Index

**UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-QSB**

ý                             Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of1934

For the quarterly period endedSeptember 30,2002

 ̈                            Transition report pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934

**COMMISSION FILE NO. 1-11602**

**SI DIAMOND TECHNOLOGY, INC.**(Exact name of Small Business Issuer as specified in charter)

| **TEXAS**                               |  | **76-0273345**         |
|-----------------------------------------|--|------------------------|
| (State of                               |  | (IRS Employer          |
| Incorporation)                          |  | Identification Number) |
|                                    |  |                        |
| **3006 Longhorn Blvd., Suite 107**      |  |                        |
| **AUSTIN, TEXAS**                       |  | **78758**              |
| (Address of principal executive office) |  | (Zip Code)             |

Registrant's telephone number, including area code:  (512) 339-5020

        Indicate by check mark whether the issuer: (1)filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  [X]  No [  ]

        As ofNovember 1, 2002, the registrant had 75,163,730 shares of common stock, par value $.001 per share, issued and outstanding.

        Transitional Small Business DisclosureFormat.

Yes  [  ]   No [X]

----

**SI DIAMOND TECHNOLOGY, INC.INDEX**

 

| Part I.  Financial Information | **Page**                                                                                                                                                                                                                              |
|-------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     | Item 1.  Financial Statements                                                                                                                                                                                                    |  |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     |                                                                                                                                                                                                                                       | Consolidated BalanceSheets--September 30, 2002 and December 31, 2001 | 3 |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     |                                                                                                                                                                                                                                       | Consolidated Statements ofOperations--Three Months and Nine Months Ended           September 30, 2002 and 2001 | 4 |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     |                                                                                                                                                                                                                                       | Consolidated Statements of CashFlows--Nine Months Ended           September 30, 2002 and 2001 | 5 |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     |                                                                                                                                                                                                                                       | Notes  to Consolidated Financial Statements | 6 |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     | Item 2.  Management's Discussion and Analysis of Financial Condition                      andResults of Operations | 10 |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     | Item3.  Controls and Procedures                                                                                                                                                                                             | 14 |
|                                |                                                                                                                                                                                                                                       |  |  |
| Part II.  Other Information    |                                                                                                                                                                                                                                       |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     | Item 1. Legal Proceedings                                                                                                                                                                                                             | 15 
Item 6.  Exhibits and Reports on Form 8-K

15 
Signatures

16

2
   
**PART I. FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

**SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

**ASSETS**

**(Unaudited)September 30, 2002**

**December 31, 2001**
 
Current assets:
    
Cash and cash equivalents

$

218,098 

$

261,861 
 
Marketable equity securities
 
–   
23,850 
 
Accounts receivable, trade – net of allowance for doubtfulaccounts              of$0 in 2002 and $47,581 in 2001
 
56,528 
 
528,147 
 
Inventories
 
–   
232,389 
 Assets held for sale 
 250,000  
–  
Prepaid expenses and other current assets
 
168,664 
 
94,189 
  
               Total current assets
 
693,290 
 
1,140,436 
   
Property and equipment, net
 
186,696 
 
557,431 
 
Intangible assets, net
 
–  
70,000 
 
Officer receivable
 
62,500 
 
62,500 
 
Other assets
 
800 
 
8,688 
  
               Total assets

$

943,286 

$

1,839,055 
 
**LIABILITIES AND STOCKHOLDERS’(DEFICIT)**

Current liabilities:
       
Accounts payable

$

490,108 

$

705,458 
 
Current portion of long-term debt
 
52,467 
 
64,431 
 
Obligations under capital lease
 
17,112 
 
19,987 
 
Notes payable
 
1,540,645 
 
1,398,302 
 
Accrued liabilities
 
573,014 
 
263,050 
 Deferred revenue 
414,287  
–  
Customer deposits
 
–  
211,790 
  
               Total current liabilities
 
3,087,633 
 
2,663,018  
Notes payable, long-term
 
–  
39,832 

Obligations under capital lease
 
51,629 
 
81,819 

Commitments and contingencies
 
–  
–  
Stockholders' (deficit):
     
Convertible preferred stock, $1.00 par value, 2,000,000 shares authorized;      Series G convertible, no shares issued and outstanding atSeptember 30,            2002 and850 shares issued and outstanding at December 31, 2001
 
–  
850 

Common stock, $.00l par value, 120,000,000 shares authorized,      75,163,730 and 66,899,584 shares issued and outstanding at      September 30, 2002 and December 31, 2001, respectively
 
75,163 
 
66,900 

Additional paid-in capital
 
68,375,451 
 
65,324,967 

Accumulated deficit
 
(70,646,590)
 
(66,338,331)
 
               Total stockholders' (deficit)
 
(2,195,976)
 
(945,614)
 
               Total liabilities and stockholders' (deficit)

$

943,286 

$

1,839,055 
 
See notes to consolidated financial statements.

3
   
**SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF  OPERATIONS(UNAUDITED)**
For the Three Months Ended September 30,For the Nine Months Ended  September 30,
2002

2001
 
2002

2001
 
Revenues

    Government contracts

46,086 

225,816 
 
254,152 

304,417 

    Privately fundedresearch

85,713 

162,988 
 
585,713 

374,967 

    Other 

      87,191 

          26,021 
 
         144,846 

         26,021 
  
       Total Revenues

    218,990 

         414,825 
 
         984,711 

        705,405 
  
 

Cost of sales

231,873 

377,186 
 
811,456 

870,548 

Selling, general and administrative expenses

1,043,764 

551,653 
 
2,740,668 

1,901,338 

Research and development

295,049 

639,464 
 
1,207,640 

1,581,986 

Impairment charge

 176,286 

— 
 
        176,286 

— 
   
      Operating costs and expenses

1,746,972 

1,568,303 
 
4,936,050 

4,353,872 

Loss from operations

(1,527,982)

(1,153,478)
 
(3,951,339)

(3,648,467)
 
Other income (expense), net
    
     Net realized and unrealized gains (losses)
     
        on marketablesecurities

(4,167)

(6,767)
 
(3,397)

(28,542)

     Interest Expense

(141,992)

(18,990)
 
(556,917)

(45,995)

     Lawsuit Settlement

435,240 

— 
 
435,240

— 

     Other

              201 

         (5,404)
 
                 409 

         (4,003)
   
Loss from continuing operations before taxes

(1,238,700)

(1,184,639)
 
(4,076,004)

(3,727,007)

Provision for taxes

 — 

— 
 
— 

— 
  
Loss from continuing operations

(1,238,700)

(1,184,639)
 
(4,076,004)

(3,727,007)

Discontinued operations
     
       Loss from operation ofSBOA

(71,340)

(119,615)
 
(90,941)

(112,192)

       Loss on disposal ofSBOA

    (141,314)

— 
 
     (141,314)

— 
   
Net loss

(1,451,354)

(1,304,254)
 
(4,308,259)

(3,839,199)
 
Less accretion on convertible preferred stock

— 

      (21,250)
 
      (37,495)

      (63,750)
   
Net loss applicable to commonshareholders

$(1,451,354)

$(1,325,504)
 
$(4,345,754)

$(3,902,949)
   
Loss per share
     
       Basic 

$(0.02)

$(0.02)
 
$(0.06)

$(0.06)
  
       Diluted

$(0.02)

$(0.02)
 
$(0.06)

$(0.06)
    
Weighted average shares outstanding
 
       Basic

73,767,176 

66,041,136 
 
70,429,339 

63,971,176 
  
       Diluted

73,767,176 

66,041,136 
 
70,429,339 

63,971,176 
  
See notes to consolidated financial statements.

4
   
**SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF  CASH FLOWS(UNAUDITED)**

 

**For  the Nine Months EndedSeptember 30,**

**2002**

**2001**
** **** **
Cash flows from operating activities:
      
Net loss
  
$

(4,308,259)

$

(3,839,199)
  
Adjustments to reconcile net loss to net
       
cash used in operating activities:
       
Depreciation and amortization expense
 
247,320 
 
469,548 
   
Amortization of discount on debt
 
352,343 
 
– 
   Loss on disposal of fixed assets 
– 
 
9,000    
Net realized and unrealized loss on marketable securities
 
3,397  
28,542    Non-cash loss on disposal of SBOA 
 104,845  
– 
   Impairment charge 
176,286  
– 
   Option repricing expense 
– 
 
5,000 
   Common shares issued for services 
21,000  
– 
   
Changes in assets and liabilities:
        
Accounts receivable, trade
 
 150,292 
 
(249,222)
    
Inventories
 
(46,739)
 
(122,388) 
    
Prepaid expenses and other assets
 
 (66,587) 
 8,739     
Accounts payable and accrued liabilities
 
652,537 
 
93,144 
    
Customer deposits and deferred revenue

  

428,699 
 
308,171 
** **** **             
Total adjustments
 
2,023,393 
 
550,534 
** **** **    
Net cash used in operating activities
 
(2,284,866)
 
(3,288,665)
** **** **
Cash flows from investing activities:
    
  
 
Capital expenditures
   
(228,550)
 
(261,360)
  
Proceeds from the sale of marketable securities
 
46,313 
 
62,308   Proceeds from disposal of equipment 
– 
 
15,000   
Purchase of marketable securities
 
(25,860) 
(37,487)** **** **  
       Net cash used in investing activities
 
(208,097)
 
(221,539)
** **** ** 
Cash flows from financing activities:
    
  
 
Repayment of notes payable
 
(666,389)
 
(241,872)
  
Proceeds from notes payable and long-term debt
 
1,150,000 
 
300,000   
Proceeds of stock issuance, net of costs
 
1,965,589 
 
3,623,591 
** **** **   
       Net cash provided by financing activities
 
2,449,200 
  
3,681,719 
** **** ** 
Net increase (decrease) in cash and cash equivalents
 
(43,763) 
  
171,515  
Cash and cash equivalents, beginning of period
 
261,861 
  
8,818 
** **** ** 
Cash and cash equivalents, end of period

$

218,098 

$

180,333 
** **** **
See notes to consolidated financial statements.

5
   
**SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

1.     Basis of Presentation

        The consolidated financial statements of theCompany for the three and nine month periods ended September 30, 2002 and 2001 have been prepared by the Company without auditpursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company’s management,all adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company as ofSeptember 30, 2002 and 2001 and for the periods then ended have been made. Those adjustments consist of normal and recurringadjustments. The consolidated balance sheet of the Company as of December 31, 2001 has been derived from the audited consolidatedbalance sheet of the Company as of that date.

        Certain information and note disclosuresnormally included in the Company’s annual financial statements prepared in accordance with generally accepted accountingprincipals have been condensed or omitted. These consolidated financial statements should be read in conjunction with a reading ofthe financial statements and notes thereto included in the Company’s Annual Report on Form 10KSB/A for 2001 as filed with theU.S.  Securities and Exchange Commission.

        The results of operations for the three andnine month periods ended September 30, 2002 are not necessarily indicative of the results to be expected for the fullyear.

2.     Supplemental Cash Flow Information

        Cash paid for interest for the nine monthsended September 30, 2002 and 2001 was $24,152 and $27,472, respectively. During the nine months ended September 30, 2002, theCompany had non-cash transactions related to the conversion of accounts payable and  notes payable, including related accruedinterest, into shares of the Company’s common stock. This transaction is described in greater detail in Note 3.

          In the nine months ended September 30,2001, the Company also had non-cash transactions related to the issuance of a note payable in the amount of $100,000 in connectionwith a lawsuit settlement and a capital lease. The lawsuit settlement was accrued at December 31, 2000.

3.     Stockholders’ Equity

        In the nine months ended September 30, 2002,the Company issued a total of 4,809,221 restricted shares of its common stock and received net proceeds of $1,829,339 in a seriesof exempt offerings under Regulation D of the Securities Act of 1933. The Company also received $136,250 and issued 230,000 sharesas the result of the exercise of options during the period. The Company also issued 1,009,911 shares of restricted common stock inpayment of two convertible note payables and related accrued interest. The face amount of the notes totaled $500,000 and therelated accrued interest was $33,750. In addition, 517,397 shares of common stock were issued to pay $165,308 of accrued intereston other convertible notes. The Company also issued 355,000 shares of its common stock to pay accounts payable in the amount of$112,250 and 75,000 shares of its common stock in payment for services valued at $21,000.

        In June 2002, all remaining outstanding sharesof the Company’s Series G Convertible Preferred Stock were converted to common shares. A total of 850 preferred shares wereconverted into 1,267,617 shares of  common stock.

4.     Notes Payable and Long Term Debt

       The Company issued a note payable due December31, 2002 in the gross amount of $500,000 during February 2002. This note and resulting accrued interest due is convertible intoshares of the Company’s common stock at a rate of $0.50 per share. The Company valued the conversion rights at $60,000 andrecorded this as a discount at the time of issuance. In July, the Company also issued a six-month note payable in the amount of$100,000 that is convertible into shares of the Company’s common stock at a discount of 50% of the market value of the commonstock at the time of maturity. This conversion right was valued at $50,000 and recorded as a discount at the time of issuance.These discounts are being amortized to interest expense over the term of the notes. The Company also issued two short-term notespayable in the amount of $450,000 and $100,000, respectively,  which were repaid in September 2002.  The $100,000 notewas issued to a corporate officer.

6
   
**SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

5.     Contingencies

Litigation

        The Company previously had a royalty agreementwith Texas Digital Systems, Inc. (TDS) which was terminated by TDS pursuant to the terms of the agreement as of December 31,1999.  Under the terms of the agreement, TDS was prohibited from using the Company’s technology after the termination ofthe agreement. The Company believed that TDS was continuing to ship products using our technology and contacted TDS. TDS responded,in part, by filing suit against the Company and EBT for breach of contract  in the 272nd Judicial District Court inBrazos County Texas on July  26, 2000. The Company was not served with notice of this suit until December 5, 2000. The Companyfiled a counterclaim against TDS and sought substantial damages and an injunction against TDS for continuing to use theCompany’s technology in TDS products after the termination of the agreement. The case was settled in September 2002 and an 8Kwas filed as a result of that settlement. All parties agreed to drop all claims against other parties to the lawsuit with noadmission of liability by any party and the Company no longer has any potential liability in this matter.

       The Company is a defendant in other lawsuitsdescribed in greater detail in its 2001 annual report on Form 10-KSB/A.

6.     Business Segments

Following is information related to the Company’s continuing businesssegments for the nine months ended September 30, 2002 and 2001:

ANI

EBT

All Other

Total

2002
 
Revenue

 $
 856,125 

 $
128,586 

 $
                -  

$
 984,711 
 
Loss from continuing
 operations
  (1,294,003)

  (1,287,417)

  (1,494,584)

  (4,076,004)
 
Expenditures for

  long-lived assets

  52,327 

  171,674 

  2,771 

  226,772 
 
2001
 
Revenue

 $
700,405 

 $
5,000  

 $
-  

 $
705,405 
 
Loss from continuing

  (955,487)

  (1,992,344)

  (779,176)

  (3,727,007)
 operations 
Expenditures for

  long-lived assets

  12,403 

  226,072 

  9,402 

  247,877 

7.     Related Party Transactions

        The Company has made a non-interest bearingadvance in the amount of $62,500 to its President and Chief Operating Officer, Dr. Zvi Yaniv. The advance as been classified aslong-term because there are no scheduled repayment terms. The Company also had a short-term note payable in the amount of $100,000,bearing interest at a rate of 5% to Mr. Jake Schroepfer, the former Chief Executive Officer of Electronic Billboard Technology,Inc. The note payable to Mr. Schroepfer was issued in June 2002, initially due in July 2002, and repaid in September2002.

7
   
**SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

 

8.     Subsequent Events

        As described in greater detail in Note10, theCompany sold its Sign Builders of America, Inc. operations in October 2002.

9.     Impairment charge

        In August 2002, the Company made the decisionto restructure its Electronic Billboard Technology, Inc. subsidiary and focus on licensing its technology to others instead ofdirectly marketing and installing products using its technology. As a result of this decision, the Company recorded an impairmentcharge of $176,286 to reduce the value of fixed assets, including leasehold improvements and personal property owned by EBT. TheCompany expects to dispose of these assets prior to December 31, 2002.

10.   Discontinued Operations

        On September 27, 2002, the Company signed aletter of intent to sell all of the assets of Sign Builders of America, Inc. The buyer agreed to pay $250,000 plus assumesubstantially all of the liabilities of SBOA. The transaction was closed October 8, 2002 with an effective date of October 1, 2002.Full payment was received at closing. The purchaser was an entity formed by the previous controller of Sign Builders of America,Inc. For comparative purposes, the Company’s financial statements have been presented to reflect SBOA as a discontinuedoperation in the consolidated statement of operations for all periods presented. The net assets of SBOA have been adjusted to theirnet realizable value and classified as assets held for sale on the balance sheet at September 30, 2002.

Following is a summary of the net assets of SBOA as of September 30, 2002:
 Cash$6,469  Accounts receivable321,327  Inventory279,128   Property, plant, and equipment –net245,679   Accountspayable (195,556)  Accruedexpenses(51,059)  Customerdeposits (226,202) Capital lease      obligations(18,472)   Net Assets361,314   Recorded loss111,314     Net carrying value of      assets held for sale$250,000
       A loss of $111,314 was recorded at September30, 2002 to reduce the net carrying value of the SBOA assets to their net realizable value of $250,000. Additional expenses relatedto the disposition were accrued as of September 30, 2002 to bring the total expected loss to $141,314.

11.   Recently Issued Accounting Standards

        In July 2001, FAS 141, BusinessCombinations, and FAS 142 Goodwill and Other Intangible Assets, were issued. These pronouncements provide that all businesscombinations initiated after June 30, 2001 be accounted for using the purchase method and that goodwill be reviewed for impairmentrather than amortized, beginning on January 1, 2002. Adoption of these pronouncements did not have a material effect on thefinancial statements. Any business combination transactions in the future would be accounted for under this newguidance.

8
   
**SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

        In September 2001, the FASB issuedStatement 143, Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligation associatedwith the retirement of tangible long-lived assets and the associated asset retirement costs. The Statement will be effective forthe Company's fiscal year ending December 2003.  The Company does not believe that the adoption of this pronouncement willhave a material effect on its financial statements.

        In August 2001, the FASB issued Statement144, Accounting for Impairment or Disposal of Long-Lived Assets. This Statement addresses financial accounting and reporting forthe impairment or disposal of long-lived assets. The Statement will be effective for the Company's fiscal year ending December2002.  The Company does not believe that the adoption of this pronouncement will have a material effect on its financialstatements.

        In  April 2002, the FASB issuedStatement 145, Recision of FASB Statements  4, 44, and 64 and Amendment of FASB 13. This Statement addresses financialaccounting and reporting associated with the extinguishment of certain debts and leases. The Company does not believe that theadoption of this pronouncement will have a material effect on its financial statements.

        In June 2002, the FASB issued Statement146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement will be effective after December 31, 2002.The Company does not believe that the adoption of this pronouncement will have a material effect on its financialstatements.

        In October 2002, the FASB issuedStatement 147, Acquisitions of Certain Financial Institutions. This Statement will be effective October 1, 2002, but will have noeffect on the Company’s financial statements.

9
   
**ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTSOF OPERATIONS**

The following is management’s discussion and analysis of certain significant factorsthat have affected the Company’s financial position and operating results during the periods included in the accompanyingconsolidated financial statements.

FORWARD-LOOKING STATEMENTS

       This Form 10-QSB contains certain forward-looking statements that we believe are withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intendedto be covered by the safe harbors created by such acts. For this purpose, any statements that are not statements of historical factmay be deemed to be forward-looking statements, including the statements under "Management's Discussion and Analysis of FinancialCondition and Results of Operations" regarding our strategy, future operations, future expectations or future estimates, financialposition and objectives of management. Those statements in this Form 10-QSB containing the words "believes," "anticipates,""plans," "expects" and similar expressions constitute forward-looking statements, although not all forward-looking statementscontain such identifying words. These forward-looking statements are based on our current expectations and are subject to a numberof risks, uncertainties and assumptions relating to our operations, results of operations, competitive factors, shifts in marketdemand and other risks and uncertainties.

       Although we believe that the assumptions underlying our forward-looking statements arereasonable, any of the assumptions could be inaccurate and actual results may differ from those indicated by the forward-lookingstatements included in this Form 10-QSB.  In light of the significant uncertainties inherent in the forward-looking statementsincluded in this Form 10-QSB, you should not consider the inclusion of such information as a representation by us or anyone elsethat we will achieve such results. Moreover, we assume no obligation to update these forward-looking statements to reflect actualresults, changes in assumptions or changes in other factors affecting such forward-looking statements.

**Nine months ended September 30, 2002 and 2001**

**OVERVIEW**

        During the nine months ended September 30,2002, the Company's primary revenues were earned as a result of the reimbursed research expenditures at our Applied Nanotech, Inc.(“ANI”) subsidiary. We continued to incur substantial expenses in support of the development of our proprietaryCarbon  Nanotube Based Field Emission (“CFE”) Technology and in the development of our electronic displayproducts. As more fully discussed in our Annual Report on Form 10-KSB/A for the year ended December 31, 2001, we expect to incuradditional research and development expenses throughout 2002 in developing our CFE technology. We sold the assets of our SignBuilders of America, Inc. (“SBOA”) subsidiary, effective October 1, 2002. Accordingly, SBOA is accounted for as adiscontinued operation in the financial statements. We have restructured our Electronic Billboard Technology, Inc.(“EBT”) subsidiary to focus on licensing our technology and no longer will market directly to end users, or installproducts directly at end users. This will substantially reduce the expenditures required at EBT.

**OUTLOOK**

        We expect our external cash needs for 2002 tobe approximately $3.3 million, of which approximately $2.8 million has already been raised. We intend to fund our overall cashneeds through a combination of reimbursements for research, license agreements, and issuance of debt and equitysecurities. 

          We anticipate thatlosses will continue in 2002 as we continue to fund the development of our CFE technology, although we expect these losses to besubstantially reduced from previous levels. We have developed a plan to breakeven in 2003, although there is no assurance that thisplan will be achieved. There can be no assurance that we will be profitable in the future. Our future profitability is dependent oneither generating significant revenues for reimbursed research, or the signing of significant royalty agreements.  Fullcommercial development of our technology may require additional funds that may not be available at terms acceptable to us. 

10
   
         We developed a plan toallow ourselves to maintain operations until we are able to sustain ourselves on our own revenue, however our current cash levelsare not sufficient to reach that point. We have the existing resources, including commitments, to continue operations forapproximately one to two months. We also have a commitment to receive $400,000 of research funding on January 15, 2003. We havebeen operating in this manner for an extended period of time and we believe that we have the ability to continue to raise shortterm funding, as necessary, to enable us to continue operations until our plan can be completed. Our plan is primarily dependent onraising funds through the licensing of our technology and through additional debt and equity offerings.

        This plan is based on current developmentplans, current operating plans, the current regulatory environment, historical experience in the development of electronic productsand general economic conditions. Changes could occur which would cause certain assumptions on which this plan is based to be nolonger valid. Although we do not expect funding our operations to be a problem, if adequate funds are not available fromoperations, or additional sources of financing, we may have to eliminate, or reduce substantially, expenditures for research anddevelopment, testing and production of products, or obtain funds through arrangements with other entities that may require us torelinquish rights to certain of our technologies or products. Such results would materially and adversely affect us.

**RECENT DEVELOPMENTS**

        Effective January 1, 2002, ANI entered into acontract with a large Japanese display manufacturer to perform contract research related to our CFE nanotube technology.  Apayment of $500,000 was received in January 2002. This revenue was recognized as it was earned under the contract. The contract wascompleted as of June 30, 2002. In August 2002, ANI entered into an additional research contract and license agreement with the samemanufacturer. ANI will complete an additional research project in exchange for a payment of $900,000. The project will takeapproximately 6 months and started in September 2002. A payment of $500,000 was received in September 2002 and the balance of$400,000 is due in January 2003. ANI also granted the display manufacturer a worldwide non-exclusive license for all the owned andassigned patents of SIDT and ANI. in the field of carbon films/carbon nanotubes electron emission technologies for themanufacturing and sales of flat panel displays. ANI also received a future royalty of 2% of product sales by the licensee that usethis technology once those sales exceed $100 million.

        In September 2002, we announced a restructuringof our EBT subsidiary to shift its focus to licensing its patented technology to hardware manufacturers and suppliers to the retailindustry. EBT expects to license its patented technology for a combination of up-front and ongoing royalty payments based on salesof products using the patented technology. EBT will no longer directly market, assemble, or install these products.

        In September 2002, we signed a letter of intentto sell the operations of our Sign Builders of America, Inc. subsidiary. In exchange for all of the assets of SBOA, the purchaserpaid $250,000 in cash and assumed substantially all of the liabilities of SBOA. The transaction was effective October 1, 2002 andclosed October 8, 2002.

        We expect to file a registration statement nolater than November 8, 2002 to register previously issued common shares and shares that may be issued in the future.

**RECENT ACCOUNTING PRONOUNCEMENTS**

        In July 2001, FAS 141, BusinessCombinations, and FAS 142 Goodwill and Other Intangible Assets, were issued. These pronouncements provide that all businesscombinations initiated after June 30, 2001 be accounted for using the purchase method and that goodwill be reviewed for impairmentrather than amortized, beginning on January 1, 2002. Adoption of these pronouncements did not have a material effect on thefinancial statements. Any business combination transactions in the future would be accounted for under this newguidance.

        In September 2001, the FASB issuedStatement 143, Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and the associated asset retirement costs. The Statement will be effective forthe Company's fiscal year ending December 2003.  The Company does not believe that the adoption of this pronouncement willhave a material effect on its financial statements.

        In August 2001, the FASB issued Statement144, Accounting for Impairment or Disposal of Long-Lived Assets. This Statement addresses financial accounting and reporting forthe impairment or disposal of long-lived assets. The Statement will be effective for the Company's fiscal year ending December2002.  The Company does not believe that the adoption of this pronouncement will have a material effect on its financialstatements.

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**ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTSOF OPERATIONS (cont.)**

        In  April 2002, the FASB issuedStatement 145, Recision of FASB Statements  4, 44, and 64 and Amendment of FASB 13. This Statement addresses financialaccounting and reporting associated with the extinguishment of certain debts and leases. The Company does not believe that theadoption of this pronouncement will have a material effect on its financial statements.

        In June 2002, the FASB issued Statement146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement will be effective after December 31, 2002.The Company does not believe that the adoption of this pronouncement will have a material effect on its financialstatements.

        In October 2002, the FASB issuedStatement 147, Acquisitions of Certain Financial Institutions. This Statement will be effective October 1, 2002, but will have noeffect on the Company’s financial statements.

**RESULTS OF OPERATIONS**

       Our revenues for the third quarter ended September 30, 2002 totaled $218,990 compared to$414,825 for the third quarter of 2001. We earned $984,711 in revenues during the nine month period ended September 30, 2002, (the“2002 Period”) as compared with $705,405 during the nine month period ended September 30, 2001 (the “2001Period”). During the 2002 Period, we had revenues of $856,125 from ANI, and $128,586 from EBT. In the 2001 Period, we hadrevenue of $700,405 from ANI, and $5,000 from EBT. The ANI revenues in both periods were substantially all the result of reimbursedresearch expenditures. In the 2002 Period, $254,152 of these reimbursements were from government programs, $585,713 was from aprivate research contracts with a large Japanese display manufacturer, and $16,260 from miscellaneous product sales. In the 2001Period, $304,417 of these reimbursements were from government programs, and $374,967 was from a private research contract with thesame display manufacturer. During both periods, EBT revenues were from the sale of products and services.

       We had a total revenue backlog of $814,287 as of September 30, 2002, which consisted ofprivate research funding at ANI. In addition, ANI had a commitment for a Phase II SBIR contract. The amount of the contract has notyet been finalized but such contracts usually approximate $750,000. The ANI backlog at September 30, 2001 was $651,237 and wascomposed of $426,204 related to government-funded research and $225,033 related to privately funded research. EBT had no backlog ateither September 30, 2002 or 2001. Our ability to perform continued research, or fulfill our backlog, should not requiresignificant additional personnel.

       For the 2002 Period, our cost of sales were $811,456 , or a gross margin of 18%, ascompared with $870,548, a negative gross margin of 23%, for the 2001 Period This increased margin resulted primarily from increasedoverall revenues. In the 2001 Period, EBT had fixed costs associated with the cost of sales, but virtually no sales. As a result ithad negative margins. We expect our future margins to remain at the 2002 levels or better. To the extent our primary source ofrevenue is reimbursed research expenditures at ANI, margins will remain at similar levels. There are minimal costs associated withlicense agreements and any license agreements at either EBT and ANI will result in improved margins.

       Our selling, general, and administrative expenses were $2,740,668 for the 2002 Period,compared with $1,901,338 for the 2001 Period. The primary reason for the increase was an increase in payroll and related costs, andmarketing costs at EBT. In excess of $400,000 of the increase was at EBT, which will occur virtually no selling, general, andadministrative costs in the future. We expect selling, general, and administrative costs to decrease substantially in the future asa result of our restructuring at EBT and other reductions that have been made to reduce overhead costs.

       We incurred research and development expenses of $1,207,640 in  the 2002 Period,compared with $1,581,986 in the 2001 Period.  This reduced expense results from a lower level of activity at EBT and anincreased level of funding for research at ANI. We expect to continue to incur expense throughout the remainder of   2002 insupport of additional research and development activities related to the commercial development of our CFE technology. We expectthe overall research and development in 2002 to be lower than 2001 as a result of the increased funding available to ANI and therestructuring at EBT. We also expect minimal internally funded research and development expense in 2003 because of expected fundingfor the majority of planned research.

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**ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTSOF OPERATIONS (cont.)**

       We had net realized and unrealized losses onour marketable securities portfolio of $3,397 in 2002 as compared with net realized and unrealized losses of $28,542 in 2001. Wehave liquidated our marketable securities an expect no future activity. Our interest expense increased from $45,995 in 2001 Periodto $556,917 in the 2002 Period as a result of our greater reliance on convertible debt to fund our operations in the 2002 Periodthan in the 2001 Period and the beneficial conversion features associated with that debt. The income from the lawsuit settlementresulted from a lawsuit settlement in September 2002. There were no comparable lawsuit settlements in the 2001 Period.

**FINANCIAL CONDITION AND LIQUIDITY**

        At September 30, 2002, we had cash and cashequivalents in the amount of $218,098 as compared with cash and cash equivalents of $261,861 at December 31, 2001.  Thisdecrease in cash is primarily the result of cash used in operating activities and cash used in investing activities, partiallyoffset by cash provided by financing activities . The cash used in  operations was primarily the result of our net operatingloss for the periods. The cash used in operating activities during the 2002 Period of $2,284,866 was substantially lower than the$3,288,665 used in the 2001 Period. The primary reason for this is a substantially higher level of non-cash expenses included innet income during the 2002 Period.

        As described in greater detail in the notes tothe financial statements, we received proceeds of $1,965,589 from the issuance of common stock related to private placements andoptions during the 2002 Period, as compared with $3,623,591 from the issuance of common stock, including shares related to optionsand warrants, during the 2001 Period.  The primary reason for this decrease relates to a higher level of private placementactivity during the 2001 Period to provide an increased level of working capital for the Company and higher option exerciseactivity during the 2001 Period as a result of the higher stock price at that time. We also raised a net amount of $483,611 fromthe issuance of debt in the 2002 Period compared with a net amount of $58,128 in the 2001 Period.

        Cash used in investing activities during the2002 Period was $208,097 as compared with cash used by investing activities of $221,539 for the 2001 Period. The cash used inboth periods was primarily the result of capital expenditures at EBT.

           Theprincipal source of our liquidity has been funds received from exempt offerings of common and preferred stock. In the event that weneed additional funds, we may seek to sell additional debt or equity securities. While we expect to be able to obtain any fundsneeded for operations, there can be no assurance that any of these financing alternatives can be arranged on commerciallyacceptable terms. We believe that our success in reaching profitability will be dependent upon the viability of our products andtheir acceptance in the marketplace, and our ability to obtain additional debt or equity financings in the future. Our independentauditor’s, Sprouse & Anderson, L.L.P., expressed uncertainty as to the ability of the Company to continue as a goingconcern based on current losses and accumulated  past losses from operations and our past reliance on raising outside capital.See “Independent Auditor’s Report.” We have received similar opinions from our auditors in each year since1995.

        We expect to continue to incur substantialexpenses for research and development  ("R&D") and product testing. Further, we believe that certain products that may bedeveloped by potential licensees of our technology may not be available for commercial sale or routine use for a period of one totwo years. While we would likely receive initial license payments, ongoing royalty streams related to those licenses will not beavailable until potential licensees have introduced products using our technology. Therefore, it is anticipated that thecommercialization of our existing and proposed products will require additional capital in excess of our currentfunding.

        The combined effect of the foregoing mayprevent us from achieving sustained profitability for an extended period of time. Because the timing and receipt of revenues fromthe sale of products will be tied to the achievement of certain product development, testing and marketing objectives which cannotbe predicted with certainty, there may be substantial fluctuations in our results of operations. If revenues do not increaseas rapidly as anticipated, or if product development, testing, and marketing require more funding than anticipated, we may berequired to curtail our expansion or seek additional financing from other sources.

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**ITEM 3.  CONTROLSAND PROCEDURES**

       Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with theparticipation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), ofthe effectiveness of our disclosure controls and procedures.  Based on that evaluation, the CEO and CFO have concluded thatthe Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Companyin reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of theirevaluation, there were no significant changes in the Company's internal controls or in other factors that could significantlyaffect the disclosure controls, including any corrective actions with regard to significant deficiencies and materialweaknesses.

 

 

 

 

 

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** PART II. OTHER INFORMATION**

**ITEM 1.  LEGAL  PROCEEDINGS**

        The Company previously had a royalty agreementwith Texas Digital Systems, Inc. (TDS) which was terminated by TDS pursuant to the terms of the agreement as of December 31,1999.  Under the terms of the agreement, TDS was prohibited from using the Company’s technology after the termination ofthe agreement. The Company believed that TDS was continuing to ship products using our technology and contacted TDS. TDS responded,in part, by filing suit against the Company and EBT for breach of contract  in the 272nd Judicial District Court inBrazos County Texas on July  26, 2000. The Company was not served with notice of this suit until December 5, 2000. The Companyfiled a counterclaim against TDS and sought substantial damages and an injunction against TDS for continuing to use theCompany’s technology in TDS products after the termination of the agreement. The case was settled in September 2002 and an 8Kwas filed as a result of that settlement. All parties agreed to drop all claims against other parties to the lawsuit with noadmission of liability by any party. The Company has no further potential liability in conjunction with this case.

**ITEM 2.  CHANGES IN SECURITIES**

        During the quarter ended September 30, 2002 ina series of private placements of the Company’s common stock in exempt offerings under Regulation D of the Securities act of1933, the Company issued 2,028,333 shares of its common stock and received proceeds of $557,250. These shares were issued at pricesthat represented a slight discount to the market price of the stock at the time of the offerings. No commissions were paid inconnection with the sale of these shares. The Company also issued 872,397 shares in settlement of $277,808 in liabilities and75,000 shares as payment for services rendered. Following is a summary of shares issued:

George Fetterman

120,000

Patrick Dolan

233,333

Sarah Thomas

100,000

Winstead Sechrest & Minick

325,000

Donald T. Locke

30,000

Delta Traders

500,000

First London Securities

300,000

Dan Cafolla & Associates Pension Plan

82,500

Daniel & Louise Cafolla

92,500

Ralph & Sandra Parry

200,000

Robert Sprotte Pension Plan

400,000

Western National Marketing LLC

75,000

Pinnacle Fund LP

517,397

**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**

        (a)   Exhibits:  See Index toExhibits on page 19 for a descriptive response to this item.

       (b)   Reports on Form 8-K:

                (1)                SI Diamond’s Current Report onForm 8-K dated as of September 12, 2002.

                 (2)                SI Diamond’s Current Report onForm 8-K dated as of September 27, 2002.

                 (3)               SI Diamond’s Current Report onForm 8-K dated as of October 8, 2002.

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed onits behalf by the undersigned, thereunto duly authorized.

 

SI DIAMOND TECHNOLOGY, INC. (Registrant)
 
Date:      November 1, 2002

                /s/ Marc W.Eller                              Marc W. Eller Chairman and Chief Executive Officer (Principal Executive Officer)
  
Date:      November 1, 2002

        /s/ Douglas P.Baker                                Douglas P. Baker Chief Financial Officer (Principal Financial Officer)
 
Date:      November 1, 2002

        /s/ TracyVaught                                        Tracy Vaught Chief Accounting Officer (Principal Accounting Officer)

 

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**Certificate of Chief Executive Officer**

I, Marc W. Eller, certify that:

1.        I have reviewed this quarterly report on Form 10-Q of SI Diamond Technology,Inc. (“SIDT”).

2.        Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstancesunder which such statements were made, not misleading with respect to the period covered by this quarterly report.

3.        Based on my knowledge, the financial statements and other financialinformation included in this quarterly report fairly present, in all material respects, the financial condition, results ofoperations and cash flows of SIDT as of, and for, the periods presented in this quarterly report.

4.        SIDT’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) for SIDT and wehave:

a.           designed such disclosure controls and procedures to ensurethat material information relating to SIDT, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this quarterly report is being prepared;

b.           evaluated the effectiveness of SIDT's disclosure controlsand procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c.           presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5.        SIDT's other certifying officers and I have disclosed, based on our mostrecent evaluation, to our auditors and the audit committee of SIDT's board of directors :

a.           all significant deficiencies in the design or operation ofinternal controls which could adversely affect SIDT's ability to record, process, summarize and report financial data and haveidentified for SIDT's auditors any material weaknesses in internal controls; and

b.           any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in SIDT's internalcontrols.          

6.        SIDT’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or in other factors that could significantly affectinternal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

Date:    November 7,2002 

***/s/ Marc W. Eller***_______________________________Marc W. Eller, Chairman of the Boardand Chief Executive Officer

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**Certificate of Chief Financial Officer**

 

I, Douglas P. Baker, certify that:

1.        I have reviewed this quarterly report on Form 10-Q of SI Diamond Technology,Inc. (“SIDT).

2.        Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstancesunder which such statements were made, not misleading with respect to the period covered by this quarterly report.

3.        Based on my knowledge, the financial statements and other financialinformation included in this quarterly report fairly present, in all material respects, the financial condition, results ofoperations and cash flows of SIDT as of, and for, the periods presented in this quarterly report.

4.        SIDT’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) for SIDT and wehave:

a.           designed such disclosure controls and procedures to ensurethat material information relating to SIDT, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this quarterly report is being prepared;

b.           evaluated the effectiveness of SIDT's disclosure controlsand procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c.           presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5.        SIDT's other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant's auditors and the audit committee of SIDT's board of directors:

a.           all significant deficiencies in the design or operation ofinternal controls which could adversely affect SIDT's ability to record, process, summarize and report financial data and haveidentified for SIDT's auditors any material weaknesses in internal controls; and

b.           any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in SIDT's internal controls.

6.        SIDT's other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or in other factors that could significantly affectinternal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

Date:    November 7,2002

 

/***s/ Douglas P. Baker***___________________Douglas P. BakerVice-President andChief Financial Officer

 

 

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**INDEX TO EXHIBITS**

The following documents are filed as part of this Report:

    Exhibit

         11      Computation of (Loss) Per CommonShare

        99.1    Certification of Periodic Financial Reports

        99.2    Certification of Periodic Financial Reports

 

 

 

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