to cause conversion of the 91-M Preferred Shares at any
time, or from time to time without additional payment upon 60 days prior written
notice. In the event the Company elects to convert the 91-M shares to Common
Stock, each share of Series 91-M Preferred Stock shall be converted into 300
shares of the Company's Common Stock.

Series 91-P

Dividends. No dividends are payable on the Series 91-P Preferred Stock.

Redemption. Neither the Company nor the holders have the right to cause
redemption of the Series 91-P Preferred Stock.

Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-P
Preferred Stock shall be entitled to a cash payment of $2.50 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.

Conversion. On or after July 15, 1993, each 4,000 shares of Series 91-P
Preferred Stock is convertible into 250 shares of Common Stock of the Company at
the election of the shareholder and without further payment. The Company shall
also have the absolute right to cause conversion of the Series 91-P Preferred
Shares at any time or from time to time upon 60 days prior written notice. In
such event, each share of Series 91-P Preferred Stock shall be convertible into
250 shares of Common Stock.

Series 91-R

Dividends. Dividends of 8% per annum will be payable on the Series 91-R
Preferred Stock, in quarterly installments out of unreserved earned surplus,
before any dividends shall be payable on any other class of stock or any other
shares of Preferred Stock other than previously issued series of Preferred
Stock, and before any sum shall be set aside for the purchase of, or retirement
of, the whole or any part of the Series 91-R Preferred Stock or any other class
of stock, other than any previously issued series of Preferred Stock of the
Company. Dividends payable on the Series 91-R Preferred Stock are cumulative
and are payable prior to the payment of any dividends on the Common Stock of
the Company.

Redemption. The holders do not have the right to require redemption of the
Series 91-R Preferred Stock. The Company may redeem the Series 91-R Preferred
Stock in whole or part, at any time and from time to time effective on 60 days
prior written notice, at $10,000 per Series 91-R Preferred Share, plus the
amount of any unpaid cumulative dividends which have then become payable with
respect thereto. The right of the Company to redeem the Series 91-R Preferred
Shares 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 termination of the Company, the holders of shares of the Series 91-R
Preferred Stock shall be entitled to a cash payment of $10,000 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 payment shall be made
before any payment or distribution is made to the holders of the Common Stock,
or any other series of Preferred Stock other than previously issued series of
Preferred Stock of the Company.

Conversion. During the 60 day notice period provided for redemption by the
Company, each share of the Series 91-R Preferred Stock is convertible into 167
shares of Common Stock without further payment at the election of the
shareholder. At any time after October 15, 1993, the holders of the preferred
shares may demand conversion into Common Stock.

Series 91-S

Dividends. No dividends are payable on the Series 91-S Preferred Stock.

Redemption. Neither the Company nor the holders have the right to cause
redemption of the Series 91-S Preferred Stock.

Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-S
Preferred Stock shall be entitled to a cash payment of $3.50 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.

Conversion. On or after September 30, 1993, each share of Series 91-S
Preferred Stock shall be convertible into 150 shares of Common Stock of the
Company, at the election of the shareholder. The Company also has the right to
cause conversion of the Series 91-S Preferred Stock at any time, or from time to
time upon 60 days prior written notice. In such event, each share of 91-S
Preferred Stock shall be convertible into 150 shares of Common Stock.

Series 91-V

Dividends. The holders of the 91-V Preferred Stock have no right to dividends.

Redemption. The holders of the Series 91-V Preferred Stock do not have the
right to require the redemption of the Series 91-V convertible Preferred Stock.
The Company has a right to cause redemption of the Series 91-V Preferred Stock
as a series, in whole or in part, at any time and from time to time effective on
60 days prior notice, at $100 per share. The right of the Company to redeem the
Series 91-V 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 termination of the Company, the holders of shares of the Series 91-V
Preferred Stock shall be entitled to a cash payment of $100 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.

Conversion. During the 60 day notice period provided wherein the Company
may redeem the Series 91-V Preferred Stock, or at any other prior time, each
share of the Series 91-V Preferred Stock is convertible into 8 shares of Common
Stock of the Company without further payment at the election of the shareholder.

Series 92-A and 92-B

Dividends. The Series 92-A and 92-B Preferred Stock have no dividend rights.

Redemption. The Series 92-A and 92-B Preferred Stock holders do not have
the right to require its redemption. The Company may redeem the Preferred Stock
as a series, in whole or in part, at any time and from time to time effective on
60 days prior notice, at $100 per share. The right of the Company to redeem the
shares is subject to compliance with Utah law, including without limitation
certain retained earnings and requirements.

Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 92-A and
92-B Preferred Stock shall be entitled to a cash payment of $100 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.

Conversion. Each share of the Series 92-A Preferred Stock is convertible
into 6 shares of Common Stock. Each share of the Series 92-B Preferred Stock is
convertible into 8 shares of Common Stock. Each share is convertible without
further payment at the election of the shareholder.

Series 93-A, 93-B and 93-C

Dividends. The Series 93-A, 93-B and 93-C Preferred Stock have no dividend
rights.

Redemption. The holders of the Series 93-A, 93-B and 93-C Preferred Stock
have no option or right to require redemption of their shares. The Series 93-A,
93-B and 93-C Preferred Stock is redeemable by the Company as a series, in whole
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
the Company, whether voluntary or involuntary, the holders of the Series 93-A,
93-B and 93-C Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $100 per share. The liquidation preference shall be payable before
any payment or distribution is made to the holders of the Common Stock, or any
other series of Preferred Stock other than previously issued series of Preferred
Stock.

Conversion. Each share of the Series 93-A, 93-B and 93-C Preferred Stock is
convertible, at the option of the holder without further payment, into either 15
or 38 shares of the Company depending upon the due date and interest

rate on the promissory note purchased in connection with the private placement
under which the shares of these three series of Preferred Stock were issued.

Series 94-A and 94-B

Dividends. The Series 94-A and 94-B Preferred Stock have no dividend rights.

Redemption. The holders of the Series 94-A and 94-B Preferred Stock have no
option or right to require redemption of their shares. The Series 94-A and 94-B
Preferred Stock is redeemable by the Company as a series, in whole 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 the
Company, whether voluntary or involuntary, the holders of the Series 94-A and
94-B Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $100 per share. The liquidation preference shall be payable before
any payment or distribution is made to the holders of the Common Stock, or any
other series of Preferred Stock other than previously issued series of Preferred
Stock.

Conversion. Each share of the Series 94-A and 94-B Preferred Stock is
convertible, at the option of the holder without further payment, into from 25
to 45 shares of the Company depending upon the due date and interest rate on the
promissory note purchased in connection with the private placement with which
the shares of these series of Preferred Stock were issued.

Series 95-R

Dividends. No dividends are payable on the Series 95-R Preferred Stock.

Redemption. The holders of the Series 95-R Preferred Stock have no option
or right to require redemption. The Series 95-R preferred shares are redeemable
by the Company as a series effective on 60 days prior notice, at $10,000 per
share.

Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 95-R
Preferred Stock are entitled to be paid out of the assets of the Company
available for distribution to shareholders, liquidating distributions in the
amount of $10,000 per share for each share of Series 95-R Preferred Stock. Such
liquidation payments are to be made before any payment or distribution is made
to the holders of the Common Stock, or any other series of Preferred Stock other
than previously issued series of Preferred Stock.

Conversion. Each share of the Series 95-R Preferred Stock is convertible
after November 1, 1997, at the option of the holder without further payment,
into Common Stock with a bid based market value of (i) $18,000; or (ii) $16,500.
Alternatively, each share of Series 95-R Preferred Stock can be converted into
12,500 shares of Common Stock, at the option of the holder.

Series 96-A and 96-B

Dividends. The Series 96-A and 96-B Preferred Stock have no dividend rights.

Redemption. Neither the holders of the Series 96-A or 96-B Preferred Stock nor
the Company have any option or right to require or cause redemption.

Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 96-A
and 96-B Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $10,000 and $13,000 per share, respectively. The liquidation
preference shall be payable before any payment or distribution is made to the
holders of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock.

Conversion. Each share of the Series 96-A Preferred Stock is convertible,
at the option of the holder without further payment after April 30, 1998, into
13,500 common shares. Each share of Series 96-B Preferred Stock is convertible
at the option of the holder without further payment after the earlier of August
30, 1998 or the date a registration statement filed by the Company with the SEC
is declared effective, into 3,000 shares of Common Stock.

Series 97-D, 97-F and 97-G

Dividends. The Series 97-D Preferred Stock has a right to cumulative
dividends, out of assets legally available therefore, at a per share rate equal
to 7% per annum of its liquidation preference of $1,000 per share. The Series
97-F and 97-G Preferred Stock have a right to cumulative dividends, out of
assets legally available therefore, at a per share rate equal to 8% per annum of
the liquidation preference of $1,000 per share.

Redemption. Neither the holders of the Series 97-D Preferred Stock nor the
Company have any option or right to require or cause redemption of the Series
97-D Preferred Stock. The holders of the Series 97-F and 97-G Preferred
Stock may not require its redemption. The Company may redeem the Series 97-F and
97-G Preferred Stock at 130% of the liquidation preference ($1,000), plus
the amount of any unpaid cumulative dividends which have become payable with
respect thereto.

Liquidation. The Series 97-D, 97-F and 97-G are each entitled to be paid
out of the assets of the Company available for distribution to shareholders,
liquidating distributions in the amount of $1,000 per share. The liquidation
preference with respect to each series shall be payable before any payment or
distribution is made to the holders of the Common Stock, or any other series of
Preferred Stock other than previously issued series of Preferred Stock.

Conversion. Each share of Series 97-D Preferred Stock is convertible, at
the option of the holder thereof, at the earlier of: (i) the date a registration
statement shall be declared effective by the SEC for the Common Stock underlying
the Series 97-D Preferred Stock, or (ii) one year from the closing date of the
purchase of such series, which was August 12, 1997. Each share is convertible
into the number of shares of Common Stock derived by dividing the conversion
rate by the conversion price. The conversion rate is the liquidation preference
of $1,000 per share of Series 97-D Preferred Stock and the Dividend Amount. The
Dividend Amount is equal to the Liquidation Preference of $1,000 per share
multiplied by 7% per annum, multiplied by the number of days since the closing
date, divided by 365 days. The conversion price is determined based on the date
that the conversion notice is received ("Conversion Date") and shall equal the
lesser of (a) the average closing bid price of the shares of the Common Stock
over the five day trading period prior to the closing date of August 12, 1997
or (b) 77.5% of the average of the closing bid price of the shares of Common
Stock of the Company on the five trading days ending on the date proceeding the
Conversion Date. There are monetary penalties to the Company if Common Stock is
not delivered to the holder within five days of receipt of a notice of
conversion and receipt of the Preferred Stock to be converted.

Conversion of the Series 97-D Preferred Stock is subject to the following
limitations. The Series 97-D Preferred Stock is not convertible until the
earlier of (a) the date the registration statement is declared effective or (b)
one year from the closing date of the purchase of such series. The holder is
precluded from converting any portion of the Preferred Stock which would cause
holder to be deemed to be the beneficial owner of 4.99% or more of the issued
and outstanding Common Stock of the Company. The Common Stock underlying the
Series 97-D Preferred Stock and the warrants issued in connection with the sale
thereof have demand registration rights. The Company is obligated to use its
best efforts to maintain any registration statement or post-effective amendment
current until the earlier of the date

that all of such securities have been sold pursuant to the registration
statement, or the date the holders receive a legal opinion of counsel that the
securities may be sold under Rule 144, or the second anniversary of the
effective date of the registration statement.

Each share of Series 97-F Preferred Stock is convertible, at the option of
the holder thereof, at the earlier of: (i) the date a registration statement
shall be declared effective by the SEC for the Common Stock underlying the
Series 97-F, or (ii) one year from November 6, 1997. Each share is convertible
into the number of shares of Common Stock derived by dividing the conversion
rate by the conversion price. The conversion rate is the liquidation preference
of $1,000 per share of Series 97-F Preferred Stock and the dividend amount. The
dividend amount is equal to the liquidation preference of $1,000 per share
multiplied by 8% per annum, multiplied by the number of days since November 6,
1997, divided by 365 days. The conversion price is determined based on the date
that the conversion notice is received ("Conversion Date") and shall equal the
lesser of (a) the average closing bid price of the shares of the Common Stock
over the five day trading period prior to November 6, 1997 or (b) 75% of the
average of the closing bid price of the shares of Common Stock of the Company on
the five trading days ending on the date proceeding the Conversion Date. There
are monetary penalties to the Company if the Common Stock is not delivered to
the holder with 5 days of receipt of a notice of conversion and receipt of the
Preferred Stock to be converted. The Series 97-F must be converted no later
than two years from November 6, 1997.

Conversion of the Series 97-F Preferred Stock is subject to the following
limitations. 50% of the Series 97-F Preferred Stock issued to purchasers is
convertible on the 61st day from the date that purchasers deliver a demand for
registration to the Company, if the registration statement filed by the Company
is not effective by that date. If the registration statement filed by the
Company is not declared effective by the 121st day from the demand for
registration then the remaining 50% of the Series 97-F Preferred Stock is
convertible. However, in order for purchasers to convert at these times the
purchasers must meet all of the qualifications for trading under Regulation S.
The holder is precluded from converting any portion of the Preferred Stock which
would cause holder to be deemed to be the beneficial owner of 4.99% or more of
the issued and outstanding Common Stock of the Company.

Each share of Series 97-G Preferred Stock is convertible, at the option of
the holder thereof, beginning 41 days from January 8, 1998. Each share is
convertible into the number of shares of Common Stock derived by dividing the
conversion rate by the conversion price. The conversion rate is the liquidation
preference of $1,000 per share of Series 97-G Preferred Stock. The conversion
price is determined based on the date that the conversion notice is received
("Conversion Date") and shall equal the lesser of (a) the average closing bid
price of the shares of the Common Stock over the five day trading period prior
to January 8, 1998 or (b) 75% of the average of the closing bid price of the
shares of Common Stock of the Company on the five trading days ending on the
date proceeding the Conversion Date. There are monetary penalties to the Company
if the Common Stock is not delivered to the holder with five days of receipt of
a notice of conversion and receipt of the Preferred Stock to be converted. The
Series 97-G must be converted no later than two years from January 8, 1998.

The holder of the Series 97-G Preferred Stock is precluded from converting
any portion which would cause the holder to be deemed to be the beneficial owner
of 4.99% or more of the issued and outstanding Common Stock of the Company.

Warrants

As of September 30, 1997, the Company had outstanding warrants entitling
the holders thereof to purchase approximately 2,507,576 shares of Common Stock
of the Company at exercise prices which range from $.60 to $54.00 and with
varying warrant expiration dates. The exercise price of the warrants is
generally subject to adjustment in the event of stock splits, stock dividends
and similar events. Some outstanding warrants expire only on the occurrence of
certain conditions precedent, which are not dates certain. The warrants are not
divided into any series or class, and there is currently no public market for
any of the warrants which are outstanding as of the date hereof.

The various warrant exercise prices were determined arbitrarily by the
Company, and there is no assurance the price of the Common Stock will ever rise
to a level where exercise of the warrants would be of economic value to any the
warrant holders.

The warrants do not confer upon the holders any voting or dividend rights
or any other rights of a shareholder of the Company. The warrants may generally
be exercised during the exercise period upon surrender of the warrant
certificate at the offices of the Company, with a form of election to purchase
generally shown on the reverse side of the warrant certificate completed and
executed as indicated, accompanied by payment of the full exercise price for the
number of shares being purchased.

Registration Rights

The Company will be able to issue shares of Common Stock upon exercise of
all of the various warrants only if there is a then current prospectus relating
to such Common Stock under an effective registration statement filed with the
Securities and Exchange Commission or pursuant to an applicable exemption from
such requirements, and only if such Common Stock is qualified for sale or exempt
from qualification under applicable state securities laws of the states
in which the various holders of the warrants reside. Common Stock underlying
warrants issued in connection with the sale of Series 97-D, 97-F and 97-G, as
well as other warrants issued under varying circumstances are being registered
in this Registration Statement. See "Selling Security Holders." Many of these
warrants were issued with "piggyback" registration rights. The warrants with
"piggyback" registration rights were all issued with an exercise price equal to
the fair market value of the Common Stock or higher on the date of issue.

In connection with the issuance of the Series 96-B, 97-D and 97-F, the Company
is required to use its best efforts to file a registration statement covering
the Preferred Shares with the SEC. For the Series 97-D and 97-F the Company is
further required to use its best efforts to have the registration statement
declared effective, generally within 120 days of the closing of each of the
transactions, wherein the Series 97-D and 97-F Preferred Stock was purchased.
Failure to have the registration statementdeclared effective generally within
120 days of the respective closings relative to the Series 97-D and 97-F
Preferred Stock will result in the Company having to pay significant monetary
damages computed on a daily basis until the registration statement is effective.
For the Series 97-D and 97-F Preferred Stock, the Company is required to
register 230% and 200%, respectively, of the number of shares which would be
capable of conversion five days prior to the filing of the registration
statement, and to keep the registration statement effective, until the earlier
of: (i) all of the holders' securities have been registered; (ii) the holders'
securities which are subject to registration may be sold without registration
pursuant to Rule 144, Rule 144(k) or Regulation S; or (iii) one year from the
issuance of the securities subject to registration.

Transfer Agent

The Transfer Agent for the Company's Common Stock is Atlas Stock Transfer
Corporation located at 5899 South State Street, Salt Lake City, UT 84107.

DESCRIPTION OF CERTAIN PROVISIONS OF THE ARTICLES
OF INCORPORATION AND BYLAWS WITH POSSIBLE ANTI-TAKEOVER EFFECT

The Company's Articles of Incorporation and Bylaws contain several
provisions that may make acquiring control of the Company by means of tender
offer, over-the-market purchases, a proxy fight or otherwise more difficult. Set
forth below is a description of certain provisions of the Company's Articles of
Incorporation, as amended and the Bylaws.

Classified Board of Directors

The Articles of Incorporation, as amended, divide the Board of Directors
into three classes, with each class having a term of three years, and with each
class expiring in successive years. Each such class is as near equal in number
as possible. At each annual meeting of shareholders, directors are elected to
succeed those directors whose terms have expired.

The Company believes a classified Board of Directors will help to assure
the continuity and stability of the Company's Board of Directors and its
business strategies and policies. The classified Board of Directors provision
should increase the likelihood in the event of a takeover of the Company that
incumbent directors will retain their positions. In addition, the classified
board provision will help ensure the Company's Board of Directors, if confronted
with an unsolicited proposal from a third party that has acquired a block of the
voting stock of the Company, will have sufficient time to review the proposal
and appropriate alternatives and seek the best available result for all
shareholders.

Special Meetings

The Company's Articles of Incorporation as amended provide that no action
shall be taken by shareholders except at an annual or special meeting of
shareholders. The Company's Articles of Incorporation, as amended, provide that
special meetings of shareholders of the Company may be called by the President
or Chief Executive Officer, or by the Board of Directors pursuant to a
resolution approved by a majority of the entire Board of Directors.

Shareholders Nomination of Directors

The Company's Articles of Incorporation and Bylaws, as amended, establish
an advance notice procedure with regard to the nomination, other than by or at
the direction of the Board of Directors, of candidates for election as directors
and the introduction of business. Only persons who are nominated by the Board of
Directors, or by a shareholder who has given timely prior written notice to the
Secretary of the Company prior to the meeting at which directors are to be
elected shall be eligible for election as directors of the Company.

Although the Company's Articles of Incorporation and Bylaws, as amended, do
not give the Board of Directors any power to approve or disapprove shareholder
nominations for the election of directors or any other business properly brought
by the Company's shareholders before an annual or special meeting, the Articles
of Incorporation as amended may have the effect of precluding certain methods of
proposing a nomination for the election of a director or precluding a certain
manner of conducting business at a particular meeting if the proper procedures
are not followed, or may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors, or otherwise
attempting to obtain control of the Company.

Certain Voting Requirements and Business Combinations

Under certain circumstances, the Company's Articles of Incorporation as
amended require the affirmative vote of 70% of the voting power of then
outstanding shares of capital stock of the Company entitled to vote generally in
the election of directors, voting together as a single class to approve or
authorize (a) any merger or consolidation of the Company or any subsidiary with
any interested shareholder as defined in the Bylaws, or any other corporation
which is or after such merger or consolidation would be an affiliate (as
defined) of an interested shareholder; (b) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition to or with any interested shareholder or
any affiliate of any interested shareholder of any assets of the corporation or
any subsidiary having an aggregate fair market value equal to or in excess of
the lesser of Five Million Dollars ($5,000,000) or twenty (20%) percent of the
gross assets of the Company; (c) the issuance or transfer by the Company or any
subsidiary of any securities of the Company or any subsidiary to any interested
shareholder or any affiliate of any interested shareholder in exchange for cash,
securities,

or other property having an aggregate fair market value equal to or
in excess of the lesser of $5,000,000 or 20% percent of the gross assets of the
Company; (d) the adoption of any plan or proposal for the liquidation or
dissolution of the Company proposed by or on behalf of an interested shareholder
or any affiliate of any interested shareholder; (e) any reclassification of
securities or recapitalization of the Company or any merger or consolidation of
the Company with any of its subsidiaries or any other transaction which has the
effect directly or indirectly of increasing the proportionate share of the
outstanding shares of any class of equity or convertible securities of the
Company or any subsidiary which is directly or indirectly owned by any
interested shareholder or any affiliate of any interested shareholder. The 70%
vote requirement is not applicable to any business combination, as defined in
the Bylaws, where such business combination is either approved by a majority of
the disinterested directors, or certain price and procedure requirements are
met.

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fisher Thurber LLP, 4225 Executive
Square, Suite 1600, La Jolla, California 92037-1483. David A. Fisher, a Partner
of Fisher Thurber LLP, owns an option to purchase 10,000 shares of Common Stock
at $2.00 per share.

EXPERTS

The consolidated financial statements of SGI International appearing in SGI
International's Annual Report (Form 10-K) for the fiscal year ended December 31,
1996 have been audited by Ernst & Young LLP, independent auditors, as set forth
in the report thereon (which contains an explanatory paragraph with respect to
the Company's ability to continue as a going concern, as described in Note 2 to
the consolidated financial statements) included therein and incorporated herein
by reference. Such consolidated financial statements referred to above are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

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SGI International

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Shares of Common Stock

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PROSPECTUS

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

January __, 1998
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No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus. If given or made, such information or representations must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any of the
securities other than the securities other than the securities to which it
relates, or an offer or solicitation of an offer to buy any of the securities to
which it relates, or an offer or solicitation to any person in any jurisdiction
where such an offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall under any circumstances create
an implication that information contained herein is correct as of any time
subsequent to the date hereof.

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TABLE OF CONTENTS Page
Prospectus Summary.....................................................
Summary Financial Data.................................................6
Risk Factors...........................................................7
Selected Consolidated Financial Data...................................16
Recent Developments....................................................17
Business...............................................................19
Use of Proceeds........................................................30
Selling Security Holders...............................................31
Plan of Distribution...................................................36
Description of Securities..............................................38
Description of Certain Provisions of Articles of
Incorporation and Bylaws with Possible
Anti-Takeover Effects..................................................47
Legal Matters..........................................................49
Experts................................................................49

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

Until _____ ___, 1998 all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered. All of the amounts
shown are estimates except the Securities and Exchange Commission ("SEC")
registration fee.

SEC Filing Fee....................................... $2,593.22

Blue Sky Fees and Expenses........................... $ *
-----

Printing and Engraving Expenses...................... $ *
-----

Accounting Fees and Expenses......................... $ *
-----

Legal Fees and Expenses.............................. $ *
-----

Miscellaneous........................................ $ *
-----

Total (Estimated) $ *
* To be filed by amendment -----

Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under the Company's Bylaws, and in accordance with Section 16-10a-901 et
seq. of the Utah Revised Business Corporation Act ("Utah Corporation Act"), the
Company shall indemnify any person who was or is a party or is threatened to
made a party to any threatened, pending, or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was a director or officer of the Company, or is or was
serving at the request of the Company as an officer or director or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses reasonably incurred by him or imposed on him in the connection
with or resulting from the defense of such action, suit or other proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in good faith
or in a manner which he reasonably believed to be in or not opposed to the best
interests of the Company, or with respect to any criminal action or proceeding,
that the person had reasonable cause to believe that his conduct was unlawful.

The Company's Bylaws provide the Company shall pay for expenses incurred
defending a civil or criminal action, suit or proceeding against a director or
officer of the Company, and shall be paid in advance of the final disposition of
the action, suit or proceeding, upon receipt of an undertaking by or on behalf
of the officer or director, that he shall repay the amount advanced, if it is
ultimately determined he is not entitled to be indemnified by the Company. The
Board of Directors shall approve such undertaking, but shall be liberal with
respect to the requirements for the undertaking, to promote the beneficial and
remedial purposes of protecting those persons who serve as directors and
officers. The Company's Bylaws also provide the Company may purchase and
maintain insurance on behalf of any person who is or was a director or officer,
or employee of the Company, or is or was serving at the request of another

II-1

corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or incurred by him in any capacity, or arising
out of his status as such, whether or not the Company would have the power to
indemnify him against liability under the provisions of the Bylaws.

Section 16-10a-901 et seq. of the Utah Corporation Act provides for the
indemnification of officers, directors and agents of the Company against
expenses, judgments, fines and amounts paid in settlement under certain
conditions and subject to certain limitations. The Company currently maintains
officer and director liability insurance with policy limits of $2,000,000.

Pursuant to authorization provided under the Bylaws and the Utah
Corporation Act, the Company has entered into indemnification agreements with
each of its directors and officers. Generally, the indemnification agreements
attempt to provide the maximum protection permitted by Utah law as it may be
amended from time to time. Moreover, the indemnification agreements provide for
certain additional indemnification. Under such additional indemnification
provisions, however, an individual will not receive indemnification for
judgments, settlements or expenses if he or she is found liable to the Company
(except to the extent the court determines he or she is fairly and reasonably
entitled to indemnity for expenses), for settlements not approved by the Company
or for settlements and expenses if the settlement is not approved by the court.
The indemnification agreements provide for the Company to advance to the
individual any and all reasonable expenses (including legal fees and expenses)
incurred in investigating or defending any such action, suit or proceeding. The
individual must repay such advances upon a final judicial decision that he or
she is not entitled to indemnification. The Company's Bylaws contain a provision
of similar effect relating to advancement or expenses to a director or officer,
subject to an undertaking to repay if it is ultimately determined that
indemnification is unavailable.

Item 16. EXHIBITS

Exhibit
Number Description

3.1 Restated Articles of Incorporation.(2)

3.2 Registrants' Bylaws as amended to date.(1)

3.3 Certificate of Secretary re: Designation of Series 96-B Preferred Stock.(2)

3.4 Amended Certificate of Secretary re: Designation of Series 97-B Preferred
Stock.(2)

3.5 Certificate of Secretary re: Designation of Series 97-C Preferred Stock.(2)

3.6 Certificate of Secretary re: Designation of Series 97-D Preferred Stock.(2)

3.7 Form of Debenture for Series 97-E.(2)

3.8 Form of Warrant for Series 97-E.(2)

3.9 Certificate of Secretary re: Designation of Series 97-F Preferred Stock.(2)

3.10 Amended Certificate of Secretary re: Designation of Series 97-G Preferred
Stock.(2)

4.1 Form of Common Stock certificate.(2)

4.2 Form of Warrant Certificate re: Existing Warrants.(3)

II-2

4.3 Form of Stock Purchase Warrant re: Series 97-D, and 97-F Preferred
Stock.(3)

4.4 Form of Stock Purchase Warrant re: Series 97-B, Preferred Stock.(2)

4.5 Form of Stock Purchase Warrant re: Series 97-G Preferred Stock.(2)

4.6 Series 97-D Preferred Stock Purchase Agreement dated August 12, 1997
between the Registrant and the holders thereof.(3)

4.7 Registration Rights Agreement re: Series 97-D Preferred Stock dated
August 12, 1997 between the Registrant and the holders thereof.(3)

4.8 Series 97-F 8% Convertible Preferred Stock Subscription Agreement dated
November 6, 1997 between the Registrant and the holders thereof.(3)

4.9 Registration Rights Agreement re: Series 97-F Preferred Stock dated
November 6, 1997 between the Registrant and the holders thereof.(3)

4.10 Series 97-G 8% Convertible Preferred Stock Subscription Agreement between
Registrant and Settendown Capital dated January 8, 1998.(2)

4.11 Series 97-G 8% Convertible Preferred Stock Subscription Agreement between
Registrant and Dominion Capital dated January 8, 1998.(2)

4.12 Form Registration Rights Agreement re: Series 97-G Preferred Stock dated
January 8, 1998 between the Registrant and the holders thereof.(2)

4.13 Agreement between the Registrant and AEM dated December 11, 1997.(2)

4.14 Agreement between the Registant and The Taxin Network dated April 22,
1997.(2)

5.1 Opinion of Fisher Thurber LLP regarding the legality of the securities
being registered.(4)

23.1 Consent of Ernst & Young LLP, independent auditors.(2)

23.2 Consent of Fisher Thurber LLP (included in Exhibit 5.1).

24.1 Power of attorney (see pg. II-5).

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

(1) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1990.
(2) Filed herewith.
(3) Incorporated by reference to the Company's Form 10-Q for the period ended
September 30, 1997.
(4) To be filed by amendment.

Item 17. UNDERTAKINGS

The Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act;

(ii) To reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no

II-3

more than a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective Registration
Statement; and

(iii) To include any additional or changed material information on the plan of
distribution.

(2) That, for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered and the offering of the securities at that time to be the initial bona
fide offering.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The Registrant hereby undertakes:

(1) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(l) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.

(2) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration Statement,
and the offering of the securities at that time as the initial bona fide
offering thereof.

II-4

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on January 22, 1998.

SGI International

By: /s/ Joseph A. Savoca
- ---------------------------------------------
Joseph A. Savoca, Chief Executive Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Joseph A. Savoca, as his or her true and
lawful attorney-in-fact and agents, with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement, and to sign any registration statement for the same
offering covered by this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and
all post-effective amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agents, or their substitutes may
lawfully do or cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.

Signatures

/s/ Joseph A. Savoca
- ------------------------------
Joseph A. Savoca
Chief Executive Officer, Chief Financial Officer and Director
January 22, 1998

/s/ Ernest P. Esztergar
- ------------------------------
Ernest P. Esztergar
Director
January 22, 1998

/s/ William A. Kerr
- -----------------------------
William A. Kerr
Director
January 22, 1998

/s/ William R. Harris
- ----------------------------
William R. Harris
Director
January 22, 1998

/s/ Bernard V. Baus
- ----------------------------
Bernard V. Baus
Director
January 22, 1998

/s/ Norman Grant
- ----------------------------
Norman Grant
Director
January 22, 1998

Exhibit Index
--------------

3.1 Restated Articles of Incorporation.(2)

3.2 Registrants' Bylaws as amended to date.(1)

3.3 Certificate of Secretary re: Designation of Series 96-B Preferred Stock.(2)

3.4 Amended Certificate of Secretary re: Designation of Series 97-B Preferred
Stock.(2)

3.5 Certificate of Secretary re: Designation of Series 97-C Preferred Stock.(2)

3.6 Certificate of Secretary re: Designation of Series 97-D Preferred Stock.(2)

3.7 Form of Debenture for Series 97-E.(2)

3.8 Form of Warrant for Series 97-E.(2)

3.9 Certificate of Secretary re: Designation of Series 97-F Preferred Stock.(2)

3.10 Amended Certificate of Secretary re: Designation of Series 97-G Preferred
Stock.(2)

4.1 Form of Common Stock certificate.(2)

4.2 Form of Warrant Certificate re: Existing Warrants.(3)

4.3 Form of Stock Purchase Warrant re: Series 97-D, and 97-F Preferred
Stock.(3)

4.4 Form of Stock Purchase Warrant re: Series 97-B, Preferred Stock.(2)

4.5 Form of Stock Purchase Warrant re: Series 97-G Preferred Stock.(2)

4.6 Series 97-D Preferred Stock Purchase Agreement dated August 12, 1997
between the Registrant and the holders thereof.(3)

4.7 Registration Rights Agreement re: Series 97-D Preferred Stock dated
August 12, 1997 between the Registrant and the holders thereof.(3)

4.8 Series 97-F 8% Convertible Preferred Stock Subscription Agreement dated
November 6, 1997 between the Registrant and the holders thereof.(3)

4.9 Registration Rights Agreement re: Series 97-F Preferred Stock dated
November 6, 1997 between the Registrant and the holders thereof.(3)

4.10 Series 97-G 8% Convertible Preferred Stock Purchaser Subscription
Agreement between Registrant and Settendown Capital dated January 8,
1998.(2)

4.11 Series 97-G 8% Convertible Preferred Stock Purchaser Subscription
Agreement between Registrant and Dominion Capital dated January 8, 1998.(2)

4.12 Form Registration Rights Agreement re: Series 97-G Preferred Stock dated
January 8, 1998 between the Registrant and the holders thereof.(2)

4.13 Agreement with AEM.(2)

4.14 Agreement with Taxin Network.(2)

5.1 Opinion of Fisher Thurber LLP regarding the legality of the securities
being registered.(4)

23.1 Consent of Ernst & Young LLP, independent auditors.(2)

23.2 Consent of Fisher Thurber LLP (included in Exhibit 5.1).

24.1 Power of attorney (see pg. II-5).