<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                  FORM 10-KSB/A

[X]      Annual report under Section 13 or 15(d) of the Securities Exchange Act
         of 1934 for the fiscal year ended December 31, 2000; or

[ ]      Transition report under 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 its charter)

              TEXAS                                 76-0273345
    (State of Incorporation)           (IRS Employer Identification Number)

             3006 LONGHORN BOULEVARD, SUITE 107, AUSTIN, TEXAS 78758
           (Address of principal executive office, including Zip Code)

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

      Securities registered pursuant to Section 12(b) of the Exchange Act:

             TITLE OF EACH CLASS

       Common Stock, $0.001 par value

    Securities registered pursuant to Section 12(g) of the Exchange Act: None

     Check 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 past 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 [ ]

     Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB/A or any amendment to this Form 10-KSB/A. [x]

     State issuer's revenues for its most recent fiscal year: $2,724,830

     The aggregate market value of the Common Stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on the OTC
Bulletin Board system on March 14, 2001, was approximately $38,650,441. Shares
of Common Stock held by each officer and director and by each person who may be
deemed to be an affiliate have been excluded.

     As of March 14, 2001, the registrant had 61,867,216 shares of Common Stock
issued and outstanding.

           Transitional Small Business Disclosure Format (check one).

                                 Yes [ ] No [X]

================================================================================


<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                                         <C>
PART I   ....................................................................................................Page 1

         Item 1.  Business...................................................................................Page 1
         Item 2.  Properties.................................................................................Page 9
         Item 3.  Legal Proceedings.........................................................................Page 10
         Item 4.  Submission of Matters to a Vote of Security Holders.......................................Page 11

PART II  ...................................................................................................Page 12

         Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters .....................Page 12
         Item 6.  Management's Discussion and Analysis of Financial Condition and Results of
                  Operations................................................................................Page 15
         Item 7.  Financial Statements......................................................................Page 20
         Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial
                  Disclosure................................................................................Page 52

PART III ...................................................................................................Page 53

         Item 9.  Directors, Executive Officers, Promoters, Control Persons; Compliance with Section
                  16(a) of the Exchange Act.................................................................Page 53
         Item 10. Executive Compensation....................................................................Page 54
         Item 11. Security Ownership of Certain Beneficial Owners and Management............................Page 58
         Item 12. Certain Relationships and Related Transactions............................................Page 60
         Item 13. Exhibits and Reports on Form 8-K..........................................................Page 60
</TABLE>


                                     Page i
<PAGE>   3

                    FORWARD-LOOKING STATEMENTS AND IMPORTANT
                        FACTORS AFFECTING FUTURE RESULTS

         Our disclosure and analysis in this report contains some
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. They use words such as "anticipate",
"believe", "expect", "estimate", "project", "intend", "plan", and other words
and terms of similar meaning in connection with any discussion of future
operating or financial performance. In particular, these include statements
relating to future actions, prospective products or product approvals, future
performance or results of current and anticipated products, sales efforts,
expenses, the outcome of contingencies such as legal proceedings, and financial
results. From time to time, we also may provide oral or written forward-looking
statements in other materials we release to the public.

         Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions we might make or by known or unknown risks or
uncertainties. Many factors mentioned in the following discussion - for example,
product development, competition, and the availability of funding - are
important in determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially.

         We undertake no obligation to publicly update any forward-looking
statements, whether as the result of new information, future events, or
otherwise. You are advised, however, to consult any further disclosures we make
on related subjects in our 10-QSB, 8-K, and 10-KSB reports to the SEC. Also note
that we provide the following cautionary discussion of risks, uncertainties, and
possibly inaccurate assumptions relevant to our business. These are factors that
we think could cause our actual results to differ materially from expected and
historical results. Other factors besides those listed here could also adversely
affect us.

WE HAVE NO CURRENT ROYALTY AGREEMENTS PRODUCING REVENUE

         Our future strategy is dependent on licensing our technology to other
companies and obtaining royalties based on products that these licensees develop
and sell. We have no plans to manufacture and sell any CFE products ourselves,
and as such, we have no CFE product revenues. We signed a license agreement in
1999, for a one-time, up front, payment of approximately $5.6 million. This was
a non exclusive license to Canon, Inc. that covered substantially all of our
patents, including those related to the CFE technology. This license will
produce no future revenue. We have no license agreements at the present time
that will provide any future revenues. Upon completion of the development
process, we expect to license our technology to be used in both the HYFED(TM)
and PET products previously discussed in the risk factor "Our CFE product
development is in its early stages and the outcome is uncertain". It is our
intention that all future license agreements will include a provision that
requires the payment of ongoing royalties. We would expect to license our
technology for these products, if they are successfully developed to some or all
of our development partners that were previously identified or to other third
parties interested in manufacturing the products.

OUR DEVELOPMENT PARTNERS HAVE CERTAIN RIGHTS TO JOINTLY DEVELOPED PROPERTY AND
TO LICENSE OUR TECHNOLOGY

         We have committed to license our technology to our development partners
upon completion of certain development projects that are in process. The terms
of any such license have not yet been determined. One of our development
partners, Futaba Corporation, has paid us $600,000 for research services and has
the right to offset this payment against any future license fee payments due as
a result of any license agreement. Our development partners also have rights to
any jointly developed property, however any such jointly developed property
would be based, at least in part, on our underlying technology and would require
our partners to enter into an agreement with us. See also "Our CFE product
development is in its early stages and the outcome is uncertain" for further
discussion.


                                    Page ii
<PAGE>   4

OUR CFE PRODUCT DEVELOPMENT IS IN ITS EARLY STAGES AND THE OUTCOME IS UNCERTAIN

         Our Carbon Field Emission ("CFE") technology, and products that use
this technology, will require significant additional development, engineering,
testing and investment prior to commercialization. We are exploring the use of
our technology in several different types of products. We have two leading
potential CFE products. We are developing these products jointly with others
based on our technology. Upon successful completion of the development process,
our development partners will be required to license our technology to produce
and sell the products. Our development partners retain all rights to any
intellectual property that they develop in the process. Consequently, it may not
be possible for others to produce these products without obtaining licenses from
both us and our development partners.

         The first product being developed is a Picture Element Tube ("PET")
intended for use initially in large indoor displays. If the PET is successful,
we expect to enhance it to allow it to be used in outdoor displays. We are
jointly developing this product with Futaba Corporation (see Exhibit 10.1 to the
registration of which this prospectus is a part). We are overseeing the project
and incurring the majority of the costs. Futaba has provided us $600,000 to
cover our portion of the cost. Futaba is also incurring internal costs related
to the research; however the $600,000 that we are incurring represents the
majority of the costs incurred on the project. Upon completion of the project,
Futaba has the right to enter into a license agreement with us to allow them to
manufacture the product. Terms of the license agreement have not been
negotiated, however the $600,000 paid by Futaba can be applied to any license
fees due from Futaba to us. We anticipate that any license agreement would
involve both an initial up-front payment and ongoing royalties. Any jointly
developed intellectual property will be jointly owned by the two parties;
however any such intellectual property would be based on our underlying patented
technology and therefore would still require Futaba to license our technology.
The PET or displays may not be successfully developed.

         We are also working on a product called the HyFED(TM), which combines
what we believe to be the best properties of a cathode ray tube ("CRT") and our
CFE technology. It is our intention to license our HyFED(TM) technology to be
used in the production of flat-screen TV applications that are cost competitive
with CRTs. We are jointly developing this product with the aid of a consortium
that includes Electrovac GESMBH, Imaging System Technology, Inc., Supertex,
Inc., Schott Fiber Optics, Lead Sangyo Co., Ltd., Shanghai Novel Color Picture
Tube Co., Ltd., and Shanghai Vacuum Electron Devices Co., Ltd. (see exhibits
10.2 through 10.8 to the registration statement of which this prospectus is a
part). We are overseeing this consortium. Each member of the consortium is
responsible for its own costs. We expect to incur approximately $600,000 in
costs during the current phase of the project and we believe this represents
greater than 50% of the total costs incurred by the consortium. Upon completion
of the project, each consortium member has the first right to enter into
agreements with us to license our technology. We expect any products that are
developed to be manufactured by other members of the consortium. No terms have
been negotiated for any potential license agreements.

          If either of these products using our CFE technology are developed, it
may not be possible for potential licensees to produce these products in
significant quantities at a price that is competitive with other similar
products. At the present time, the only revenue that we receive related to our
CFE technology is related to reimbursed research expenditures. These revenues
are identified in our quarterly filings on form 10QSB and our annual filings on
form 10KSB as revenues of our Field Emission Picture Element Technology, Inc.
subsidiary in the related management discussion and analysis sections.

OUR SUCCESS IS DEPENDENT ON OUR PRINCIPAL PRODUCTS AND TECHNOLOGY

         Our CFE technology is an emerging technology. Our financial condition
and prospects are dependent upon our licensing the technology to others and upon
market acceptance of our electronic display products. Additional R&D needs to be
conducted on the CFE technology before others can produce products using this
technology. Market acceptance of our products and products using our technology
will be dependent upon the perception within the electronics and instrumentation
industries of the quality, reliability, performance, efficiency, breadth of
application and cost-effectiveness of the products. There can be no assurance
that we will be able to gain commercial market acceptance for our products or
develop other products for commercial use.


                                    Page iii
<PAGE>   5

WE HAVE A HISTORY OF NET LOSSES

         We have a history of net losses. Our first profitable year was 1999,
based on the strength of a license agreement of approximately $5.6 million
signed in March 1999. We have incurred net income and losses as shown below:

<TABLE>
<CAPTION>
                                                     Net Income
                  Year Ended December 31               (Loss)
                  ----------------------            ------------
                  <S>                               <C>
                           1992                     $ (1,630,978)
                           1993                     $ (7,527,677)
                           1994                     $ (7,255,420)
                           1995                     $(14,389,856)
                           1996                     $(13,709,006)
                           1997                     $ (6,320,901)
                           1998                     $ (3,557,548)
                           1999                     $  1,118,134
                           2000                     $ (7,671,014)
</TABLE>

         Although we expect to be profitable in the future, we may not be. Our
profitability in 2001 is dependent on the signing of additional license
agreements. We may, however, continue to incur additional operating losses for
an extended period of time as we continue to develop products. We do, however,
expect the magnitude of those losses, if they continue, to decrease. McGladrey &
Pullen, LLP, independent auditors of the Company, have expressed uncertainty as
to our ability to continue as a going concern based, in part, on our accumulated
losses from operations in prior years. See "Independent Auditor's Report." We
have funded our operations to date primarily through the proceeds from the sale
of our equity securities and debt offerings. In the past, we were primarily a
contract research and development organization, but are in the process of
transitioning to an organization that is primarily dependent on products sales
and other business operations. In order to continue our transition from a
contract research and development organization to an organization with ongoing
operations, we anticipate that substantial product development and introduction
expenditures will continue to be incurred.

WE ARE EXPOSED TO LITIGATION LIABILITY

We were sued in 1996 by a former customer of Plasmatron for damages that the
former customer claimed that it incurred as a result of the alleged failure of
the machine provided by Plasmatron to perform as intended. This lawsuit was
settled in January 2000 for a total payment of $1,450,000 of which $1,000,000
was funded by a bonding company that had provided a bond on the original
contract and $450,000 was funded by us. We were also named as a third party
defendant in another suit by other guarantors under the bond. This related
lawsuit was settled in January 2001 for a total payment of $800,000 to the
bonding Company. The majority of that settlement was paid by other defendants in
the case. We agreed to pay $150,000 of this settlement. We have no further
liability in either of these matters, beyond the $200,000 of notes payable
recorded on the balance sheet.

         We have other lawsuits that arise in the normal course of business,
including lawsuits by various trade creditors related to payment of amounts due.
We expect all lawsuits to be resolved with no material impact on our financial
statements. If we were to become subject to a judgment that exceeds our ability
to pay, that judgment would have a material impact on our financial condition
and could affect our ability to continue in existence.


                                    Page iv
<PAGE>   6

WE HAVE FUTURE CAPITAL NEEDS AND THE SOURCE OF THAT FUNDING IS UNCERTAIN

         We expect to continue to incur substantial expenses for R&D, product
testing, product introduction, product manufacturing at our subsidiary, Sign
Builders of America, Inc. ("SBOA"), product marketing, and administrative
overhead. The majority of R&D expenditures are for the development of our CFE
technology and our electronic display products. Our business model is based on
our installing electronic display products at customer sites at our cost and
then deriving advertising revenues from the signs, or from the outright sale of
these products. Installation of our products at customer sites will require a
significant capital investment on our part. Our outdoor electronic billboard
product is available now and we have installed three units at test sites,
although only minor revenues have been generated. We also have a variety of
smaller electronic display products available that are intended primarily for
indoor use. Some of our other proposed products may not be available for
commercial sale or routine use for a period of up to two years.
Commercialization of our existing and proposed products will require additional
capital in excess of our current capital. A shortage of capital may prevent us
from achieving 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, manufacturing and marketing
objectives, which cannot be predicted with certainty, there may be substantial
fluctuations in our 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, we may be required to curtail our
expansion and/or seek additional financing from other sources. We may seek
additional financing through the offer of debt or equity or any combination of
the two at any time.

         We have developed a plan to allow us to maintain operations until we
are able to sustain ourselves on our own revenue, however our current cash
levels are not sufficient to fund operations until we reach that point. We have
the existing resources to continue operations for approximately four to six
weeks. We have been operating in this manner for an extended period of time and
we believe that we have the ability to continue to raise short term funding, if
necessary, to enable us to continue operations until our plan can be completed.
Our plan is primarily dependent on raising funds through the licensing of our
technology, revenue generated from the installation of our electronic billboard
product, and through debt and equity offerings.

         Our 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. Our plan is primarily dependent on increasing revenues,
licensing our technology, and raising additional funds through additional debt
and equity offerings. If adequate funds are not available from operations or
additional sources of financing, we may have to eliminate, or reduce
substantially, expenditures for research and development, testing and production
of our products. We may have to obtain funds through arrangements with other
entities that may require us to relinquish rights to certain of our technologies
or products. These actions could materially and adversely affect us.

RAPID TECHNOLOGICAL CHANGES COULD RENDER OUR PRODUCTS OBSOLETE AND WE MAY NOT
REMAIN COMPETITIVE

         The display industry is highly competitive and is characterized by
rapid technological change. Our existing and proposed products will compete with
other existing products and may compete against other developing technologies.
Development by others of new or improved products, processes or technologies may
reduce the size of potential markets for our products. There is no assurance
that other products, processes or technologies will not render our proposed
products obsolete or less competitive. Many of our competitors have greater
financial, managerial, distribution, and technical resources than we do. We will
be required to devote substantial financial resources and effort to further R&D.
There can be no assurance that we will successfully differentiate our products
from our competitors' products, or that we will adapt to evolving markets and
technologies, develop new products, or achieve and maintain technological
advantages.


                                     Page v
<PAGE>   7

WE HAVE TECHNOLOGIES SUBJECT TO LICENSES

         As a licensee of certain research technologies through license and
assignment agreements with Microelectronics and Computer Technology Corporation
("MCC"), we have acquired rights to develop and commercialize certain research
technologies. In certain cases, we are required to pay royalties on the sale of
products developed from the licensed technologies and fees on revenues from
sublicensees. We also have to pay for the costs of filing and prosecuting patent
applications. The agreement is subject to termination by either party, upon
notice, in the event of certain defaults by the other party. We expect any
royalty payments to be made to MCC to be insignificant based on the substantial
amounts of revenues that would have to be generated to offset the costs of
maintaining the patents over the years.

         We have also licensed certain patents related to carbon nanotube
technology from Till Keesman. We are obligated to pay 50% of any royalties that
we receive related to these patents to Mr. Keesman. If minimum royalties of
$500,000 have not been paid by the end of May, 2002, the license will terminate
at that time. If minimum royalties of $500,000 have been paid by the end of May
2002, but minimum royalties of $1,000,000 have not been paid by May, 2004, the
license will terminate at that time. The effect of termination of this license
could have a significant impact on us. At the present time, we have no product
or revenue that is dependent on these patents. We are developing products that
may depend, in part, on these patents, including both the HYFED(TM) and PET. If
these products are successfully developed and they use the licensed technology,
termination of this license agreement would have a significant negative impact.
We expect to make the minimum payments due under the agreement if we have
products or other licenses that are dependent on these patents.

         Certain of the products that we are developing may, in part, be based
on some of the patents that we have licensed. Both of the main products that we
are developing based on our CFE Technology may rely on certain of the patents.
Successful completion of the development work and introduction of the HyFED(TM)
and PET products may require us to pay royalties or license fees to either MCC
or Till Keesman.

OUR PRODUCTS MAY NOT BE ACCEPTED BY THE MARKET

         Since our inception, we have focused our product development and R&D
efforts on technologies that we believe will be a significant advancement over
currently available technologies. With any new technology, there is a risk that
the market may not appreciate the benefits or recognize the potential
applications of the technology. Market acceptance of our products and products
using our technology will depend, in part, on our ability to convince potential
customers of the advantages of such products as compared to competitive
products. It will also depend upon our ability to train manufacturers and others
to use our products

WE HAVE LIMITED MANUFACTURING CAPACITY AND EXPERIENCE

         We have no established commercial manufacturing facilities in the area
of CFE technology in which we are conducting our principal research . At the
present time, we have no intention of establishing a manufacturing facility
related to our CFE technology. We are focusing our efforts on licensing our
technology to others for use in their manufacturing processes. The management
team has commercial manufacturing and marketing experience in other industries
and with other products in the display industry; however, we have no experience
in manufacturing our proposed CFE products. To the extent that any of our other
products require manufacturing facilities, we intend to contract with a
qualified manufacturer.


                                    Page vi
<PAGE>   8

WE ARE DEPENDENT ON THE AVAILABILITY OF MATERIALS AND SUPPLIERS

         The materials used in producing our current and future products are
purchased from outside vendors. In certain circumstances, we may be required to
bear the risk of material price fluctuations. We anticipate that the majority of
raw materials used in products to be developed by us will be readily available.
However, there is no assurance that the current availability of these materials
will continue in the future, or if available, will be procurable at favorable
prices.

WE MAY BE UNABLE TO ENFORCE OR DEFEND OUR OWNERSHIP AND USE OF PROPRIETARY
TECHNOLOGY

         Our ability to compete effectively with other companies will depend on
our ability to maintain the proprietary nature of our technology. Although we
have been awarded patents, have filed applications for patents, or have licensed
technology under patents that we do not own, the degree of protection offered by
these patents or the likelihood that pending patents will be issued is
uncertain. Competitors in both the United States and foreign countries, many of
which have substantially greater resources and have made substantial investment
in competing technologies, may already have, or may apply for and obtain patents
that will prevent, limit or interfere with our ability to make and sell our
products. Competitors may also intentionally infringe on our patents. The
defense and prosecution of patent suits is both costly and time-consuming, even
if the outcome is favorable to us. In foreign countries, the expenses associated
with such proceedings can be prohibitive. In addition, there is an inherent
unpredictability in obtaining and enforcing patents in foreign countries. An
adverse outcome in the defense of a patent suit could subject us to significant
liabilities to third parties. Although third parties have not asserted
infringement claims against us, there is no assurance that third parties will
not assert such claims in the future.

         We also rely on unpatented proprietary technology, and there is no
assurance that others will not independently develop the same or similar
technology, or otherwise obtain access to our proprietary technology. To protect
our rights in these areas, we require employees, consultants, advisors and
collaborators to enter into confidentiality agreements. These agreements may not
provide meaningful protection for our trade secrets, know-how, or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how, or other proprietary information.
While we have attempted to protect proprietary technology that we develop or
acquire and will continue to attempt to protect future proprietary technology
through patents, copyrights and trade secrets, we believe that our success will
depend upon further innovation and technological expertise.

WE MAY NOT BE ABLE TO PROVIDE SYSTEM INTEGRATION

         In order to prove that our technologies work and will produce a
complete product, we must ordinarily integrate a number of highly technical and
complicated subsystems into a fully-integrated prototype. There is no assurance
that we will be able to successfully complete the development work on some of
our proposed products or ultimately develop any market for those products.

THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS

         Our future success will depend on our ability to attract and retain
highly qualified scientific, technical and managerial personnel. Competition for
such personnel is intense. We may not be able to attract and retain all
personnel necessary for the development of our business. In addition, much of
the know-how and processes developed by us reside in our key scientific and
technical personnel. The loss of the services of key scientific, technical and
managerial personnel could have a material adverse effect on us.


                                    Page vii
<PAGE>   9

OUR REVENUES HAVE BEEN DEPENDENT ON GOVERNMENT CONTRACTS IN THE PAST

         In previous years, a significant part of our revenues were derived from
contracts with agencies of the United States government. Following is a summary
of those revenues in recent years:

<TABLE>
<CAPTION>
                                             Revenues from
                                               Government          Percentage of
                  Year Ended December 31       Contracts           Total Revenue
                  ----------------------     -------------         -------------

                  <S>                        <C>                   <C>
                           1992               $   930,000               99%
                           1993               $ 1,147,000               89%
                           1994               $   820,000               41%
                           1995               $ 1,009,000               33%
                           1996               $ 2,869,000               50%
                           1997               $   854,000               24%
                           1998               $         0                0%
                           1999               $         0                0%
                           2000               $   352,341               13%
</TABLE>

         We currently have one commitment for future government funding of
approximately $580,000. We do not intend to seek any government funding unless
it directly relates to achievement of our strategic objectives. A significant
portion of the cost associated with the revenue recognized in 2000 were costs
paid to a subcontractor on the project.

         Contracts involving the United States government are, or may be,
subject to various risks including, but not limited to, the following:

         -        Unilateral termination for the convenience of the government

         -        Reduction or modification in the event of changes in the
                  government's requirements or budgetary constraints

         -        Increased or unexpected costs causing losses or reduced
                  profits under fixed-price contracts or unallowable costs under
                  cost reimbursement contracts

         -        Potential disclosure of our confidential information to third
                  parties

         -        The failure or inability of the prime contractor to perform
                  its prime contract in circumstances where we are a
                  subcontractor

         -        The failure of the government to exercise options provided for
                  in the contracts

         -        The right of the government to obtain a non-exclusive, royalty
                  free, irrevocable world-wide license to technology developed
                  under contracts funded by the government if we fail to
                  continue to develop the technology


                                   Page viii
<PAGE>   10

                                     PART I.

         When used in this document, the words "anticipate", "believe",
"expect", "estimate", "project", "intend", "plan", and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks, uncertainties, and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, believed, expected,
estimated, projected, intended, or planned. For additional discussion of such
risks, uncertainties, and assumptions, see "Forward-Looking Statements and
Important Factors Affecting Future Results" included at the beginning of this
report.

ITEM 1. BUSINESS.

                             DESCRIPTION OF BUSINESS

GENERAL

         SI Diamond Technology, Inc., a Texas corporation, acting through its
subsidiaries, is engaged in the development of products and services based
principally on novel applications of thin films and the application of display
technologies. We believe that microelectronic and other applications of carbon
based thin film technology will play an important role in the electronics and
other industries. Our research is at FEPET is focused on identifying key
applications of this technology. In addition to the electronics industry, we are
also working on applications of our technology in the medical, x-ray, and
wireless communication industries. Based on our research, we are currently
engaged in the development of uses for our Carbon Field Emission ("CFE")
technology. We are also developing electronic display products based on existing
technology. Electronic billboards and other electronic display products would
provide a market for the Company's Picture Element Tube ("PET") product when
completed. We believe that our greatest growth opportunity lies in CFE products
and the development of our electronic display products for indoor and outdoor
point of purchase advertising.

         We were incorporated in Texas in 1987. Our directly and indirectly
owned subsidiaries are as follows:

<TABLE>
<CAPTION>
              Subsidiary                                           State of Incorporation        Status
              ----------                                           ----------------------        ------

<S>                                                                <C>                           <C>
Electronic Billboard Technology, Inc. ("EBT")                         Delaware                   Active
Sign Builders of America, Inc. ("SBOA")                               Delaware                   Active
Field Emission Picture Element Technology, Inc. ("FEPET")             Delaware                   Active
Diamond Tech One, Inc. ("DTO")                                        Delaware                   Inactive
Plasmatron Coatings and Systems, Inc. ("Plasmatron")                  Pennsylvania               Inactive
SDI Acquisition Corp. ("SDI")                                         Delaware                   Inactive
</TABLE>

         Our business includes the development and commercialization of
electronic billboards and related electronic display products, the manufacture
and sale of all types of signage, and the development and commercialization of
CFE technology. From time to time, we also conduct contract research and
development, primarily for United States governmental agencies. The business
efforts of SI Diamond have arisen out of its interest in thin film materials,
notably thin carbon film, diamond film, and diamond-like carbon film ("DLC").
These interests have led us into microelectronics-related processes, thin film
based CFE technology, electronic billboards, and related indoor and outdoor
electronic display products.

         We conduct our operations through our subsidiaries. EBT is engaged in
the development and introduction of electronic display products, such as
billboards, outdoor display devices for use in the fast food or other
industries, and indoor point of sale products. EBT installed three outdoor
electronic billboards at test sites in 2000. SBOA manufactures and sells all
types of signage. FEPET is conducting research on and developing uses for the
CFE technology. Where appropriate, we enter into collaborations with third
parties as discussed in greater detail under the heading "Technology Agreements"
later in this section.


                                     Page 1
<PAGE>   11

         We incurred research and development expense of $2,620,623 in 2000 and
$1,475,655 in 1999. Some of our proposed products will require significant
additional development, engineering, testing and investment prior to
commercialization and certain of these proposed products may not be available
for commercial sale or routine use for a period of up to two years. There is no
assurance that all products currently under development will be successfully
developed, produced in commercial quantities on a cost-effective basis, or
marketed successfully.

BUSINESS SEGMENTS

         FIELD EMISSION PICTURE ELEMENT TECHNOLOGY, INC. FEPET was incorporated
in January 1997 and is developing our proprietary CFE technology. In the past,
our research has concentrated on the emission properties of diamond like
substances. Diamond is a subset of carbon and our research has indicated that
carbon is actually a better emitter. Accordingly, our research is now focused in
the broader area of CFE technology and its application to the electronics,
medical, x-ray, and wireless communication industries.

          We are developing a new display technology, the HyFED, which combines
what we believe to be the best properties of cathode ray tubes ("CRTs") and our
CFE technology. We are also extending our research to apply our technology in
other non-display related fields. Our plans for this technology are discussed in
greater detail in the section entitled "Business Development Strategies" later
in this report. We successfully completed phase I of our HyFED development by
demonstrating a 4" monochrome proof of concept. We have now started phase II to
develop a 4" full color proof of concept as a precursor to development of a 60"
display.

Another intended use for the technology is in a PET. The PET is a unique, high
brightness, multi-color display component intended for use initially in outdoor
billboards, indoor video walls, and alphanumeric displays. This technology, when
fully developed, could be a natural step in the improvement of the Company's
electronic billboard and other electronic products.

         ELECTRONIC BILLBOARD TECHNOLOGY, INC. EBT was incorporated in January
1997 to focus on developing sun-readable display products for outdoor use. Its
initial primary product focus was an electronic billboard which would enable the
outdoor advertising industry to exploit the Internet and information revolution
by placing ads at different locations at different times. We installed three
outdoor billboards at test locations in 2000. Two of the billboards were
installed under a pilot program with Eckerd Corporation, a subsidiary of
JCPenney. We also installed one outdoor billboard at a Cinemark location, which
is currently not in use. We have also developed displays for indoor use that
could be used as part of an overall point of purchase advertising program. Our
plans for the billboard and related products are discussed in greater detail in
the section entitled "Business Development Strategies" later in this report.

         SIGN BUILDERS OF AMERICA, INC. SBOA was incorporated in August 1999 to
acquire the assets (including the right to use the name) and certain liabilities
of a company operating under the same name. SBOA is a manufacturer of high
quality signage with a broad customer base throughout the United States. Prior
to our acquisition of SBOA, they were a vendor of EBT's. SBOA assisted in the
development of the electronic billboard and now assembles and assists in the
installation of the electronic billboard product. SBOA has two significant
customers (see Note 16 to the consolidated financial statements). SBOA has no
significant raw material suppliers.

BUSINESS DEVELOPMENT STRATEGIES

         OVERALL. We are primarily a technology company. We are focusing our
efforts on research, product development, and licensing our technology to
others. FEPET is focused on developing world class technologies using carbon
films for electron field emission applications. EBT is focused on the
introduction of its electronic display products. We currently have a
manufacturing facility that we acquired through our acquisition of SBOA to
assemble our electronic billboard product. We have no plans to establish any
other manufacturing facilities in the immediate future. To the extent that we
need to develop additional manufacturing capabilities, we intend to use
manufacturing partnerships, joint ventures, or arrange to have products
manufactured through contract manufacturers.


                                     Page 2
<PAGE>   12

FEPET

         LICENSING AGREEMENTS. We have an extensive patent portfolio that we
have developed and acquired over the years. Licensing of this technology to
major companies in the display industry is a critical part of our overall
strategic plan and critical to achieving profitability in the short run. In
March 1999, we signed our first significant license agreement with Canon, Inc.
In exchange for a one-time, up-front payment of approximately $5.6 million,
Canon was granted a non-exclusive right to use a portion of our technology.
While we have had numerous discussions with other potential licensees, we have
no licensing agreements generating ongoing revenue at the present time. We
expect to sign multiple license agreements over the next few years and we expect
that such license agreements will include an up-front payment and a continuing
royalty stream based on the products sold by the licensee. We have made
significant progress on our CFE technology since the time of the Canon license
agreement and believe our patent portfolio to be much more valuable than it was
at the time of the Canon license agreement.

         CFE TECHNOLOGY. The major short run focus of FEPET is the continued
development and commercialization of its CFE technology. Our current research
and development efforts are focused on developing our technology for use in the
display, medical, x-ray, and wireless communication industries. We have two main
potential product for the display industry, the HyFED and the PET.

          HYFED - We have developed a new display technology, the HyFED. HyFED
combines what we believe to be the best properties of CRTs and our CFE
technology using our proprietary diamond/carbon thin films. We expect the HyFED
to compete with Plasma Displays in both cost and quality. We anticipate that the
HyFED will achieve a high-quality thin display using the existing manufacturing
base of CRTs. The HyFED display has the potential to be larger, brighter, and
have higher resolution than conventional CRTs, while still remaining
cost-competitive with existing CRTs. In January 1999, we formed an International
Development Team to develop the first HyFED display. The International
Development Team was composed of six organizations - four from Japan, one from
Europe, and ourselves. The International Development Team completed a working
four inch monochrome prototype of the HyFED in January 2000. The team has been
expanded and is now working to improve the prototype so that it is capable of
displaying a uniform full motion color video image on the screen. Each member of
the team is focusing on the development of a specific portion of the prototype
and each member is funding their own portion of the work. Upon completion of the
final prototype, these team members will be given the first opportunity to
license the HyFED technology. We expect to license our HyFED technology within
the next eighteen months.

         PET - The PET is a basic display device which could be used in many
display applications, including electronic billboards. The PET that the Company
has under development contains 64 pixels, which are the basic unit or picture
element that makes up the image displayed on a video screen. The CFE technology
provides several advantages over the existing technologies used in these areas.
It generally has a higher image quality, better sunlight readability, lower
cost, lower energy usage, improved viewing angle and excellent video
capabilities. As soon as the product is commercially viable, we plan to
introduce it in our electronic billboard product. We would also target other
large display manufacturers that manufacture displays for such uses as sports
arenas, video walls, alphanumeric signs, etc. We have demonstrated that the PET
works and are now working to solve some remaining packaging issues related to
the product. We expect to solve these issues within the next year and expect
that the product will move into the manufacturing stage at that point. We do not
intend to manufacture these PETs ourselves, but rather license other
manufacturers to produce them. We are currently working with a large Japanese
display manufacture to complete development of the PET and have received
$600,000 from this company to continue our development of the PET.

         OTHER CFE PRODUCTS - We are also concentrating on developing uses for
our technology in industries other than the display industry. We have developed
a carbon cold cathode electron source, which can be utilized for many
non-display related applications such as x-ray tubes, medical devices,
microelectronics, nanotechnologies, low-power thrusters, CRT electron guns,
wireless communications, and polluted air scrubbing. We have signed a license
agreement with Oxford Instruments to provide cathodes for use in their products
in the field of X-ray technology. We have also received a grant of approximately
$582,000 from NASA to develop low power thrusters using our technology. This
grant was received as a follow up to an initial feasibility study funded by NASA
in the amount of approximately $67,000. We are also researching the use of our
technology in other industries and are encouraged by the preliminary results
that we have achieved to date.


                                     Page 3
<PAGE>   13

EBT

         ELECTRONIC DISPLAY PRODUCTS. EBT has developed and markets several
electronic display products, including the E-Window, the E-Banner, the Digital
Poster, and an electronic billboard. We are focusing our current marketing
efforts on our indoor electronic display products. We are targeting major
national retailers for the use of these displays in conjunction with existing
on-site signage. We intend to lease or operate our display products through
joint venture arrangements with these retailers. To facilitate our entry into
this market, we have signed marketing agreements with Vision Mark, LLC ("Vision
Mark"), a Texas limited liability company, and a related consulting and advisory
services agreement with C&A Services LLC ("C&A"), a Texas limited liability
company, affiliated with Vision Mark. We have also signed a marketing agreement
with Kaleidoscope Communications, a global advertising and marketing agency. As
a result of the Vision Mark agreement, we signed an agreement with Eckerd
Corporation, a subsidiary of JCPenney to install two electronic billboards on a
test basis in 2000. We installed these billboards at stores in Clearwater,
Florida and Austin, Texas in 2000. As a result of the successful tests of the
outdoor signs at these two sites, we signed an additional agreement with Eckerd
Corporation in February 2001 to install indoor point of sale displays at ten
Eckerd locations in four states. We expect these indoor displays to be installed
by mid April 2001.

         As a result of our agreement with Kaleidoscope, we signed an agreement
with a national quick service restaurant chain to install our E-Window and
E-Banner products at several locations for a test that will run through June
2001. It is expected that these tests will result in an increase in the average
check size and an increase in the unit sales of the items featured on the
displays. We also intend to use Kaleidoscope to sell the advertising on displays
that we own that are installed at customer locations, such as with the Eckerd
agreement described above. Kaleidoscope, which is affiliated with DDB worldwide,
one of the largest advertising agencies in the world, will bring us needed
expertise in the sale of advertising.

         We are also targeting other national retail chains, banks, restaurants,
and others for our display products. We previously signed an agreement with
Cinemark, a national theatre chain, for installation of a billboard at a test
site. Because of the difficult financial conditions currently being experienced
by the theatre industry and because of the limitations on advertising at these
locations, we are evaluating this agreement. We have the ability to terminate
this contract with 30 days notice and will do so if we determine that our
resources can be better deployed elsewhere.

         Our outdoor billboard is based on a proprietary version of a mature
existing technology. This technology is Vacuum Fluorescent Display ("VFD"). The
VFD technology is widely used in a variety of applications and is readily
available from many component suppliers. This product offers many advantages
over existing technologies used in the outdoor advertising industry. These
include full video capability, full color, wide viewing angle with excellent
outdoor readability, relatively low cost compared with competing technologies,
and high reliability. We are also developing an outdoor electronic billboard
using Liquid Crystal Display ("LCD") technology. This LCD billboard, when fully
developed using our patented technology, is expected to provide similar quality
at approximately one third the cost of existing outdoor electronic billboards.
We have developed a demonstration model of our LCD billboard that was completed
in January 2001. The model is modular in design and consists of four one foot by
one foot modules. The Company expects to eventually install outdoor electronic
billboards using this technology.

         As discussed above, we completed installation of our first electronic
billboard at a customer site in 2000 and allowed the customer an extended test
period. Our benchmark for success was to develop an operational outdoor
billboard and we were successful. Since this is a new concept and we have no
historical results available to us, we are unable to predict future revenues
with sufficient certainty and accordingly, pursuant to the provisions of
Financial Accounting Standards Board Pronouncement No. 121 ("FAS 121") we
reduced the carrying value of these display units to the lower end of the range
of estimated liquidation values. Notwithstanding the provisions of FAS 121, we
expect our strategy (see MD&A) to be successful.


                                     Page 4
<PAGE>   14

         OTHER ELECTRONIC DISPLAY PRODUCTS. EBT, in conjunction with Texas
Digital Systems, Inc. ("TDS"), a distributor to the fast food industry,
developed an outdoor electronic display for use in the fast food industry. These
units, primarily in 10.4" to 17" sizes, are readable outdoors in direct sunlight
and intended for use at the drive through window of fast food restaurants. We
received a royalty on all units sold by TDS through December 31, 1999, when the
agreement was terminated. We believe that TDS continued to use our patented
technology after the termination of the agreement and as described in greater
detail in Item 3, the matter is currently under litigation. We are seeking back
royalties for all products shipped by TDS which involve our technology and for
payment of future royalties related to all products sold which involve our
technology.

SBOA

         CUSTOM SIGN MANUFACTURING. SBOA is continuing to target customers in
its home geographical area of Central Texas and selected national accounts using
its own internal sales force.


                                     Page 5
<PAGE>   15

COMPETITION

EBT

         ELECTRONIC BILLBOARDS. We believe that the proprietary version of the
VFD and LCD technologies that we have developed is superior to existing
technology when combining the issues of brightness, cost, and image quality
required for electronic billboards. Competing technologies include:

         -        Light Emitting Devices ("LED") which have a grainy picture, do
                  not allow certain colors to be viewed in direct sunlight, and
                  have a high initial cost

         -        Incandescent bulbs that are high maintenance and result in
                  poor graphics

         -        Electromechanical systems that have poor image qualities and
                  limited colors

         We are unaware of any other organizations developing an electronic
billboard using technologies similar to ours. However, these are existing
technologies used in many applications. Competition from other manufacturers
could develop at any time. There are several other companies either producing or
developing electronic billboards using other technologies.

         OTHER ELECTRONIC DISPLAY PRODUCTS. Our other electronic display
products face competition from a variety of similar products and a variety of
sources. Our E-window product is a unique product with a patent pending, which
gives us an advantage in this area. Our success in this area is dependent on our
ability to market our products. We believe our marketing efforts are enhanced by
our ability to provide a complete product line, including the sun-readable
outdoor displays, and the E-window product.

FEPET

         CFE TECHNOLOGY. There are other companies attempting to develop
non-carbon based field emission display technologies. It is our opinion that
these technologies will not be as cost efficient or demonstrate as high a level
of brightness as the CFE technology. In addition, these companies are attempting
to develop these technologies for use in computer screens rather than large
display applications. Other competition for the CFE technology comes from the
existing technologies used in the industries for which the Company is developing
the technology. These technologies vary from industry to industry.

SBOA

         CUSTOM SIGNS. SBOA faces competition from a variety of national,
regional and local custom sign manufacturers. The custom sign business is an
extremely competitive business.

TECHNOLOGY AGREEMENTS

         MCC. We acquired 62 patents and patent applications related to the CFE
technology from MCC in 1998. We are obligated to pay MCC a royalty of 2% of
future commercial revenues related to these patents. We can, however, offset
certain pre-defined expenses against these royalty payments. It is not expected
that we will be obligated to pay any royalties in the near future.

         TILL KEESMAN. We licensed 6 patents from Till Keesman in exchange for a
payment of $250,000 payable in shares of our common stock. Under the terms of
the agreement, we are obligated to pay license fees equal to 50% of any
royalties received by the Company related to these patents. We are allowed to
offset certain expenses, up to a maximum of $50,000 per year, against payments
due under this agreement. The agreement also contains provisions related to
minimum license fee payments. If we do not pay minimum additional license fees
of $500,000 by May 2002, the license will terminate at that point. If we do not
pay additional cumulative license fees of $1,000,000 (including any fees applied
toward the previously described minimum due in May 2002) by May 2004, the
license will terminate at that point. We are not obligated to make any
additional payments, but the license may terminate if these payments are not
made.


                                     Page 6
<PAGE>   16

INTELLECTUAL PROPERTY RIGHTS

         An important part of our product development strategy is to seek, when
appropriate, protection for our products and proprietary technology through the
use of various United States and foreign patents and contractual arrangements.

         We own 57 issued patents, two allowed patents, and have 56 patent
applications pending before the United States Patent and Trademark Office. We
also have several unsubmitted patent applications in process. The patents,
allowances and applications relate to the CFE technology and other technologies.
In addition, there are foreign counterparts to certain United States patents and
applications. We consider our patent portfolio to be our most valuable asset.

         The patenting of technology-related products and processes involves
uncertain and complex legal and factual questions. To date, no consistent policy
has emerged regarding the breadth of claims of such technology patents.
Therefore, there is no assurance that our pending United States and foreign
applications will issue, or what scope of protection any issued patents will
provide, or whether any such patents ultimately will be upheld as valid by a
court of competent jurisdiction in the event of a legal challenge. Interference
proceedings, to determine priority of invention, also could arise in any of our
pending patent applications. The costs of such proceedings would be significant
and an unfavorable outcome could result in the loss of rights to the invention
at issue in the proceedings. If we fail to obtain patents for our technology,
and are required to rely on unpatented proprietary technology, there is no
assurance that we can protect our rights in such unpatented proprietary
technology, or that others will not independently develop substantially
equivalent proprietary products and techniques, or otherwise gain access to our
proprietary technology.

         Competitors have filed applications for or have been issued patents and
may obtain additional patents and proprietary rights relating to products or
processes used in, necessary to, competitive with, or otherwise related to, our
patents. The scope and validity of these patents, the extent to which we may be
required to obtain licenses under these patents or under other proprietary
rights and the cost and availability of licenses are unknown. This may limit our
ability to license our technology. Litigation concerning these or other patents
could be protracted and expensive. If suit were brought against us for patent
infringement, a challenge in the suit by us as to the validity of the other
patent would have to overcome a legal presumption of validity. There can be no
assurance that the validity of the patent would not be upheld by the court or
that, in such event, a license of the patent to us would be available. Moreover,
even if a license were available, the payments that would be required are
unknown and could materially reduce the value of our interest in the affected
products. We do, however, consider our patents to be very strong and easily
defendable in any action that may be brought against us.

         We also rely upon unpatented trade secrets. No assurance can be given
that others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets or
disclose such technology or that we can meaningfully protect our rights to our
unpatented trade secrets.

         We require our employees, directors, consultants, outside scientific
collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with us. These agreements provide that all confidential
information developed or made known to the individual during the course of the
relationship is to be kept confidential and not disclosed to third parties
except in specific circumstances. In the case of employees, the agreements
provide that all inventions conceived by the individual shall be our exclusive
property. There is no assurance, however, that these agreements will provide
meaningful protection for our trade secrets in the event of unauthorized use or
disclosure of such information.


                                     Page 7
<PAGE>   17

GOVERNMENT REGULATION

         Our products will be subject to extensive government regulation in the
United States and in other countries. In order to produce and market our
existing and proposed products, we must satisfy mandatory safety standards
established by the U.S. Occupational Safety and Health Administration ("OSHA"),
pollution control standards established by the U.S. Environmental Protection
Agency ("EPA") and comparable state and foreign regulatory agencies. We may also
be subject to regulation under the Radiation Control for Health and Safety Act
administered by the Center for Devices and Radiological Health ("CDRH") of the
U.S. Food and Drug Administration. We do not believe that our CFE products will
present any significant occupational risks to the operators of such equipment.
In addition, the CFE products are not expected to produce significant hazardous
or toxic waste that would require extraordinary disposal procedures.
Nevertheless, OSHA, the EPA, the CDRH and other governmental agencies, both in
the United States and in foreign countries, may adopt additional rules and
regulations that may affect us and our products. Additionally, our arrangements
with our customers and affiliates may subject our products to export and import
control regulations of the U.S. and other countries. The cost of compliance with
these regulations has not been significant in the past and is not expected to be
material in the future.

         In the past, a portion of our revenues have consisted of reimbursement
of expenditures under U.S. government contracts, although we recognized no such
revenue in 1999 and only $352,341 in 2000. These reimbursements represent a
portion of the costs associated with such contracts. As of December 31, 2000, we
have only one grant, however we received three additional small grants
subsequent to that date. Government contracts are subject to delays and risk of
cancellation. Also, government contractors generally are subject to various
kinds of audits and investigations by government agencies. These audits and
investigations involve review of a contractor's performance on its contracts, as
well as its pricing practices, the costs it incurs and its compliance with all
applicable laws, regulations and standards. We are, and in the future expect to
be, audited by the government.

EMPLOYEES

         As of March 14, 2001, we had 42 full-time employees, including three
executive officers. Within the next twelve months, if business conditions
support it, we expect to hire additional employees. We are not subject to any
collective bargaining agreements and we consider our relations with our
employees to be good.


                                     Page 8
<PAGE>   18

                               EXECUTIVE OFFICERS

         The names of executive officers of the Company and certain information
with respect to each of them are set forth below.

<TABLE>
         <CAPTION>
         Name               Age       Position
         ----               ---       --------
         <S>                <C>       <C>
         Marc W. Eller      45        Chairman and Chief Executive Officer

         Zvi Yaniv          54        President and Chief Operating Officer

         Tracy Vaught       44        Vice President and Chief Financial Officer
</TABLE>

         Marc W. Eller has served as the Company's Chief Executive Officer since
July 29, 1996. Mr. Eller is Chairman of the Board of Directors and has been a
Director since November 1995. Mr. Eller co-founded BEG Enterprises, Inc. in 1989
and has been its Vice President since that date. Prior to becoming CEO, Mr.
Eller was involved in commercial real estate investment and in investment
banking activities for publicly traded companies. Mr. Eller has a B.A. degree in
Economics.

         Dr. Zvi Yaniv has served as the Company's President and Chief Operating
Officer since July 29, 1996. Dr. Yaniv has degrees in physics, mathematics, and
electro-optics as well as a Ph.D. in Physics. Prior to joining the Company, in
May 1996, Dr. Yaniv operated a consulting practice and previously was President
and CEO of OIS Optical Imaging Systems Inc., a supplier of flat panel color
liquid crystal displays to the avionics and defense industries.

         Tracy Vaught has been Vice President and Chief Financial Officer since
March 10, 2000. Ms. Vaught received a B.A. from the University of Texas at
Austin. Prior to becoming CFO of the Company, Ms. Vaught served as controller of
SBOA since 1994. She also has public accounting experience at both a local CPA
firm in Austin, Texas and Coopers & Lybrand in Houston, Texas.

ITEM 2. PROPERTIES

         We lease a 10,000 square foot facility in Austin that is used for our
corporate headquarters and research and development activities under a lease
expiring in June 2004. The monthly rental is approximately $7,000. SBOA also
leases a 10,000 square foot facility in Austin that it uses for its
manufacturing operations under a lease expiring in August 2001. The monthly rent
on this facility is approximately $5,000. We also lease offsite storage space
totaling approximately 2,200 square feet on a month to month basis.

         We believe that these facilities will be adequate for our anticipated
research, development, and manufacturing activities until additional products or
alternative applications are developed. If and when such additional products or
alternative applications are developed, we may be required to establish
additional facilities or enter into manufacturing agreements with others.

         We do not currently invest in real estate or interests in real estate,
real estate mortgages, or securities of or interests in persons primarily
engaged in real estate activities. However, the Company has no policy, either
for or against, making such investments.


                                     Page 9
<PAGE>   19

ITEM 3. LEGAL PROCEEDINGS

         On May 20, 1996, Semi-Alloys Company, a former customer of Plasmatron,
filed a complaint with the Supreme Court of the State of New York, County of
Westchester. The complaint named Plasmatron, SI Diamond, and Westchester Fire
Insurance Company as defendants. Semi-Alloys claimed a breach of contract
related to $1 million of coating equipment that Plasmatron delivered in 1993,
prior to our ownership of Plasmatron. Semi-Alloys claimed the equipment did not
perform as required under the contract. Semi-Alloys sought to recover
compensatory, consequential and incidental damages. The plaintiff sought damages
of approximately $8.0 million. In January 2000, we agreed to participate in a
settlement agreement between the plaintiff and the other defendant;
notwithstanding our denial of any liability to the plaintiffs. The plaintiff
agreed to accept a total payment of $1,450,000 in exchange for a release of all
claims. We agreed to pay a total of $450,000 of this settlement. A total of
$225,000 was due at signing and we signed three notes payable for the balance of
the settlement. These notes, in the amount of $25,000, $100,000, and $100,000,
are due in three months, nine months, and eighteen months, respectively. In
exchange for this settlement, and upon payment of the notes, we received a
complete release from further liability from both the plaintiff and the
co-defendant. The first two notes were paid in 2000. The remaining note of
$100,000 is due in July 2001.

         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 seeking to recover the $1,000,000 paid as a
result of the Semi-Alloys settlement, plus legal costs. 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, SI Diamond, 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. This case was
settled in January 2001. As part of the settlement, SI Diamond Technology, Inc.
agreed to contribute $150,000 as part of an overall settlement package to which
all defendants contributed a total of $800,000. The terms of the settlement call
for us to pay $50,000 no later than June 1, 2001. The balance of $100,000 is in
the form of a note due in July 2003.

     On July 20, 1998, TFI Telemark, Inc., a former vendor of Plasmatron, filed
a complaint in the County Court at Law No. 2 of Travis County, Texas against us
for debts of Plasmatron. We were served with notice of this suit on August 5,
1998. The plaintiff seeks damages of approximately $25,000. All amounts claimed
as owing by TFI are recorded as liabilities in the consolidated financial
statements. We believe that the ultimate resolution of this matter will not have
a material impact on our consolidated financial statements.

         On January 28, 1999, Aetna Life Insurance Company, a former landlord of
DTO, filed a complaint in the 12th Judicial District Court, Travis County, Texas
against DTO as lessee, and the Company as guarantor, for unspecified alleged
damages occurring as a result of DTO's early termination of a lease. DTO moved
out of this facility with approximately nine months remaining on the lease which
called for monthly rental payments of approximately $17,000. We settled this
suit in 2000 for a total payment of $28,000, which represented less than two
months rent during the vacancy period.

         On November 16, 2000, Lance Adams, the former owner of Sign Builders of
America, Inc. filed suit against SI Diamond Technology, Inc and Sign Builders of
America, Inc. in the 20th Judicial District Court in Travis County, Austin Texas
for alleged breech of the purchase agreement in which the Company purchased
SBOA. Of the initial purchase price of $1,800,000, a total of $1,350,000 was
paid in cash and stock in September 1999. The remainder of $450,000 was due in
the form of a note due in two installments in March and September 2000. The
agreement contained provisions that allowed for a downward adjustment of the
sales price if certain sales levels were not achieved and allowed offsets for
other claims against the note. In February 2000, an initial purchase price
adjustment reduced the note to $250,000 and a payment $125,000 plus interest was
made in March 2000. In September 2000, the Company notified Mr. Adams of
additional purchase price adjustments and other offsets which eliminated the
remaining balance due on the note. Mr. Adams disagreed with these offsets and
filed suit for breech of the agreement, alleging damages of not less than
$175,000. The Company has filed a counterclaim against Mr. Adams for amounts due
back to the Company as a result of these offsets. The Company expects the
ultimate resolution of this suit to have no material impact on the consolidated
financial statements.


                                    Page 10
<PAGE>   20

     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 TDS was continuing to ship products using our technology
and contacted TDS. TDS responded, in part, by filing suit against the Company
and its subsidiary, Electronic Billboard Technology, Inc. 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 claim against the Company has little merit
and that a significant reason that TDS filed suit was to obtain venue in its
home venue of Brazos County rather than in the Company's home county of Travis
County. TDS has alleged unspecified damages in excess of $500,000. The Company
intends to vigorously pursue its claim against TDS and seek damages and an
injunction against TDS for continuing to use the Company's technology in TDS
products after the termination of the agreement.

     The Company and its subsidiaries are also defendants in various other
lawsuits related to the non-payment of invoices when due, or minor employment
matters. It is expected that all such lawsuits will be settled for an amount no
greater than the liability recorded in the financial statements for such
matters. If resolution of any of these suits results in a liability greater than
that recorded, it could have a material financial impact on us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         There were no matters submitted to a vote of security holders during
the fourth quarter of 2000.


                                    Page 11
<PAGE>   21

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

         Our common stock, $0.001 par value trades via the OTC Bulletin Board
system under the symbol "SIDT". The following table sets forth, on a per share
basis for the periods indicated, the high and low sale prices for the common
stock as reported by the OTC Bulletin Board system. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.

<TABLE>
<CAPTION>
                                                          HIGH            LOW

<S>    <C>                                                <C>            <C>
1999   First Quarter ...................................  $1.18          $0.37
       Second Quarter...................................  $1.59          $0.65
       Third Quarter....................................  $3.06          $1.22
       Fourth Quarter...................................  $2.06          $1.31

2000   First Quarter ...................................  $4.28          $1.67
       Second Quarter...................................  $3.00          $1.03
       Third Quarter....................................  $1.80          $0.94
       Fourth Quarter...................................  $1.09          $0.22
2001
       First Quarter (through March 14, 2001)...........  $0.86          $0.37
</TABLE>

         On March 14, 2001, the closing sale price for our common stock as
reported on the OTC Bulletin Board system was $0.64. As of March 14, 2001, there
were approximately 325 shareholders of record for our common stock.

         We have never paid cash dividends on our common stock, nor do we have
any plans to pay dividends. Our board of directors currently intends to invest
future earnings, if any, to finance expansion of our business. Any payment of
cash dividends in the future will be dependent upon our earnings, financial
condition, capital requirements, and other factors deemed relevant by our board
of directors. It is unlikely that any dividends on the common stock will be paid
in the foreseeable future. Our convertible preferred stock has a liquidation
preference of $1,145,123 as of December 31, 2000.

          Information required in this Item 5 of our Annual Report on Form
10-KSB/A concerning information as to all equity securities issued by us during
the last three fiscal years that were not registered under the Securities Act of
1933 and that is not contained in "Item 6. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Financial Condition," or in
Note 10 to the Notes to the Consolidated Financial Statements contained in this
Annual Report on Form 10-KSB/A is presented below:

MCC Settlement

         During 1998, we issued 500,000 shares of our common stock to MCC as
part of an agreement to settle and pay the remaining amount due under the
minimum royalty agreement described in Note 14 to the Consolidated Financial
Statements. Based on the market price of our stock at the time, these shares
were valued at $100,000. In 1997 we also issued 340,717 shares of our common
stock to MCC to pay the remaining balance due on a services agreement entered
into in the April 1995 amendment to the MCC agreement. The remaining principal
and interest due under the agreement at the time of issuance of the shares was
$201,810.

Minority Interest in Subsidiary

         In February 2000, the Company issued 200,000 shares of its common stock
to Nomura Holding Company to acquire the shares of stock in the Company's FEPET
subsidiary held by Nomura Holding Company. These shares were included on a
registration statement filed in June 2000.


                                    Page 12
<PAGE>   22

1998 Private Placements

         In 1998, we issued 3,915,895 shares of restricted common stock, and
received cash proceeds of $713,236, in connection with private placements of our
common stock in exempt offerings under Regulation D of the Securities Act of
1933. The shares were issued at prices approximating the market price of the
stock at the time of the offerings. Following is a list of the shares issued:

<TABLE>
<CAPTION>
                                                   Common shares
                     Shareholder                      issued
                     -----------                   -------------

                 <S>                               <C>
                 Mary Ellery Calloway                 50,000
                 Hal Bozoff                           22,000
                 Gilbert Kitt                         12,500
                 Barry M. Kitt                        12,500
                 Delta Traders                        50,000
                 Bob Berman                          100,000
                 Hemisphere list                     275,000
                 Pinnacle Fund                       190,895
</TABLE>

1998 Notes and Private Placements

         During 1998, we issued a total of $1,005,000 of notes payable to
investors that were convertible into shares of our common stock at the option of
the lender, primarily at a rate of $0.25 per share, which approximated the
market price at the time the loans were made. A total of $200,000 of these notes
were converted into shares of our common stock in 1998 and the remaining
$805,000 were converted into shares of our common stock in February 1999. We
also issued notes payable totaling $260,000 which were not convertible into our
common stock. These notes were short-term notes bearing interest at a rate of
15% and secured by all of our assets. In addition, we issued $100,000 of 90 day
notes payable bearing interest at a rate of 15%, secured by all of our assets,
and were accompanied by warrants enabling the holders to purchase a total of
400,000 shares of our common stock at $0.25 per share, which approximated market
at the time of the loans. Following is a listing of the shares issued:

<TABLE>
<CAPTION>
                                                            Common shares
                     Noteholder                                issued
                     ----------                             -------------

                 <S>                                        <C>
                 D. Craig Valassis                             442,904
                 John Green Company                            433,863
                 Dan Cafolla Associates                        185,140
                 Dan Cafolla PS Plan                           105,301
                 Gilbert Kitt                                  210,000
                 Nick Martin                                   207,808
                 N. Martin Company                             207,808
                 MSB Family Trust                              830,904
                 Tom Hickey                                    414,795
                 Barney Caccioppo                              103,534
                 Bill Clement                                  102,507
                 Michael Denton, Jr.                           205,014
</TABLE>


                                    Page 13
<PAGE>   23

1999 Notes and Private Placements

         In January and February 1999, we borrowed a total of $200,000 from a
shareholder, the Pinnacle Fund, L.P., for working capital purposes. These
short-term loans bear interest at a rate of 15%, are secured by all assets of
the Company, and are convertible into our common stock at rates ranging from
$0.30 to $0.40 per share. These conversion rates approximated the market price
of our common stock at the times the loans were arranged. These notes were
converted into shares of Company's common stock in February 1999. The Company
also issued a total of 200,000 shares, 100,000 each to Bill Clement and Michael
Denton, Jr., of its common stock, in an exempt offering under Regulation D of
the Securities act of 1933, for a total of $110,000 in February 1999.

2000 Private Placements

         During 2000, in a series of private placements under Regulation D of
the Securities Act of 1933, we issued a total of 3,992,242 shares of our common
stock in exchange for $3,455,000. The shares were issued at a slight discount to
the market price of our common stock at the time of issuance. The Company filed
registration statements in June and November 2000 to register these shares and
to update the registration of other previously registered shares. Following is a
listing of those shares:

<TABLE>
<CAPTION>
                                                      Common shares
                     Shareholder                          issued
                     -----------                      -------------

                 <S>                                  <C>
                 MSB Family Trust                        700,000
                 Pinnacle Fund                           250,000
                 Michael Denton Jr.                      250,000
                 Zachary Q. Carlile                      100,000
                 Robert Berman                           200,000
                 Bill Clement                            250,000
                 Pacific Northern                        250,000
                 Alpine Capital                          312,500
                 Carlton Neel                            150,000
                 Street Search Advisors                  250,000
                 D. Craig Valassis                       434,028
                 First London Securities                 845,714
</TABLE>


                                    Page 14
<PAGE>   24

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

         The following discussion should assist in understanding our financial
condition and results of operations for the years ended December 31, 2000 and
1999 and our liquidity and capital resources for 2001. The Notes to our
Consolidated Financial Statements included later in this report contain detailed
information that should also be read in conjunction with this discussion.

                                     OUTLOOK

         We expect our cash needs for 2001 to be approximately $3.5 million. We
intend to fund those needs through a combination of SBOA sales, reimbursements
for research, license agreements, and issuance of debt and equity securities.
Successful introduction of our electronic display products resulting in
significant customer orders would cause our cash needs to exceed that, however,
such customer orders would also result in increased availability of funding.

         We anticipate that losses will continue in 2001 as we continue to fund
the development of our CFE technology and continue installations of our
electronic display products. We expect to reach break-even on a monthly
operating basis by the end of 2001. There can be no assurance that we will be
profitable in the future. Full commercial development of our technology and
electronic billboard and related electronic display will require additional
funds that may not be available at terms acceptable to us.

         We expect to continue our concentrated research and development of
FEPET's technology in 2001. EBT developed new electronic display products in
2000 intended primarily for indoor use as point of sale displays. In February
2001, we signed an agreement with a national quick service restaurant chain to
install our indoor electronic displays on a test basis. We also signed an
agreement with Eckerd Corporation, a subsidiary of JCPenney, to install indoor
point of sale electronic displays at 10 test locations beginning in March 2001.

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

         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. Our plan is primarily dependent on increasing revenues and
raising funds through additional debt and equity offerings. Although we do not
expect funding our operations to be a problem, if adequate funds are not
available from operations, or additional sources of financing, we may have to
eliminate, or reduce substantially, expenditures for research and development,
testing of our products, or obtain funds through arrangements with other
entities that may require us to relinquish rights to certain of its technologies
or products. Such results would materially and adversely affect us.


                                    Page 15
<PAGE>   25

                              RESULTS OF OPERATIONS

         2000 Compared to 1999. The Company had $2,724,830 in revenues during
2000, as compared with $6,752,104 during 1999. The main reason for the decrease
was that the 1999 revenues included $5,555,556 in license fee received from
Canon, Inc. Commercial (non-governmental) sales accounted for $2,372,489 of the
2000 revenue and all revenues in 1999. Our 2000 commercial revenue included
$2,257,013 from SBOA, $2,632 from FEPET, and $112,844 from EBT. The 1999
commercial revenue came from FEPET, EBT, and SBOA in the amounts of $5,794,269,
$300,282, and $657,553, respectively. The 1999 FEPET revenues were composed of
license fees of $5,555,556 and $238,713 of research revenues. The 2000 revenues
were primarily the result of the sale of research services. The EBT revenue in
1999 was primarily the result of royalty payments from TDS. The 2000 EBT revenue
included $25,500 of royalty payments from TDS and the remainder was from the
sale of advertising and miscellaneous display products. We recognized no revenue
from government funded projects in 1999 and $352,341of revenue from government
grants in 2000. We received approval for an additional grant near the end of
2000, that will result in approximately $580,000 of revenue in 2001. We may seek
additional research grants in the future if such grants are directly related to
projects that we are already working on in conjunction with our strategic
objectives.

         We are unable to predict our 2001 revenues by segment with any degree
of accuracy at the present time, however we had a revenue backlog of $1,186,858
at December 31, 2000. The 2000 backlog was composed of $604,525 from our SBOA
subsidiary and $582,333 from a NASA grant. This represents an increase over the
backlog at December 31, 1999 backlog, which was composed of approximately
$211,000 from SBOA and approximately $67,000 from a NASA grant.

          In 2000, our cost of sales were $1,949,042, or a margin of 28%. For
1999, our costs of sales were $674,380, resulting in a margin of 90%. The reason
for the large decrease in margin was the royalty payment received in 1999, which
had only negligible costs associated with it. We expect future margins to
improve from 2000 levels as we begin to receive increased advertising revenues
from the installation of our display products at customer locations. We expect
margins at SBOA, our main segment, to improve slightly from 2000 levels.

         Our selling, general and administrative expenses increased to
$3,881,141 in 2000 from $3,356,675 in 1999. This increase results from a
combination of factors including increased overhead associated with operating
our SBOA subsidiary for the entire year and a $675,000 marketing expense related
to the agreement signed with Eckerd Corporation. We expect selling, general and
administrative expense in 2001 to be similar to 2000.

         Company sponsored research and development expenses increased in 2000
to $2,620,623 from $1,475,655 in 1999. Development expense related to our
electronic billboard product is the primary reason for the increase. Research
and development expense at EBT increased from $817,436 in 1999 to $1,732,690 in
2000. All of EBT's research and development was focused on its indoor and
outdoor electronic display products. Research and Development expense at FEPET
increased from $658,219 in 1999 to $887,933 in 2000 due to a general higher
level of activity. We expect to incur substantial expenses in support of
additional research and development activities related to the commercial
development of our CFE and electronic display technologies, however we expect
research and development expenditures to be substantially reduced from 2000
levels for two reasons. First, FEPET has a much higher level of commitment for
external funding in 2001. In addition to the NASA grant in the amount of
approximately $582,000, which existed at December 31, 2000, FEPET has signed a
$600,000 contract with a large Japanese display manufacturer and three other
small research grants from the US Government. Second, EBT's display products are
market ready and will require much lower levels of ongoing research and
development expenditures. We may apply for other government grants, but only if
those grants are specifically related to activities we are already pursuing to
accomplish our own strategic objectives. We spent $2,620,623 on unreimbursed
research and development in 2000 and expect to spend at least $1,000,000 in
2001 on unreimbursed research and development.

Taxes in 1999 are foreign taxes related to the Canon license agreement. There
were no foreign taxes in 2000.


                                    Page 16
<PAGE>   26

         The largest single component of cost that we incur is payroll related
expense. In 2000, we incurred approximately $3.1 million of payroll related
expense, of which $0.6 million is included in costs of sales related to SBOA.
The remaining amount is included in selling, general and administrative expense,
and research and development. As a result of reductions that we have made, our
annualized current cost of payroll is approximately $2.6 million, with
approximately $0.6 million still related to SBOA cost of sales. We do not expect
our payroll levels to increase in 2001 until such time as additional employees
may be required because of increased revenues.

         As discussed in greater detail in Note 6 to the financial statements,
our operating results for 2000 include $1,838,261 in FAS 121 impairment charges.
We do not expect to have any impairment charges in the future. The entire gain
on disposal of assets of $375,000 in 2000 and $250,000 of the gain in 1999
resulted from the sale of our previous domain name, diamond.com. The balance of
the gain in 1999 resulted from minor equipment disposals. We incurred net
realized and unrealized losses on marketable securities in 2000 of $449,504 as
compared with net realized and unrealized gains on marketable securities in 1999
of $309,172. The marketable securities were invested primarily in NASDAQ stocks
and the overall results are similar to the overall performance of the NASDAQ
during those time periods. We have liquidated the majority of our marketable
securities portfolio and do not expect gains or losses in 2001 to be
significant.

                         LIQUIDITY AND CAPITAL RESOURCES

         Our cash position decreased from $348,832 at December 31, 1999 to
$8,818 at December 31, 2000. Net cash used in operating activities was
$5,205,723 in 2000, as opposed to cash provided by operating activities of
$868,226 in 1999. The cash used in operations was primarily the result of the
net loss incurred in 2000. Our operating results in 2000 included non cash
charges of $1,838,261 related to impairment charges, $679,646 related to
warrants and stock issued for services, and $544,794 related to depreciation.
The major reason that we were profitable in 1999 was the royalty revenue
received from Canon, Inc. in that year.

         Cash provided by investing activities was $233,192 in 2000 as compared
with cash used in investing activities of $1,736,134 in 1999. The cash used in
investing activities in 1999 was related to the construction of our electronic
billboard product, our purchase of the assets of SBOA, and our investment of a
portion of our operating funds in marketable securities. The cash provided by
investing activities in 2000 was the result of the sale of the majority of our
marketable securities portfolio and proceeds received from the sale of the
entity which had purchased our previous domain name. No material commitments
exist as of December 31, 2000 for future purchases of capital assets.

         In 2000, we had cash provided by financing activities of $4,632,517.
These funds were primarily the result of the sale of equity securities and were
primarily used to fund our operating losses. This was a substantial increase
over the cash provided by financing activities of $1,214,104 in 1999, when we
had a much smaller need for operating capital as a result of the license
agreement signed with Canon, Inc.

         As of December 31, 2000, our current liabilities exceeded our current
assets by $888,644, with a current ratio of .4 to 1, compared to a working
capital deficit of $356,106 and a current ratio of .8 to 1 as of December 31,
1999. This decrease is primarily the result of the reduction in our cash and
marketable securities positions. Current liabilities decreased by $443,129 from
1999 to 2000. The primary reason for this decrease is the total payments of
$350,000 made related to a lawsuit settlement that was included in accrued
liabilities at December 31, 1999. We do not expect the aggregate payments
related to lawsuits to exceed the liabilities recorded in the financial
statements and we do not expect aggregate payments related to lawsuits to affect
our liquidity beyond using resources that we have set aside to make payments at
the appropriate times. If resolution of any of these suits results in a
liability greater than that recorded, it could have a material financial impact
on us.

         Based on the developmental stages of our technology, additional
financing will be necessary in the future. If all of the our warrants that were
outstanding as of December 31, 2000 were exercised, we would collect proceeds of
approximately $466,000. (See Note 12 to the Consolidated Financial Statements.)
Proceeds from the exercise of warrants totaled approximately $375,000 in 2000
and $650,000 in 1999. Given that the current price of our common stock is below
the exercise price of our outstanding warrants, it is unlikely that a
significant portion of the outstanding warrants will be exercised in the near
future. We may also receive proceeds from the exercise of stock options. At the
present time, it is also unlikely that significant amounts of options will be
exercised, since for current in-the-money options, the current market price of
our common stock does not exceed the exercise price of those options by a
significant amount.


                                    Page 17
<PAGE>   27

The principal source of our liquidity has been funds received from exempt
offerings of common and preferred stock. We may receive additional funds from
the exercise of warrants, although there is no assurance that such warrants will
be exercised. In the event that we need additional funds, we may seek to sell
additional debt or equity securities. We may seek to increase our liquidity
through bank borrowings or other financings. While we expect to be able to
obtain any funds needed for operations, there can be no assurance that any of
these financing alternatives can be arranged on commercially acceptable terms.
We believe that our success in reaching profitability will be dependent upon the
viability of our products and their acceptance in the marketplace, and our
ability to obtain additional debt or equity financings in the future. Our
independent auditors, McGladrey & Pullen, LLP, expressed uncertainty as to the
ability of the Company to continue as a going concern based on accumulated past
losses from operations. See "Independent Auditor's Report."

         Following is a summary of debt and equity proceeds that the Company has
received from January 1, 2000 through the date of this filing:

2000 Private Placements

         During 2000, in a series of private placements under Regulation D of
the Securities Act of 1933, we issued a total of 3,992,242 shares of our common
stock in exchange for $3,455,000. The shares were issued at a slight discount to
the market price of our common stock at the time of issuance. The Company filed
registration statements in June and November 2000 to register these shares and
to update the registration of other previously registered shares.

2000 Notes

         In June 2000, we borrowed a total of $375,000 from two separate
entities. We repaid $125,000 in January 2001. The remaining $250,000 is due in
June 2001 and is convertible into our common stock at the option of the lender
at a rate of $0.675 per share. The shares into which this note are convertible
were registered on a registration statement declared effective July 17, 2000.

2001 Private Placements and Notes

         Through March 12, 2001 in a series of private placements under
Regulation D of the Securities Act of 1933, we issued a total of 1,178,284 and
received total proceeds of $522,047. These shares have not yet been registered.
It is likely that we will continue to fund our operations through the use of
private placements and Notes until such time as we are able to sustain ourselves
on our own revenue.

SBOA Acquisition

         In September 1999, we acquired substantially all of the assets
(including the right to use the name) and assumed certain liabilities of Sign
Builders of America, Inc. In connection with this transaction we issued 423,132
shares of our common stock, which were valued at $900,000 at the time of
issuance to the former owner of SBOA. We also issued a total of $250,000 of
notes payable to the same individual. These notes are convertible into our
common stock at his option at a rate of $2.127 per share. In February 2000,
$125,000 of principal and the related accrued interest were converted into
62,284 shares of our common stock.

Common Stock for Services

         As a result of a marketing agreement and related consulting and
advisory agreement with Vision Mark, LLC and C&A Consulting Services, LLC., the
Company issued 300,000 shares of its common stock in January 2000 to C&A in
connection with an agreement to provide an electronic billboard to Eckerd
Corporation, a subsidiary of JCPenney , Inc. The shares were valued at $675,000
based upon the market price of the common stock at the time of issuance. A
registration statement covering these shares was declared effective June 23,
1999 and amended on several occasions since that date.


                                    Page 18
<PAGE>   28

Patent Acquisition

         In June 2000, the Company acquired a patent valued at $250,000. In
exchange for this patent, the Company issued 240,164 shares of its common stock.
A registration statement covering these shares was declared effective July 17,
2000. We may acquire additional patents in the future, but at the present time
we have no plans to do so.

                            SEASONALITY AND INFLATION

         SI Diamond's business is not seasonal in nature. Management believes
that SI Diamond's operations have not been affected by inflation.


                                    Page 19
<PAGE>   29

ITEM 7. FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                         OF SI DIAMOND TECHNOLOGY, INC.

<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS:

<S>                                                                                           <C>
Independent Auditor's Report................................................................  21

Consolidated Balance Sheets - December 31, 2000 and 1999....................................  23

Consolidated Statements of Operations - Years Ended December 31, 2000 and 1999..............  24

Consolidated Statements of Shareholders' Equity - Years Ended December 31,
     2000 and 1999..........................................................................  25

Consolidated Statements of Cash Flows - Years Ended December 31, 2000 and 1999..............  27

Notes to Consolidated Financial Statements..................................................  28
</TABLE>


                                    Page 20
<PAGE>   30

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Shareholders
SI Diamond Technology, Inc.
Austin, Texas

We have audited the accompanying consolidated balance sheet of SI Diamond
Technology, Inc. and Subsidiaries (collectively, the "Company") as of December
31, 2000 and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SI Diamond
Technology, Inc. and Subsidiaries as of December 31, 2000, and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and the Company has relied primarily on capital raised through
offerings of common stock, preferred stock, and convertible debt securities to
fund its operations. It is uncertain whether the Company will be able to secure
additional capital to fund its operations and this raises substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

McGladrey & Pullen, L.L.P.
Dallas, Texas
March 14, 2001


                                    Page 21
<PAGE>   31

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of SI Diamond Technology, Inc. and
Subsidiaries:

We have audited the accompanying consolidated balance sheets of SI Diamond
Technology, Inc. and Subsidiaries (collectively, the "Company") as of December
31, 1999 and 1998, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SI
Diamond Technology, Inc. and Subsidiaries as of December 31, 1999 and 1998, and
the consolidated results of their operations, and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As described in Note 1 to the
consolidated financial statements, the Company has relied primarily on capital
raised through offerings of common stock, preferred stock, and convertible debt
securities to fund its operations, and had sustained only operating losses prior
to 1999. As a result, there is substantial uncertainty regarding the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

WallaceSanders & Company

Dallas, Texas
February 12, 2000


                                    Page 22
<PAGE>   32

                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                       DECEMBER 31,
                                                                                             --------------------------------
                                                                                                 2000                1999
                                                                                             ------------        ------------

<S>                                                                                          <C>                 <C>
                                           ASSETS

Current assets:
     Cash and cash equivalents ......................................................        $      8,818        $    348,832
     Marketable equity securities ...................................................              70,313             719,376
     Accounts receivable, trade - net of allowance for doubtful accounts
           of $30,566 and $6,012 in 2000 and 1999, respectively .....................             353,154             314,518
     Notes receivable ...............................................................                  --              60,000
     Inventories ....................................................................             153,244             167,775
     Prepaid expenses and other current assets ......................................              90,767              52,312
                                                                                             ------------        ------------

           Total current assets .....................................................             676,296           1,662,813

Property and equipment, net .........................................................             766,581           1,437,246
Intangible assets, net ..............................................................             190,000             836,021
Other assets ........................................................................               8,688               7,250
                                                                                             ------------        ------------
           Total assets .............................................................        $  1,641,565        $  3,943,330
                                                                                             ============        ============

                            LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable ...............................................................        $    467,414        $    751,225
     Current portion of notes payable ...............................................             496,623             255,473
     Obligations under capital lease ................................................                  --              31,432
     Accrued liabilities ............................................................             441,958             723,842
     Customer deposits and other current liabilities ................................             169,795             256,947
                                                                                             ------------        ------------

           Total current liabilities ................................................           1,575,790           2,018,919
                                                                                             ------------        ------------

Note payable, long-term .............................................................                  --              21,623
                                                                                             ------------        ------------

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

Minority interest in subsidiary .....................................................                  --              22,547
                                                                                             ------------        ------------

Shareholders' equity :
     Convertible preferred stock, $1.00 par value, 2,000,000 shares authorized;
       850 and 1,100 shares issued and outstanding, respectively ....................                 850               1,100
     Common stock, 120,000,000 shares authorized, $.001 par value,
       60,518,983 and 53,906,719 shares issued and outstanding, respectively ........              60,519              53,906
     Additional paid-in capital .....................................................          61,272,028          55,410,993
     Less stock subscriptions receivable ............................................             (10,850)                 --
     Accumulated deficit ............................................................         (61,256,772)        (53,585,758)
                                                                                             ------------        ------------
           Total shareholders' equity ...............................................              65,775           1,880,241
                                                                                             ------------        ------------

           Total liabilities and shareholders' equity ...............................        $  1,641,565        $  3,943,330
                                                                                             ============        ============
</TABLE>

                 See notes to consolidated financial statements.


                                    Page 23
<PAGE>   33

                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                       YEAR ENDED
                                                                                                       DECEMBER 31,
                                                                                             --------------------------------
                                                                                                 2000                1999
                                                                                             ------------        ------------

<S>                                                                                          <C>                 <C>
Revenues
     License fees and royalties .....................................................        $     25,500        $  5,842,756
     Sign construction ..............................................................           2,257,013             657,553
     Government contracts ...........................................................             352,341                  --
     Advertising ....................................................................              44,931                  --
     Other ..........................................................................              45,045             251,795
                                                                                             ------------        ------------
                 Total Revenues .....................................................           2,724,830           6,752,104

Cost of sales .......................................................................           1,949,042             674,380
Selling, general and administrative expenses ........................................           3,881,141           3,356,675
Research and development ............................................................           2,620,623           1,475,655
Impairment charge ...................................................................           1,838,261                  --
                                                                                             ------------        ------------
           Operating costs and expenses .............................................          10,289,067           5,506,710
                                                                                             ------------        ------------
                  Income (loss) from operations .....................................          (7,564,237)          1,245,394
                                                                                             ------------        ------------

Other income (expense):
         Gain on disposal of assets .................................................             375,000             265,688
         Net realized and unrealized gains (losses) on marketable securities ........            (449,504)            309,172
         Other income (expense), net ................................................             (54,820)           (124,017)
                                                                                             ------------        ------------

Income (loss) before minority interest in subsidiary earnings .......................          (7,693,561)          1,696,237

Minority interest in subsidiary earnings ............................................              22,547             (22,547)
                                                                                             ------------        ------------

Income (loss) before taxes ..........................................................          (7,671,014)          1,673,690

Provision for taxes .................................................................                  --             555,556
                                                                                             ------------        ------------

Net income (loss) ...................................................................          (7,671,014)          1,118,134

Accretion on convertible preferred stock ............................................             (90,328)           (140,163)
                                                                                             ------------        ------------

Net income (loss) applicable to common shareholders .................................        $ (7,761,342)       $    977,971
                                                                                             ============        ============

Earnings (loss) per share

         Basic ......................................................................        $      (0.14)       $       0.02
                                                                                             ============        ============
         Diluted ....................................................................        $      (0.14)       $       0.02
                                                                                             ============        ============

Weighted average common shares outstanding

         Basic ......................................................................          57,379,240          51,188,385
                                                                                             ============        ============
         Diluted ....................................................................          57,379,240          57,401,654
                                                                                             ============        ============
</TABLE>

                 See notes to consolidated financial statements.


                                    Page 24
<PAGE>   34

                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                          PREFERRED             COMMON
                                       ----------------  -------------------   ADDITIONAL    ACCUMULATED      STOCK
                                       SHARES   AMOUNT     SHARES    AMOUNT  PAID-IN CAPITAL   DEFICIT     SUBSCRIPTION    TOTAL
                                       ------  --------  ---------- -------- --------------- ------------  ------------ -----------

<S>                                    <C>     <C>       <C>        <C>      <C>             <C>           <C>          <C>
Balance, January 1, 2000                1,100  $  1,100  53,906,719 $ 53,906   $ 55,410,993  $(53,585,758)         --   $ 1,880,241

Warrants exercised                         --        --     375,000      375        374,625            --          --       375,000

Issuance of common stock
   as a result of the exercise
   of employee stock options               --        --   1,125,177    1,125        474,147            --          --       475,272

Conversion of Series G
   preferred stock into common stock     (250)     (250)    317,397      317            (67)           --          --            --

Issuance of common shares for cash         --        --   3,992,242    3,993      3,451,007            --          --     3,455,000

Issuance of common stock
   shares in payment of short
   term notes and interest                 --        --      62,284       63        132,417            --          --       132,480

Issuance of common stock
   warrants for services                   --        --          --       --          4,646            --          --         4,646

Issuance of common stock
   for patent acquisition                  --        --     240,164      240        249,760            --          --       250,000

Issuance of common stock
   for services                            --        --     300,000      300        674,700            --          --       675,000

Issuance of common shares
   for minority interest in subsidiary     --        --     200,000      200        499,800            --          --       500,000

Stock subscription                         --        --          --       --             --            --     (10,850)      (10,850)

Net (loss)                                 --        --          --       --             --    (7,671,014)         --    (7,671,014)
                                       ------  --------  ---------- --------   ------------  ------------    --------   -----------

Balance, December 31, 2000                850  $    850  60,518,983 $ 60,519   $ 61,272,028  $(61,256,772)   $(10,850)  $    65,775
                                       ======  ========  ========== ========   ============  ============    ========   ===========
</TABLE>

                 See notes to consolidated financial statements.


                                    Page 25
<PAGE>   35

                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>
                                            PREFERRED                 COMMON
                                        ------------------    ----------------------     ADDITIONAL     ACCUMULATED
                                        SHARES     AMOUNT       SHARES       AMOUNT   PAID-IN CAPITAL     DEFICIT         TOTAL
                                        ------    --------    ----------    --------  ---------------   ------------   ------------

<S>                                     <C>       <C>         <C>           <C>       <C>               <C>            <C>
Balance, January 1, 1999                 1,700    $  1,700    45,986,617    $ 45,987    $ 52,019,707    $(54,703,892)  $ (2,636,498)

Warrants exercised                          --          --       970,000         970         646,097              --        647,067

Issuance of common stock
   as a result of the exercise
   of employee stock options                --          --     1,557,037       1,557         623,729              --        625,286

Conversion of Series A and G
   preferred stock into common stock      (600)       (600)      729,658         729            (129)             --             --

Issuance of common shares for cash          --          --       200,000         200         109,800              --        110,000

Issuance of common stock
   shares in payment of short
   term notes and interest                  --          --     4,040,275       4,040       1,045,812              --      1,049,852

Issuance of common stock
   warrants for services                    --          --            --          --          66,400              --         66,400

Issuance of common stock
   for subsidiary acquisition               --          --       423,132         423         899,577              --        900,000

Net income                                  --          --            --          --              --       1,118,134      1,118,134
                                        ------    --------    ----------    --------    ------------    ------------   ------------

Balance, December 31, 1999               1,100    $  1,100    53,906,719    $ 53,906    $ 55,410,993    $(53,585,758)  $  1,880,241
                                        ======    ========    ==========    ========    ============    ============   ============
</TABLE>

                 See notes to consolidated financial statements.


                                    Page 26
<PAGE>   36

                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                              YEAR ENDED
                                                                                             DECEMBER 31,
                                                                                   --------------------------------
                                                                                       2000                1999
                                                                                   ------------        ------------

<S>                                                                                <C>                 <C>
Cash flows from operating activities:
   Net income (loss) ......................................................        $ (7,671,014)       $  1,118,134
Adjustments to reconcile net income (loss) to net
     cash provided by (used in) operating activities:
   Interest paid in common stock ..........................................               7,480              44,852
   Minority interest in subsidiary earnings ...............................             (22,547)             22,547
   Warrants and stock issued for debt and services ........................             679,646              66,400
   Depreciation and amortization expense ..................................             544,794             171,035
   Gain on disposal of assets .............................................            (375,000)            (23,688)
   Non-cash compensation expense ..........................................              23,560                  --
   Impairment charge ......................................................           1,838,261                  --
   Net realized and unrealized (gains) losses on marketable securities ....             449,504            (309,172)
   Changes in assets and liabilities:
     Accounts receivable, trade ...........................................             (38,636)            174,428
     Notes receivable .....................................................              60,000             (60,000)
     Inventories ..........................................................              14,531              58,511
     Prepaid expenses and other assets ....................................             (38,455)             49,196
     Accounts payable .....................................................            (283,811)           (721,310)
     Accrued expenses .....................................................            (306,884)            104,667
     Customer deposits and other current liabilities ......................             (87,152)            172,626
                                                                                   ------------        ------------

       Total adjustments ..................................................           2,465,291            (249,908)
                                                                                   ------------        ------------

     Net cash provided by (used in) operating activities ..................          (5,205,723)            868,226
                                                                                   ------------        ------------

Cash flows from investing activities:
   Decrease (increase) in deposits ........................................              (1,438)              7,250
   Purchase of marketable securities ......................................          (1,966,453)         (1,943,522)
   Sale of marketable securities ..........................................           2,166,012           1,533,318
   Capital expenditures ...................................................            (339,929)           (914,683)
   Cash paid for acquisition of Sign Builders of America, Inc. ............                  --            (427,741)
   Proceeds from sale of assets ...........................................             375,000               9,244
                                                                                   ------------        ------------

     Net cash provided by (used in) investing activities ..................             233,192          (1,736,134)
                                                                                   ------------        ------------

Cash flows from financing activities:
   Proceeds from short-term notes payable .................................             375,000             250,000
   Repayment of short-term notes payable ..................................                  --            (400,000)
   Proceeds from issuance of common stock .................................           4,294,422           1,382,353
   Repayment of long-term notes payable and capital lease obligations .....             (36,905)            (18,249)
                                                                                   ------------        ------------

Net cash provided by financing activities .................................           4,632,517           1,214,104
                                                                                   ------------        ------------

Net increase (decrease) in cash and cash equivalents ......................            (340,014)            346,196
Cash and cash equivalents, beginning of year ..............................             348,832               2,636
                                                                                   ------------        ------------
Cash and cash equivalents, end of year ....................................        $      8,818        $    348,832
                                                                                   ============        ============
</TABLE>

                 See notes to consolidated financial statements.


                                    Page 27

<PAGE>   37
                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       ORGANIZATION, OPERATIONS, AND LIQUIDITY:

         SI Diamond Technology, Inc. and its subsidiaries ("the Company") are
engaged in the construction and sale of all types of outdoor signage, the
commercialization of electronic digitized sign technology, and the development
of products for applications using our proprietary field emission technology.
The Company is performing significant research and development related to its
Carbon-Based Field Emission ("CFE") technology and electronic digitized sign
technology.

         The Company launched its electronic billboard product in 2000,
installed test units at three locations, and began receiving nominal amounts of
revenue related to these signs. The Company is continuing to focus on rolling
out its full line of display products. The Company is also continuing to pursue
license agreements for its technology. Until the Company is able to operate
profitably as a result of either revenues from its display products or revenue
from license agreements, it will continue to seek additional funds through the
equity markets, or raise funds through debt instruments to allow it to maintain
operations. There is no assurance that license agreements will be signed, that
commercialization of the Company's technology and products will result in
income from operations, or that funds will be available in the equity or debt
markets. Management believes it will continue to be able to secure additional
short term funding, to allow the Company to continue operations until it
achieves profitability. Full commercial development of the Company's CFE
technology may require additional funds that may not be available at terms
acceptable to the Company.

         The principal source of the Company's liquidity since the time of its
initial public offering in 1993 has been from the funds received from exempt
offerings of common stock, preferred stock, and convertible debt securities.
The Company may receive additional funds from the exercise of warrants or
options, although there is no assurance that significant funds will be received
from the exercise of any such warrants or options in the near future. The
Company may also seek to increase its liquidity through additional bank
borrowings or other financings. 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 depend on the
viability of its products and technology, their acceptance in the marketplace,
and its ability to obtain additional debt or equity financings in the future.

         A portion of the Company's research and development has been funded by
others. To the extent that other funding is not available, the research and
development performed is being internally funded by the Company.

         The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates continuation
of the Company as a going concern. However the Company has sustained
substantial operating losses since inception and continues to sustain losses.
In view of this, realization of a portion of the assets in the accompanying
balance sheet is dependent upon continued operations of the Company. Management
believes that actions currently being taken will allow it to achieve
profitability and allow the Company to continue as a going concern.


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of consolidation

         The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries, Field Emission Picture Element
Technology, Inc. ("FEPET"), Electronic Billboard Technology, Inc. ("EBT"), Sign
Builders of America, Inc. ("SBOA"), Diamond Tech One, Inc. ("DTO"), SDI
Acquisition Corp. ("SDI"), and Plasmatron Coatings and Systems, Inc.
("Plasmatron"), after the elimination of all significant intercompany accounts
and transactions. FEPET is primarily involved in developing products for
applications using the Company's proprietary CFE technology. EBT is primarily
involved in the commercialization of electronic digitized sign technology. SBOA
is a manufacturer of custom signage. The Companies remaining subsidiaries (SDI,
DTO, and Plasmatron) are currently inactive.


                                    Page 28
<PAGE>   38


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Revenue recognition

         In 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements,
("SAB 101"). SAB 101 summarizes some of the staff's interpretations of the
application of the generally accepted accounting principals to revenue
recognition. The Company adopted SAB No. 101 in the fourth quarter of 2000. The
accompanying financial statements comply with the provisions of SAB 101.

         The Company recognizes revenue from the construction and sale of
custom signage when the sign is installed on the customer's premises. The
Company recognizes royalty revenue at the time the underlying product upon
which the royalty is based is shipped by the entity paying the royalty. License
revenue from licensing the Company's product is recognized as revenue when
earned under the terms of the agreement. Advertising revenues are recognized as
revenue in the period in which the advertising runs.

         The Company's revenues include reimbursements under agreements to
perform research and development for others. The agreements with federal
government agencies generally provide that, upon completion of a technology
development program, the funding agency is granted a royalty-free license to
use the newly developed technology for its own purposes. The Company retains
all other rights to use, develop, and commercialize the technology and
recognizes revenue when it is billed pursuant to the terms of the contract.
Agreements with other entities generally allow the other entity to license the
Company's technology upon completion of the project. Revenue under these
contracts is recognized when it is earned pursuant to the terms of the
contract.

Cash and cash equivalents

         The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

Marketable equity securities

         The Company's securities investments that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities. Trading securities are recorded at fair value on the
balance sheet in current assets, with the change in fair value during the
period included in earnings.

Accounts receivable

         The Company's SBOA subsidiary frequently sells products to smaller
companies on credit, but requires deposits and prepayments where appropriate.
It is the Company's policy to record reserves for potential credit losses.
Since inception, the Company has experienced minimal losses.

Inventories

         Inventories are recorded at the lower of cost (first-in, first-out) or
market. Inventories consist of purchased components and work-in-process at
December 31, 2000 and 1999.


                                    Page 29
<PAGE>   39


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Property and equipment

         Property and equipment are recorded at cost, net of accumulated
depreciation and amortization. Depreciation is provided on the straight-line
method over the estimated useful lives of the assets, which range from two to
seven years, or the lease term for leasehold improvements, if less.
Expenditures for major renewals and betterments that extend the original
estimated economic useful lives of the applicable assets are capitalized.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. The cost and related accumulated depreciation or amortization of
assets sold or otherwise disposed of are removed from the accounts, and any
gain or loss is included in income.

Intangible assets

         The Company has applied to obtain certain United States patents, which
are currently pending. The majority of patent costs, which consist primarily of
legal fees, are expensed as incurred. The Company has capitalized the
acquisition cost of patents acquired in 2000 and is amortizing the cost of
those patents over a period of 25 months.

         Goodwill represents the excess of the cost of the SBOA acquisition
over the fair value of the net assets at the date of acquisition and is being
amortized over a period of 15 years. Amortization expense charged to operations
was $26,574 in 2000 and $8,858 in 1999. In connection with this acquisition,
the Company also signed a covenant not to compete. The covenant not to compete
is being amortized over a three year period. Amortization expense charged to
operations was $166,667 in 2000 and $55,556 in 1999.

Impairment

         At each balance sheet date, the Company evaluates the carrying amount
and the amortization period for its intangible assets and for its long-lived
assets. If an indicator of impairment exists, it is recorded at that time.
During the current year, property and equipment, as well as goodwill and
covenant not to compete were considered impaired. See Note 6 for details
related to the impairment write down.

Income taxes

         The Company accounts for income taxes using the liability method
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109. Under
this method, deferred income taxes are recorded to reflect the tax consequences
on future years of temporary differences between the tax basis of the assets
and liabilities and their financial amounts at year-end. The Company provides a
valuation allowance to reduce deferred tax assets to their net realizable
value.

Research and development expenses

         Costs of research and development for Company-sponsored projects are
expensed as incurred.

Minority Interest in Subsidiary

         At December 31, 1999, the minority interest in subsidiary represented
the 5% of FEPET owned by Diamond Pro-Shop Nomura, Company, Ltd. and was equal
to 5% of the book value of FEPET. In February 2000, the Company acquired the
remaining 5% of FEPET. At December 31, 2000, no minority interest in any
subsidiaries exists. See Note 6 for more information on the acquisition of the
minority interest.


                                    Page 30
<PAGE>   40


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Accretion on convertible preferred stock

         The Company's Series G Convertible Preferred stock bears a 10%
accretion payable in common stock at the date of conversion. All accretions
paid in common stock or payable in common stock if the shares had been
converted as of December 31, 2000 and 1999, respectively, have been treated as
preferred dividends. The entire amount reflected as accretion on convertible
preferred stock on the income statement relates to the Series G Preferred stock
accretion.

Income (loss) per common share

Basic per share amounts are computed, generally, by dividing net income or loss
by the weighted average number of common shares outstanding. Diluted per-share
amounts assume the conversion, exercise, or issuance of all potential common
stock instruments unless the effect is anti-dilutive, thereby reducing the loss
or increasing the income per common share. As described in Notes 10, 11 and 12,
at December 31, 2000, the Company had convertible preferred shares, options and
warrants outstanding to purchase a total of 1,145,123; 5,143,826; and 390,000
shares of common stock, respectively, at a weighted average exercise price of
approximately $0.85. However, because the Company incurred a loss in 2000, the
inclusion of those potential common shares in the calculation of diluted loss
per-share would have an anti-dilutive effect. Therefore, basic and diluted
per-share amounts are the same in 2000.

In calculating the basic (income) loss per common share, the premium earned by
the preferred shareholders, ($90,328 in 2000 and $140,163 in 1999) reduced the
net income in 1999 and increased the net loss in 2000.

Reclassifications

         Certain reclassifications were made to previously reported amounts in
the accompanying consolidated financial statements and notes to make them
consistent with the current year presentation format.

Management's estimates

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses, as well as the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates. Significant estimates include
the NOL reserve, warranty reserve, bad debt reserve, litigation reserves, and
the remaining value of impaired assets.

Disclosures about fair value of financial instruments

         The following methods and assumptions were used to estimate the fair
value of each class of certain financial instruments for which it is
practicable to estimate that fair value. For cash equivalents, the carrying
amount approximates fair value because of the short term nature of these
instruments. The fair value of the Company's notes payable and capital lease
obligations is estimated based on the quoted market prices for the same, or
similar, issues, or on the current rates offered to the Company for debt of the
same remaining maturities with similar collateral requirements. At December 31,
2000 and 1999, the fair value of the Company's notes payable and capital lease
obligations approximates their carrying values. See Note 4 for information on
the fair value of marketable securities.


                                    Page 31
<PAGE>   41


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


3.       OTHER INCOME

         The gain on disposal of assets included in other income (expense) was
primarily the result of the sale of the Company's previous domain name,
diamond.com. The entire gain of $375,000 in 2000 and $250,000 of the total gain
of $265,688 in 1999 related to the sale. The remainder of the gain in 1999 was
related to miscellaneous equipment sales. In 1999, the Company sold its domain
name, diamond.com for $250,000 in cash and notes receivable and an ownership
position in the entity that purchased it. In 2000, that entity was sold. As a
result of that sale, the Company received an additional $375,000 in cash and an
ownership position in the privately held company that purchased it. Because
there is no readily available market for the common stock received by the
Company, no value has been assigned to it at this time.

Other income (expense) is composed of the following:


<TABLE>
<CAPTION>
                                       2000                 1999
                                     --------             ---------

<S>                                  <C>                  <C>
Lawsuit settlement ......            $     --             $(200,000)
Escrow recovery .........                  --                99,708
Interest expense ........             (68,196)              (42,933)
Other ...................              13,376                19,208
                                     --------             ---------
Total ...................            $(54,820)            $(124,017)
                                     ========             =========
</TABLE>

         The escrow recovery in 1999 was the result of the resolution of a
dispute with the purchaser of the assets of Diamond Tech One, Inc. related to
claims made against the escrow account by the purchaser in 1998.


4.       MARKETABLE EQUITY SECURITIES

         The Company invests a portion of its working capital in marketable
equity securities. All such equity securities are classified as trading
securities. The fair market value of marketable securities, at December 31, was
determined as follows:


<TABLE>
<CAPTION>
                                   2000                1999
                                  -------            --------

<S>                               <C>                <C>
Cost basis ...........            $67,120            $540,646
Unrealized gains .....              3,193             178,730
                                  -------            --------
Fair market value ....            $70,313            $719,376
                                  =======            ========
</TABLE>

The net realized and unrealized gains (losses) on marketable equity securities
consists of the following for the years ended December 31:


<TABLE>
<CAPTION>
                                                             2000            1999
                                                           ---------            --------

<S>                                                        <C>                  <C>
Unrealized gains - beginning of the year .......           $(178,730)           $     --
Realized gains .................................             479,990             210,197
Realized losses ................................            (753,957)            (79,755)
Unrealized gains - end of year .................               3,193             178,730
                                                           ---------            --------
Net realized and unrealized gains (losses) .....           $(449,504)           $309,172
                                                           =========            ========
</TABLE>


                                    Page 32
<PAGE>   42


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


5.       DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:

Additional information regarding certain balance sheet accounts at December 31,
2000 and 1999 is as follows:


<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                  -----------------------------------
                                                                     2000                     1999
                                                                  -----------             -----------

<S>                                                               <C>                     <C>
Inventories
     Raw materials ...................................                 98,019                 111,861
     Work in process .................................                 55,225                  55,914
                                                                  -----------             -----------
           Total .....................................            $   153,244             $   167,775
                                                                  ===========             ===========

Property and equipment:
     Plant and equipment .............................            $   856,608             $   830,431
     Electronic display units under construction .....                     --                 858,509
     Electronic Display units ........................                300,000                      --
     Furniture and office equipment ..................                229,315                 182,057
     Vehicles ........................................                103,079                 131,079
                                                                  -----------             -----------
           Total carrying cost .......................              1,489,002               2,002,076
     Less accumulated depreciation ...................               (722,421)               (564,830)
                                                                  -----------             -----------
                                                                  $   766,581             $ 1,437,246
                                                                  ===========             ===========
Intangible assets:
     Patents .........................................            $   250,000             $    30,000
     Covenant not to compete .........................                     --                 500,000
     Goodwill and other ..............................                     --                 398,607
                                                                  -----------             -----------
           Total cost ................................                250,000                 928,607
     Less accumulated amortization ...................                (60,000)                (92,586)
                                                                  -----------             -----------
                                                                  $   190,000             $   836,021
                                                                  ===========             ===========
Accrued liabilities:
     Payroll and related accruals ....................            $    37,693             $    11,373
     Accounting and legal fees .......................                     --                  42,500
     Lawsuit settlements .............................                275,000                 450,000
     Other ...........................................                129,265                 219,969
                                                                  -----------             -----------
           Total .....................................            $   441,958             $   723,842
                                                                  ===========             ===========
</TABLE>


6.       IMPAIRMENT OF ASSETS:

The impairment charge for 2000 consists of the following:


<TABLE>
<S>                                                               <C>
Property and equipment                                            $  712,500
Goodwill and covenant not to compete                                 639,761
Minority interest goodwill                                           486,000
                                                                  ----------
Total impairment of assets                                        $1,838,261
                                                                  ==========
</TABLE>

PROPERTY AND EQUIPMENT:

         The electronic display units installed by the Company use technology
developed by the Company and are currently installed under test agreements with
customers. As a result, the Company is not able to predict future cash flows
with sufficient certainty and accordingly, pursuant to the provisions of
Financial Accounting Standards Board Pronouncement No.121, ("FAS 121"), has
reduced the carrying value of these display units to the lower end of the range
of estimated liquidation values of the display units, in the event that
ultimate implementation of the Company's strategy related to these boards is
unsuccessful. We had expected to implement our advertising strategy in the 4th
quarter, but because of delays in moving to the next stage with our customers,
our estimates were not met. Accordingly, the impairment adjustment was recorded
as of December 31, 2000.


                                    Page 33
<PAGE>   43


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


6.       IMPAIRMENT OF ASSETS (CONTINUED):

SBOA GOODWILL AND COVENANT NOT TO COMPETE:

         In connection with the acquisition of assets of SBOA in August 1999,
the former owner of SBOA entered into a covenant not to compete with the
Company, whereby this individual agreed not to compete with the Company for a
period of three years from the date of acquisition. This covenant not to
compete was being amortized over the three year period covered by the
agreement. The Company also recorded goodwill in connection with the SBOA
transaction. This goodwill was being amortized over a fifteen year period. As
part of the evaluation of intangible assets at December 31, 2000, the Company
determined that the goodwill and covenant not to compete were impaired as of
that date. The remaining net book value of these two intangible assets were
written off and charged to expense at that date. This determination was based
on the failure of SBOA to meet projected sales levels in the 4th quarter of
2000, which caused the Company to reduce sales projections for future periods.

MINORITY INTEREST GOODWILL

         In February 2000, the Company had the opportunity to reacquire the
minority interest in its FEPET subsidiary and negotiated to do so by issuing
200,000 shares of the Company's common stock. The Company considered it to be a
good decision to reacquire the minority interest for this price, since we
considered this to be much less than the true value of the minority interest
and it enabled us to acquire total control of what we believe to be a very
valuable asset. The transaction was valued based on the market price of the
common stock issued. Since FEPET had a negligible book value, this resulted in
$486,000 of goodwill. However, since there was no future cash flow directly
related to this 5% minority interest, FAS 121 required us to write the goodwill
off as impaired at the time that it was acquired. The transaction had no
overall effect on stockholders' equity since the value of the stock issued at
the time approximated the impairment write off.


7.       OPERATING LEASE OBLIGATIONS:

         The Company leases various facilities and equipment under operating
lease agreements having terms expiring at various dates through 2006. Rental
expense was $271,156 and $160,554 for the years ended December 31, 2000 and
1999, respectively.

         Future minimum lease payments under operating leases that have initial
or remaining noncancelable lease terms in excess of one year at December 31,
2000, were as follows:


<TABLE>

<S>                                                   <C>
2001                                                  $187,888
2002                                                   164,894
2003                                                   110,380
2004                                                    47,083
2005, and thereafter                                    25,202
                                                      --------

Total future minimum lease payments                   $535,447
                                                      ========
</TABLE>


         At December 31, 1999, the Company had a capital lease obligation of
$31,432 related to a construction vehicle. Payments of $1,629 per month were
due under the capital lease agreement through August 2000. A balloon payment of
$17,818 was due in September 2000. Ownership of the vehicle transferred to the
Company when the balloon payment was made in September 2000. The cost of the
vehicle is included in vehicles and the related amortization is included in
accumulated depreciation.


                                    Page 34
<PAGE>   44


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


8.       NOTES PAYABLE:

Notes payable at December 31, 2000 and 1999 consisted of the following:


<TABLE>
<CAPTION>
                                                                                      2000                1999
                                                                                    --------            --------

<S>                                                                                  <C>
Note payable to shareholder, due in two equal installments in March and
September 2000, bearing interest at a rate of 6%. The note arose in connection
with the purchase of the assets of SBOA. and was convertible into common stock
at a rate of $2.127 per share at the option of the note holder. In 2000, the
company issued an additional 62,284 shares of common stock in payment of
$125,000 of the note payable and related interest of $7,480 on this note            $     --            $250,000

Notes payable to shareholder, due June 1, 2001. This note bears interest at a
rate of 15%, and is secured by all assets of the Company. This note is
convertible into common stock at the option of the holder at a discount of 15%
to the floating average for the five trading days preceding the due date of the
note. This conversion feature is considered to have negligible value                 250,000                  --


Note payable to investor, originally due September 2000 and extended to January
2001, bearing interest at a rate of 15%, convertible under the same terms as
the preceding note, and secured by all assets of the Company.  (See Note 22)         125,000                  --

Note payable to a bonding company. This note arose in connection with a lawsuit
settlement, bears interest at a rate of 10%, is due in July 2001, and is secured
by all assets of the Company                                                         100,000                  --

Note payable due in monthly installments of $615 through April 2004, when the
remaining balance is due. The entire amount is classified as current because
the Company intends to pay the note in full in 2001. This note bears interest
at a rate of  7.75% and is secured by a vehicle                                       21,623              27,096
                                                                                    --------            --------

Total                                                                                496,623             277,096

Less current portion                                                                 496,623             255,473
                                                                                    --------            --------

Notes payable, long-term                                                            $     --            $ 21,623
                                                                                    ========            ========
</TABLE>


Total interest expense for all debt was approximately $68,000 and $43,000 for
2000 and 1999, respectively, and is included in other income (expense).


                                    Page 35
<PAGE>   45


SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


9.       INCOME TAXES:

The components of deferred tax assets (liabilities) at December 31, 2000 and
1999, were as follows:


<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                      -------------------------------------
                                                                          2000                     1999
                                                                      ------------             ------------

<S>                                                                   <C>                      <C>
Deferred tax assets:
     Net operating loss carryforwards ....................            $ 20,170,000             $ 17,427,000
     Research and experimentation credits ................                 469,000                  478,000
     Foreign tax credit credits ..........................                 556,000                  556,000
     Capitalized intangible assets .......................                 509,000                  328,000
     Depreciation assets .................................                 275,000                   37,000
     Accrued expenses not deductible until paid ..........                 300,000                  176,000
                                                                      ------------             ------------
     Total deferred tax assets ...........................              22,279,000               19,002,000
                                                                      ------------             ------------

Deferred tax liabilities:
     Unrealized gains on securities ......................                   1,000                   61,000
                                                                      ------------             ------------
     Total deferred tax liabilities ......................                   1,000                   61,000
                                                                      ------------             ------------

Net deferred tax assets before valuation allowance .......              22,278,000               18,941,000

Valuation allowance ......................................             (22,278,000)             (18,941,000)
                                                                      ------------             ------------

Net deferred tax asset ...................................            $         --             $         --
                                                                      ============             ============
</TABLE>


         The following is a reconciliation of the amount of the income tax
expense (benefit) that would result from applying the statutory federal income
tax rates to pretax income (loss) and the reported amount of income tax expense
(benefit) for the periods ended December 31, 2000 and 1999.


<TABLE>
<CAPTION>
                                                                                                         DECEMBER 31,
                                                                                               ---------------------------------
                                                                                                  2000                   1999
                                                                                               -----------             ---------

<S>                                                                                            <C>                     <C>
Expected income tax expense (benefit) ..................................................       $(2,608,000)            $ 569,000
Effect of net operating loss and tax credit carryforwards with no current benefit ......         3,337,000               605,000
Foreign taxes paid .....................................................................                --               555,556
Foreign tax rates ......................................................................                --              (133,000)
Income tax credits .....................................................................                --              (556,000)
Deductible expenses not charged against book income ....................................          (599,000)             (450,000)
Non-deductible expenses ................................................................             4,000                 4,000
Nontaxable income included in book income ..............................................           (90,000)                   --
Other ..................................................................................           (44,000)              (39,000)
                                                                                               -----------             ---------
     Total Tax .........................................................................       $        --             $ 555,556
                                                                                               ===========             =========
</TABLE>

         As of December 31, 2000, the Company had net operating loss
carryforwards of approximately $60 million that expire from 2006 through 2018,
and are available to offset future taxable income. The majority of these
carryforwards expire in 2010 and after. Additionally, the Company has tax
credit carryforwards related to research and development expenditures of
approximately $469,000 that expire through 2011 and foreign tax credits of
approximately $556,000 that expire in 2004.

         The Company's IPO, completed in 1993, and subsequent issuances of
stock have effected ownership changes under Internal Revenue Code Section 382.
The ownership changes resulting from these stock issuances may limit the
Company's ability to utilize any net operating loss carryforwards or credits
generated before the changes in ownership.


                                    Page 36
<PAGE>   46


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


10.      CAPITAL STOCK:

Convertible Preferred Stock

         The Company has authorization for the issuance of 2,000,000 shares of
$1.00 par value preferred stock. As of December 31, 2000 and 1999, all
preferred shares outstanding were shares of the Company's Series G Preferred
Stock. The Series G Preferred Stock had a liquidation preference of $1,145,123
as of December 31, 2000.

Series G

         From June 1997 through August 1997, through an exempt offering under
Regulation D of the Securities Act of 1933, the Company issued 1,700 shares of
its Series G preferred stock. The offering provided gross proceeds of
$1,700,000 to the Company. There were no material expenses associated with this
offering. Each share has a liquidation preference of $1,000 plus 10% per annum
from the date of issuance. The Series G preferred stock bears no dividends and
holders of the Series G preferred stock are entitled to vote on all matters
submitted to a vote of the stockholders on an "as if converted" basis.

Each share of Series G preferred stock is convertible into that number of
shares of common stock determined by dividing the original issue price of the
Series G preferred stock, plus an accretion amount equal to 10 % of the issue
price per annum, by the conversion price. The conversion price is fixed at a
rate of $1.00 per share.

         In connection with the issuance of the Series G preferred shares, each
Series G shareholder also received warrants to purchase the Company's common
stock. A total of 850,000 warrants were issued in connection with this
transaction. These warrants allow the holder to purchase shares of the
Company's common stock at a price of $1.00 per share for a period of 5 years.

         During 2000, a total of 250 shares of Series G preferred stock were
converted into 317,397 shares of the Company's common stock and during 1999, a
total of 500 shares of Series G preferred stock were converted into 604,383
shares of the Company's common stock.

Subsidiary Preferred Stock

         In September 1997, the Company completed an agreement with Diamond
Pro-shop Nomura Co., Ltd. ("DPN"), an affiliate of Noritake. Both DPN and
Noritake are corporations organized under the laws of Japan. Under the terms of
the agreement, DPN acquired 50 shares of convertible preferred stock and
acquired certain licensing and marketing rights for products developed by FEPET
in exchange for a payment of $500,000. Of this payment, $400,000 was allocated
to the licensing and marketing rights and $100,000 was allocated to the
preferred stock based on its estimated fair market value at that date. These
preferred shares were convertible into FEPET common shares equivalent to a 5%
ownership interest in FEPET. In January 2000, DPN transferred its ownership of
these shares to Nomura Holding Company, an affiliate of DPN. In February 2000,
the Company agreed to exchange Nomura's FEPET shares for 200,000 shares of the
Company's common stock. These shares were valued at $500,000 based on the
market price of the shares at the time of the transaction. This amount was
considered goodwill and written off as of the acquisition date. See note 6 for
additional information on the impairment write-off.


                                    Page 37
<PAGE>   47


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


10.      CAPITAL STOCK (CONTINUED):

Common Stock

         During 2000, in a series of private placements of the Company's common
stock in exempt offerings under Regulation D of the Securities act of 1933, the
Company issued 3,992,242 shares of its common stock and received proceeds of
$3,455,000. These shares were issued at prices which represented a slight
discount to the market price of the stock at the time of the offerings. A
registration statement covering these shares was declared effective November
17, 2000.

         During 2000, the Company acquired a patent valued at $250,000. In
exchange for this patent, the Company issued 240,164 shares of its common
stock. A registration statement covering these shares was declared effective
July 17, 2000.

         As described in greater detail in Note 14, the Company has a marketing
agreement and related consulting and advisory agreement with Vision Mark, LLC
and C&A Consulting Services, LLC. As a result of these agreements, the Company
issued 300,000 shares of its common stock in January 2000 to C&A in connection
with an agreement signed with Eckerd Corporation, a subsidiary of JCPenney,
Inc. The shares were valued at $675,000 based upon the market price of the
common stock at the time of issuance. These shares were registered in June
1999.

         During 1999, $1,005,000 of the convertible notes, including accrued
interest, were converted into 4,040,275 shares of the Company's common stock.
Of the notes converted, $805,000 of these notes were outstanding at December
31, 1998 and $200,000 of the notes were issued in 1999. The notes were
converted at rates ranging from $0.25 to $0.40 per share and were based on the
price of a common share at the time the notes were issued. A registration
statement covering all shares issued as a result of convertible notes was
declared effective June 23, 1999.

         In 1999, the Company issued 200,000 shares of restricted common stock
and received cash proceeds of $100,000 in connection with private placements of
the Company's common stock in exempt offerings under Regulation D of the
Securities act of 1933. The shares were issued at prices approximating the
market price of the stock at the time. A registration statement covering these
shares was declared effective June 23, 1999.

         As described in greater detail in Note 19, the Company issued a total
of 423,132 shares of common stock in connection with its acquisition of the
assets of SBOA. A registration statement covering theses shares was filed and
declared effective by post-effective amendment on November 29, 1999. In 2000,
the Company issued an additional 62,284 shares of its common stock in payment
of a note payable and related accrued interest arising in connection with the
SBOA acquisition. The amount of the note payable and accrued interest was
$132,480.

         At December 31, 2000 and 1999, common stock was reserved for the
following reasons:


<TABLE>
<CAPTION>
                                                                 2000                  1999
                                                              ----------            ----------

<S>                                                           <C>                   <C>
Conversion of debt ...............................               423,831                62,284

Exercise of stock warrants .......................            10,090,000            10,599,792

Conversion of preferred stock ....................             1,145,123             1,372,192

Exercise and future grants of stock options ......             7,170,426             8,295,673
                                                              ----------            ----------

Total ............................................            18,829,380            20,329,941
                                                              ==========            ==========
</TABLE>


                                    Page 38
<PAGE>   48


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


11.      STOCK OPTIONS:

         The Company sponsors three stock-based incentive compensation plans
(the "Plans"). The Company applies Accounting Principles Board ("APB") Opinion
No. 25 and related interpretations in accounting for the Plans. In 1995, the
FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation" which, if
fully adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plans. Adoption of the cost recognition provisions
of SFAS No. 123 is optional and the Company has decided not to elect these
provisions of SFAS No. 123. However, pro forma disclosures as if the Company
adopted the cost recognition provisions of SFAS No. 123 are required by SFAS
No. 123 and are presented below.

         In March 1992, the shareholders of the Company approved the 1992
Employees Stock Option Plan (the "1992 Employees Plan") for purposes of
granting incentive or non-qualified stock options. The 1992 Employees Plan was
amended in July 1996 by the shareholders of the Company to reserve up to
3,000,000 shares of common stock for issuance to certain officers and key
employees. The Company's Board of Directors amended the plan in January 1999 to
increase the number of shares authorized under the plan to 3,500,000 and
further amended the plan in December 1999 to increase the number of shares
authorized under the plan to 6,500,000.

         The incentive stock options are exercisable for up to ten years, at an
option price per share not less than the fair market value on the date the
option is granted. The incentive stock options are limited to persons who have
been regular full-time employees of the Company or its present and future
subsidiaries for more than one (1) year and at the date of the grant of any
option are in the employ of the Company or its present and future subsidiaries.
Non-qualified options may be granted to any person, including, but not limited
to, employees, independent agents, consultants and attorneys, who the Company's
Compensation Committee believes have contributed, or will contribute, to the
success of the Company. Non-qualified options may be issued at option prices of
less than fair market value on the date of grant and are exercisable for up to
ten years from date of grant. The option vesting schedule for options granted
is determined by the Compensation Committee of the Board of Directors at the
time of the grant. At December 31, 2000, a total of 1,713,236 shares remained
available for grant under the 1992 Employees Plan.

The following is a summary of stock option activity under the 1992 Employees
Plan:


<TABLE>
<CAPTION>
                                                                                    Wgtd. Avg.
                                                               Number of             Exercise
                                                                 Shares                Price
                                                               ---------            ----------

<S>                                                            <C>                  <C>
Options outstanding at January 1, 1999 ...........             2,642,494             $   0.51

         Granted .................................               682,186             $   1.44
         Exercised ...............................              (714,555)            $   0.38
         Canceled ................................              (191,292)            $   2.36
                                                               ---------

Options outstanding at December 31, 1999 .........             2,418,833             $   0.67
                                                               ---------

         Granted .................................             1,819,545             $   1.74
         Exercised ...............................              (665,427)            $   0.40
         Canceled ................................              (351,841)            $   1.72
                                                               ---------

Options outstanding at December 31, 2000 .........             3,221,110             $   1.20
                                                               =========
</TABLE>


                                    Page 39
<PAGE>   49


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


11.      STOCK OPTIONS (CONTINUED):

         In March 1992, the Board of Directors adopted the 1992 Outside
Directors' Stock Option Plan (the "1992 Directors Plan"), for purposes of
granting non-qualified options to non-employee directors of the Company. The
1992 Directors Plan was amended in 1994, 1996, 1997 and 1999. A total of
1,000,000 shares are reserved for issuance under the plan and are issued each
year based on a formula defined by the plan. The stock options granted under
the 1992 Directors Plan are exercisable for up to 10 years at an option price
equal to the fair market value on the date the option is granted. At December
31, 2000, a total of 313,364 shares remained available for grant.

The following is a summary of stock option activity under the 1992 Director's
Plan:


<TABLE>
<CAPTION>
                                                                                  Wgtd. Avg.
                                                              Number of            Exercise
                                                                Shares               Price
                                                              ---------           ----------

<S>                                                           <C>                 <C>
Options outstanding at January 1, 1999 ...........             384,903             $    0.34

         Granted .................................              60,000             $    2.27
         Exercised ...............................            (168,920)            $    0.33
         Canceled ................................              (1,600)            $    0.375
                                                               -------

Options outstanding at December 31, 1999 .........             274,383             $    0.77
                                                               -------

         Granted .................................             243,333             $    2.21
         Exercised ...............................             (16,000)            $    0.375
         Canceled ................................                  --             $    0.375
                                                               -------

Options outstanding at December 31, 2000 .........             501,716             $    1.48
                                                               =======
</TABLE>

         In May 1998, the Board of Directors of the Company established the
1998 Officers and Directors Stock Option Plan and reserved a total of 1,200,000
shares for issuance under the Plan. The plan was amended in January 1999 by the
Board of Directors of the Company to increase the shares reserved for issuance
under the plan to 2,500,000. Options under this plan are granted at the
discretion of the Board of Directors. No additional shares are currently
available under the plan.

The following is a summary of stock option activity under the 1998 Officers and
Directors Plan:


<TABLE>
<CAPTION>
                                                                                     Wgtd. Avg.
                                                               Number of              Exercise
                                                                 Shares                 Price
                                                               ---------             ----------

<S>                                                            <C>                   <C>
Options outstanding at January 1, 1999 ...........             1,200,000             $   0.375

         Granted .................................             1,300,000             $    0.50
         Exercised ...............................              (635,180)            $    0.42
                                                               ---------

Options outstanding at December 31, 1999 .........             1,864,820             $    0.45
                                                               ---------

         Granted .................................                    --                    --
         Exercised ...............................              (443,820)            $    0.46
         Canceled ................................                    --                    --
                                                               ---------

Options outstanding at December 31, 2000 .........             1,421,000             $    0.44
                                                               =========
</TABLE>


                                    Page 40
<PAGE>   50


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


11.      STOCK OPTIONS (CONTINUED):

         The fair value of each stock option granted in 2000 and 1999 is
estimated on the date of grant using the Black-Scholes option pricing-model
with the following weighted-average assumptions: no dividend yield for 2000 and
1999; risk-free interest rate of 6.00% and 5.50% for 2000 and 1999,
respectively; the expected lives of the options are five years for 2000 and
1999; and volatility of approximately 100% for both 2000 and 1999.

The following table summarizes information about stock options outstanding and
exercisable under all three plans at December 31, 2000:


<TABLE>
<CAPTION>
                         Options Outstanding                                     Options Exercisable
--------------------------------------------------------------------       --------------------------------
                                      Wgtd. Avg.
                      Number         Remaining                              Number
    Range of        Outstanding      Contractual        Wgtd. Avg.         Exercisable        Wgtd. Avg.
Exercise Prices     at 12/31/00         Life          Exercise Price       at 12/31/00       Exercise Price
---------------     -----------      -----------      --------------       -----------       --------------

<S>                 <C>              <C>              <C>                  <C>               <C>
$0.00 - $0.49       2,040,559        6.3 Years            $0.37             2,036,029             $0.37
$0.50 - $1.00       1,120,600        8.0 Years            $0.55               955,600             $0.52
$1.01 - $1.99       1,146,667        7.8 Years            $1.51               878,666             $1.51
$2.00 - $4.00         836,000        8.2 Years            $2.56               688,443             $2.53
                    ---------                                               ---------

Total               5,143,826        7.3 Years            $1.02             4,558,738             $0.95
                    ---------                                               ---------
</TABLE>


The following table summarizes information about stock options outstanding and
exercisable under all three plans at December 31, 1999:


<TABLE>
<CAPTION>
                         Options Outstanding                                     Options Exercisable
--------------------------------------------------------------------       --------------------------------
                                      Wgtd. Avg.
                      Number         Remaining                              Number
    Range of        Outstanding      Contractual        Wgtd. Avg.         Exercisable        Wgtd. Avg.
Exercise Prices     at 12/31/00         Life          Exercise Price       at 12/31/00       Exercise Price
---------------     -----------      -----------      --------------       -----------       --------------

<S>                 <C>              <C>              <C>                  <C>               <C>
$0.00 - $0.49       2,794,116        7.5 Years            $0.37              2,531,853            $0.37
$0.50 - $1.00       1,243,920        8.2 Years            $0.50              1,236,420            $0.50
$1.01 - $1.99         425,000        9.8 Years            $1.83                 44,584            $1.73
$2.00 - $4.00          95,000        9.2 Years            $2.27                 95,000            $2.27
                    ---------                                                ---------

Total               4,558,036        7.9 Years            $0.58              3,907,857            $0.48
                    ---------                                                ---------
</TABLE>


The weighted-average fair values of options under the plans granted during 2000
and 1999 were as follows:


<TABLE>
<CAPTION>
                                            2000              1999
                                          --------         --------

<S>                                       <C>              <C>
Discounted options                        $   0.00         $   0.00
At-the-money options                      $   1.12         $   0.67
Premium options                           $   0.00         $   0.00
Repriced options                          $   0.00         $   0.00
</TABLE>


                                    Page 41
<PAGE>   51


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


11.      STOCK OPTIONS (CONTINUED):

         During 2000 and 1999, the Company did not incur any compensation cost
for the Plans under APB No. 25. Had the compensation cost for the Company's
compensation plans been determined consistent with SFAS No. 123, the Company's
net loss and net loss per common share for 2000 and 1999 would approximate the
pro forma amounts as shown below:


<TABLE>
<CAPTION>
                                                 2000                    1999
                                              -----------             ----------

<S>                                           <C>                     <C>
Net income (loss)
     As reported                              $(7,671,014)            $1,118,134
     SFAS No. 123 Charge                        1,800,265                643,535
     Pro Forma                                 (9,471,279)               474,599

Net income (loss) per common
    share - basic and diluted
     As reported                              $     (0.14)            $     0.02
     Pro Forma                                $     (0.17)            $     0.01
</TABLE>


         The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to awards prior
to 1995 and the Company anticipates making awards in the future under its
compensation plans.


12.      STOCK WARRANTS:

Common Stock Warrants

         In connection with the issuance of the Company's Series E preferred
stock in February 1996, the Company issued 144,792 warrants to advisors
involved in the transaction. These warrants enable the holders to purchase
shares of the Company's common stock at a price of $7.89 through January 7,
2000. These warrants expired unexercised.

         In 1996, the Company issued 35,000 warrants to an advisor in
connection with the Company's fundraising activities. These warrants enable the
holder to purchase shares of the Company's common stock at a price of $2.00 per
share through 2006. In 1997, the Company issued 75,000 additional warrants to
this advisor in connection with services related to a joint venture agreement.
These warrants enable the holder to purchase shares of the Company's Common
Stock at a price of $1.00 per share through 2007.

         In connection with the issuance of the Company's Series G preferred
stock in 1997, the Company issued 850,000 warrants to holders of the Series G
Preferred. These warrants enable the holders to purchase shares of the
Company's common stock at a price of $1.00 through August 2002. A total of
350,000 of these warrants were exercised in 1999 and an additional 325,000 of
these warrants were exercised in 2000.

         In October 1996, the Company completed a transaction whereby it
borrowed a total of $1,000,000 in secured loans from a group of individuals. In
connection with these loans, the Company issued 200,000 warrants with a value
of approximately $200,000. The warrants enabled the holder to purchase shares
of the Company's common stock at a price of $1.00 through June 2000. A total of
100,000 of these warrants were exercised in 1997 and 50,000 were exercised in
2000. The remaining 50,000 warrants were extended until June 2001.


                                    Page 42
<PAGE>   52


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)


12.      STOCK WARRANTS (CONTINUED):

         In October 1997, the Company issued 205,000 warrants to an advisor in
connection with an agreement to provide public relations services. The warrants
entitled the holder to purchase shares of the Company's common stock as
follows: 125,000 shares at a price of $0.6875 through September 1999, 40,000
shares at a price of $1.0313 through March 2000, 40,000 shares at a price of
$1.375 through September 2000. These warrants were valued at $150,000. All of
these warrants were exercised in 1999.

         The Company issued 1,000,000 warrants to purchase its common stock in
connection with loans made to the Company in 1998. A total of 600,000 warrants
were issued in March 1998 in connection with a series of loans totaling
$500,000 in March and April of 1998. These warrants were exercisable at a price
of $0.15 per share, which approximated the market price of the Company's common
stock at the time of issuance. These warrants were exercised in 1998. The
remaining 400,000 warrants were issued in connection with loans totaling
$100,000 made to the Company in November 1998. These warrants were exercisable
for a period of one year, at a price of $0.25 per share, which approximated the
market price of the Company's common stock at the time of issuance. These
warrants were exercised in 1999.

         In 1999, the Company issued a total of 60,000 warrants to three
separate individuals in connection with services rendered to the Company. The
exercise price of these warrants is based on the fair market value of the
Company's common stock at the time of issuance and range from $0.88 to $2.15
per share. These warrants are exercisable for a period of 5 years from the date
of issuance.

         In 2000, the Company issued a total of 10,000 warrants to an
individual in connection with services rendered to the Company. The exercise
price of these warrants is $0.80 per share and they were valued at $4,646 based
on the fair market value of the Company's common stock at the time of issuance.
These warrants are exercisable for a period of 5 years from the date of
issuance.

The following is a summary of outstanding warrants:


<TABLE>
<CAPTION>
                                                               NUMBER OF
                                                                SHARES              EXERCISE PRICE
                                                               ---------            --------------

<S>                                                            <C>                  <C>
Warrants outstanding at January 1, 1999 ..........             2,195,379             $0.625-7.89

         Granted .................................                60,000             $ 0.88-2.15
         Exercised ...............................              (970,000)            $0.25-1.375
         Expired .................................              (385,587)            $ 3.90-6.78
                                                               ---------

Warrants outstanding at December 31, 1999 ........               899,792             $ 0.88-7.89

         Granted .................................                10,000             $      0.80
         Exercised ...............................              (375,000)            $      1.00
         Expired or canceled .....................              (144,792)            $ 3.90-6.78
                                                               ---------

Warrants outstanding at December 31, 2000 ........               390,000             $ 0.80-2.15
                                                               =========
</TABLE>

         The preceding summary of stock warrant activity excludes the C&A
warrants described in Note 14 which only become exercisable upon the occurrence
of future contingent events.


                                    Page 43
<PAGE>   53


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


13.      SUPPLEMENTAL CASH FLOW INFORMATION:

         Cash paid for interest was $18,998 and $20,022 for 2000 and 1999,
respectively. Cash paid for foreign taxes was $555,556 in 1999. No foreign
taxes were paid in 2000. The following non-cash transactions have been excluded
from the accompanying consolidated statement of cash flows:


<TABLE>
<CAPTION>
                                                                                                  2000                 1999
                                                                                                --------            ----------

<S>                                                                                             <C>                 <C>
Non-cash financing activities:
     Conversion of accounts payable and accrued liabilities into common shares .....            $     --            $  100,000
     Conversion of notes payable and interest into common shares ...................            $132,480            $1,049,852

Non-cash investing activities
     Acquisition of SBOA ...........................................................            $     --            $  900,000
     Common shares issued for patent ...............................................            $250,000            $       --
</TABLE>


14.      COMMITMENTS AND CONTINGENCIES:

Government contracts

         Governmental contractors are subject to many levels of audit and
investigation. Among United States agencies that oversee contract performance
are: the Defense Contract Audit Agency, the Inspector General, the Defense
Criminal Investigative Service, the General Accounting Office, the Department
of Commerce, the Department of Justice and Congressional Committees. The
Company's management believes that an audit or investigation, if any, as a
result of such oversight would not have any material adverse effect upon the
Company's financial condition or results of operations.

Agreements with MCC

         The Company entered into an agreement in 1994 with Microelectronics
and Computer Technology Corporation ("MCC") that was amended on several
subsequent occasions to cross license and pool technologies. As part of this
relationship with MCC, 62 Diamond Field Emission patents and patent
applications were assigned directly to the Company and the Company has agreed
to pay a royalty fee of 2% of future commercial revenues related to the patents
received. The Company has the right to offset one half of the costs of
maintaining these patents against any royalties due under the agreement. No
payments have been made to, or are due to, MCC under this agreement.

DiaGasCrown Venture

         In February 1995, the Company entered into an agreement with
Diagascrown, Inc., 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. There is disagreement as to the amount actually spent,
however it is our position that there are no further amounts due under this
agreement and there will be no further spending in Russia. At present we are
not using the technology developed under this joint venture agreement in any
manner and do not anticipate using this technology in the future. It is
unlikely that any future amounts will ever be spent.


                                    Page 44
<PAGE>   54


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


14.      COMMITMENTS AND CONTINGENCIES (CONTINUED):


Till Keesman Agreement

         In May 2000, the Company licensed 6 carbon nanotube patents from Till
Keesman in exchange for a payment of $250,000 payable in shares of the
Company's common stock. Under the terms of the agreement, the Company is
obligated to pay license fees equal to 50% of any royalties received by the
Company related to these patents. The company is allowed to offset certain
expenses, up to a maximum of $50,000 per year, against payments due under this
agreement. The agreement also contains provisions related to minimum license
fee payments. If the Company does not pay minimum additional license fees of
$500,000 by May, 2002, the license will terminate at that point. If the Company
does not pay additional cumulative license fees of $1,000,000 (including any
fees applied toward the previously described minimum due in May 2002) by May
2004, the license will terminate at that point. The Company is not obligated to
make any additional payments, but the license may terminate if these payments
are not made. Accordingly, the initial payment of $250,000 for the patents is
being amortized over a period of approximately two years.

Employment contracts

         The Company has entered into an employment agreement with its
president and chief operating officer. The agreement calls for an annual base
salary of $150,000 and for the Company to provide a vehicle for his use. The
agreement can be terminated by either party with or without cause with 30 days
notice. If the agreement is terminated by the Company without cause, the
Company is obligated to pay severance equal to nine months salary.

Research and Development commitments

         As of December 31, 2000, the Company was obligated to perform funded
research in the amount of approximately $582,000 on government contracts. The
cost of the research in 2001 is expected to approximate the revenue received
for the research.

Legal Proceedings

         On November 16, 2000, the former owner of Sign Builders of America,
Inc. filed suit against SI Diamond Technology, Inc and Sign Builders of
America, Inc. for alleged breach of the purchase agreement related to offsets
the Company took against the final note payment. The Company has filed a
counterclaim against the former owner for amounts due back to the Company as a
result of these offsets. The Company expects the ultimate resolution of this
suit to have no material impact on the consolidated financial statements. See
Note 5.

         On July 20, 1998, TFI Telemark, Inc., a former vendor of Plasmatron,
filed a complaint in the County Court at Law No. 2 of Travis County, Texas
against the Company for debts of its subsidiary, Plasmatron. The Company was
served with notice of this suit on August 5, 1998. All amounts claimed as owing
by TFI are recorded as liabilities in the consolidated financial statements of
the Company. The Company believes the ultimate resolution of this matter will
not have a material impact on the consolidated financial statements of the
Company.

         On January 28, 1999, Aetna Life Insurance Company, a former landlord
of DTO, filed a complaint in the 126th Judicial District Court, Travis County,
Texas against DTO as lessee, and the Company as guarantor, for unspecified
alleged damages occurring as a result of DTO's early termination of a lease.
DTO moved out of this facility with approximately nine months remaining on the
lease which called for monthly rental payments of approximately $17,000. The
Company contends that Aetna failed in its duty to mitigate damages and behaved
in a reckless manner, which resulted in damages to the Company and its
property. The Company settled this lawsuit in 2000 in exchange for a payment of
$28,000.


                                    Page 45
<PAGE>   55


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


14.      COMMITMENTS AND CONTINGENCIES (CONTINUED):

Legal Proceedings (cont.)

         On May 20, 1996, Semi-Alloys Company, a former customer of Plasmatron,
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. Semi-Alloys claimed a breach of contract
related to $1 million of coating equipment that Plasmatron delivered in 1993,
prior to the Company's ownership of Plasmatron. In January 2000, the Company
agreed to participate in a settlement agreement between the plaintiff and the
other defendant; notwithstanding our denial of any liability to the plaintiff.
The Company agreed to pay a total of $450,000, of which $225,000 was due at
signing. The Company signed three notes payable for the balance of the
settlement. These notes, in the amount of $25,000, $100,000, and $100,000, are
due in three months, nine months, and eighteen months, respectively and bear
interest at a rate of 10% per annum. In exchange for this settlement, and upon
payment of the notes, the Company will receive a complete release from further
liability from both the plaintiff and the co-defendant. The first two notes
were paid when due in 2000.

         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. In February 2001, the Company
agreed to participate in a settlement agreement whereby it would pay a total of
$150,000, of which $50,000 is due by June 1, 2001 and the balance of $100,000
is in the form of a note due in July, 2003. See Note 5.

         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 TDS was continuing to ship products using
our technology and contacted TDS. TDS responded, in part, by filing suit
against the Company and EBT for breach of contract in the 272nd Judicial
District Court 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 claim against the Company has little merit and that a
significant reason that TDS filed suit was to obtain venue in its home venue of
Brazos County rather than in the Company's home county of Travis County. The
Company intends to vigorously pursue its claim against TDS and seek damages and
an injunction against TDS for continuing to use the Company's technology in TDS
products after the termination of the agreement.

The Company and its subsidiaries are also defendants in various other lawsuits
related to the non-payment of invoices when due, or minor employment matters.
It is expected that all such lawsuits will be settled for an amount no greater
than the liability recorded in the financial statements for such matters. If
resolution of any of these suits results in a liability greater than that
recorded, it could have a material financial impact on us.

         The above lawsuits resulted in $118,000 and $200,000 charged to
operations in 2000 and 1999, respectively. A total of approximately $300,000
was accrued at December 31, 2000.


                                    Page 46
<PAGE>   56


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


14.      COMMITMENTS AND CONTINGENCIES (CONTINUED):

Vision Mark Agreement

         In November 1998, the Company signed a marketing agreement with Vision
Mark, LLC ("Vision Mark"), a Texas limited liability company and a related
consulting and advisory services agreement with C&A Services LLC ("C&A"), a
Texas limited liability company affiliated with Vision Mark., whereby Vision
Mark and C&A agreed to represent the Company with several "protected"
customers, as defined by the agreements. Under the terms of the agreements, the
Company was obligated to provide C&A with 300,000 shares of its common stock
upon the signing of an agreement with any one of the protected customers to
provide an electronic billboard to such customer. In January 2000, the Company
signed an agreement with Eckerd Corporation, a subsidiary of JCPenney, Inc.,
one of the protected customers. Accordingly, 300,000 shares of common stock
were issued to C&A as a result of this agreement. In addition, C&A received
warrants to purchase up to 9,700,000 shares of the Company's common stock. None
of the warrants that are potentially exercisable have been assigned any value
as the ultimate exercisability of the warrants is not determined at this point.
The Company had revenues of $2,160 in 2000 and no revenues in 1999 resulting
from this agreement.

         The warrants granted to C&A become exercisable under the following
conditions:

1.       At such time as the Company receives total revenue of $10 million from
         any or all of C&A's protected customers, C&A has the right to purchase
         250,000 shares of common stock of the Company at a discounted price
         per share equal to 50% of the market price of the stock at the time
         the $10 million milestone is achieved.

2.       Thereafter, for each increment of $10 million of revenue received from
         protected customers, C&A has the right to purchase another 250,000
         shares at a discounted price per share equal to 50% of the market
         price of the stock at the time each $10 million increment is achieved.

3.       In addition, when the total revenue received from any or all of C&A's
         protected customers reaches $100 million, C&A has the right to acquire
         an additional 2.3 million shares of the common stock of the Company at
         a discounted price per share equal to 50% of the market price of the
         stock at the time $100 million in revenue is achieved.

4.       An additional 2.3 million shares of the Company's common stock will be
         made available to C&A at a discounted price equal to 50% of the market
         price of the stock at the time cumulative revenues from protected
         customers reaches $200 million.

5.       Finally, at the end of each twelve month period (ending on the
         anniversary date of the agreement) in which the revenue from protected
         customers exceeds $10 million during that period, C&A has the right to
         acquire up to 200,000 shares of common stock of the Company under the
         following terms and conditions;

a.       If the revenue received from protected customers equals or exceeds 25%
         of the total Company revenue for that twelve month period, then C&A
         may purchase 100,000 shares of the Company's common stock at a
         discounted price which is equal to 75% of the market price of the
         common stock at the end of the period.

b.       C&A may acquire the remaining 100,000 shares at a reduced price where
         the discount from the market price is equal to the ratio (expressed as
         a percentage) that the revenue from C&A protected customers bears to
         the total Company revenue received during that period. The maximum
         discount can not exceed 50%.

6.       The maximum number of shares that can be acquired pursuant to these
         warrants is 9.7 million shares and all warrants issued under this
         agreement expire December 31, 2006.


                                    Page 47
<PAGE>   57


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


15.      CONCENTRATIONS OF CREDIT RISK:

         The Company's financial instruments that are exposed to concentrations
of credit risk consist of cash and cash equivalents and receivables. The
Company places its cash and cash equivalents with high credit quality financial
institutions. At December 31, 2000 and 1999, the Company had no amounts on
deposit in excess of the Federal Deposit Insurance Corporation insurance limit;
however, for limited periods of time during the year, bank balances may exceed
such limits.

         The Company's receivables are uncollateralized and result primarily
from its research and development projects performed primarily for U.S. Federal
Government Agencies and services performed for large U.S. and multinational
corporations. The Company's SBOA subsidiary also provides services for small
and medium size companies, but requires deposits and progress payments for work
performed. The Company has not incurred any material losses on these
receivables.

16.      SIGNIFICANT CUSTOMERS:

         Accounts receivable - trade includes receivables from two major
customers, amounting to $97,120, and $1,974, at December 31, 2000 and 1999 ,
respectively. Net sales, to these two major customers amounted to $474,467 in
2000 and $38,025 in 1999.

17.      RETIREMENT PLAN:

         The Company sponsors a defined contribution 401k profit sharing plan.
No company contributions were made in either 2000 or 1999.

18.      RELATED PARTY TRANSACTIONS:

         In October 1998, EBT entered into a Patent Assignment and Royalty
Agreement with Advanced Technology Incubator, Inc., ("ATI") a corporation based
in Austin, Texas and owned by Dr. Zvi Yaniv, the Company's President and Chief
Operating Officer. Under the terms of the agreement, ATI agreed to assign U.S.
Patent No. 5,469,187 related to certain LCD technology to EBT in exchange for
an initial payment of $200,000. In addition, ATI is entitled to receive a
royalty of 5% of gross revenue related to products using this patent. EBT
intends to use this technology in the development of its next generation
electronic billboard product. EBT may terminate this assignment at any time
upon 30 days written notice to ATI. The assignment may be terminated by ATI if,
within two years of the first sale or lease of a billboard using this
technology, cumulative royalty payments under the agreement have not totaled
$500,000, or if payments do not equal $500,000 in any one year period following
this initial two year period. If the assignment is terminated by ATI, EBT will
be granted a non-exclusive worldwide license to use the technology under terms
similar to those contained in this agreement.

         ATI had the right to terminate this agreement if the initial payment
was not received by February 15, 1999. This date was extended until 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 was 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. The Company elected to exercise each of its extension
options and paid ATI a total of $50,000 through January 2000. In April 2000,
the agreement was modified to allow EBT to obtain additional 90 day extensions
at a cost of $12,500 for each extension. An additional $37,500 was paid for 3
additional extensions, bringing the total payments to $87,500. EBT can complete
the patent assignment agreement at any time by paying the remaining $112,500
due on the initial payment.

         During 2000, the Company sold electronic display units to Dr. Zvi
Yaniv, the Company's President and Chief Operating Officer at a total price of
$22,500. This sales price approximated the Company's cost.


                                    Page 48
<PAGE>   58


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


19.      ACQUISITION OF SIGN BUILDERS OF AMERICA, INC.:

         Effective August 31, 1999, the Company purchased substantially all of
the assets and assumed certain liabilities of SBOA. The assets acquired and
liabilities assumed were recorded at fair values as a purchase acquisition and
have been accounted for as a non-cash transaction in the consolidated statement
of cash flows. The Company used cash of $450,000, executed a note payable
bearing interest at an annual rate of 6% in the amount of $250,000, and issued
common stock valued at $900,000 to finance the transaction. The assets acquired
and liabilities assumed are as follows:


<TABLE>

     <S>                                               <C>
     Cash                                              $   24,089
     Accounts receivable                                  304,926
     Inventory                                            160,757
     Property and equipment                               446,898
     Goodwill and covenant not to compete                 896,777
     Accounts payable                                    (52,931)
     Accrued expenses                                    (34,188)
     Customer deposits                                   (79,551)
     Notes payable                                       (28,829)
     Capital leases payable                              (37,948)
                                                        ---------

     Total Purchase Price                              $1,600,000
                                                        =========
</TABLE>


         The cash paid of $450,000 is reflected in the consolidated statement
of cash flows net of the $24,089 of cash received in connection with the
acquisition of the assets. The purchase agreement contained certain
contingencies related to the sales of the acquired business during the time
period from September 1, 1999 through December 31, 1999 which resulted in
downward adjustments to the purchase price. As a result of these adjustments,
the original purchase price of $1,800,000 was adjusted downward at December 31,
1999 to the $1,600,000 reflected above. The notes payable described above were
adjusted down at the same date to $250,000 from their initial amount of
$450,000 as a result of the same purchase price adjustments. At the time of the
due date of the final note in September 2000, additional purchase price
adjustments provided for in the agreement were calculated and offset against
the payment due at that time. As described in note 14, the seller has initiated
a lawsuit in connection with these offsets. Accordingly, the basis of the
assets has not been adjusted, pending resolution of that litigation.

         At December 31, 2000, as part of the review of its intangible assets
described in greater detail in Note 6, the Company determined that the Goodwill
and Covenant not to Compete received in this acquisition were impaired at that
date and the remaining net book value of $639,761 was charged to operations at
that time.


                                    Page 49
<PAGE>   59


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


20.      SEGMENT INFORMATION:

         The Company's operations are classified into three principal
reportable segments that provide slightly different products or services.


<TABLE>
<CAPTION>
                                 FEPET                 SBOA                   EBT                All Other               Total
                              -----------           -----------           -----------           -----------           -----------

<S>                           <C>                   <C>                   <C>                   <C>                   <C>
      2000

Revenue                       $   332,961           $ 2,257,013           $   112,844           $    22,012           $ 2,724,830
Interest Expense                    8,549                12,595                    --                47,052                68,196
Depreciation and
   Amortization                   119,158               278,815               124,994                21,827               544,794
Research and
    Development                   887,933                    --             1,732,690                    --             2,620,623
Impairment Charge                      --               639,761               712,500               486,000             1,838,261
Profit (Loss)                  (1,567,769)           (1,058,660)           (3,457,843)           (1,586,742)           (7,671,014)
Assets                            370,547               814,114               380,809                76,095             1,641,565
Capital Expenditures                2,452                44,678               285,803                 6,996               339,929

      1999

Revenue                         5,794,269               657,553               300,282                    --             6,752,104
Interest Expense                      541                 5,849                    --                36,553                42,943
Depreciation and
   Amortization                    58,927                89,936                 7,267                14,905               171,035
Research and
    Development                   658,219                    --               817,436                    --             1,475,655
Profit (Loss)                   3,726,957               (11,917)             (807,863)           (1,789,043)            1,118,134
Assets                            842,842             1,762,863               936,988               400,637             3,943,330
Capital Expenditures               30,000                 2,238               880,644                 1,801               914,683
</TABLE>


         Although the chief operating decision maker does not use this
segmental financial information in evaluating performance, some segmental
financial information is furnished to the chief operating officer for review
regarding each subsidiary of the Company.

         The FEPET segment consists of the activities of FEPET and includes
license revenues and contract research revenues related to FEPET's technology.
In 2000, all FEPET revenues were contract research revenues. In 1999,
approximately 95% of FEPET's revenue came from license fees and the remaining
amount came from contract research services. The SBOA segment consists of the
activity of SBOA which is the manufacture and installation of custom signage,
including electronic, neon, static, and other types of signage. SBOA was
acquired in 1999 and the above segment information covers the four month period
from September 1, 1999 through December 31, 1999. The Company's EBT subsidiary
sells electronic display products, installs electronic display products on
customer premises under agreements to share in advertising revenue, sells
advertising on displays, and licenses its products or technology to others.
Virtually all EBT revenue in 1999 was from licensing technology. The majority
of EBT's revenue in 2000 was from the sale of advertising and the sale of
electronic display products. All other segments include the Company's general
overhead.

         The accounting policies applied by each of the segments are the same
as those used by the Company.


                                    Page 50
<PAGE>   60


                  SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


21.      RESEARCH AND DEVELOPMENT CONTRACTS:

         The Company makes significant expenditures for research and
development. On occasion, the Company may seek funding for a portion of its
research and development costs to reduce the cost of such expenditures to the
Company. The Company only seeks funding for projects that it already intended
to do, or for projects that would apply its technology for other uses in
instances where that application would allow the Company to achieve technical
milestones that were already part of its goals. The majority of the Company's
funded research has been from government contracts. Under government contracts,
the government has the right to utilize the results for its purposes and the
Company has the right to utilize the technology for commercial purposes.
Generally, when the Company contracts with other entities, the entity is also
conducting its own internal research related to application of the Company's
technology to its products and such expenditures by the entity may exceed the
amount of funding provided to the Company. Usually the entity has the right to
license the technology at the conclusion of the project, if they desire. The
costs of a particular research program may significantly exceed the funding
received, however since the research was part of planned research, these
contracts generally involve only nominal additional costs to the Company. For
financial statement purposes, the Company considers the cost of the contracts
to be equal to the revenue received.

The following schedule summarizes certain information with respect to research
and development contracts:


<TABLE>
<CAPTION>
                                                              2000                1999
                                                            --------            --------

<S>                                                         <C>                 <C>
Contract research revenues .....................            $352,341            $238,713

Costs incurred charged to operations ...........            $352,341            $238,713

Amount of additional funding commitments .......            $582,333            $352,341
</TABLE>


22.      SUBSEQUENT EVENTS:

         Through March 14, 2001, in exempt offerings under Regulation D of the
Securities Act of 1933, the Company issued a total of 1,178,284 shares of its
common stock for a total of $522,047.

         Effective January 2001, the Company entered into a contract with a
large Japanese display manufacturer to perform contract research related to the
Company's technology. A payment of $600,000 was received in January 2001.

         In January 2001, the Company paid off a short term note payable in the
amount of $125,000.

         As described in greater detail in Note 14, in February 2001, the
Company agreed to participate in a settlement agreement related to a lawsuit
whereby it would pay a total of $150,000, of which $50,000 is due by June 1,
2001 and the balance of $100,000 is in the form of a note due in July, 2003.
This settlement was accrued as of December 31, 2000.


                                    Page 51
<PAGE>   61


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         On September 6, 2000, SI Diamond Technology, Inc. (the "Registrant")
was notified that WallaceSanders & Company had merged with McGladrey & Pullen,
LLP and that WallaceSanders & Company would no longer be the auditor for the
Registrant. McGladrey & Pullen, LLP was appointed as the Registrant's new
auditor effective September 6, 2000. The Auditor's reports from WallaceSanders &
Company for the Registrant's past two fiscal years did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified as to audit scope or
accounting principles. However, the auditor's report for the past two fiscal
years were modified regarding the uncertainty of the Registrant's ability to
continue as a going concern. The decision to engage McGladrey & Pullen, LLP as
the successor to WallaceSanders & Company was recommended and approved by the
Registrant's Board of Directors. During 1998 and 1999 and the subsequent interim
period preceding the change, there have been no disagreements with
WallaceSanders & Company on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.


                                    Page 52
<PAGE>   62


                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         The following sets forth the names, ages and certain information
concerning the Directors of SI Diamond. Additional information on Marc W. Eller
and Dr. Zvi Yaniv and all information concerning executive officers may be
found under the caption "EXECUTIVE OFFICERS" on page 9 of this Annual Report on
Form 10-KSB/A.


<TABLE>
<CAPTION>
       Name             Age      Class      Position                      Director Since          Term Expires
       ----             ---      -----      --------                      --------------          ------------

<S>                     <C>      <C>        <C>                           <C>                     <C>
Charles C. Bailey        52        I        Director                      November 1999               2003
David R. Sincox          62        I        Director                      October 1994                2003
Dr. Zvi Yaniv            54        I        Director, President,          July 1996                   2003
                                            Chief Operating Officer
Philip C. Shaffer        64        II       Director                      March 1992                  2001
Marc W. Eller            45        III      Director, Chairman,           November 1995               2002
                                            Chief Executive Officer
Ronald J. Berman         44        III      Director                      May 1996                    2002
</TABLE>

---------

         Mr. Bailey has been an attorney in private practice since 1995. Prior
to that Mr. Bailey had a 20 year career in government. Positions held include
Assistant Criminal District Attorney and Chief Prosecutor in Lubbock County,
Texas; General Counsel for the Texas Department of Public Safety; Assistant
General Counsel for Governor Bill Clements; and Director of Legal Services and
Franchise Taxes for the Texas State Comptroller's Office. His last position
with the state of Texas, from 1993 to 1995, was Executive Assistant and General
Counsel to Lt. Governor Bob Bullock.

         Mr. Sincox has been a Director of the Company since October 1994.
Since 1987, Mr. Sincox has served as the Vice President of Administration of
Ref-Chem Construction Corporation, an engineering and construction firm.

         Mr. Shaffer has been a Director of the Company since March 1992. Since
1977, Mr. Shaffer has worked as a self-employed consultant in the field of
aerospace technology and management, with an emphasis in business acquisition.
Mr. Shaffer also serves as the General Partner of an oil and gas development
partnership with a total capitalization of approximately $1.2 million. Prior to
1977, Mr. Shaffer worked for 13 years in the National Aeronautics and Space
Administration in a series of positions including Flight Dynamics Officer,
Apollo and Skylab Flight Director, Special Assistant to the Director of the
Johnson Space Center, and Manager of Space Shuttle Operations.

         Mr. Berman has been a Director since May 1996. Mr. Berman co-founded
BEG Enterprises, Inc. with Marc W. Eller and was its President from 1989 until
1998. Mr. Berman currently is President of R.J. Berman Enterprises, Ltd., a
real estate development company, Inergi Fitness, and Walkers Warehouse. Mr.
Berman earned a Juris Doctor degree in 1980 from the University of Detroit.
Prior to 1989, Mr. Berman was an attorney in private practice.

         The Board of Directors has three committees. The audit committee
consists of Mr. Sincox and Mr. Bailey. The compensation committee consists of
Mr. Shaffer and Mr. Berman. The executive committee consists of Mr. Eller, Mr.
Yaniv, and Mr. Shaffer.


                                    Page 53
<PAGE>   63


            SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities of Exchange Act of 1934 requires SI
Diamond's officers, and Directors, and persons who beneficially own more than
10 % of a registered class of SI Diamond's common stock, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and NASDAQ. Officers, Directors, and beneficial owners of more than 10% of SI
Diamond's common stock are required by the Securities and Exchange Commission
regulations to furnish SI Diamond with copies of all Section 16(a) forms that
they file.

Based solely on review of the copies of such reports furnished to us, or
written representations that no reports were required, we believe that for the
period from January 1, 2000 through December 31, 2000, all its Officers,
Directors, and greater than 10% beneficial owners complied with all Section
16(a) filing requirements applicable to them.


ITEM 10. EXECUTIVE COMPENSATION

         The following table sets forth the total cash compensation paid or to
be paid, as well as certain other compensation paid or accrued, for services
rendered during the fiscal years ended December 31, 2000, 1999 and 1998 by the
Chief Executive Officer and all executive officers whose total annual salary
and bonus exceeded $100,000 for the fiscal year ended December 31, 2000 (the
"Named Executive Officers"):

SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                                             Long-Term
                                                          Annual Compensation               Compensation
                                            ---------------------------------------------   -----------
                                                                             Other            Securities
                                                                            Annual           Underlying
Name and Principal Position      Year       Salary($)     Bonus($)     Compensation($)(1)    Options(#)
---------------------------      ----       ---------     --------     ------------------   -----------

<S>                              <C>        <C>           <C>          <C>                  <C>
Marc W. Eller,                   2000       $170,833           -0-             -0-            230,000
Chief Executive Officer          1999       $168,750      $111,250             -0-            250,000
                                 1998       $150,000           -0-             -0-            780,000

Zvi Yaniv, President and         2000       $170,833           -0-          $3,205            230,000
Chief Operating Officer          1999       $175,000      $125,000          $3,205            150,000
                                 1998       $150,000           -0-          $6,839          1,170,000
</TABLE>

---------

(1)      No Named Executive Officers received perquisites that exceeded in
         value the lesser of $50,000 or 10% of such officers' salary and bonus.
         Dr. Yaniv was provided use of a Company owned automobile valued at $
         3,205 in 2000 and 1999, and $1,882 in 1998. In 1998, Dr. Yaniv was
         reimbursed $4,957 in connection with the transportation of his
         household belongings in connection with the relocation of his primary
         residence to Austin, Texas.


                                    Page 54
<PAGE>   64


                    STOCK OPTION GRANTS IN FISCAL YEAR 2000

         SI Diamond has an Amended and Restated 1992 Employee Stock Option
Plan, which may be used to grant employees, including officers of SI Diamond,
incentive stock options designed to qualify under Section 422 of the Internal
Code of 1986, or non-qualified stock options. SI Diamond also established the
1998 Directors and Officers Stock Option Plan, which may be used to grant
non-qualified stock options to officers and directors of SI Diamond. The
following table sets forth information concerning stock-option grants to the
Named Executive Officers in 2000.


<TABLE>
<CAPTION>
                              Number of             Percent of Total
                        Securities Underlying      Options Granted to
                              Options                Employees in                Exercise
    Name                  Granted(#)(1)(2)        in Fiscal Year 2000     or Base Price ($/sh)       Expiration Date
    ----                ---------------------     -------------------     --------------------       ---------------

<S>                     <C>                       <C>                     <C>                        <C>
Marc W. Eller                 30,000 (3)                1.64%                   $2.75                   2/2/2010
                             200,000 (3)               10.99%                   $1.50                  6/27/2010

Dr. Zvi Yaniv                 30,000 (3)                1.64%                   $2.75                   2/2/2010
                             200,000 (3)               10.99%                   $1.50                  6/27/2010
</TABLE>

---------

(1)      Under the terms of SI Diamond's Amended and Restated 1992 Stock Option
         Plan and the 1998 Directors and Officers Stock Option Plan, the
         Compensation Committee of the SI Diamond Board of Directors retains
         discretion, subject to plan limits, to modify the terms of outstanding
         options and to reprice the options.

(2)      The options were granted for a term of ten (10) years, subject to
         earlier termination in certain events related to termination of
         employment.

(3)      These options became exercisable in full on the date of the grant in
         2000.


                                    Page 55
<PAGE>   65


                      AGGREGATED OPTION EXERCISES IN 2000
                     AND OPTION VALUES AT DECEMBER 31, 2000

         The following table sets forth certain information concerning the
number and intrinsic value of the options held by the named executives at
December 31, 2000. Year-end values are based on the closing price of $0.39 per
share of the common stock on December 31, 2000, on the NASDAQ OTC Bulletin
Board System. They do not reflect the actual amounts, if any, which may be
realized upon the future exercise of remaining stock options and should not be
considered indicative of future stock performance.


<TABLE>
<CAPTION>
                                                              Number of
                                                             Unexercised            Value of
                                                             Securities            Unexercised
                                                             Underlying           In-the-Money
                                                             Options at            Options at
                                                          December 31, 2000     December 31, 2000
                             Shares                       -----------------     ------------------
                            Acquired         Value           Exercisable/          Exercisable/
Name                       on Exercise     Realized         Unexercisable         Unexercisable
----                       -----------     --------       -----------------     ------------------

<S>                        <C>             <C>            <C>                   <C>
Marc W. Eller                   0            0              200,000/0                  $0/$0
Dr. Zvi Yaniv                   0            0            1,550,000/0             $17,550/$0
</TABLE>


                         DIRECTOR COMPENSATION FOR 2000


<TABLE>
<CAPTION>
                                 Director Compensation                   Security Grants in 2000
     Name(1)                      Meeting Fees($)(2)          Number of Securities Underlying Options(#)(3)
    --------                     ---------------------        ---------------------------------------------

<S>                              <C>                          <C>
David R. Sincox                       600                                      50,000
Philip C. Shaffer                     600                                      50,000
Ronald J. Berman                      600                                      50,000
Nicholas Martin Jr.                   350                                      50,000
Charles C. Bailey                     450                                      43,333
</TABLE>

---------

(1)      Directors who are also executives of SI Diamond are not listed in the
         above table. They do not receive compensation as Directors. Refer to
         the Summary Compensation Table for information concerning their
         compensation. Mr. Martin resigned as a director on January 1, 2001.

(2)      All Directors receive $150 per board meeting or committee meeting
         attended in person, and $50 per telephonic meeting. Reasonable
         expenses incurred by each Director in connection with his duties as a
         Director are also reimbursed by SI Diamond. This amount is not
         reflected in the above table.

(3)      All of SI Diamond's outside Directors participate in the Amended and
         Restated 1992 Outside Directors Stock Option Plan, under which SI
         Diamond may grant stock options to any Director who is not a full time
         salaried employee of the Company. On February 2, 2000, each Director
         at that time was granted a discretionary grant of 30,000 options under
         this plan at a price of $2.75 per share. On July 24, 2000, each
         Director at that time was granted an automatic grant of 20,000 options
         under this plan at a price of $1.3438, with the exception of Mr.
         Bailey who was granted 13,333 options. Under the terms of the plan,
         Mr. Bailey's grant was prorated because of a partial year of service
         on the Board. All grants in 2000 became exercisable in full on the
         date of the grant.


                                    Page 56
<PAGE>   66


         All of the Directors have retained the right to pursue additional
business activities that are not competitive with the business of SI Diamond,
and do not adversely affect their performance as Directors. If, as and when
conflicts of interest arise, the nature of the conflict must be fully disclosed
to the Board of Directors, and the person who is subject to the conflict must
abstain from participating in any decision that may impact on his conflict of
interest. Except for this disclosure and abstention policy, the Directors will
not be in breach of any fiduciary duties owed to SI Diamond or the shareholders
by virtue of their participation in such additional business activities.

                             EMPLOYMENT AGREEMENTS

         The Company has entered into an employment agreement with its
president and chief operating officer. The agreement calls for an annual base
salary of $150,000 and for the Company to provide a vehicle for his use. The
agreement can be terminated by either party with or without cause with 30 days
notice. If the agreement is terminated by the Company without cause, the
Company is obligated to pay severance equal to nine months salary.


                                    Page 57
<PAGE>   67


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                           CERTAIN BENEFICIAL OWNERS

         The following table sets forth certain information with respect to the
beneficial ownership of shares of each class of the SI Diamond's voting stock
as of March 14, 2001, by each person known to be the beneficial owner of 5% or
more of the outstanding voting stock of each such class. For the purposes of
this Annual Report on Form 10-KSB/A, beneficial ownership of securities is
defined in accordance with the rules of the SEC to mean generally the power to
vote or dispose of securities, regardless of any economic interest therein.


<TABLE>
<CAPTION>
                                                                                       Shares Owned        Percent of
 Title of Class                 Name and Address of Beneficial Owner                   Beneficially          Class
 --------------                 ------------------------------------                   ------------        ----------

<S>                             <C>                                                    <C>                 <C>
Common Stock                    None                                                       --                     --

Series G Preferred              William W. Gow                                            100                  11.76%
Stock                           4747 Sunset Blvd.
                                Los Angeles, CA 90027

                                SCG Cellular                                               50                   5.89%
                                8584 Katy Freeway, Suite 300
                                Houston, TX 77024

                                Chris Lawson                                               50                   5.89%
                                3737 Glenwood Ave, Suite 400
                                Raleigh, NC 27612

                                Steve Aiello                                               50                   5.89%
                                38984 Santa Barbara
                                Clinton Township, MI 48036

                                Peerless Distributing                                      50                   5.89%
                                21700 Northwestern Highway, Suite 1160
                                Southfield, MI 48075

                                ARA Services                                               50                   5.89%
                                29844 High Valley Court
                                Farmington Hills, MI 48331

                                Klaich Animal Hospital, Ltd.                              100                  11.73%
                                Amended Profit Sharing Retirement Plan & Trust
                                1990 South Virginia Street
                                Reno, NV 89502

                                Nicholas Martin Living Trust                              200                  23.52%
                                3113 South University Dr., #600
                                Ft. Worth, TX 76109

                                Michael Scott Blechman Family Trust                       200                  23.53%
                                295 Shadowood Lane
                                Northfield, IL 60093
</TABLE>


                                    Page 58
<PAGE>   68


SECURITY OWNERSHIP OF MANAGEMENT

         Set forth below is certain information with respect to beneficial
ownership of SI Diamond's common stock as of March 14, 2001, by each Director,
each Named Executive Officer and by the directors and executive officers as a
group. Unless otherwise indicated, each person or member of the group listed
has sole voting and investment power with respect to the shares of common stock
listed.


<TABLE>
<CAPTION>
                                                COMMON STOCK
                                                 BENEFICIAL                      PERCENTAGE
       NAME                                     OWNERSHIP(1)                      OF CLASS
       ----                                     ------------                     ----------

<S>                                             <C>                              <C>
Philip C. Shaffer                                  612,702                            *
David R. Sincox                                    411,213                            *
Charles C. Bailey                                   43,333                            *
Marc W. Eller                                      553,796                            *
Ronald J. Berman                                 1,260,222                         2.03%
Dr. Zvi Yaniv                                    1,586,000                         2.50%
All Executive Officers and
Directors as a group (7 persons)                 4,482,266                         6.91%
</TABLE>

---------

*        Less than 1%

(1)      Included in the amounts indicated are shares that are subject to
         options exercisable within sixty (60)-days of March 14, 2001 pursuant
         to Rule 13d-3(d)(1) of the Exchange Act. The number of such shares are
         500,000 for Mr. Shaffer; 290,000 for Mr. Sincox; 414,383 for Mr.
         Berman; 1,550,000 for Mr. Yaniv; 43,333 for Mr. Bailey; 200,000 for
         Mr. Eller; and 3,012,716 for the Directors and executive officers as a
         group.


                                    Page 59
<PAGE>   69


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In October 1998, EBT entered into a Patent Assignment and Royalty
Agreement with Advanced Technology Incubator, Inc., ("ATI") a corporation based
in Austin, Texas and owned by Dr. Zvi Yaniv, the Company's President and Chief
Operating Officer. Under the terms of the agreement, ATI agreed to assign U.S.
Patent No. 5,469,187 related to certain LCD technology to EBT in exchange for
an initial payment of $200,000. In addition, ATI is entitled to receive a
royalty of 5% of gross revenue related to products using this patent. EBT
intends to use this technology in the development of its next generation
electronic billboard product. EBT may terminate this assignment at any time
upon 30 days written notice to ATI. The assignment may be terminated by ATI if,
within two years of the first sale or lease of a billboard using this
technology, cumulative royalty payments under the agreement have not totaled
$500,000, or if payments do not equal $500,000 in any one year period following
this initial two year period. If the assignment is terminated by ATI, EBT will
be granted a non-exclusive worldwide license to use the technology under terms
similar to those contained in this agreement.

         ATI had the right to terminate this agreement if the initial payment
was not received by February 15, 1999. This date was extended until 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 was 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. The Company elected to exercise each of its extension
options and paid ATI a total of $50,000 through January 2000. In April 2000,
the agreement was modified to allow EBT to obtain additional 90 day extensions
at a cost of $12,500 for each extension. An additional $37,500 was paid for 3
additional extensions, bringing the total payments to $87,500. EBT can complete
the patent assignment agreement at any time by paying the remaining $112,500
due on the initial payment.

         During 2000, the Company sold electronic display units to Dr. Zvi
Yaniv, the Company's President and Chief Operating Officer at a total price of
$22,500. This sales price approximated the Company's cost.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits: See Index to Exhibits on page 61 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
                           November 30, 2000


                                    Page 60
<PAGE>   70


                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                    SI DIAMOND TECHNOLOGY, INC.


                                    By:    /s/ Marc W. Eller
                                       ----------------------------------------
                                       Marc W. Eller,
                                       Chief Executive Officer
                                       August 27, 2001

         In accordance with the Exchange Act this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.


<TABLE>
<CAPTION>
Signature                            Title                                                              Date
---------                            -----                                                              ----

<S>                                <C>                                                             <C>
/s/  Marc W. Eller                 Chairman, Chief Executive                                       August 27, 2001
--------------------               Officer (Principal Executive Officer and
Marc W. Eller                      Director)

/s/ Tracy Vaught                   Vice President and                                              August 27, 2001
------------------                 Chief Financial Officer
Tracy Vaught                       (Principal Financial Officer and  Principal
                                   Accounting Officer)


Philip C. Shaffer*
David R. Sincox*
Ronald J. Berman*                  Directors                                                       August 27, 2001
Charles G. Bailey*
Dr. Zvi Yaniv*


*By:   /s/ Tracy Vaught
    ----------------------
    (Tracy Vaught,
    Attorney-in-Fact)
</TABLE>


                                    Page 61
<PAGE>   71



                               INDEX TO EXHIBITS

         The exhibits indicated by an asterisk (*) have been previously filed
with the Securities and Exchange Commission and are incorporated herein by
reference.


<TABLE>
<CAPTION>
EXHIBIT                                                                                                           SEQUENTIALLY
NUMBER                                       DESCRIPTION OF EXHIBIT                                               NUMBERED PAGE
-------                                      ----------------------                                               -------------


<S>             <C>                                                                                               <C>
    2.1*        Asset Purchase Agreement, dated as of August 31, 1999, by and among the Company, SIDT,
                Inc., Sign Builders of America, Inc., Sign Builders, Inc. and Lance Adams. (Exhibit
                2.1 to the Company's Current Report on Form 8-K dated as of September 3, 1999).

 3(I).1*        Restated Articles of Incorporation of Company, as filed December 9, 1999 with the
                Secretary of State for the State of Texas.

3(II).1*        Amended and Restated Bylaws of the Company (Exhibit 3(II) to the Company's Quarterly
                Report on Form 10-QSB for the fiscal quarter ended March 31, 1996).

    4.1*        Form of Certificate for shares of the Company's common stock (Exhibit 4.1 to the
                Company's Registration Statement on Form SB-2[No.33-51446-FW] dated January 7, 1993).

    4.2*        Form of Warrant issued to Swartz Investments, Inc. (Exhibit 4.5 to the Company's
                Current Report on Form 8-K dated as of January 19, 1996).

    4.3*        Form of Registration Rights Agreement by and between the Company and the Holders of
                the Company's Series G Preferred Stock (Exhibit 4.2 to the Company's Current Report on
                Form 8-K dated as of July 25, 1997).

    4.4*        Form of Warrant by and between the Company and the Holders of the Company's Series G
                Preferred Stock (Exhibit 4.3 to the Company's Current Report on Form 8-K dated as of
                July 25, 1997).

    4.5*        Regulation D Subscription Agreement dated as of November 11, 1998, by and between the
                Company and C&A Services, L.L.C. for the issuance of warrants to purchase shares of
                Common Stock of the Company. (Exhibit 4.1 to the Company's Current Report on Form 8-K
                dated as of December 7, 1998).

    4.6*        Form of Rights Agreement dated as of June 18, 1998, between the Company and American
                Securities Transfer, Incorporated, as Rights Agent, which includes as Exhibit A the
                form of Statement of Resolution establishing and designating series of preferred stock
                as "Series H Junior Participating Preferred Stock" and fixing and determining the
                relative rights and preferences thereof, as Exhibit B the form of Rights Certificate,
                and as Exhibit C the Summary of Rights to Purchase Preferred Shares. (Exhibit 4.1 to
                the Company's Current Report on Form 8-K dated as of June 18, 1998).

    4.7*        Secured Promissory Note, dated as of September 3, 1999, by SIDT, Inc. as maker and
                Sign Builders of America, Inc. and Sign Builders, Inc., as Payee. (Exhibit 4.1 to the
                Company's Current Report on Form 8-K dated as of September 3, 1999).

    4.8*        Form of Regulation D Subscription agreement by and between the Company and the
                participants of private placements

    4.9*        Form of Registration Rights Agreement by and between the Company and the participants
                of private placements

   10.1*        Patent and Technology License effective as of February 11, 1993, by and between
                Company and the Board of Regents of the University of Texas System (Exhibit 10.2 to
                the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended September
                30, 1995).

   10.2*        Joint Development Agreement dated May 25, 1995 between the Company and Supertex, Inc.
                (Exhibit 10.34 for the Company's Annual Report on Form 10-KSB for the year ended
                December 31, 1995).

   10.3*        Employment Agreement between the Company and Dr. Zvi Yaniv dated as of May 31, 1996
                (Exhibit 10.1 to the Company's report on Form 10-QSB for the fiscal quarter ended
                September 30, 1996).

   10.4*        Teaming Agreement dated February 9, 1995 between the Company and Diagascrown, Inc.
                (Exhibit 10.5 to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter
                ended March 31, 1995).
 </TABLE>


                                    Page 62
<PAGE>   72


<TABLE>
<CAPTION>
EXHIBIT                                                                                                           SEQUENTIALLY
NUMBER                                       DESCRIPTION OF EXHIBIT                                               NUMBERED PAGE
-------                                      ----------------------                                               -------------

<S>             <C>                                                                                               <C>
   10.5*        Amended and Restated 1992 Outside Directors' Stock Option Plan (Exhibit 4.2 to the
                Company's Registration Statement on Form S-8 [No. 333-56547] dated June 9, 1998).

   10.6*        1998 Directors and Officers Stock Option Plan (Exhibit 4.3 to the Company's
                Registration Statement on Form S-8 [No. 333-56547] dated June 9, 1998).

   10.7*        Amended and Restated 1992 Stock Option Plan (Exhibit 4.1 to the Company's Registration
                Statement on Form S-8 [No. 333-56457] dated June 9, 1998)

   10.8*        Asset Purchase Agreement dated May 8, 1998 between Focus Interconnect Technology
                Corporation, Diamond Tech One, Inc., SI Diamond Technology, Inc. and Field Emission
                Picture Element Technology, Inc. (Exhibit 10 to the Company's Current Report on Form
                8-K dated as of May 8, 1998).

   10.9*        Consulting and Advisory Services Agreement by and between the Company and C&A
                Services, L.L.C. dated as of November 11, 1998. (Exhibit 10.1 to the Company's Current
                Report on Form 8-K dated as of December 7, 1998).

  10.10*        Marketing Agent Agreement by and between Electronic Billboard Technology, Inc. and
                Vision Mark, L.L.C. dated as of November 11, 1998. (Exhibit 10.2 to the Company's
                Current Report on Form 8-K dated as of December 7, 1998).

  10.11*        Patent Assignment and Royalty Agreement between Electronic Billboard Technology, Inc.
                and Advanced Technology, Incubator, Inc. dated as of October 6, 1998. (Exhibit 10.18
                to the Company's Current Report on Form 10-KSB dated as of March 31, 1999).

  10.12*        Agreement on Phase 2 between Field Emission Picture Element Technology, Inc., and
                Diamond Pro-Shop Nomura dated as of January 21, 1999. (Exhibit 10.20 to the Company's
                Current Report on Form 10-KSB dated as of March 31, 1999).

  10.13*        Lease agreement between the Company and Industrial Properties Corporation dated as
                of June 2, 1998. (Exhibit 10.2 to the  Company's Current Report on Form 8-K dated as
                of December 7, 1998).

  10.14*        Patent License Agreement, dated as of March 26, 1999, by and between the Company and
                Canon, Inc. (Exhibit 10.1 to the Company's amended Current Report on Form 8-K/A dated
                as of April 16, 1999).

  10.15*        Asset Purchase Agreement, dated as of October 21, 1999, by and between the Company and
                Diamond.com, LLC. (Exhibit 10.1 to the Company's Current Report on Form 8-K dated as
                of October 21, 1999).

  10.16*        Form of Lease Agreement by and between Electronic Billboard Technology, Inc. and Eckerd
                Corporation (Exhibit 10.1 to the Company's Current Report on Form 8-K dated as of
                January  21, 2000)

  10.17*        Form of Lease Agreement by and between Electronic Billboard Technology, Inc. and Eckerd
                Corporation dated February 25, 2001.

  11            Computation of (Loss) per Common Share.

  21            Subsidiaries of the Company.

  24*           Powers of Attorney.
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