**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 June 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 ofJuly 30, 2002, the registrant had 73,288,000 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--June 30, 2002 and December 31, 2001 | 3 |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     |                                                                                                                                                                                                                                       | Consolidated Statements of Operations--Three Months and Six Months Ended           June 30, 2002 and 2001 | 4 |
|                                |                                                                                                                                                                                                                                       |  |  |
|                                     |                                                                                                                                                                                                                                       | Consolidated Statements of CashFlows--Six Months Ended           June 30, 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

13 
Signatures

14

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

**ASSETS**

**(Unaudited)June 30, 2002**

**December 31, 2001**
 
Current assets:

Cash and cash equivalents

$

48,127 

$

261,861 

Marketable Securities

25,500 

23,850 

Accounts receivable, trade – net of allowance for doubtful              accounts of$52,911 in 2002 and $47,581 in 2001

421,895 

528,147 

Inventories

193,295 

232,389 

Prepaid expenses and other assets

115,750 

94,189 
 
               Total current assets

804,567 

1,140,436 

Property and equipment, net

667,079 

557,431 

Intangible assets, net

10,000 

70,000 

Officer receivable

62,500 

62,500 

Other Assets

8,688 

8,688 
 
               Total assets

$

1,552,834 

$

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

Current liabilities:

Accounts payable

$

862,007 

$

705,458 

Current portion of long-term debt

51,187 

64,431 

Obligations under capital lease

21,008 

19,987 

Notes payable

1,531,215 

1,398,302 

Accrued liabilities

492,709 

263,050 

Customer deposits

160,454 

211,790 
 
               Total current liabilities

3,118,580 

2,633,018 
Notes payable, long-term

13,607 

39,832 

Obligations under capital lease

71,077 

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 at            June 30, 2002 and850 shares issued and outstanding at December 31, 2001

– 

850 

Common stock, $.00l par value, 120,000,000 shares authorized,      72,188,000 and 66,899,584 shares issued and outstanding at      June 30, 2002 and December 31, 2001, respectively

72,188 

66,900 

Additional paid-in capital

67,472,618 

65,324,967 

Accumulated deficit

(69,195,236)

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

(1,650,430)

(945,614)
 
               Total liabilities and stockholders' (deficit)

$

1,552,834 

$

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 June 30, 
For the Six MonthsEnded  June 30,      
2002
 
2001
 
2002
 
2001
              
Revenues
          
    Sign Construction

$
572,082 

$
498,067 

$
1,368,948 

$
1,027,922 

    Governmentcontracts.
 
121,663 
 
55,416 
 
208,066 

78,601 

    Privately funded
 
329,411 
 
85,427 
 
500,000 
 
211,979 

    Other
 
29,570 
 
– 
 
 57,655 
 
– 
     
      **Total Revenues **
 
1,052,726 
 
638,910 
 
2,134,669 
 
1,318,502 
     
 
     
Cost of sales
 
683,439 
 
541,374 
 
1,493,755 
 
1,108,312 

Selling, general and administrative expenses
 
1,123,189 
 
788,304 
 
2,169,024 
 
1,753,632 

Research and development
 
536,507 
 
  545,637 
 
  912,591 
 
  942,522 
              
Operating costs and expenses
 
2,343,135 
 
1,875,315 
 
4,575,370 
 
3,804,466 
         
Loss from operations
 
(1,290,409)
 
(1,236,405)
 
(2,440,701)
 
(2,485,964)
         
Other income (expense), net
        
     Net realized and unrealized gains (losses)
        
        on marketablesecurities
 
(750)
 
713 
 
770 
 
(21,775)

     Interest Expense
 
(196,874)
 
(14,338)
 
(416,732)
 
(28,607)

     Other
 
70 
 
1,388 
 
(242)
 
1,401 
              
Loss before taxes
 
(1,487,963)
 
(1,248,642)
 
(2,856,905)
 
(2,534,945)

Provision for taxes
 
– 
 
– 
 
– 
 
– 
     
Net loss
 
( 1,487,963)
 
(1,248,642)
 
(2,856,905)
 
(2,534,945)
          
Less accretion on convertible preferred stock
 
(16,245)
 
(21,250)
 
(37,495)
 
(42,500)
              
Net loss applicable to commonshareholders
 
$(1,504,208)

$(1,269,892)
 
$(2,894,400) 
 
$(2,577,445)
              
Loss per share
        
       Basic
 
$(0.02)
 
$(0.02)
 
$(0.04)
 
$(0.04)
     
       Diluted
 
$(0.02)

$(0.02)

$(0.04)

$(0.04)
              
Weighted average shares outstanding
        
       Basic
 
70,112,730 
 
63,648,286 
 
68,732,758 
 
62,924,823 
     
       Diluted
 
70,112,730 
  
63,648,286 
 
68,732,758 
 
62,924,823 
     
See notes to consolidated financial statements.

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

 

**For  the Six Months EndedJune 30,**

**2002**

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

Net loss

$

(2,856,905)

$

(2,534,945)

Adjustments to reconcile net loss to net

cash used in operating activities:

Depreciation and amortization expense

173,152 

318,674 

Amortization of discount on debt

292,913 

– 

Net realized and unrealized (gain) loss on marketable securities

(770)
21,775 Option repricing expense
– 

5,000 

Changes in assets and liabilities:

Accounts receivable, trade

 106,252 

52,414 

Notes receivable

– 

– 

Inventories

39,094 

(94,763) 

Prepaid expenses and other current assets

 (21,561)
 (36,324)
Accounts payable and accrued liabilities

419,958 

(5,304)

Customer deposits and deferred revenue

 

(51,336)

461,589 
** **** **
Total adjustments

957,702 

723,061 
** **** **
Net cash used in operating activities

(1,899,203)

(1,811,884)
** **** **
Cash flows from investing activities:

 

Capital expenditures

(222,800)

(273,373)

Proceeds from the sale of marketable securities

24,980 

– 

Purchase of marketable securities

(25,860) 
(37,487)** **** **
       Net cash used in investing activities

(223,680)
 
(310,860)
 
Cash flows from financing activities:
 
 

Repayment of notes payable

(99,190)
 
(135,814)

Proceeds from notes payable and long-term debt

600,000 
 
– 

Proceeds of stock issuance, net of costs

1,408,339 
 
2,510,504 
** **** ** 
       Net cash provided by financing activities

1,909,149 
 
2,374,690 
** **** ** 
Net increase (decrease) in cash and cash equivalents

(213,734) 
 
251,946  
Cash and cash equivalents, beginning of period

261,861 
 
8,818 
** **** ** 
Cash and cash equivalents, end of period

$

48,127 

$

260,764 
** **** **
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 the Company for the three and six monthperiods ended June 30, 2002 and 2001 have been prepared by the Company without audit pursuant to the rules and regulations of theSecurities and Exchange Commission. In the opinion of the Company’s management, all adjustments necessary to present fairlythe financial position, results of operations, and cash flows of the Company as of June 30, 2002 and 2001 and for the periods thenended have been made. Those adjustments consist of normal and recurring adjustments. The consolidated balance sheet of the Companyas of December 31, 2001 has been derived from the audited consolidated balance sheet of the Company as of that date.

        Certain information and note disclosures normally included in the Company’sannual financial statements prepared in accordance with generally accepted accounting principals have been condensed or omitted.These consolidated financial statements should be read in conjunction with a reading of the financial statements and notes theretoincluded in the Company’s Annual Report on Form 10KSB/A for 2001 as filed with the U.S.  Securities and ExchangeCommission.

        The results of operations for the three and six month periods ended June 30, 2002 arenot necessarily indicative of the results to be expected for the full year.

2.     Supplemental Cash Flow Information

        Cash paid for interest for the six months ended June 30, 2002 and 2001 was $10,617and $20,013, respectively. During the six months ended June 30, 2002, the Company had non-cash transactions related to theconversion of notes payable, including related accrued interest, into shares of the Company’s common stock. This transactionis described in greater detail in Note 3. In the six months ended June 30, 2001, the Company also had a non-cash transactionsrelated to the issuance of a note payable in the amount of $100,000 in connection with a lawsuit settlement. The settlement wasaccrued at December 31, 2000.

3.     Stockholders’ Equity

        In the six months ended June 30, 2002, the Company issued a total of 2,780,888restricted shares of its common stock and received net proceeds of $1,272,089 in a series of exempt offerings under Regulation D ofthe Securities Act of 1933. The Company also received $136,250 and issued 230,000 shares as the result of the exercise of optionsduring the period. The Company also issued 1,009,911 shares of restricted common stock in payment of two convertible note payablesand related accrued interest. The face amount of the notes totaled $500,000 and the related accrued interest was $33,750.

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

4.     Notes Payable and Long Term Debt

        The Company issued a note payable due December 31, 2002 in the gross amount of$500,000 during the six months ended June 30, 2002. This note and resulting accrued interest due is convertible into shares of theCompany’s common stock at a rate of $0.50 per share. The Company valued the conversion rights at $60,000 and recorded this asa discount at the time of issuance. This discount is being amortized to interest expense over the term of the note. The Companyalso issued an additional short-term note payable in the amount of $100,000 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 agreement with 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 of the agreement. The Company believed that TDSwas continuing to ship products using our technology and contacted TDS. TDS responded, in part, by filing suit against the Companyand EBT for breach of contract  in the 272nd Judicial District Court in Brazos County Texas on July  26, 2000.The Company was not served with notice of this suit until December 5, 2000. It is the Company’s view that the TDS claimagainst the Company has little merit and that a significant reason that TDS filed suit was to obtain venue in its home venue ofBrazos County rather than in the Company’s home county of Travis County. The Company is vigorously pursuing its claim againstTDS and is seeking substantial damages and an injunction against TDS for continuing to use the Company’s technology in TDSproducts after the termination of the agreement. The case, originally scheduled for trial in June 2002, is now scheduled for trialin September 2002.

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

6.    Business Segments

Following is information related to the Company’s business segments for the six months ended June 30, 2002and 2001:

ANI

SBOA

EBT

All Other

Total

2002

Revenue

 $
 715,736 

 $
1,368,948 

 $
49,985 

 $
                -  

$
 2,134,669 

Profit (Loss)

  (684,330)

  (19,601)

  (1,041,367)

  (1,111,607)

  (2,856,905)

Expenditures for

  long-lived assets

  52,327 

1,301 

  166,401 

  2,771 

  222,800 

2001

Revenue

 $
290,580 

 $
1,027,922 

 $
-  

 $
-  

 $
1,318,502 

Profit (Loss)

  (829,963)

  7,423 

  (1,176,773)

  (535,632)

  (2,534,945)

Expenditures for

  long-lived assets

  6,627 

11,436 

  247,693 

  7,617 

  273,373 

7.     Related Party Transactions

        The Company has made a non-interest bearing advance in the amount of $62,500 to itsPresident and Chief Operating Officer, Dr. Zvi Yaniv. The advance as been classified as long-term because there are no scheduledrepayment terms. The Company has a short-term note payable in the amount of $100,000, bearing interest at a rate of 5% to Mr. JakeSchroepfer, the Chief Executive Officer of Electronic Billboard Technology, Inc.

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

 

8.     Subsequent Events

        For the period from July 1, 2002 through July 30, 2002, the Company issued a total of1,100,000 restricted shares of its common stock and received net proceeds of approximately $335,000 in a series of exempt offeringsunder Regulation D of the Securities Act of 1933.

9.     Recently Issued Accounting Standards

        In July 2001 FAS 141, Business Combinations, and FAS 142 Goodwill and OtherIntangible Assets, were issued. These pronouncements provide that all business combinations initiated after June 30, 2001 beaccounted for using the purchase method and that goodwill be reviewed for impairment rather than amortized, beginning on January 1,2002. Adoption of these pronouncements did not have a material effect on the financial statements. Any business combinationtransactions in the future would be accounted for under this new guidance.

        In September 2001, the FASB issued Statement 143, Asset Retirement Obligations. ThisStatement addresses financial accounting and reporting for obligation associated with the retirement of tangible long-lived assetsand the associated asset retirement costs. The Statement will be effective for the Company's fiscal year ending December2003.  The Company does not believe that the adoption of this pronouncement will have a material effect on its financialstatements.

        In August 2001, the FASB issued Statement 144, Accounting for Impairment or Disposalof Long-Lived Assets. This Statement addresses financial accounting and reporting for the impairment or disposal of long-livedassets. The Statement will be effective for the Company's fiscal year ending December 2002.  The Company does not believe thatthe adoption of this pronouncement will have a material effect on its financial statements.

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

The following is management’s discussion and analysis of certain significant factors that have affected theCompany’s financial position and operating results during the periods included in the accompanying consolidated financialstatements.

FORWARD-LOOKING STATEMENTS

       This Form 10-QSB contains certain forward-looking statements that we believe are within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harborscreated by such acts. For this purpose, any statements that are not statements of historical fact may be deemed to beforward-looking statements, including the statements under "Management's Discussion and Analysis of Financial Condition and Resultsof Operations" regarding our strategy, future operations, future expectations or future estimates, financial position andobjectives 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 statements contain such identifyingwords. These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertaintiesand assumptions relating to our operations, results of operations, competitive factors, shifts in market demand and other risks anduncertainties.

       Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions couldbe inaccurate and actual results may differ from those indicated by the forward-looking statements included in this Form10-QSB.  In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-QSB,you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve suchresults. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results, changes inassumptions or changes in other factors affecting such forward-looking statements.

**Six months ended June 30, 2002 and 2001**

**OVERVIEW**

        During the six months ended June 30, 2002, the Company's primary revenues were earnedas a result of the construction of signs at our Sign Builders of America, Inc. (“SBOA”) subsidiary and reimbursedresearch expenditures at our Applied Nanotech, Inc. (“ANI”) subsidiary. We continued to incur substantial expenses insupport of the development of our proprietary Carbon  Nanotube Based Field Emission (“CFE”) Technology and in thedevelopment of our electronic display products. As more fully discussed in our Annual Report on Form 10-KSB/A for the year endedDecember 31, 2001, we expect to incur additional research and development expenses throughout 2002 in developing our CFEtechnology. We began receiving revenues from our Electronic Billboard Technology, Inc. (“EBT”) subsidiary in the 1sthalf of 2002 as the result of the sale of electronic display products.
**OUTLOOK**
        We expect our external cash needs for 2002 to be approximately $5.0 million, of whichapproximately $2.3 million has already been raised. We intend to fund our overall cash needs through a combination of SBOA sales,reimbursements for research, license agreements, and issuance of debt and equity securities.  Successful introduction of ourelectronic display products resulting in significant customer orders could cause our cash needs to exceed these levels, however,such customer orders would also result in increased availability of funding.

          We anticipate that losses will continue in 2002 as wecontinue to fund the development of our CFE technology and continue installations of our electronic display products. There can beno assurance that we will be profitable in the future. Our future profitability is dependent on either generating significantrevenues through EBT, or the signing of significant royalty agreements.  Full commercial development of our technology andelectronic display will require additional funds that may not be available at terms acceptable to us. 

9
   
          We developed a plan to allow ourselves to maintainoperations until we are able to sustain ourselves on our own revenue, however our current cash levels are not sufficient to reachthat point. We have the existing resources, including commitments, to continue operations for approximately two to three months. Wehave been operating in this manner for an extended period of time and we believe that we have the ability to continue to raiseshort term funding, if necessary, to enable us to continue operations until our plan can be completed. Our plan is primarilydependent on raising funds through the licensing of our technology and through additional debt and equity offerings. We are alsoconcentrating on raising revenue by seeking customers for our electronic display products.

        This plan is based on current development plans, current operating plans, the currentregulatory environment, historical experience in the development of electronic products and general economic conditions. Changescould occur which would cause certain assumptions on which this plan is based to be no longer valid. Although we do not expectfunding our operations to be a problem, if adequate funds are not available from operations, or additional sources of financing, wemay have to eliminate, or reduce substantially, expenditures for research and development, testing and production of its products,or obtain funds through arrangements with other entities that may require us to relinquish rights to certain of our technologies orproducts. Such results would materially and adversely affect us.

**RECENT DEVELOPMENTS**

        Effective January 1, 2002, ANI entered into a contract with a large Japanese displaymanufacturer to perform contract research related to our CFE nanotube technology.  A payment of $500,000 was received inJanuary 2002. This revenue was recognized as it was earned under the contract. The contract was completed as of June 30, 2002.

        In June 2002, we announced that our board of directors approved the exploration ofstrategies to separate EBT and ANI by either the partial sale and/or spin off of either subsidiary. No transaction has beencompleted yet, but we continue to evaluate potential alternatives.
**RECENT ACCOUNTING PRONOUNCEMENTS**
        In July 2001, FAS 141, Business Combinations, and FAS 142 Goodwill and OtherIntangible Assets, were issued. These pronouncements provide that all business combinations initiated after June 30, 2001 beaccounted for using the purchase method and that goodwill be reviewed for impairment rather than amortized, beginning on January 1,2002. Adoption of these pronouncements did not have a material effect on the financial statements. Any business combinationtransactions in the future would be accounted for under this new guidance.

        In September 2001, the FASB issued Statement 143, Asset Retirement Obligations. ThisStatement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assetsand the associated asset retirement costs. The Statement will be effective for the Company's fiscal year ending December2003.  The Company does not believe that the adoption of this pronouncement will have a material effect on its financialstatements.

        In August 2001, the FASB issued Statement 144, Accounting for Impairment or Disposalof Long-Lived Assets. This Statement addresses financial accounting and reporting for the impairment or disposal of long-livedassets. The Statement will be effective for the Company's fiscal year ending December 2002.  The Company does not believe thatthe adoption of this pronouncement will have a material effect on its financial statements.

 

10
   
**ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (cont.)**
RESULTS OF OPERATIONS
        Our revenues for the second quarter ended June 30, 2002 totaled $1,052,726 comparedto $638,910 for the second quarter of 2001. We earned $2,134,669 in revenues during the six month period ended June 30, 2002, (the“2002 Period”) as compared with $1,318,502 during the six month period ended June 30, 2001 (the “2001Period”). During the 2002 Period, we had revenues of $1,368,948 from SBOA, $715,736 from ANI, and $49,985 from EBT. In the2001 Period, we had revenue of $1,027,922 from SBOA, $290,580 from ANI, and no revenue from EBT. The ANI revenues in both periodswere substantially all the result of reimbursed research expenditures. In the 2002 Period, $208,066 of these reimbursements werefrom government programs, $500,000 was from a private research contract with a large Japanese display manufacturer, and $7,670 frommiscellaneous product sales. In the 2001 Period, $78,601 of these reimbursements were from government programs, and $211,979 wasfrom a private research contract with the same display manufacturer. The SBOA revenues in both periods were all from the sale ofsigns designed, manufactured, or installed by SBOA. Revenues increased by approximately 33% at SBOA in the 2002 Period as comparedwith the 2001 Period. During the 2002 Period, EBT received $49,985 from the sale of products and services.

        We had a total revenue backlog of $498,140 as of June 30, 2002, which represents asubstantial decrease from the total revenue backlog of $1,604,996 that existed at June 30, 2001. The SBOA backlog at June 30, 2002was $461,936 compared with $590,512 at June 30, 2001. At June 30, 2002 ANI had a government contract backlog of $36,204. The ANIbacklog at June 30, 2001 was $1,014,484 and was composed of $608,679 related to government-funded research and $405,805 related toprivately funded research. EBT had no backlog at either June 30, 2002 or 2001. Our ability to perform continued research, orfulfill our backlog, should not require significant additional personnel.

        For the 2002 Period, our cost of sales were $1,493,755, or a gross margin of 30%, ascompared with $1,108,312or a gross margin of 16%, for 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 June 30, 2002, we also expect margins at SBOA  to continue to remain at current levels.

        Our selling, general, and administrative expenses were $2,169,024 for the 2002Period, compared with $1,753,632 for the 2001 Period. The primary reason for the increase was an increase in payroll and relatedcosts, particularly as a result of new hires at EBT.

**       ** We incurred research and development expenses  of $912,591 in  the2002 Period.  This was slightly lower than the $942,522 incurred in the 2001 Period and results from a slightly lower level ofresearch activity. We expect to continue to incur expense throughout the remainder of  2002 in support of additional researchand development activities related to the commercial development of our CFE technology and our electronic products. We expect theoverall research and development in 2002 to be lower than 2001 as a result of the increased funding available to ANI and thetransition of the EBT products from the development stage to the installation stage. We also expect internally funded research anddevelopment expense to decrease slightly in the second half of the year for the same reasons.

We had net realized and unrealized gains on our marketable securities portfolio of $770 in 2002 as compared with net realizedand unrealized losses of $21,775 in 2001. Our interest expense increased from $28,607 in 2001 Period to $416,732 in the 2002 Periodas a result of our greater reliance on debt to fund our operations in the 2002 Period than in the 2001 Period.

11
   
**ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (cont.)**

**FINANCIAL CONDITION AND LIQUIDITY**

        At June 30, 2002, we had cash and cash equivalents in the amount of $48,127 ascompared with cash and cash equivalents of $261,861 at December 31, 2001.  This decrease in cash is primarily the result ofcash used in operating activities and cash used in investing activities, partially offset by cash provided by financing activities.. The cash used in  operations was primarily the result of our net operating loss for the periods. The cash used in operatingactivities during the 2002 Period of $1,899,203 was slightly higher than the $1,811,884 used in the 2001 Period. The primary reasonfor the increase was the increased operating costs at EBT, partially offset by increased research and development spending duringthe 2002 Period.

        As described in greater detail in the notes to the financial statements, we receivedproceeds of $1,408,339 from the issuance of common stock related to private placements and options during the 2002 Period, ascompared with $2,510,504 from the issuance of common stock, including shares related to options and warrants, during the 2001Period.  The primary reason for this decrease relates to a higher level of private placement activity during the 2001 Periodto provide an increased level of working capital for the Company and higher option exercise activity during the 2001 Period as aresult of the higher stock price at that time. We also raised approximately $335,000 of additional funds from July 1, 2002 throughJuly 30, 2002 through private placements of our common stock and an additional $100,000 through the issuance of short-term notespayable.        

        Cash used in investing activities during the 2002 Period was $223,680 as comparedwith cash used by investing activities of  $310,860 for the 2001 Period. The cash used in both periods was primarily theresult of capital expenditures at EBT.

            The principal source of our liquidity has beenfunds received from exempt offerings of common and preferred stock. In the event that we need additional funds, we may seek to selladditional debt or equity securities. While we expect to be able to obtain any funds needed for operations, there can be noassurance that any of these financing alternatives can be arranged on commercially acceptable terms. We believe that our success inreaching profitability will be dependent upon the viability of our products and their acceptance in the marketplace, and ourability to obtain additional debt or equity financings in the future. Our independent auditor’s, Sprouse & Anderson,L.L.P., expressed uncertainty as to the ability of the Company to continue as a going concern based on current losses andaccumulated  past losses from operations and our past reliance on raising outside capital. See “IndependentAuditor’s Report.” We have received similar opinions from our auditors in each year since 1995.

        We expect to continue to incur substantial expenses for research anddevelopment  ("R&D"), product testing, and product marketing. 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. Our electronic display products are availablefor installation and being installed in certain locations at the present time. In some cases, our business model calls for us toinstall electronic display products and generate revenues from the sale of advertising. As a result we must incur the cost ofinstalling the products and recover that cost through the advertising revenues generated by these products. Therefore, it isanticipated that the commercialization of our existing and proposed products will require additional capital in excess of ourcurrent funding.

        The combined effect of the foregoing may prevent us from achieving sustainedprofitability for an extended period of time. Because the timing and receipt of revenues from the sale of products will be tied tothe achievement of certain product development, testing and marketing objectives which cannot be predicted with certainty, theremay be substantial fluctuations in our results of operations.  If revenues do not increase as rapidly as anticipated, or ifproduct development, testing, and marketing require more funding than anticipated, we may be required to curtail our expansion orseek additional financing from other sources.

12
   
**  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 the terms of the agreement as of December 31, 1999.  Under the terms of theagreement, TDS was prohibited from using the Company’s technology after the termination of the agreement. The Companybelieved that TDS was continuing to ship products using our technology and contacted TDS. TDS responded, in part, by filing suitagainst the Company and EBT for breach of contract in the 272nd Judicial District Court in Brazos County Texas on July26, 2000. The Company was not served with notice of this suit until December 5, 2000. It is the Company’s view that the TDSclaim against the Company has little merit and that a significant reason that TDS filed suit was to obtain venue in its home venueof Brazos County rather than in the Company’s home county of Travis County. The Company is vigorously pursuing its claimagainst TDS and is seeking substantial damages and an injunction against TDS for continuing to use the Company’s technologyin TDS products after the termination of the agreement. The case, originally scheduled for trial in June 2002, is now scheduled fortrial in September 2002.

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

        (a)   Exhibits:  See Index to Exhibits on page 15for a descriptiveresponse to this item.

       (b)   Reports on Form 8-K:

              (1)     None

13
   
**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:      August 5, 2002

                /s/ Marc W.Eller                              Marc W. Eller Chairman and Chief Executive Officer (Principal Executive Officer)
  
Date:      August 5, 2002

        /s/ Douglas P.Baker                                Douglas P. Baker Chief Financial Officer (Principal Financial Officer)
 
Date:      August 5, 2002

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

 

14
   
**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

 

 

 

15 |