<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-QSB


[X]  Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934

     For the quarterly period ended June 30, 1999

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange 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
filing requirements for the past 90 days.
                                 Yes [X] No [ ]

         As of August 6, 1999, the registrant had 52,522,407 shares of common
stock, par value $.001 per share, issued and outstanding.

         Transitional Small Business Disclosure Format.
                                 Yes [ ] No [X]


<PAGE>   2

                          SI DIAMOND TECHNOLOGY, INC.
                                     INDEX

<TABLE>
<CAPTION>

Part I  Financial Information                                                                                     PAGE
                                                                                                                  ----
<S>                                                                                                               <C>
         Item 1.  Consolidated Financial Statements

              Consolidated Balance Sheets--June 30, 1999 and December 31, 1998..................................    3

              Consolidated Statements of Operations--Three Months and Six Months Ended
                June 30, 1999 and 1998..........................................................................    4

              Consolidated Statements of Cash Flows--Six Months Ended
                June 30, 1999 and 1998..........................................................................    5

              Notes to Consolidated Financial Statements........................................................    6

         Item 2.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations.........................................................................   10

Part II  Other Information

         Item 1.  Legal proceedings.............................................................................   14

         Item 5.  Other Information.............................................................................   15

         Item 6.  Exhibits and Reports on Form 8-K..............................................................   15



Signatures      ................................................................................................   16
</TABLE>


                                       2
<PAGE>   3

                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                              (UNAUDITED)
                                      ASSETS                                                    JUNE 30,          DECEMBER 31,
                                                                                                  1999                1998
                                                                                              ------------        ------------

<S>                                                                                          <C>                  <C>
Current assets:
   Cash and cash equivalents .............................................................    $  2,393,622        $      2,636
   Accounts receivable, trade ............................................................         105,790             184,020
   Inventory .............................................................................          62,329              65,529
   Prepaid expenses and other assets .....................................................         411,783             101,508
                                                                                              ------------        ------------

     Total current assets ................................................................       2,973,524             353,693

   Property, plant and equipment, net ....................................................         159,891             160,670
   Intangible assets, net ................................................................           6,000               9,000
   Other assets ..........................................................................          11,600              14,500
                                                                                              ------------        ------------
     Total assets ........................................................................    $  3,151,015        $    537,863
                                                                                              ============        ============

                   LIABILITIES AND STOCKHOLDERS' EQUITY  (DEFICIT)

Current liabilities:
   Accounts payable ......................................................................    $    739,795        $  1,419,604
   Notes payable .........................................................................              --           1,165,000
   Accrued liabilities ...................................................................         771,784             584,987
   Billings in excess of costs and estimated earnings on uncompleted contracts ...........         144,843               4,770
                                                                                              ------------        ------------

     Total current liabilities ...........................................................       1,656,422           3,174,361

Commitments and contingencies ............................................................              --                  --

Stockholders' equity (deficit):
   Preferred stock, $1.00 par value, 2,000,000 shares authorized;
     Series A convertible, 100 shares issued and
       outstanding at December 31, 1998 ..................................................              --                 100
     Series G convertible, 1,550 and 1,600 shares issued and outstanding at
       June 30, 1999 and December 31, 1998, respectively .................................           1,550               1,600
   Common stock, $.00l par value, 120,000,000 shares authorized,
   51,358,611 and 45,986,617 shares issued and outstanding at
   June 30, 1999 and December 31, 1998, respectively .....................................          51,358              45,987
Additional paid-in capital ...............................................................      53,582,231          52,019,707
Accumulated deficit ......................................................................     (52,140,546)        (54,703,892)
                                                                                              ------------        ------------

     Total stockholders' equity (deficit) ................................................       1,494,593          (2,636,498)
                                                                                              ------------        ------------

     Total liabilities and stockholders' equity (deficit) ................................    $  3,151,015        $    537,863
                                                                                              ============        ============
</TABLE>

               The accompanying notes are an integral part of the
                      consolidated financial statements.


                                       3
<PAGE>   4

                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)


<TABLE>
<CAPTION>

                                                                   For the Three Months Ended           For the Six Months Ended
                                                                            June 30,                             June 30,
                                                                 ------------------------------     -------------------------------
                                                                     1999             1998               1999              1998
                                                                     ----             ----               ----              ----

<S>                                                              <C>               <C>               <C>               <C>
Revenues ...................................................     $    142,380      $    112,446      $  5,799,497      $    450,666
                                                                 ------------      ------------      ------------      ------------

Cost of sales ..............................................           80,660           591,699           100,091         1,406,402
Selling, general and administrative expenses ...............          574,348           562,951         1,795,636         1,255,222
Research and development ...................................          378,549           303,672           759,398           585,692
                                                                 ------------      ------------      ------------      ------------


     Operating costs and expenses ..........................        1,033,557         1,458,322         2,655,125         3,247,316

Income (loss) from operations ..............................         (891,177)       (1,345,876)        3,144,372        (2,796,650)

Other income (expense), net ................................           83,539           665,041          (581,026)          595,532
                                                                 ------------      ------------      ------------      ------------


Income (loss) before Federal income Tax ....................         (807,638)         (680,835)        2,563,346        (2,201,118)

Federal income Tax .........................................               --                --                --                --
                                                                 ------------      ------------      ------------      ------------


Net Income  (loss) .........................................         (807,638)         (680,835)        2,563,346        (2,201,118)

Less preferred stock dividend ..............................          (38,750)          (18,262)          (77,695)          (89,325)
                                                                 ------------      ------------      ------------      ------------

Net Income (loss) applicable to common shareholders ........     $   (846,388)     $   (699,097)     $  2,485,651      $ (2,290,443)
                                                                 ============      ============      ============      ============

Earnings (loss) per share

     Basic .................................................     $      (0.02)     $      (0.02)     $       0.05      $      (0.08)
                                                                 ============      ============      ============      ============
     Diluted ...............................................     $      (0.02)     $      (0.02)     $       0.05      $      (0.08)
                                                                 ============      ============      ============      ============

Weighted average shares outstanding

     Basic .................................................       50,773,826        34,436,519        49,294,145        30,600,328
                                                                 ============      ============      ============      ============
     Diluted ...............................................       50,773,826        34,436,519        55,569,195        30,600,328
                                                                 ============      ============      ============      ============
</TABLE>

               The accompanying notes are an integral part of the
                            financial statements,.


                                       4
<PAGE>   5


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                  FOR THE SIX MONTHS ENDED
                                                                                                           JUNE 30,
                                                                                              --------------------------------
                                                                                                  1999                 1998
                                                                                              ------------        ------------


<S>                                                                                           <C>                 <C>
Cash flows from operating activities:
     Net income (loss) ...................................................................    $  2,563,346        $ (2,201,118)
       Adjustments to reconcile net income (loss) to net
         cash provided by (used in) operating activities:
       Depreciation and amortization expense .............................................          46,279             450,229
       Gain on disposal of assets ........................................................              --            (820,697)
       Interest paid in common stock .....................................................          44,852                  --
       Changes in assets and liabilities:
         Accounts receivable, trade ......................................................          78,320             384,834
         Inventory .......................................................................           3,200                  --
         Prepaid expenses and other current assets .......................................        (310,275)             22,395
         Accounts payable and accrued liabilities ........................................        (493,012)            291,788
         Billings in excess of costs and estimated earnings on uncompleted
           contracts .....................................................................         140,073              (1,230)
                                                                                              ------------        ------------
              Total adjustments ..........................................................        (490,653)            327,319
                                                                                              ------------        ------------
         Net cash provided by (used in) operating activities .............................       2,072,693          (1,873,799)
                                                                                              ------------        ------------
Cash flows from investing activities:
       Capital expenditures ..............................................................         (42,500)            (46,194)
       Proceeds from the sale of equipment ...............................................              --           1,750,480
       Decrease in deposits and other assets .............................................           2,900                  --
                                                                                              ------------        ------------
         Net cash provided by (used in) investing activities .............................         (39,600)          1,704,286
                                                                                              ------------        ------------
Cash flows from financing activities:
       Repayment of notes payable ........................................................        (410,000)           (930,000)
       Bank overdraft ....................................................................              --            (156,686)
       Proceeds from notes payable .......................................................         250,000             780,000
       Redemption of preferred stock .....................................................              --            (332,011)
       Proceeds of stock issuance, net of costs ..........................................         517,893             811,189
                                                                                              ------------        ------------
         Net cash provided by financing activities .......................................         357,893             172,492
                                                                                              ------------        ------------
Net increase in cash and cash equivalents ................................................       2,390,986               2,979
Cash and cash equivalents, beginning of period ...........................................           2,636               1,000
                                                                                              ------------        ------------
Cash and cash equivalents, end of the period .............................................    $  2,393,622        $      3,979
                                                                                              ============        ============
</TABLE>

               The accompanying notes are an integral part of the
                      consolidated financial statements.


                                       5
<PAGE>   6


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.      Basis of Presentation

         The accompanying unaudited consolidated financial statements of SI
Diamond Technology, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments consisting only of normal
recurring adjustments considered necessary for a fair presentation, have been
included. All significant intercompany transactions and balances have been
eliminated in consolidation. Operating results for the three and six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 1999. For further information,
refer to the financial statements and footnotes thereto for the year ended
December 31, 1998, included in the Company's 1998 Annual Report on Form 10-KSB.
The balance sheet information for December 31, 1998 has been derived from the
audited financial statements at that date.

2.       Supplemental Cash Flow Information

         Cash paid for interest for the six months ended June 30, 1999 and 1998
was approximately $19,173 and $27,319, respectively.

3.       Stockholders' Equity

         In February 1999, the Company issued 200,000 restricted shares of its
common stock for a total of $110,000 in cash in an exempt offering under
Regulation D of the Securities Act of 1933. The company also received $321,955
and issued 823,212 common shares as the result of the exercise of options and
received $85,938 and issued 125,000 common shares as the result of the exercise
of warrants during the six months ended June 30, 1999. From July 1, 1999
through August 6, 1999, the Company received an additional $154,547 and issued
372,125 common shares as the result of the exercise of options and received
$368,750 and issued 442,500 common shares as the result of the exercise of
warrants.

         In March 1999, all outstanding shares of the Company's Series A
preferred shares were converted into 125,275 shares of its common stock. During
the six months ended June 30, 1999, 50 shares of the Company's Series G
preferred shares were converted into 58,232 shares of its common stock. An
additional 300 shares of the Company's Series G preferred shares were converted
into 361,671 shares of the Company's common stock from July 1 1999 through
August 6, 1999.

         As described in greater detail in Note 4, a total of 4,240,275 shares
of the Company's common stock were issued during the six months ended June 30,
1999 in connection with convertible notes payable issued by the Company.

4.       Notes Payable

         As described in greater detail in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998, the Company had a total of
$1,165,000 in short term notes payable outstanding at December 31, 1998. A
total of $805,000 of these notes were convertible into shares of the Company's
common stock at the option of the lender. During January 1999, the Company
borrowed an additional $200,000 under similar convertible notes and $50,000
under notes payable in cash. During the six months ended June 30, 1999,
$1,005,000 of the convertible notes, including accrued interest, were converted
into 4,240,275 shares of the Company's common stock. A total of $410,000 of
short-term notes payable, including accrued interest, were repaid in cash.

         At December 31, 1998, $100,000 of short-term convertible notes payable
were payable to the Company's Chief Executive Officer. These notes resulted
from the CEO's personal guarantee of a loan made by an investor. The loan was
made to the CEO, who in turn loaned the money to the Company under the same
terms. In April 1999, these notes payable were assigned by the CEO to the
holder of the underlying note payable. The assignee of these notes payable
converted the notes, including accrued interest, into 442,904 shares of the
Company's common stock in April 1999.


                                       6
<PAGE>   7

                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.       Contingencies

Customer Claim at Plasmatron Coatings and Systems, Inc.

         On May 20, 1996, Semi-Alloys Company ("Plaintiff"), a former customer
of Plasmatron Coatings and Systems, Inc. ("Plasmatron"), a wholly-owned
subsidiary of the Company, filed a complaint with the Supreme Court of the
State of New York, County of Westchester. The complaint names Plasmatron, the
Company and Westchester Fire Insurance Company as defendants. Plaintiff claims
a breach of contract related to $1 million of coating equipment delivered by
Plasmatron in 1993, prior to the Company's ownership of Plasmatron. The
Plaintiff claims the equipment does not perform as required under the contract.
Plaintiff seeks to recover compensatory, consequential and incidental damages.
The amount of this claim is to be determined at trial. The trial was originally
scheduled for August 1999, however the trial date has been postponed by the
court and not been rescheduled. At this time, the outcome can not be predicted
with any certainty and the potential liability, if any, is unknown. The Company
believes it has meritorious defenses and intends to continue to vigorously
defend this action.

         On April 30, 1998, Universal Bonding Company, managing general agent
for Westchester Fire Insurance Company filed a complaint with the Superior
Court of New Jersey, Atlantic county. The Complaint named Richland Glass
Company, Inc., Robert Williams, Joan Williams, Bawa Singh, Narinder Singh,
Gaylord Evey and Doris Evey, all guarantors under the bond, as defendants. All
defendants were former owners, or associated with former owners, of Plasmatron.
Defendant Gaylord Evey filed an answer with the court naming Plasmatron, the
Company, Nicholas Rettino, and the Rettino Insurance agency as third party
defendants and asking for indemnification by the third party defendants. A
separate indemnification claim filed by Richland Glass against the same third
party defendants was consolidated with this case. The amount of this claim is
to be determined at trial; however, any potential amounts due by either the
Company or its subsidiary are dependent upon the finding of liability against
the bonding company in the New York case. No trial date has been set in the New
Jersey case.

Customer Claim at Diamond Tech One, Inc.

         On August 18, 1998, KDF Electronic & Vacuum Services, Inc., a vendor
of Diamond Tech One, Inc. ("DTO"), filed a complaint in the United Sates
District Court for the Southern District of New York against the Company for
unpaid debts of its subsidiary, Diamond Tech One, Inc. The Company was served
with notice of this suit on October 14, 1998. The Company settled the suit in
April 1999 by paying a portion of the amount owed by Diamond Tech One, Inc. in
exchange for a complete release from all further liability.

DiaGasCrown Venture

         In February 1995, the Company entered into an agreement with
Diagascrown, Inc. ("DGC"), a Russian joint stock Company controlled by
Gazcomplektimpex, a subsidiary of Gazprom, the Russian national natural gas
Company. In return for an equity position in the Company, DGC paid the Company
$5,000,000 and granted the Company an exclusive license to DGC display and
related diamond technology and license rights to all related background
patents. The Company has committed to perform $2.5 million in research and
development in Russia through February 1997. This research was allowed to be in
the form of travel and service performed by the Company's employees in Russia,
government funded research performed in Russia and through direct funding of
Russian efforts related to displays. According to its internal records, the
Company has spent approximately $2,000,000 on this research. Further spending
in Russia has been halted since 1996 pending agreement as to the nature and
amount of services to be performed in Russia for the remaining balance to be
spent under the original agreement


                                       7
<PAGE>   8

                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.       Contingencies

Outlook

         As a result of the royalty agreement signed in March 1999, the Company
was profitable for the six months ended June 30, 1999. It is anticipated that
the Company will be profitable for 1999, based on this royalty agreement, as it
continues to fund the development of its DFE technology and its electronic
billboard and related electronic display products. There can be no assurance
that the Company will be profitable in the future. Full commercial development
of the Company's DFE technology and electronic billboard may require additional
funds that may not be available at terms acceptable to the Company; however,
the Company expects to be able to obtain the funding necessary.

         The Company has developed a plan to allow it to maintain operations
until the Company is able to sustain itself on its own revenue. The plan is
primarily dependent on raising funds through the licensing of its technology
and through strategic partners and debt offerings. The Company is also
concentrating on raising revenue by seeking customers on a revenue sharing
basis for its electronic billboard product. Management believes that it has the
ability to continue to raise additional funding, if necessary, to enable it to
continue operations until its plan can be completed. At the present time the
Company has existing cash available to sustain it for a period of approximately
one year from the date of this report at current spending levels and based on
current spending plans.

         This plan is based on current development plans, current operating
plans, the current regulatory environment, historical experience in the
development of electronic products and general economic conditions. Changes
could occur which would cause certain assumptions on which this plan is based
to be no longer valid. The Company's plan is primarily dependent on increasing
revenues and raising additional funds through strategic partners and additional
debt offerings. If adequate funds are not available from operations, or
additional sources of financing, the Company may 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 the Company to relinquish rights to certain of its
technologies or products. Such results would materially and adversely affect
the Company.


6.       Business Developments

         In March 1999, the Company signed a license agreement with a large
Japanese manufacturer of information and office products. Under the terms of
this agreement, the Company received $5,000,000 on March 31, 1999 representing
gross royalties of $5,555,556, less related foreign taxes of $555,556. In
exchange for this payment, the Company granted the licensee a paid up worldwide
non-exclusive license to certain of the Company's patents and patent
applications.

         In June 1999, the Company completed a working model of the electronic
billboard that it has had under development for a period of approximately two
years. The Company is currently negotiating with various parties that are
interesting in obtaining similar electronic billboards from the Company.


                                       8
<PAGE>   9

                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.       Related Party Transactions

         As described in greater detail in Item 12 of the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998, the
Company's subsidiary, Electronic Billboard Technology, Inc. has entered into a
Patent Assignment and Royalty Agreement with Advanced Technology Incubator,
Inc., ("ATI"). ATI is owned by Dr. Zvi Yaniv, the Company's President and Chief
Operating Officer. The assignment is conditioned on an initial payment of
$200,000 from the Company to ATI. The payment was initially due February 15,
1999, but the time for payment was extended to April 15, 1999. In April 1999,
the agreement was amended to allow additional extensions, in three month
increments, for a period of up to one year from April 15, 1999. In exchange for
each three month extension, the Company is obligated to pay ATI $12,500. The
$200,000 initial payment required for the actual assignment of the Patent under
the agreement will be reduced for any amounts paid for the extension periods.
In April 1999, the Company paid ATI $12,500 and extended the payment period for
three months until July 15, 1999. In July 1999, the Company paid an additional
$12,500 to extend the patent until October 15, 1999. At that time the Company
can either complete the patent assignment in exchange for a payment of $175,00,
extend it for another three months for a payment of $12,500, or allow the
agreement to lapse.

8.       Income Taxes

         As discussed in more detail in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998, the Company had a net
operating loss of approximately $51 million available to it for federal income
tax purposes as of December 31, 1998. A portion of this net operating loss
carryforward was used to offset the taxable income for the six month period
ended June 30, 1999. If this net operating loss carryforward had not been
available, the Company would have recorded $875,000 in income tax for the six
month period ended June 30, 1999.

9.       Earnings Per Share

         The Company computes Earnings per share in accordance with SFAS No.
128, "Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic earnings per share is
computed by dividing the net income available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period. Common equivalent shares, composed of incremental common shares
issuable upon the exercise of stock options or warrants, the conversion of
convertible debts securities, or the conversion of convertible preferred stock
are included in diluted earnings per share to the extent such shares are
dilutive.


10.      Subsequent Events

         From July 1, 1999 through August 6, 1999 the Company received $368,750
and issued 442,500 shares of the Company's common stock as a result of the
exercise of warrants for the Company's common stock. The Company also issued
372,125 shares of common stock and received $154,547 in connection with the
exercise of options issued under employee stock option plans.


                                       9
<PAGE>   10

ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     SIX MONTHS ENDED JUNE 30, 1999 AND 1998

                                    OVERVIEW

     During the six months ended June 30, 1999, the Company's primary revenues
     were earned as a result of license agreement signed by the Company's Field
     Emission Picture Element Technology, Inc. ("FEPET") subsidiary. The
     Company continued to incur substantial expenses at Field Emission Picture
     Element Technology, Inc. ("FEPET") in support of the development of its
     proprietary Diamond Based Field Emission ("DFE") Technology. The Company
     also continued to incur significant product development costs at
     Electronic Billboard Technology, Inc. ("EBT") in connection with the
     completion of the working model of its electronic billboard product. As
     more fully discussed in the Company's Annual Report on Form 10-KSB for the
     year ended December 31, 1998, the Company expects to incur additional
     research and development expenses throughout 1999 in developing the
     Company's DFE technology and in refining, commercializing, and installing
     its electronic billboard product.

                              RECENT DEVELOPMENTS

     In March 1999, the Company signed a license agreement with a large
     Japanese manufacturer of information and office products. Under the terms
     of this agreement, the Company received $5,000,000 on March 31, 1999
     representing gross royalties of $5,555,556, less related foreign taxes of
     $555,556. In exchange for this payment, the Company granted the licensee a
     paid up worldwide non-exclusive license to certain of the Company's
     patents and patent applications.

     During the six months ended June 30, 1999, the Company converted a total
     of $1,005,000 of short-term notes payable into equity of the Company. This
     resulted in the issuance of 4,240,275 shares of the Company's common
     stock.

                             RESULTS OF OPERATIONS

     The Company's revenues for the second quarter ended June 30, 1999 totaled
     $142,380 compared to $112,446 for the second quarter of 1998. The Company
     earned $5,799,497 in revenues during the six month period ended June 30,
     1999, (the "1999 Period") as compared with $450,666 during the six month
     period ended June 30, 1998 (the "1998 Period"). During the 1999 Period,
     the Company had revenues of $5,648,426 from its FEPET subsidiary and
     $151,071 in revenues from its EBT subsidiary. FEPET had revenues of
     $5,555,556 from licensing certain of its patents and patent applications.
     The remaining $92,870 of FEPET revenue was derived from its collaborative
     efforts with Diamond Pro-Shop Nomura Co., Ltd. ("DPN"). Virtually all of
     the EBT revenues resulted from its royalty agreement with Texas Digital
     Systems ("TDS"). Revenues in the 1998 Period were substantially all from
     fabrication and assembly services at the Company's Diamond Tech One, Inc.
     ("DTO") subsidiary. The operating assets of DTO were sold in May 1998.

     The Company had a revenue backlog of $144,843 as of June 30, 1999 at
     FEPET. This backlog is the result of funds that have been received from
     DPN, but not yet recognized as revenue because the services related to
     these funds are to be performed in the future. EBT has no revenue backlog
     at March 31, 1999. For purposes of calculating its backlog, the Company
     includes only those verifiable commitments that exist as of the backlog
     date. Under the Company's agreement with TDS, the Company receives a
     royalty when TDS ships a product. During the 1999 Period, EBT received
     approximately $144,000 in royalties related to the TDS agreement. TDS has
     an agreement with a major national fast food chain, whereby the TDS
     product is available to franchisees. If all remaining franchisees ordered
     one unit, it would result in the Company receiving between $1,700,000 and
     $2,000,000 in future royalty payments. The Company's agreement with TDS
     ends in December 1999.

     The Company had no contract research revenues for the either the 1999
     Period or the 1998 Period. At June 30, 1999 and 1998, the Company had no
     research backlog of anticipated future revenues from governmental research
     contracts. The Company is continuing to fund research and development of
     the DFE technology despite the unavailability of any further reimbursement
     for these costs.


                                      10
<PAGE>   11


ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                 OF OPERATIONS


     For the 1999 Period, the Company's cost of sales were $100,091, or a gross
     margin of 98%, as compared with $1,406,402 or a negative gross margin of
     212%, for the 1998 Period. This increased margin resulted from a
     combination of factors. First, substantially all of the Company's revenue
     in the 1999 Period resulted from royalty agreements that have minimal
     ongoing costs associated with the agreement. In addition, the Company's
     DTO subsidiary, which accounted for the majority of sales and costs of
     sales in the 1998 Period had a negative margin due to low utilization of
     its facility which had relatively high fixed costs associated with its
     clean rooms.

     The Company's general and administrative expenses were $1,795,636 for the
     1999 Period, compared with $1,255,222 for the 1998 Period. The primary
     reason for the increase was a $500,000 fee paid in 1999 to an unrelated
     third party in connection with the patent license agreement that the
     Company completed in March 1999. Company sponsored research and
     development expenses for the 1999 Period were $759,398, as compared to
     $585,692 for the 1998 Period. This increase in research expense is
     primarily the result of the spending on the development of the Company's
     Electronic Billboard. The Company expects to continue to incur expense in
     1999 in support of additional research and development activities related
     to the commercial development of its DFE technology and its electronic
     billboard technology. The amount of these expenditures is dependent upon
     the amount of funding obtained from outside sources to support the
     research activities and level of spending on other internal activities.

     The Company had other expense of $581,026 in the 1999 Period compared to
     other income of $595,532 in the 1998 Period. The other expense in 1999 was
     primarily the result of foreign taxes of $555,556 associated with the
     Company's royalty agreement signed during March 1999. The other income in
     the 1998 Period was primarily the result of gains on the sale of assets
     associated with the Company's DTO subsidiary in May 1998.

                        LIQUIDITY AND CAPITAL RESOURCES

     At June 30, 1999, the Company had cash and cash equivalents in the amount
     of $2,393,622 as compared with cash and cash equivalents of $2,636 at
     December 31, 1998. This increase in cash is primarily the result of the
     cash provided by operations in the 1999 Period. The cash provided by
     operations was the result of the $5,000,000 received by the Company in
     connection with its patent license agreement, partially offset by other
     operating costs during the period. Based on the developmental stages of
     the Company's DFE and electronic billboard technologies, additional debt,
     equity, joint ventures, sale of product distribution or technology rights,
     or other financing will be required in the future. There can be no
     assurance that any of these financing alternatives can be arranged on
     commercially acceptable terms.

      As described in greater detail in the notes to the financial statements,
     the Company received proceeds of $517,893 from the issuance of common
     stock and $250,000 from the issuance of notes payable during the six
     months ended June 30, 1999. The Company also repaid $410,000 of notes
     payable during this period. This resulted in net cash provided by
     financing activities of $357,893 for the 1999 Period. Cash provided by
     financing activities was $172,492 for the 1998 Period.


                                      11
<PAGE>   12

ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS


     Cash provided by operating activities was $2,072,693 for the 1999 Period
     compared to cash used in operating activities of $1,873,799 for the 1998
     Period. The increase in the cash provided by operating activities was
     primarily the result of the patent license agreement signed during the
     1999 Period.

     Cash used in investing activities during the 1999 Period was $39,600 as
     compared with cash provided by investing activities of $1,704,286 for the
     1998 Period. The cash provided in the 1998 Period resulted primarily from
     sale of the DTO assets, while the cash used in the 1999 Period was
     primarily the result of equipment purchases.

     The principal source of the Company's liquidity has been the funds
     received from its initial public offering and from the subsequent foreign
     and exempt offerings of common stock or debt instruments. The Company may
     receive additional funds from the exercise of warrants, although there can
     be no assurance that such warrants will be exercised. When the Company
     needs additional funds, the Company may seek to sell additional debt or
     equity securities, secure joint venture partnerships, or sell certain
     technology rights. The Company may seek to increase its liquidity through
     bank borrowings or other financing. There can be no assurance that any of
     these financing alternatives can be arranged on commercially acceptable
     terms. The Company believes that its success in reaching profitability
     will be dependent upon the viability of its products and their acceptance
     in the marketplace, and its ability to obtain additional financing in the
     future. Wallace Sanders & Co., independent auditors of the Company,
     expressed substantial doubt as to the ability of the Company to continue
     as a going concern based on accumulated losses from operations. See
     "Independent Auditors' Report." included in the Company's 1998 Annual
     Report on Form 10-KSB.

     The Company expects to continue to incur substantial expenses for research
     and development ("R&D"), product testing, and product marketing. It is
     anticipated that the commercialization of the Company's existing and
     proposed products will require additional capital in excess of the
     Company's current funding. The combined effect of the foregoing may
     prevent the Company from achieving sustained profitability for an extended
     period of time. Because the timing and receipt of revenues from the sale
     of products will be tied to the achievement of certain product
     development, testing and marketing objectives which cannot be predicted
     with certainty, there may be substantial fluctuations in the Company's
     results of operations. If revenues do not increase as rapidly as
     anticipated, or if product development and testing and marketing require
     more funding than anticipated, the Company will be required to curtail its
     operations and seek additional financing from other sources.


                                      12
<PAGE>   13

ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS



                                    OUTLOOK

     As of June 30, 1999, the Company eliminated its deficit in both
     stockholder's equity and working capital. As a result of the royalty
     agreement signed in March 1999, it is anticipated that the Company will be
     profitable in 1999 as it continues to fund the development of its DFE
     technology and its electronic billboard and related electronic display
     products. There can be no assurance that the Company will be profitable in
     the future. Full commercial development of the Company's DFE technology
     and electronic billboard may require additional funds that may not be
     available at terms acceptable to the Company. The Company has developed a
     plan to allow it to maintain operations until the Company is able to
     sustain itself on its own revenue. At the present time the Company has the
     existing resources to sustain it for a period of approximately one year
     from the date of this report at current spending levels. The plan is
     primarily dependent on raising funds through the licensing of its
     technology and through strategic partners and debt offerings. The Company
     is also concentrating on raising revenue by seeking customers for its
     electronic billboard product. Management believes that it has the ability
     to continue to raise additional funding, if necessary, to enable it to
     continue operations until its plan can be completed.

     This belief is based on current development plans, the current state of
     the Company's business, the current regulatory environment, historical
     experience in the development of electronic products and general economic
     conditions. No assurance can be given that there will be no change that
     would cause available resources to be consumed before such time.
     Thereafter, if adequate funds are not available from operations or
     additional sources of financing, the Company will have to reduce
     substantially or eliminate expenditures for research and development,
     testing and production of its products, and associated overhead costs, or
     obtain funds through arrangements with other entities that may require the
     Company to relinquish rights to certain of its technologies or products.
     Such results could materially and adversely affect the Company.

                                YEAR 2000 UPDATE

     The Company has determined that the Year 2000 Issue will have an
     immaterial effect on the Company. The Year 2000 Issue is the result of
     computer programs being written using two digits rather than four to
     define the applicable year. Any of the Company's computer programs that
     have date-sensitive software may recognize a date using "00" as the year
     1900 rather than the year 2000. This could result in a system failure or
     miscalculations causing disruptions of operations, including, among other
     things, a temporary inability to process transactions, send invoices, or
     engage in similar normal business activities.

     Based on a recent assessment, the Company determined that it would be
     required to modify or replace portions of its software so that its
     computer systems will properly utilize dates beyond December 31, 1999. All
     of this software is prepackaged software that was purchased from outside
     vendors. The company upgraded its software during the quarter ended June
     30, 1999 and its internal systems are now Year 2000 compliant. If such
     upgrades were not installed on a timely basis, the Year 2000 Issue could
     have a material impact on the operations of the Company.

     The Company has determined that it is not vulnerable to a third party's
     failure to remediate its own Year 2000 Issues since it has no significant
     suppliers or large customers. The Company has also determined that it has
     no exposure to contingencies related to the Year 2000 Issue for the
     products it has sold. The Company is ensuring that all products currently
     under development by the Company will be Year 2000 compliant prior to the
     sale of such products.

     This assessment is based on the present circumstances of the Company in
     which the Company has virtually no customers and no significant suppliers.
     In this scenario, the Company's Year 2000 risk is virtually non-existent.
     If the Company's business plan is successful and it is able to develop and
     sell products, the Company may become subject to Year 2000 risk related to
     third parties. The Company intends to assess the risk associated with
     third party remediation of Year 2000 Issues at the time that it enters
     into any significant contracts or relationships with third parties and to
     develop a contingency plan at that time, if necessary.


                                      13
<PAGE>   14

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         On May 20, 1996, Semi-Alloys Company ("Plaintiff"), a former customer
of Plasmatron Coatings and Systems, Inc. ("Plasmatron"), a wholly-owned
subsidiary of the Company, filed a complaint with the Supreme Court of the
State of New York, County of Westchester. The complaint names Plasmatron, the
Company and Westchester Fire Insurance Company as defendants. Plaintiff claims
a breach of contract related to $1 million of coating equipment delivered by
Plasmatron in 1993, prior to the Company's ownership of Plasmatron. The
Plaintiff claims the equipment does not perform as required under the contract.
Plaintiff seeks to recover compensatory, consequential and incidental damages.
The amount of this claim is to be determined at trial. A trial date had
tentatively been set for August 1999. In June 1999, that trial date was
postponed and has not been rescheduled at the present time. At this time, the
outcome can not be predicted with any certainty and the potential liability, if
any, is unknown. The Company believes it has meritorious defenses and intends
to continue to vigorously defend this action.

On August 18, 1998, KDF Electronic & Vacuum Services, Inc., a vendor of Diamond
Tech One, Inc. ("DTO"), filed a complaint in the United Sates District Court
for the Southern District of New York against the Company for unpaid debts of
its subsidiary, Diamond Tech One, Inc. The Company was served with notice of
this suit on October 14, 1998. The Company settled the suit in April 1999 by
paying a portion of the amount owed by Diamond Tech One, Inc. in exchange for a
complete release from all further liability.


                                      14
<PAGE>   15

ITEM 5.   OTHER INFORMATION

CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements in this report are forward-looking statements concerning the
future operations of the Company. The Company is including the following
cautionary statement in this Quarterly Report on Form 10-QSB to make applicable
and take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statement made by, or on
behalf of, the Company. The factors identified in this cautionary statement are
important factors (but not necessarily all important factors) that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company.

Where any such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement, the Company
cautions that, while it believes such assumptions or basis to be reasonable and
makes them in good faith, assumed facts or basis almost always vary from actual
results, and the differences between assumed facts or basis and actual results
can be material, depending upon the circumstances. Where in any forward-looking
statement, the Company or its management expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement or expectation or belief will result or be achieved or accomplished.

Important factors that could cause the Company's actual results to differ from
results in forward-looking statements are incorporated herein by reference from
pages ii-vii of the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1998. The Company undertakes no obligation to publicly
update any forward-looking statements, whether as a result of new information,
future events, or otherwise. You are advised, however, to consult any further
disclaimers the Company may make on related subjects in our 10-QSB, 8-K, and
10KSB reports to the SEC.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a) Exhibits: See Index to Exhibits on page 17 for a descriptive
             response to this item.

         (b) Reports on Form 8-K:

             (1) Current Report on Form 8-K (Item 5) dated as of April 16,
                 1999.


                                      15
<PAGE>   16

                                   SIGNATURES


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

<TABLE>

<S>                                                               <C>
                                                                  SI DIAMOND TECHNOLOGY, INC.
                                                                  (Registrant)



Date:    August 11, 1999                                                             /s/ Marc W. Eller
                                                                  ----------------------------------------------------
                                                                  Marc W. Eller
                                                                  Chairman and Chief Executive Officer
                                                                  (Principal Executive Officer)



Date:    August 11, 1999                                                           /s/ Douglas P. Baker
                                                                  ----------------------------------------------------
                                                                  Douglas P. Baker
                                                                  Chief Financial Officer
                                                                  (Principal Financial Officer and Principal Accounting
                                                                  Officer)
</TABLE>


                                      16
<PAGE>   17

                               INDEX TO EXHIBITS


The following documents are filed as part of this Report:

<TABLE>
<CAPTION>
   Exhibit
   -------
   <S>            <C>
       11         Computation of (Loss) Per Common Share

       13         Forward-Looking Statements and Important Factors Affecting
                  Future Results (pages ii - vii of the Company's Annual Report
                  on Form 10-KSB for the fiscal year ended December 31, 1998,
                  incorporated by reference into the Quarterly Report on Form
                  10-QSB for the fiscal quarter ended June 30, 1999).

     27.1         Financial Data Schedule (For SEC use only).

     27.2         Restated Financial Data Schedule (For SEC use only).
</TABLE>

                                      17