**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 ended March 31,2002

 ̈                             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 of April 30, 2002, the registrant had69,502,327 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 Balance Sheets--March 31, 2002 and December 31, 2001 | 3 |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     |                                                                                                                                                                                                                                       | Consolidated Statements of Operations--Three Months Ended           March 31, 2002 and 2001 | 4 |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     |                                                                                                                                                                                                                                       | Consolidated Statements of Cash Flows--Three Months Ended           March 31, 2002 and 2001 | 5 |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     |                                                                                                                                                                                                                                       | Notes to Consolidated Financial Statements | 6 |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     | Item 2.  Management's Discussion and Analysis of Financial Condition                      andResults of Operations | 9 |
|                                |                                                                                                                                                                                                                                       |  |  |
| Part II.  Other Information    |                                                                                                                                                                                                                                       |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     | Item 1. Legal Proceedings                                                                                                                                                                                                             | 13 
Item 6.  Exhibits and Reports on Form 8-K

14 
Signatures

15

2
   
**PART I.  FINANCIAL INFORMATION**
**ITEM 1.  FINANCIAL STATEMENTS**
**SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**ASSETS**

**(Unaudited) March 31, 2002**

**December 31, 2001**
 
Current assets:

Cash and cash equivalents

$

372,066 

$

261,861 

Marketable Securities

26,250 

23,850 

Accounts receivable, trade – net of allowance for doubtful              accounts of $54,215 in 2002 and $47,581 in 2001

589,623 

528,147 

Inventories

178,933 

232,389 

Prepaid expenses and other assets

121,374 

94,189 
 
               Total current assets

1,288,246 

1,140,436 

Property and equipment, net

546,466 

557,431 

Intangible assets, net

40,000 

70,000 

Officer receivable

62,500 

62,500 

Other Assets

8,688 

8,688 
 
               Total assets

$

1,945,900 

$

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

Current liabilities:

Accounts payable

$

603,232 

$

705,458 

Current portion of long-term debt

64,098 

64,431 

Obligations under capital lease

20,490 

19,987 

Notes payable

1,626,134 

1,398,302 

Accrued liabilities

447,677 

263,050 

Deferred Income

329,411 

– 

Customer deposits

170,366  

211,790 
 
               Total current liabilities

3,261,408 

2,633,018 
Notes payable, long-term

26,881 

39,832 

Obligations under capital lease

76,516 

81,819 

Commitments and contingencies

– 

– 
Stockholders' equity:

Preferred stock, $1.00 par value, 2,000,000 shares authorized;      Series G convertible, 850 shares issued and outstanding at            March 31, 2002 and December 31, 2001

850 
850 

Common stock, $.00l par value, 120,000,000 shares authorized,      68,372,327 and 66,899,584 shares issued and outstanding at      March 31, 2002 and December 31, 2001, respectively

68,372 

66,900 

Additional paid-in capital

66,219,146 

65,324,967 

Accumulated deficit

(67,707,273)

(66,338,331)
 
               Total stockholders' equity (deficit)

(1,418,905)

(945,614)
 
               Total liabilities and stockholders' equity

$

1,945,900 

$

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 March 31,**

**2002**

**2001**
 ** **
Revenues

Sign construction

$

796,866 

$

529,855 

Government contracts

86,403 

23,185 

Privately funded research

170,589 

126,552 

Other

 

28,085 

 

– 
 ** **
          Total Revenues

1,081,943 

679,592 
 ** **
Cost of sales

810,316 

566,938 

Selling, general and administrative

expenses

1,045,835 

965,328 

Research and development

376,084 

396,885 
 ** **
Operating costs and expenses

2,232,235 

1,929,151 

Loss from operations

(1,150,292)

(1,249,559)

Other income (expense), net

Net realized and unrealized gains (losses) on marketable securities

1,520 

(22,488)

Interest expense

(219,858)

(14,269)

Other

(312)

13 
 ** **
Loss before taxes

(1,368,942)

(1,286,303)

Provision for taxes

– 

– 

Net loss

$

(1,368,942)

$

(1,286,303)
 ** **
Less accretion on convertible preferred stock

(21,250)

(21,250)
 ** **
Net loss applicable to common stockholders

$

(1,390,192)

$

(1,307,553)
 ** **
Loss per share

Basic

$

(0.02)

$

(0.02)
 ** **
Diluted

$

(0.02)

$
(0.02)
 ** **
Average shares outstanding

Basic

67,318,116 

60,829,605 
 ** **
Diluted

67,318,116 

60,829,605 
 ** **
See notes to consolidated financial statements.

4
   
**SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**

 

**For  the Three Months Ended March 31,**

**2002**

**2001**
** **** **
Cash flows from operating activities:

Net loss

$

(1,368,942)

$

(1,286,303)

Adjustments to reconcile net loss to net

Cash used in operating activities:

Depreciation and amortization expense

84,694 

99,808 

Amortization of discount on debt

147,832 

– 

Common shares issued for services

– 

– 

Net realized and unrealized (gain) loss on marketable securities

(1,521)
22,488 
Changes in assets and liabilities:

Accounts receivable, trade

(61,476)

82,697 

Notes receivable

– 

– 

Inventory

53,456 

8,368 

Prepaid expenses and other current assets

 (27,185)
 (3,811)
Accounts payable and accrued liabilities

101,151 

203,344 

Customer deposits and deferred income

 

287,987 

523,808 
** **** **
Total adjustments

584,938 

936,702 
** **** **
Net cash used in operating activities

(784,004)

(349,601)
** **** **
Cash flows from investing activities:

 

Capital expenditures

(43,729)

(322,175)

Purchase of marketable securities

(25,859)

(37,488)

Proceeds from the sale of marketable securities

24,980 
– 
** **** **
       Net cash used in investing activities

(44,608)

(359,663)

Cash flows from financing activities:

 

Repayment of notes payable and capital lease obligations

(68,084)

(126,541)

Proceeds from long term debt

500,000 

115,613 

Proceeds of stock issuance, net of costs

506,901 

1,934,368 
** **** **
       Net cash provided by financing activities

938,817 

1,923,440 
** **** **
Net increase in cash and cash equivalents

110,205 

1,214,176 

Cash and cash equivalents, beginning of period

261,861 

8,818 
** **** **
Cash and cash equivalents, end of period

$

372,066 

$

1,222,994 
** **** **
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-month periods ended March 31, 2002 and 2001 have been prepared by the Company without audit pursuant to therules and regulations of the Securities and Exchange Commission. In the opinion of the Company’s management, all adjustmentsnecessary to present fairly the financial position, results of operations, and cash flows of the Company as of March 31, 2002 and2001 and for the periods then ended have been made. Those adjustments consist of normal and recurring adjustments. The consolidatedbalance sheet of the Company as of December 31, 2001 has been derived from the audited consolidated balance sheet of the Companyas 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 for 2001 as filed with theU.S.  Securities and Exchange Commission.

        The results of operations for the three-monthperiod ended March 31, 2002 are not necessarily indicative of the results to be expected for the full year.

2.     Supplemental Cash Flow Information

        Cash paid for interest for the three monthsended March 31, 2002 and 2001 was  $11,513 and $15,256, respectively. During the quarter ended March 31, 2002, the Company hada non-cash transaction related to the conversion of a note payable, including related accrued interest in to shares of theCompany’s common stock. This transaction is described in greater detail in Note 3. In the three months ended March 31, 2001,the Company had a non-cash transactions related to the issuance of a note payable in the amount of $100,000 in connection with alawsuit settlement. This settlement was accrued at December 31, 2000.

3.     Capital Stock

        In the quarter ended March 31, 2002, theCompany issued 762,832 restricted shares of its common stock and received net proceeds of $370,652 cash in exempt offerings underRegulation D of the Securities Act of 1933. The Company also received $136,250 and issued 230,000 shares of common stock as theresult of the exercise of options during the quarter. The Company also issued 479,911 shares of restricted common stock in paymentof a convertible note payable and related accrued interest. The gross amount of the note was $250,000 and related accrued interestwas $18,750.

4.     Notes Payable and Long Term Debt

        The Company issued a note payable due December31, 2002 in the gross amount of $500,000 during the quarter ended March 31, 2002. This note and resulting accrued interest due isconvertible into shares of the Company’s common stock at a rate of $0.50 per share. The Company valued the conversion rightsat $60,000 and recorded this as a discount at the time of issuance. This discount is being amortized to interest expense over theterm of the note.

6
   
**SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES**

**NOTES 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. It is theCompany’s view that the TDS claim against the Company has little merit and that a significant reason that TDS filed suit wasto obtain venue in its home venue of Brazos County rather than in the Company’s home county of Travis County. The Company isvigorously pursuing its claim against TDS and is seeking substantial damages and an injunction against TDS for continuing to usethe Company’s technology in TDS products after the termination of the agreement. The case, originally scheduled for trial inJune 2002, is now scheduled for trial in September 2002.

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

6. Business Segments

Following is information related to the Company’s business segments forthe quarters ended March 31, 2002 and 2001:

ANI

SBOA

EBT

All Other

Total

2002

Revenue

$ 264,592 

$ 796,866 

$ 20,485 

$               -  

$   1,081,943 

Profit (Loss)

  (358,493)

  2,209 

  (402,619)

  (610,039)

  (1,368,942)

Expenditures for

     long-lived assets

29,249 

  462 

12,028 

  1,990 

  43,729 

2001

Revenue

$ 149,737 

$ 529,855 

 $           -  

  $            -  

  $   679,592 

Profit (Loss)

  (389,574)

  (61,718)

  (523,634)

  (311,377)

  (1,286,303)

Expenditures for

     long-lived assets

  84,989 

  29,684 

  203,948 

  3,554 

  322,175 

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.

7
   
**SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

8.     Subsequent Events

        In April 2002,  the Company received$300,000 and issued 600,000 share of common stock in exempt offerings under Regulation D of the Securities Act of 1933. Inaddition, the Company converted $250,000 of notes payable and $15,000 in related accrued interest to common stock at a price of$0.50 per share in lieu of a cash payment. A total of 530,000 shares were issued in connection with this conversion.

9.     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.

        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.

8
   
**ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

        The following ismanagement’s discussion and analysis of certain significant factors that have affected the Company’s financial positionand operating results during the periods included in the accompanying consolidated financial statements.

**FORWARD-LOOKING STATEMENTS**

       This Form 10-QSB contains certainforward-looking statements that we believe are within the meaning of Section 27A of the Securities Act of 1933 and Section 21E ofthe Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by such acts. For this purpose,any statements that are not statements of historical fact may be deemed to be forward-looking statements, including the statementsunder "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our strategy, futureoperations, future expectations or future estimates, financial position and objectives of management. Those statements in this Form10-QSB containing the words "believes," "anticipates," "plans," "expects" and similar expressions constitute forward-lookingstatements, although not all forward-looking statements contain such identifying words. These forward-looking statements are basedon our current expectations and are subject to a number of risks, uncertainties and assumptions relating to our operations, resultsof operations, competitive factors, shifts in market demand and other risks and uncertainties.

       Although we believe that theassumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate and actual resultsmay differ from those indicated by the forward-looking statements included in this Form 10-QSB.  In light of the significantuncertainties inherent in the forward-looking statements included in this Form 10-QSB, you should not consider the inclusion ofsuch information as a representation by us or anyone else that we will achieve such results. Moreover, we assume no obligation toupdate these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affectingsuch forward-looking statements.

        **Three Months Ended March 31, 2002 and2001:**

**OVERVIEW**

        During the quarter ended March 31, 2002, ourprimary revenues were earned as a result of the construction of signs at our Sign Builders of America, Inc. (“SBOA”)subsidiary and reimbursed research expenditures at our Applied Nanotech, Inc. (“ANI”) subsidiary. We continued to incursubstantial expenses in support of the development of our proprietary Carbon Nanotube Based Field Emission (“CFE”)Technology and in the development of our electronic display products. As more fully discussed inour Annual Report on Form10-KSB for the year ended December 31, 2001, we expect to incur additional research and development expenses throughout 2002 indeveloping our CFE technology. We expect to begin receiving revenues through our Electonic Billboard Technology, Inc.(“EBT”) subsidiary related to its electronic display products during the current year. We expect this revenue to beboth as the result of product sales and the sale of advertising on company owned displays installed on customerpremises.
**OUTLOOK**
        We expect our external cash needs for 2002 tobe approximately $6.0 million, of which approximately $1.4 million has already been raised. We intend to fund those needs through acombination of SBOA sales, reimbursements for research, license agreements, and issuance of debt and equity securities.  Alicense agreement with a substantial up-front payment could significantly reduce this number. Successful introduction of ourelectronic display products resulting in significant customer orders would cause our cash needs to exceed these levels, however,such customer orders would also result in increased availability of funding.

          We anticipate thatlosses will continue throughout 2002 as we continue to fund the development of our CFE nanotube technology and continueinstallations of our electronic display products. There can be no assurance that we will be profitable in the future.  Fullcommercial development of our technology and electronic billboard and related electronic display will require additional funds thatmay not be available at terms acceptable to us.  

        We have developed a plan to allowourselves to maintain operations until we are able to sustain ourselves on our own revenue. Our plan is primarily dependent onraising funds through the licensing of our technology and through additional debt and equity offerings. We are also concentratingon raising revenue by seeking customers for our electronic display products. However, our current cash, includingcommitments, isonly sufficient to allow us to maintain operations for approximately four to six weeks. We believe that we have the ability tocontinue to raise short term funding, if necessary, to enable us to continue operations until our plan can be completed.

9
   
**ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (continued)**

        This plan is based on currentdevelopment plans, current operating plans, the current regulatory environment, historical experience in the development ofelectronic products and general economic conditions. Changes could occur which would cause certain assumptions on which this planis based to be no longer valid. Although we do not expect funding our operations to be a problem, if adequate funds are notavailable from operations, or additional sources of financing, we may have to eliminate, or reduce substantially, expenditures forresearch and development, testing and production of its products, or obtain funds through arrangements with other entities that mayrequire us to relinquish rights to certain of its technologies or products. Such results would materially and adversely affectus.

**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 is being recognized as it is earned under the contract.

        In January 2002, EBT announced that it willroll out its electronic display products to approximately 80 McDonald’s locations in Hawaii. The products will be installedand owned by EBT. McDonald’s and EBT will share in the advertising revenue generated by the displays. The roll out will beginafter certain levels of advertising have been presold.
**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 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.

**RESULTS OF OPERATIONS**

        Our revenues for the quarter ended March 31,2002 (the “2002 Period”) totaled $1,081,943 compared to $679,592 for the quarter ended March 31, 2001 (the “2001Period”). During the 2002 Period, we had revenues of  $796,866 from SBOA, $264,592 from ANI, and $20,485 from EBT. The ANI revenues in the both periods were all the result of reimbursed research expenditures under government programs and privateresearch contracts. In the 2001 Period, ANI had revenues of  $149,737. The SBOA revenues in both periods were all from thesale of signs designed, manufactured, or installed by SBOA. Revenues from SBOA increased to $796,866 in the 2002 period from$529,855 in the 2001 period. The EBT revenues in the 2002 Period resulted from the sale of miscellaneous products and services.There were no EBT revenues in the 2001 Period.

       We had a total revenue backlog of $1,009,226 asof March 31, 2002. The portion of that backlog that related to SBOA was $461,762. This represents a decrease from the SBOA backlogof $581,589 at March 31, 2001. ANI had a total backlog of $522,464 at March 31, 2002, of which $329,411 was related to privatelyfunded research and $193,053 was related to government-funded research. At March 31, 2001, ANI had a backlog of $559,148 related togovernment-funded research and $473,448 related to privately funded research. EBT had no backlog at March 31, 2001 and a backlog of$25,000 at March 31, 2002. EBT expects to begin generating advertising during the current fiscal year as a result of theinstallation of its electronic displays at customer sites.

10
   
**ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (continued)**

        For the 2002 Period, our cost of sales was$810,316, or 75% of revenues, as compared with $566,938, which was 83% of revenues, for the 2001 Period. The resulting margin of25% in the 2002 Period was higher than the 17% margin in the 2001 Period. This increased margin resulted primarily from increasedoverall revenues, particularly at SBOA, that resulted in a greater absorption of fixed costs.  We expect our future margins tocontinue to increase from the 25% margin that resulted in this quarter as EBT begins to generate advertising revenue from itselectronic display products and as ANI enters into additional license or royalty agreements. Based on the strength of the SBOAbacklog at March 31,  2002, we also expect margins at SBOA  to continue to remain at current levels.

        Our  selling, general, and administrativeexpenses were $1,045,835 for the 2002 Period, compared with $965,328 for the 2001 Period. The primary reason that the 2002 periodwas higher than the 2001 period related to increased payroll related costs. This results from both new employees and higher payrollcosts associated with existing employees.

        We incurred research and developmentexpenses  of $ 396,885 for  the 2001 Period.  Our research and development cost decreased slightly in the 2002Period to $376,084.  This decrease results both from a higher level of outside funding for our research and a greater focus ondeployment of EBT products, rather than continued development. We expect total research and development expense to decline for thebalance of the year.  We expect to continue to incur expense in 2002 in support of additional research and developmentactivities related to the commercial development of our CFE nanotube technology and our electronic display technology, however weexpect the overall research and development expense in 2002 to be lower than 2001 as a result of the increased funding available toANI and the transition of EBT products from the development stage to the installation stage. We also expect internally fundedresearch and development to decrease from the 1st quarter level for the same reasons.

        We had net realized and unrealized losses onour marketable securities portfolio of $22,488 in 2001 as compared with net realized and unrealized gains of $1,520 in 2002. Ourinterest expense increased substantially in the 2002 Period because of our substantially increased use of debt, rather than equity,funding during the period.

**FINANCIAL CONDITION AND LIQUIDITY**

        At March 31, 2002, we had cash and cashequivalents in the amount of $372,066 as compared with cash and cash equivalents of $261,861 at December 31, 2001.  Thisincrease in cash is primarily the result of cash provided by financing activities, partially offset by cash used in operatingactivities and cash used in investing activities. The cash used in  operations was primarily the result of our net operatingloss for the period. The cash used in operating activities during the 2002 Period of $784,004 was substantially higher than the$349,601 used in the 2001 Period. The primary reason for the increase was that fewer advance payments were received from customersduring the 2002 period and increased customer receivable levels at March 31, 2002.

        As described in greater detail in the notes tothe financial statements, we received net proceeds of $506,901 from the issuance of common stock related to private placements andoptions during the 2002 Period, as compared with $1,934,368 from the issuance of common stock, including shares related to optionsand warrants, during the quarter ended March 31, 2001.  The primary reason for this increase relates to a higher level ofprivate placement activity during the 2001 Period to provide an increased level of working capital for the Company. We alsoreceived $500,000 in proceeds from the issuance of notes payable during the 2002 Period.   

        Cash used in investing activities during the2002 Period was $44,608 as compared with cash used by investing activities of  $359,663 for the 2001 Period. The cash used inthe 2001 Period resulted primarily from the purchase of equipment and electronic display products. The cash used in the 2002 Periodresulted primarily from the purchase of research equipment.

11
   
**ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)**

         The principal source of ourliquidity has been funds received from exempt offerings of common and preferred stock. In the event that we need additional funds,we may seek to sell additional debt or equity securities. While we expect to be able to obtain any funds needed for operations,there can be no assurance that any of these financing alternatives can be arranged on commercially acceptable terms. We believethat our success in reaching profitability will be dependent upon the viability of our products and their acceptance in themarketplace, and our ability to obtain additional debt or equity financings in the future. Our independent auditors, Sprouse &Anderson, L.L.P., expressed uncertainty as to the ability of the Company to continue as a going concern based on accumulated past losses from operations and our working capital deficiency. See “Independent Auditor’s Report.” We havereceived similar opinions from our auditors in each year since 1995.

        We expect to continue to incur substantialexpenses for research and development  ("R&D"), product testing, and product marketing. Further, we believe that certainproducts that may be developed by potential licensees of our technology may not be available for commercial sale or routine use fora period of one to two years. While we would likely receive initial license payments, ongoing royalty streams related to thoselicenses will not be available until potential licensees have introduced products using our technology. Our electronic displayproducts are available for installation and being installed in certain locations at the present time. In some cases, our businessmodel calls for us to install electronic display products and generate revenues from the sale of advertising. As a result we mustincur the cost of installing the products and recover that cost through the advertising revenues generated by these products.Therefore, it is anticipated that the commercialization of our existing and proposed products will require additional capital inexcess of our current funding.

        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 increase asrapidly as anticipated, or if product development, testing, and marketing require more funding than anticipated, we may be requiredto curtail our expansion or seek additional financing from other sources.

 

 

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**ITEM 2: PART II.  OTHER INFORMATION**
**ITEM 1. LEGAL PROCEEDINGS**
               The Company previously had a royalty agreement with Texas Digital Systems, Inc. (TDS) which was terminated by TDS pursuant to theterms of the agreement as of December 31, 1999.  Under the terms of the agreement, TDS was prohibited from using theCompany’s technology after the termination of the agreement. The Company believed that TDS was continuing to ship productsusing our technology and contacted TDS. TDS responded, in part, by filing suit against the Company and EBT for breach of contractin the 272nd Judicial District Court in Brazos County Texas on July 26, 2000. The Company was not served with notice ofthis suit until December 5, 2000. It is the Company’s view that the TDS claim against the Company has little merit and that asignificant reason that TDS filed suit was to obtain venue in its home venue of Brazos County rather than in the Company’shome county of Travis County. The Company is vigorously pursuing its claim against TDS and is seeking substantial damages and aninjunction against TDS for continuing to use the Company’s technology in TDS products after the termination of the agreement.The case, originally scheduled for trial in June 2002, is now scheduled for trial in September 2002.

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

        (a)   Exhibits:  See Index toExhibits on page 16 for a descriptive response to this item.

        (b)  Reports on Form 8-K:

                 (1)     None

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**SIGNATURES**

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registranthas duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

SI DIAMOND TECHNOLOGY, INC. (Registrant)

Date:       May 1, 2002

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

        /s/ Douglas P.Baker                                Douglas P. Baker Chief Financial Officer (Principal Financial Officer)

Date:       May 1, 2002

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

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**INDEX TO EXHIBITS**

The following documents are filed as part of this Report:

    Exhibit

            11   Computationof (Loss) Per Common Share

                            

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