**Exhibit 4.8**

THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGECOMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON ANEXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIESACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO ANEFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO ANAVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATIONREQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATESECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TOSUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THECOMPANY.  THIS SECURITY MAY BE PLEDGED INCONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCHSECURITY AS PERMITTED BY THE SECURITIES PURCHASE AGREEMENT PURSUANT TOWHICH THE SECURITIES WERE ISSUED.

Original IssueDate: May 24, 2006
| No. 1 |   | $750,000 |
|-------|--------|----------|

 

**12% SENIOR SECUREDCONVERTIBLE DEBENTURE**

This 12% SeniorSecured Convertible Debenture (this “***Debenture***”)is a duly authorized and issued 12% Senior Secured Convertible Debenture ofUNIPIXEL, INC., a Delaware corporation (“***UniPixel***”),and UNIPIXEL DISPLAYS, INC., a Texas corporation (“***UniPixelDisplays***”), having their principal place of business locatedat 8708 Technology Forest Place, Suite 100, The Woodlands, Texas 77381, for theprincipal amount of SEVEN HUNDRED AND FIFTY THOUSAND DOLLARS AND NO CENTS($750,000), issued in connection with that certain Purchase Agreement (asdefined below) of even date herewith entered into by and among the Company andthe Holder.

FOR VALUE RECEIVED,UniPixel and UniPixel Displays (collectively, hereinafter referred to as the “***Company***”) hereby jointly andseverally promise to pay to CAPSOURCE FUND, L.P., a Mississippi limitedpartnership, having its principal place of business located at 795 WoodlandsParkway, Suite 100, Ridgeland, MS 39157, or its registered assigns (the “***Holder***”), the principal sum of$750,000 on the earlier of (a) May 23, 2007; (b) the consummation of a Changeof Control Transaction; or (c) upon the closing of a Qualifying Transaction(the “***Maturity Date***”),and to pay interest to the Holder on the then outstanding principal amount ofthis Debenture in accordance with the provisions hereof.  This Debenture is subject to the followingadditional provisions:

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Section 1.      Definitions.  Forthe purposes hereof, in addition to the terms defined elsewhere in thisDebenture: (a) capitalized terms not otherwise defined herein have the meaningsgiven to such terms in the Purchase Agreement, and (b) the following termsshall have the following meanings:

“***Bankruptcy Event***” means any of the following events: (a) the Company or any Subsidiary (as such term is defined in Rule 1.02(s) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Subsidiary thereof; (b) there is commenced against the Company or any Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement; (c) the Company or any Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) the Company or any Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 days; (e) the Company or any Subsidiary thereof makes a general assignment for the benefit of creditors; (f) the Company or any Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; (g) the Company or any Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing; or (h) an application for the appointment of a receiver or liquidator for the Company or any of its material assets.

“***Capital Lease***” means any lease of property (real, personal or mixed) which, in accordance with GAAP, should be capitalized on the lessee’s balance sheet or for which the amount of the asset and liability thereunder as if so capitalized should be disclosed in a note to such balance sheet.

“***Cash Flow***” means an amount equal to (i) the Company’s Consolidated EBITDA, minus (ii) the Company’s Consolidated non-financed Capital Expenditures.

## “***Consolidated EBITDA***”means, for any Person for any period:

### (i)            the consolidatednet income of such Person and its Consolidated Subsidiaries for such period(after Income Taxes), calculated in accordance with GAAP, but excluding:

#### (A)          any gain arising from the sale ofcapital assets,

#### (B)           any gain arising from any write-up ofassets,

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####  

#### (C)           earnings of any other Person,substantially all of the assets of which have been acquired by such Person orits Consolidated Subsidiaries in any manner, to the extent that such earningswere realized by such other Person prior to the date of such acquisition.

#### (D)          earnings of any Person in which thePerson or its Consolidated Subsidiaries has an ownership interest (other thanwholly owned Subsidiaries of such Person ), unless such earnings have actuallybeen received by the Person or its Consolidated Subsidiaries in the form ofcash distributions,

#### (E)           earnings of any Person to whichassets of the Person or its Consolidated Subsidiaries shall have been sold,transferred or disposed of, or into which the Person shall have merged, to theextent that such earnings arise prior to the date of such transaction,

#### (F)           any gain arising from the acquisitionof any securities of such Person or any of its Consolidated Subsidiaries, and

#### (G)           any extraordinary gain realized bysuch Person or any of its Consolidated Subsidiaries during such period.

### (ii)           plus the following,but only in each case to the extent incurred by the Company and itsConsolidated Subsidiaries during such period and deducted in the calculationabove for such period,

#### (A)          all income and franchise taxes,

#### (B)           all Interest Expense,

#### (C)           all depreciation expense, and

#### (D)          all amortization expense.

“***Current Assets***” means, at any particular time, all amounts which, in conformity with GAAP, would be included as current assets on a consolidated balance sheet of the Company and its Subsidiaries; provided however, there shall be excluded therefrom (a) all prepaid expenses of every type and nature, (b) all amounts due from partners, officers, stockholders or other Affiliates, and all loans due from employees, and (c) all deferred charges.

“***Current Liabilities***” means, at any particular time, all amounts (including deferred taxes) which, in conformity with GAAP, would be included as current liabilities on a consolidated balance sheet of the Company and its Subsidiaries.

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“***Current Ratio***” means the ratio of Current Assets to Current Liabilities.

“***Dallas Courts***” shall have the meaning set forth in Section 7(e).

“***Debenture Register***” shall have the meaning set forth in Section 2(b).

“***Event of Default***” shall have the meaning set forth in Section 6.

“***GAAP***” mean generally accepted accounting principles.

“***Interest Expense***” means, with respect to any Person and for any period (without duplication), all interest on that Person’s Debt, whether paid in cash or accrued as a liability and payable in cash during any subsequent period (including, without limitation, the interest component of Capital Leases), as determined by GAAP.

“***Late Fees***” shall have the meaning set forth in the second paragraph to this Debenture.

“***Liabilities***” mean all liabilities, obligations and indebtedness of any and every kind and nature (including, without limitation, lease obligations, accrued interest, charges, expenses, attorneys’ fees and other sums) chargeable to the Company and made to or for the benefit of the Company, whether arising under this Debenture or arising under the any of the Transaction Documents, whether heretofore, now or hereafter owing, arising, due or payable from Company to the Holder and however evidenced, credited, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed, or otherwise, including obligation of performance.

“***Net Income***”**or**“***Net Loss***”  means, with respect to any Person for any period, the net income or net loss of such Person determined in accordance with GAAP, after payment of income Taxes but excluding any extraordinary or non-recurring items.

“***Original Issue Date***” shall mean the date of the first issuance of this Debenture regardless of the number of transfers of this or any portion of this Debenture and regardless of the number of instruments which may be issued to evidence such Debenture or Debentures.

“***Purchase Agreement***” means the Securities Purchase Agreement of even date herewith, to which the Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms.

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Section 2.              Interest.

a)             Payment of Interest in Cash. The Company shallpay interest, in cash, to the Holder on the then outstanding principal amountof this Debenture at the rate of 12% per annum, payable monthly in arrears incash via wire transfer or by automated bank transfer in immediately availableand freely transferable funds (as requested by Purchaser), on the last day ofeach month for the period beginning on the Initial Issuance Date and ending onthe Maturity Date or such earlier or later time when this Debenture is paid orprepaid in full (except that, if any such date is not a Business Day, then suchpayment shall be due on the next succeeding Business Day) (each such date, an “***Interest Payment Date***”), subjectto the conversion rights of Holder as stated herein.

b)            Interest Calculations. Interest shall becalculated on the basis of a 360-day year and shall accrue daily commencing onthe Original Issue Date until payment in full of the principal sum, togetherwith all accrued and unpaid interest and other amounts which may become duehereunder, has been made.  Interesthereunder will be paid to the Person in whose name this Debenture is registeredon the records of the Company regarding registration and transfers ofDebentures (the “***Debenture Register***”).

c)             Late Fee. All overdue accrued and unpaid interest to be paid hereunder shallentail a late fee at the rate of 18% per annum (or such lower maximum amount ofinterest permitted to be charged under applicable law or regulation) (“***Late Fee***”) which will accruedaily, from the date such interest is due hereunder through and including thedate of payment.

d)            Prepayment. The Company may prepay all orany portion of the then outstanding principal amount of this Debenture withoutany prepayment premium or discount by providing Holder not less than 30 daysprior written notice, such outstanding principal balance remaining subject toHolder’s conversion rights hereunder until the actual prepayment is madefollowing such notice period.

Section 3.                Conversion Right; Adjustments.

TheHolder of this Debenture shall have the right, at Holder’s option, immediatelyfollowing the Original Issue Date, to convert all, or, in multiples of $50,000,any part of this Debenture into such number of fully paid and nonassessableshares of Common Stock as shall be provided herein.  The Holder of this Debenture may exercise theconversion right by giving written notice (a “***ConversionNotice***”) to the Company of the exercise of such right andstating the name or names in which the stock certificate or stock certificatesfor the shares of Common Stock are to be issued and the address to which suchcertificates shall be delivered.  TheConversion Notice shall be accompanied by this Debenture.  The number of shares of Common Stock thatshall be issuable upon 

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conversionof the Debenture shall equal the then outstanding principal amount of thisDebenture plus all accrued and unpaid interest due and payable on the Debentureon the Conversion Date****(definedbelow) or a portion thereof (in the discretion of the Holder)****divided by the Conversion Price (as defined below) ineffect on the date the Conversion Notice is given.  Conversion shall be deemed to have beeneffected on the date the Conversion Notice is delivered to the Company (each, a“***Conversion Date***”).  Within 10 business days after a ConversionDate, the Company shall issue and deliver by hand against a signed receipttherefor or by reputable overnight delivery carrier to the address designatedin the Conversion Notice, a stock certificate or stock certificates of theCompany representing the number of shares of Common Stock to which Holder isentitled and a check or cash in payment of all interest accrued and unpaidunder the Debenture being converted up to and including the ConversionDate.  If a stock certificate orstock certificates are not delivered within 10 business days after a ConversionDate, the Company shall pay and/or grant to Holder 0.1% (on a Fully DilutedBasis) of the Company’s Common Stock per day until such certificates aredelivered. The conversion rights will be governed by the following provisions:

a)    Conversion Price. On the issuedate hereof and until such time as an adjustment shall occur, the ConversionPrice shall be equal to the lesser of:

(i)           90%of the average price per share of the Common Stock and Common StockEquivalents sold to any Person in the first Qualifying Transaction to beconsummated following the Original Issue Date (determined by dividing the totalnumber of shares of Common Stock issued plus shares issuable under Common StockEquivalents in such Qualifying Transaction, by the aggregate considerationreceived by the Company plus all consideration to be received uponexercise or conversion of all Common Stock Equivalents issued in such QualifyingTransaction).  With respect todetermining the price paid per share in any asset purchase, only shares ofCommon Stock actually issued and outstanding shall be used in determining suchper share calculation; or

(ii)          $1.75per share (which such Conversion Price shall apply in the event no QualifyingTransaction has closed on or by the Conversion Date.

Notwithstanding the foregoing, theparties agree that the Conversion Price shall be adjusted down from thedetermination resulting from the foregoing formula by mutual agreement of theparties in the event that any convertible securities are sold to investors inany Qualifying Transaction, the parties hereby recognizing that the issuancethereof, even at an exercise or conversion price above the Conversion Price,would increase the value of the securities issued to such investors and thusentitle Holder to a greater number 

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of shares of Common Stock upon conversionhereof.  The parties agree to negotiatesuch determination in good faith.

b)   Adjustment forIssuance of Shares at less than the Conversion Price.

(i)           If and whenever any Additional CommonStock (as herein defined) shares shall be issued by the Company (the “***Stock Issue Date***”) for aconsideration per share less than the Conversion Price, then in each such casethe initial Conversion Price shall be reduced to a new Conversion Price equalto the consideration per share received by the Company for the additionalshares of Common Stock then issued, and accordingly, the number of sharesissuable to Holder upon conversion shall be proportionately increased as aresult thereof; and, in the case of shares issued without consideration, theinitial Conversion Price shall be reduced in amount and the number of sharesissued upon conversion shall be increased in an amount so as to maintain forthe Holder the right to convert this Debenture into shares equal in amount tothe same percentage interest in the Common Stock of the Company as existed forthe Holder immediately preceding the Stock Issue Date.

(ii)         Consideration for Shares.   In case of the issuance of Additional CommonStock for a consideration part or all of which shall be cash, the amount of thecash consideration therefor shall be deemed to be the amount of the cashreceived by Company for such shares.  Incase of the issuance of any shares of Additional Common Stock for aconsideration part or all of which shall be other than cash, the amount of theconsideration therefor, other than cash, shall be deemed to be the then fairmarket value of the property received as determined by an investment bankingfirm selected by Holder.

(iii)         Reclassification of Shares.   In case of the reclassification ofsecurities into shares of Common Stock, the shares of Common Stock issued insuch reclassification shall be deemed to have been issued for a considerationother than cash.  Shares of AdditionalCommon Stock issued by way of dividend or other distribution on any class ofstock of the Company shall be deemed to have been issued without consideration.

(iv)        Split up or Combination of Shares.   In case issued and outstanding shares ofCommon Stock shall be subdivided or split up into a greater number of shares ofthe Common Stock, the Conversion Price shall be proportionately decreased, andin case issued and outstanding shares of Common Stock shall be combined into asmaller number of shares of Common Stock, the Conversion Price shall beproportionately increased, such increase or decrease, as the case may be,becoming effective at the time of record of the split-up or combination, as thecase may be.

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(v)         The term “***AdditionalCommon Stock***” herein shall mean, other than with respect to anExempt Issuance, in the most broadest sense all shares of Common Stock orCommon Stock Equivalents hereafter issued by the Company (including, but notlimited to Common Stock held in the treasury of the Company, except CommonStock issued upon the conversion or exercise of any security purchased inconnection with the Purchase Agreement.

c)    Adjustment for Mergers, Consolidations, Etc..

(i)           In the event of distribution to allCommon Stock holders of any stock, indebtedness of the Company or assets(excluding cash dividends or distributions from retained earnings) or otherrights to purchase securities or assets, then, after such event, this Debenturewill be convertible into the kind and amount of securities, cash and otherproperty which the holder of the Debenture would have been entitled to receiveif the holder owned the Common Stock issuable upon conversion of the Debentureimmediately prior to the occurrence of such event.

(ii)          In case of any capital reorganization,reclassification of the stock of the Company (other than a change in par valueor as a result of a stock dividend, subdivision, split up or combination ofshares), this Debenture shall be convertible into the kind and number of sharesof stock or other securities or property of the Company to which the holder ofthe Debenture would have been entitled to receive if the holder owned theCommon Stock issuable upon conversion of the Debenture immediately prior to theoccurrence of such event.  The provisionsof the foregoing sentence shall similarly apply to successive reorganizations,reclassifications, consolidations, exchanges, leases, transfers or otherdispositions or other share exchanges.

d)   Notice of Adjustment.   In the event the Company shall propose totake any action which shall result in an adjustment in the Conversion Price,the Company shall give notice to the Holder, which notice shall specify therecord date, if any, with respect to such action and the date on which suchaction is to take place.  Such noticeshall be given on or before the earlier of 10 days before the record date orthe date which such action shall be taken. Such notice shall also set forth all facts (to the extent known)material to the effect of such action on the Conversion Price and the number,kind or class of shares or other securities or property which shall bedeliverable or purchasable upon the occurrence of such action or deliverableupon conversion of this Debenture. Additionally, following completion of an event wherein the ConversionPrice shall be adjusted, the Company shall furnish to the holder of thisDebenture a statement, signed by an authorized officer of the Company of thefacts creating such adjustment and specifying the resultant adjusted ConversionPrice then in effect.

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e)    Reservation of Shares.** **The Company warrantsand agrees that it shall at all times reserve and keep available, free frompreemptive rights, sufficient authorized and unissued shares of Common Stock toeffect conversion of this Debenture.

f)    Registration Rights.  The Holder has certain rights with respect tothe registration of shares of Common Stock issued upon the conversion of thisDebenture, such rights being specifically set forth in the Purchase Agreemententered into by and between Holder and the Company on the date hereof.

g)   *Intentionally Deleted*.

Section 4.               Registration of Transfers andExchanges.

a)             Different Denominations. This Debenture isexchangeable for an equal aggregate principal amount of Debentures of differentauthorized denominations, as requested by the Holder surrendering thesame.  No service charge will be made forsuch registration of transfer or exchange.

b)            Investment Representations. This Debenture hasbeen issued subject to certain investment representations of the originalHolder set forth in the Purchase Agreement and may be transferred or exchangedonly in compliance with the Purchase Agreement and applicable federal and statesecurities laws and regulations.

c)             Reliance on Debenture Register. Prior to duepresentment to the Company for transfer of this Debenture, the Company and anyagent of the Company may treat the Person in whose name this Debenture is dulyregistered on the Debenture Register as the owner hereof for the purpose ofreceiving payment as herein provided and for all other purposes, whether or notthis Debenture is overdue, and neither the Company nor any such agent shall beaffected by notice to the contrary.

Section 5.               Negative Covenants. Solong as any portion of this Debenture is outstanding, without the prior writtenconsent of the Holder, which consent may be withheld in the sole discretion ofthe Holder, the Company will not and will not permit any of its Subsidiaries todirectly or indirectly:

a)             Indebtedness. Other than equipment leases of up to $­­­­­­­25,000 in the aggregate forany 12 month period, enter into, create, incur, assume or suffer to exist anyindebtedness or Liens, on or with respect to any of its property or assets nowowned or hereafter acquired or any interest therein or any income or profitstherefrom that is senior to, or paripassu with, in any respect,the Company’s obligations under the Debentures; *provided,however*, that this provision shall not prevent the Company fromentering into 

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any transaction, thepurpose of which is to repay this Debenture, provided all proper notices aregiven in accordance herewith;

b)            Repayment of Indebtedness.  Repay any principal due and owing on anypromissory notes, debentures, or other forms of indebtedness, other than (i)periodic interest payments due and owing thereunder; (ii) repayment due of anyprincipal amount or interest due or becoming due under this Debenture; and(iii) repayment of the indebtedness set forth in Schedule 4.9 to the PurchaseAgreement; provided, nothing contained in this section shall prohibit theCompany from making any payments with respect to trade payables made in theordinary course of the Company’s business;

c)             Repayment of Shares.  Repay, repurchase or offer to repay,repurchase or otherwise acquire more than a de minimus number of shares of itsCommon Stock or other equity securities or as otherwise permitted by theTransaction Documents; 

d)            Bylaws.      Amendits certificate of incorporation, bylaws or other charter documents so as toadversely affect any rights of the Holder in its capacity as a holder of theDebentures;

e)             Loans and Investments.  Lend or advance money, credit or property toany person or entity, or invest in (by capital contribution or otherwise), orpurchase or repurchase the stock or indebtedness or assets or properties of anyperson or entity, or agree to do any of the foregoing, other than in theordinary course of business; 

f)             Guarantees. Assume, endorse or otherwise become or remain liable in connection withthe obligations (including accounts payable) of any other person or entity,other than in the ordinary course of business.

g)            Sale of Assets, Dissolution, Etc.  Transfer, sell, assign, lease or otherwisedispose of any of its properties or assets, or any assets or propertiesnecessary or desirable for the proper conduct of its business, or transfer,sell, assign or otherwise dispose of any of its accounts, or contract rights toany person or entity, or change the nature of its business, wind-up,liquidate or dissolve, or agree to any of the foregoing, other than in theordinary course of business;

h)            Acquisition of Assets.  Agree to purchase, acquire, or lease of anyassets of any Person, other than in the ordinary course of business;

i)              Compensation. Increase the compensation of any of its officers or consultants makingmore than $100,000 per year, hire any relative of any officer, director orshareholder of the Company, or pay a bonus to any such person.  

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j)              Subsidiaries. Establish or form a partially orwholly owned Subsidiary.  Sell, transferor assign any interest in the Company’s existing Subsidiaries.

k)             No Further Issuance of Securities.  Other than in accordance herewith, create,issue or permit the issuance of any additional securities of the Company or ofany of its Subsidiaries (including with respect to any Qualifying Transaction),if any, or any rights, options or warrants to acquire any such securities andin the event that Company desires to issue securities with preferences orrights greater than that which the Common Stock has, the Holder will have theoption of converting into such stock in lieu of the Common Stock hereby;  

l)              No Dividends; No Redemption.  Declare any dividend, pay or set aside forpayment any dividend or other distribution, in cash, stock, or other property,or make any payment to any related parties, including to any preferredstockholders, as a dividend, redemption, or otherwise, other than the paymentof salaries in the ordinary course of business.

m)            Stock Splits.  Undertake a reverse or forward stock split or reclassification of theCommon Stock; or

n)            Agreement.  Enter into any agreement obligating the Company to undertake any of thematters set forth in this Section 5.

Section 6.             Affirmative Covenants.  So long as any portion of this Debenture isoutstanding and unless the Holder otherwise consents in writing, which consentmay be withheld in the sole discretion of the Holder, the Company will:

a)             Taxes and Liens. Promptly pay, or cause to be paid, all taxes, assessments and othergovernmental charges which may lawfully be levied or assessed upon the incomeor profits of the Company, or upon any property, real, personal or mixed,belonging to the Company, or upon any part thereof, and also any lawful claimsfor labor, material and supplies which if unpaid, might become a lien or chargeagainst any such property; provided, however, the Company shallnot be required to pay any such tax, assessment, charge, levy or claim so longas the validity thereof shall be actively contested in good faith by properproceedings; but, providedfurther that any such tax, assessment,charge, levy or claim shall be paid or bonded in a manner satisfactory to theHolder upon the commencement of proceedings to foreclose any lien securing thesame.

b)            Business and Existence.  Do or cause to be done all things necessaryto preserve and to keep in full force and effect any licenses necessary to thebusiness of the Company, its corporate existence and rights of its franchises,trade names, trademarks, 

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and permits which arereasonably necessary for the continuance of its business; and continue toengage principally in the business currently operated by the Company.

c)             Insurance and Properties.  Keep its business and properties insured atall times with responsible insurance companies and carry such types and amountsof insurance as are required by all federal, state and local governments in theareas which the Company does business and as are usually carried by entitiesengaged in the same or similar business similarly situated.  In addition, the Company shall maintain infull force and effect policies of liability insurance in amounts at least equalto that currently in effect.

d)            Maintain Property and Assets.  Maintain its property and assets in goodorder and repair and, from time to time, make all needed and proper repairs,renewals, replacements, additions and improvements thereto, so that thebusiness carried on may be properly and advantageously conducted at all timesin accordance with prudent business management, and maintain annually adequatereserves for maintenance thereof.

e)             True Books. Keep true books of record and account in which full, true and correctentries will be made of all of its dealings and transactions, and set aside onits books such reserves as may be required by GAAP, consistently applied, withrespect to all taxes, assessments, charges, levies and claims referred to in(a) above, and with respect to its business in general, and include suchreserves in interim as well as year-end financial statements.

f)             Right of Inspection.  Permit any person designated by the Holder,at the Holder’s expense, to visit and inspect any of the properties, books andfinancial reports of the Company, all at such reasonable times upon three (3)Business Days prior notice to Company, and as often as the Holder mayreasonably request, provided the Holder does not unreasonably interfere withthe daily operations of the Company and Holder executes a confidentialityagreement.

g)            Observance of Laws.  Conform to and duly observe all laws,regulations and other valid requirements of any regulatory authority withrespect to the conduct of its business except those that would not cause aMaterial Adverse Effect, as determined in the reasonable discretion of theHolder.

h)            Company’s Knowledge of Default.  Upon an officer or director of the Companyobtaining knowledge of, or threat of, an Event of Default hereunder, cause suchofficer to promptly, within no more than five (5) Business Days, deliver to theHolder notice thereof specifying the nature thereof, the period of existencethereof, and what action the Company has taken and/or proposes to take withrespect thereto.

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i)              Notice of Proceedings.  Upon an officer or director of the Companyobtaining knowledge of any material litigation, dispute or proceedings beinginstituted or threatened against the Company, or any attachment, levy,execution or other process being instituted against any assets of the Company,cause such officer to promptly, within no more than five (5) Business Days,give the Holder written notice of such litigation, dispute, proceeding, levy,execution or other process.

j)              Certificate of Covenant Compliance Within 30days of the last day of each March, June, September and December, the Companywill issue a Certificate of Covenant Compliance, executed by either the ChiefExecutive Officer or Chief Financial Officer in the form of Exhibit Aattached hereto.  If the Company is notin compliance with the covenants specified in this Section 5, the Company willmodify the Certificate of Covenant Compliance by stating the exception andproviding a detailed explanation of the non-compliance.

k)             Payment of Holder’s Expenses.  If at any time or times hereafter, Holderemploys counsel in connection with the execution and consummation of thetransactions contemplated by this Debenture or to commence, defend orintervene, file a petition, complaint, answer, motion or other pleading, or totake any action in or with respect to any suit or proceeding (bankruptcy orotherwise) relating to this Debenture or any other Transaction Document, or anyother agreement, guaranty, note, instrument or document heretofore, now or atany time or times hereafter executed by the Company and delivered to Holder, orto enforce any rights of Holder hereunder whether before or after theoccurrence of any Event of Default, or to collect any of the Liabilities, thenin any of such events, all of the reasonable attorneys’ fees arising from suchservices, and any expenses, costs and charges relating thereto, shall be partof the Liabilities, payable on demand.

l)              Financial Reporting.  The Company shall provide to Holder auditedannual financial statements, audited by mutually agreed upon independentcertified public accounting firm.  Saidfinancial statements shall be prepared in accordance with GAAP, consistentlyapplied, and shall be delivered to Holder within ninety (90) days after the closeof the Company’s fiscal year.  The reportof the auditor that accompanies the financial statements shall not contain anyqualifications or limitations, such auditor to be a mutually agreeableaccounting firm.  The Company’s fiscalyear ends on December 31, and shall not be changed without the prior writtenconsent of the Holder.  The Company shallprovide to Holder unaudited monthly financial statements (including month todate and year to date actual to prior periods) and a report in such form as isacceptable to Holder, both presented in accordance with GAAP, consistentlyapplied (subject to such exceptions for interim financials as may be noted bythe Company thereon), and shall be delivered to Holder within twenty-five (25)days after the close of the Company’s month. The Company shall also deliver any other reports reasonably 

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requested byHolder.  If the statements or reports arenot delivered within twenty-five (25) days of the close of any month, then theCompany will pay a late fee of $250 per day until the report is delivered inadequate form in the sole discretion of Holder.

m)           Financial Covenants.  As of the 60th datefollowing the date of this Agreement and thereafter continuing until theTermination Date, the Company must maintain the following ratios:

(i)           *Cash Interest Coverage*.Until this Debenture is repaid in full, the Company shall maintain aConsolidated EBITDA ratio, based on any of the Company’s quarterly financialstatements (as determined on the last day of each fiscal quarter for theimmediately preceding quarter), of 2.0 or greater.  The Consolidated EBITDA ratio is defined asConsolidated EBITDA divided by Interest Expense (Consolidated EBITDA ÷ InterestExpense).

(ii)          *Cash Flow Coverage Ratio*.  The ratio of (a) the Company’s Cash Flow to(b) the sum of (i) the Company’s consolidated Interest Expense plus (ii) theCompany’s scheduled payments of principal (including the principal component ofCapital Leases) to be paid during the 12 months following any date ofdetermination shall at all times exceed (1) 1.5 to 1.0.  Compliance with the ratio will be tested asof the last day of each month, with Cash Flow and Interest Expense beingcalculated for the twelve months then ended.

(iii)         *Current Ratio*.  The Company will at all times maintain aCurrent Ratio of not less than 1.5 to 1.0. The Current Ratio shall be calculated and tested quarterly as of thelast day of each fiscal quarter of the Company.

(iv)         *Actual versus Budget***.**  The Company shallon a quarterly basis achieve 75 percent of its budgeted revenue andincome.  Budget numbers shall be thosedelivered to Holder contemporaneously herewith and then on an annual calendarbasis.

Section 7.             Events of Default.

a)             “***Event of Default***”,wherever used herein, means any one of the following events (whatever thereason and whether it shall be voluntary or involuntary or effected byoperation of law or pursuant to any judgment, decree or order of any court, orany order, rule or regulation of any administrative or governmental body):

i.              any default in the payment of (A)the principal amount of any Debenture, or (B) interest (including Late Fees)on, or liquidated damages in respect of, any Debenture, in each case free ofany claim of subordination, as and when the same shall become due and payable(whether on the Maturity Date or by acceleration or otherwise);

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ii.             the Company shall fail to observeor perform any other covenant or agreement contained in this Debenture or anyof the other Transaction Documents which failure is not cured, if possible tocure, within the earlier to occur of (A) 10 Business Days after notice of suchdefault sent by the Holder or by any other Holder and (B) 10 Business Daysafter the Company shall become or should have become aware of such failure;

iii.            a default or event of default(subject to any grace or cure period provided for in the applicable agreement,document or instrument) shall occur under (A) any of the Transaction Documentsor (B) any other material agreement, lease, document or instrument to which theCompany or any Subsidiary is bound and not cured;

iv.            any representation or warranty madeherein, in any other Transaction Documents, in any written statement pursuanthereto or thereto, or in any other report, financial statement or certificatemade or delivered to the Holder or any other holder of Debentures shall beuntrue or incorrect in any material respect as of the date when made or deemedmade;

v.             there shall have occurred aBankruptcy Event;

vi.            the Company or any Subsidiary shalldefault in any of its obligations under any mortgage, credit agreement or otherfacility, indenture agreement, factoring agreement or other instrument underwhich there may be issued, or by which there may be secured or evidenced anyindebtedness for borrowed money or money due under any long term leasing or factoringarrangement of the Company in an amount exceeding $100,000, whether suchindebtedness now exists or shall hereafter be created and such default shallresult in such indebtedness becoming or being declared due and payable prior tothe date on which it would otherwise become due and payable.

vii.           the Company shall be a party to anyChange of Control Transaction or Fundamental Transaction, shall agree to sellor dispose of all or in excess of 33% of its assets in one or more transactions(whether or not such sale would constitute a Change of Control Transaction) orshall redeem or repurchase any its outstanding shares of Common Stock or CommonStock Equivalents;

viii.          the Company shall fail to haveavailable a sufficient number of authorized and unreserved shares of CommonStock to issue to such Holder upon exercise of the Warrants in full and notremedied as permitted in the Transaction Documents;

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ix.            the Company shall redeem any of  the Common Stock Equivalents;

x.             upon the reasonable determinationby the Holder that there has been a Material Adverse Effect; or

xi.            the occurrence of an Activity Eventof Default (as defined in Section 5.1(f)(ii) of the Purchase Agreement).

b)            Remedies Upon Event of Default. If any Event ofDefault occurs, the full principal amount of this Debenture, together withinterest and other amounts owing in respect thereof, to the date ofacceleration shall become, at the Holder’s election, immediately due andpayable in cash.   Commencing 5 daysafter the occurrence of any Event of Default that results in the eventualacceleration of this Debenture, the interest rate on this Debenture shallaccrue at the rate of 18% per annum, or such lower maximum amount of interestpermitted to be charged under applicable law or regulation.  All Debentures for which the full principalamount hereunder shall have been paid in accordance herewith shall promptly besurrendered to or as directed by the Company. The Holder need not provide and the Company hereby waives anypresentment, demand, protest or other notice of any kind, and the Holder mayimmediately and without expiration of any grace period enforce any and all ofits rights and remedies hereunder and all other remedies available to it underapplicable law.  Such declaration may berescinded and annulled by Holder at any time prior to payment hereunder and theHolder shall have all rights as a Debenture holder until such time, if any, asthe full payment under this Section shall have been received by it.  No such rescission or annulment shall affectany subsequent Event of Default or impair any right consequent thereon.

Section 8.             Miscellaneous.

a)             Notices. Any and all notices or other communications or deliveries to be providedby the Holders hereunder shall be in writing and delivered personally, byfacsimile, sent by a nationally recognized overnight courier service, addressedto the Company, at the address set forth above, facsimile number (281) 825-4955, Attn: Chief Executive Officer, 8708Technology Forest Place, Suite 100, The Woodlands, Texas 77381**,**or such other address or facsimile numberas the Company may specify for such purposes by notice to the Holders deliveredin accordance with this Section.  Any andall notices or other communications or deliveries to be provided by the Companyhereunder shall be in writing and delivered personally, by facsimile, sent by anationally recognized overnight courier service addressed to each Holder at thefacsimile number or address of such Holder appearing herein, or such otheraddress or facsimile number as such Holder may specify in accordance with thisSection.  Any notice or othercommunication or deliveries hereunder shall be deemed given and effective onthe 

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earliest of (i) the dateof transmission, if such notice or communication is delivered via facsimile atthe facsimile telephone number specified in this Section prior to 5:30 p.m.(Dallas, Texas time), (ii) the date after the date of transmission, if suchnotice or communication is delivered via facsimile at the facsimile telephonenumber specified in this Section later than 5:30 p.m. (Dallas, Texas time) onany date and earlier than 11:59 p.m. (Dallas, Texas time) on such date, (iii)the second Business Day following the date of mailing, if sent by nationallyrecognized overnight courier service, or (iv) upon actual receipt by the partyto whom such notice is required to be given.

b)            Absolute Obligation. Except as expressly providedherein, no provision of this Debenture shall alter or impair the obligation ofthe Company, which is absolute and unconditional, to pay the principal of,interest and liquidated damages (if any) on, this Debenture at the time, place,and rate, and in the coin or currency, herein prescribed.  This Debenture is a direct debt obligation ofthe Company.  This Debenture ranks paripassu with all other Debentures now or hereafter issued under the termsset forth herein.

c)             Security Interest.  This Debenture is a direct debt obligation ofthe Company and, pursuant to the Security Documents, is secured by a firstpriority security interest in all of the assets of the Company and certainother collateral for the benefit of the Holders.

d)            Lost or Mutilated Debenture.  If this Debenture shall be mutilated, lost,stolen or destroyed, the Company shall execute and deliver, in exchange andsubstitution for and upon cancellation of a mutilated Debenture, or in lieu ofor in substitution for a lost, stolen or destroyed Debenture, a new Debenturefor the principal amount of this Debenture so mutilated, lost, stolen ordestroyed but only upon receipt of evidence of such loss, theft or destructionof such Debenture, and of the ownership hereof, and indemnity, if requested,all reasonably satisfactory to the Company.

e)             Governing Law. All questions concerning the construction, validity, enforcement andinterpretation of this Debenture shall be governed by and construed andenforced in accordance with the internal laws of the State of Texas, withoutregard to the principles of conflicts of law thereof.  Each party agrees that all legal proceedingsconcerning the interpretations, enforcement and defense of the transactionscontemplated by any of the Transaction Documents (whether brought against aparty hereto or its respective affiliates, directors, officers, shareholders,employees or agents) shall be commenced in the state and federal courts sittingin the City of Dallas, Texas (the “***Dallas Courts***”).  Each party hereto hereby irrevocably submitsto the exclusive jurisdiction of the Dallas Courts for the adjudication of anydispute hereunder or in connection herewith or with any transactioncontemplated hereby or discussed herein (including with respect to theenforcement of any of the Transaction Documents), and hereby irrevocablywaives, and agrees not to assert in any suit, action or proceeding, any claimthat it is not 

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personally subject to thejurisdiction of any such court, or such Dallas Courts are improper orinconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process andconsents to process being served in any such suit, action or proceeding bymailing a copy thereof via registered or certified mail or overnight delivery(with evidence of delivery) to such party at the address in effect for noticesto it under this Debenture and agrees that such service shall constitute goodand sufficient service of process and notice thereof.  Nothing contained herein shall be deemed tolimit in any way any right to serve process in any manner permitted by law.Each party hereto hereby irrevocably waives, to the fullest extent permitted byapplicable law, any and all right to trial by jury in any legal proceedingarising out of or relating to this Debenture or the transactions contemplatedhereby. If either party shall commence an action or proceeding to enforce anyprovisions of this Debenture, then the prevailing party in such action orproceeding shall be reimbursed by the other party for its attorneys fees andother costs and expenses incurred with the investigation, preparation andprosecution of such action or proceeding.

f)             Waiver. Any waiver by the Company or the Holder of a breach of any provision ofthis Debenture shall not operate as or be construed to be a waiver of any otherbreach of such provision or of any breach of any other provision of thisDebenture.  The failure of the Company orthe Holder to insist upon strict adherence to any term of this Debenture on oneor more occasions shall not be considered a waiver or deprive that party of theright thereafter to insist upon strict adherence to that term or any other termof this Debenture.  Any waiver must be inwriting.

g)            Severability. If any provision of this Debenture is invalid, illegal or unenforceable,the balance of this Debenture shall remain in effect, and if any provision isinapplicable to any person or circumstance, it shall nevertheless remainapplicable to all other persons and circumstances.  If it shall be found that any interest orother amount deemed interest due hereunder violates applicable laws governingusury, the applicable rate of interest due hereunder shall automatically belowered to equal the maximum permitted rate of interest. The Company covenants(to the extent that it may lawfully do so) that it shall not at any time insistupon, plead, or in any manner whatsoever claim or take the benefit or advantageof, any stay, extension or usury law or other law which would prohibit orforgive the Company from paying all or any portion of the principal of orinterest on this Debenture as contemplated herein, wherever enacted, now or atany time hereafter in force, or which may affect the covenants or theperformance of this indenture, and the Company (to the extent it may lawfullydo so) hereby expressly waives all benefits or advantage of any such law, andcovenants that it will not, by resort to any such law, hinder, delay or impededthe execution of any power herein granted to the Holder, but will suffer andpermit the execution of every such as though no such law has been enacted.

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h)            Next Business Day. Whenever any payment or other obligation hereunder shall be due on a dayother than a Business Day, such payment shall be made on the next succeedingBusiness Day.

i)              Headings. The headings contained herein are for convenience only, do notconstitute a part of this Debenture and shall not be deemed to limit or affectany of the provisions hereof.

j)              Usury.  Tothe extent it may lawfully do so, the Company hereby agrees not to insist uponor plead or in any manner whatsoever claim, and will resist any and all effortsto be compelled to take the benefit or advantage of, usury laws whereverenacted, now or at any time hereafter in force, in connection with any claim,action or proceeding that may be brought by any Purchaser in order to enforceany right or remedy under any Transaction Documents.  Notwithstanding any provision to the contrarycontained in any Transaction Documents, it is expressly agreed and providedthat the total liability of the Company under the Transaction Documents forpayments in the nature of interest shall not exceed the Maximum Rate, and,without limiting the foregoing, in no event shall any rate of interest ordefault interest, or both of them, when aggregated with any other sums in thenature of interest that the Company may be obligated to pay under theTransaction Documents exceed such Maximum Rate. It is agreed that if the maximum contract rate of interest allowed bylaw and applicable to the Transaction Documents is increased or decreased bystatute or any official governmental action subsequent to the date hereof, thenew maximum contract rate of interest allowed by law will be the Maximum Rateapplicable to the Transaction Documents from the effective date of suchincrease or decrease forward, unless such application is precluded by applicablelaw.  If under any circumstanceswhatsoever, interest in excess of the Maximum Rate is paid by the Company toany Purchaser with respect to indebtedness, if any, evidenced by theTransaction Documents, such excess shall be applied by such Purchaser to theunpaid principal balance of any such indebtedness or be refunded to theCompany, the manner of handling such excess to be at such Purchaser’s electionin the event any principal amount remains outstanding.

(k)            Amendment.  This Agreement may not be amended,supplemented or modified, except by an agreement in writing signed by each ofthe parties hereto.

[*Signature Page Follows*]

 

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**INWITNESS WHEREOF**, UniPixel and UniPixel Displays have causedthis Debenture to be duly executed by a duly authorized officer as of the datefirst above indicated.

 
|            | **UNIPIXEL, INC.**          |
|------------|-----------------------------|
| ** ** | By:                         | ** ** |
| ** ** | ** **                  | Name: Reed Killion |
| ** ** | ** **                  | Title: President |
| ** ** | ** **                  | ** ** |
| ** ** | ** **                  | ** ** |
| ** ** | ** **                  | ** ** |
| ** ** | **UNIPIXEL DISPLAYS, INC.** |
| ** ** | By:                         | ** ** |
| ** ** | ** **                  | Name: Reed Killion |
| ** ** | ** **                  | Title: President |
| ** ** | ** **                  | ** ** |

 

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####  

#### **EXHIBIT A**

We,the undersigned, hereby represent that UniPixel, Inc. and UniPixel Displays,Inc. are in compliance with all of their respective covenants specified inSections 5 and 6 of that certain 12% Senior Secured Convertible Debentureoriginally dated as of May 24, 2006, executed by such parties, each with theirprincipal place of business located at 8708 Technology Forest Place, Suite 100,The Woodlands, Texas 77381, in favor of Capsource Fund, L.P., a Mississippilimited partnership, having its principal place of business located at 795Woodlands Parkway, Suite 100, Ridgeland, MS 39157.
|            | **UNIPIXEL, INC.**          |
|------------|-----------------------------|
| ** ** | By:                         | ** ** |
| ** ** | ** **                  | Name: |
| ** ** | ** **                  | Title: |
| ** ** | ** **                  | ** ** |
| ** ** | ** **                  | ** ** |
| ** ** | ** **                  | ** ** |
| ** ** | **UNIPIXEL DISPLAYS, INC.** |
| ** ** | By:                         | ** ** |
| ** ** | ** **                  | Name: |
| ** ** | ** **                  | Title: |
| ** ** | ** **                  | ** ** |

 

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