**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-QSB**
| **x**                                             | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                            |
|---------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                        |
| **For  the Quarterly Period Ended June 30, 2006** |
|                                              |
| **or**                                            |
| ** **                                        |
| **o**                                             | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                           |
| ** **                                        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                         |
|                                              |       | **For  the Transition Period  from                         to                         ** |
|                                              |       |                                                                                                                                                                                                                                                                                                                                               |
|                                              |       | **COMMISSION  FILE NUMBER: 0-49737**                                                                                                                                                                                                                                                                                                               |

**UNI-PIXEL,INC.**

(Exact Name of Small Business Issuer as Specified inIts Charter)
|  **DELAWARE**                                                            | ** ** | **75-2926437**                        |
|-------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)              |       | (I.R.S. Employer  Identification No.) |
|                                                                          |
| **8708  Technology Forest Place, Suite 100  The Woodlands, Texas 77381** |
| (Address of  Principal Executive Offices)                                     |
| ** **                                                                    |
| **(281)  825-4500**                                                           |
| (Issuer’s  Telephone Number, Including Area Code)                        |

 

Checkwhether the issuer: (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days.   x Yes o No

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).   Yes o   No x

As ofAugust 14, 2006, the issuer had 16,014,686 shares of issued and outstandingcommon stock, par value $0.001 per share.

Transitional Small Business Disclosure Format (CheckOne):   Yes o   No x

 

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**TABLE OFCONTENTS**
| Part I.  | Financial Information                                                                                                                                                               |                     |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|
|          |                                                                                                                                                                                |                     |
| Item 1.       | Financial Statements                                                                                                                                                                |                     |
|          |                                                                                                                                                                                |                     |
|          | Consolidated  Balance Sheets  June 30, 2006 (unaudited) and December 31, 2005                                                                                                  |                     |
|          |                                                                                                                                                                                |                     |
|          | Consolidated Statements  of Operations  Six months ended June 30, 2006 (unaudited) and June 30, 2005 (unaudited)  and cumulative period from inception to June 30, 2006 (unaudited) |                     |
|          |                                                                                                                                                                                |                     |
|          | Three months ended  June 30, 2006 (unaudited) and June 30, 2005 (unaudited)                                                                                                    |      |
|          |                                                                                                                                                                                |                     |
|          | Consolidated  Statements of Shareholders’ Equity  From inception to June 30, 2006 (unaudited)                                                                                  |                     |
|          |                                                                                                                                                                                |                     |
|          | Consolidated Statements of  Cash Flows  Six months ended June 30, 2006 (unaudited) and June 30, 2005 (unaudited)  and cumulative period from inception to June 30, 2006 (unaudited) |                     |
|          |                                                                                                                                                                                |                     |
|          | Notes to  Unaudited Consolidated Financial Statements                                                                                                                               |                     |
|          |                                                                                                                                                                                |                     |
| Item 2.       | Management’s  Discussion and Analysis or Plan of Operation                                                                                                                     |                     |
|          |                                                                                                                                                                                |                     |
| Item 3.       | Controls and  Procedures                                                                                                                                                            |                     |
|          |                                                                                                                                                                                |                     |
| Part II. | Other Information                                                                                                                                                                   |                     |
|          |                                                                                                                                                                                |                     |
| Item 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                        |                     |
|          |                                                                                                                                                                                |                     |
| Item 5.       | Other Information                                                                                                                                                                   |                     |
|          |                                                                                                                                                                                |                     |
| Item 6.       | Exhibits                                                                                                                                                                            |                     |

 

2

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**PART I -FINANCIAL INFORMATION**

**ITEM 1. FINANCIALSTATEMENTS.**

Uni-Pixel, Inc.

(A DevelopmentStage Company)

Consolidated Balance Sheets

 
| ** **                                                                                                                                                                                                       | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                       | ** ** | **(unaudited)**         | ** ** | **(audited)**               | ** ** |
| **ASSETS**                                                                                                                                                                                                       |       |                    |       |                        |       |
| Current assets                                                                                                                                                                                                   |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                        |       | $                       | 711,453    |                        | $          | 2,328,385 |   |
| Current portion of restricted cash                                                                                                                                                                               |       | 40,000                  |       | 40,000                      |       |
| Interest receivable                                                                                                                                                                                              |       | 3,180                   |       | 6,297                       |       |
| Prepaid expenses                                                                                                                                                                                                 |       | 36,551                  |       | 16,965                      |       |
|                                                                                                                                                                                                             |       |                    |       |                        |       |
| Total current assets                                                                                                                                                                                             |       | 791,184                 |       | 2,391,647                   |       |
|                                                                                                                                                                                                             |       |                    |       |                        |       |
| Property and  equipment, net of accumulated depreciation of $335,727 and $203,709, at June  30, 2006 and December 31, 2005, respectively                                                                         |       | 770,221                 |       | 854,052                     |       |
| Restricted cash,  less current portion                                                                                                                                                                           |       | 40,000                  |       | 260,000                     |       |
|                                                                                                                                                                                                             |       |                    |       |                        |       |
| Total assets                                                                                                                                                                                                     |       | $                       | 1,601,405  |                        | $          | 3,505,699 |   |
|                                                                                                                                                                                                             |       |                    |       |                        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                   |       |                    |       |                        |       |
|                                                                                                                                                                                                             |       |                    |       |                        |       |
| Current liabilities                                                                                                                                                                                              |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                                                 |       | $                       | 191,237    |                        | $          | 278,749 |   |
| Accrued expenses                                                                                                                                                                                                 |       | —                  |       | 10,812                      |       |
| Deferred revenue                                                                                                                                                                                                 |       | —                  |       | 200,000                     |       |
| Derivative liability for Warrant                                                                                                                                                                                 |       | 1,445,740               |       | —                      |       |
| Current portion of notes payable, net of unamortized  discounts of $1,295,894                                                                                                                                    |       | 214,098                 |       | 144,019                     |       |
|                                                                                                                                                                                                             |       |                    |       |                        |       |
| Total current liabilities                                                                                                                                                                                        |       | 1,851,075               |       | 633,580                     |       |
|                                                                                                                                                                                                             |       |                    |       |                        |       |
| Note payable,  less current portion                                                                                                                                                                              |       | 11,498                  |       | 57,537                      |       |
|                                                                                                                                                                                                             |       |                    |       |                        |       |
| Total liabilities                                                                                                                                                                                                |       | 1,862,573               |       | 691,117                     |       |
|                                                                                                                                                                                                             |       |                    |       |                        |       |
| Shareholders’ equity                                                                                                                                                                                        |       |                    |       |                        |       |
| Preferred stock, $0.001 par value; $3.50 liquidation  preference; 10,000,000 shares authorized, 2,378,606 and 2,685,651 issued and  outstanding at June 30, 2006 and December 31, 2005, respectively   |       | 2,379                   |       | 2,686                       |       |
| Common stock, $0.001 par value; 40,000,000 shares  authorized, 16,014,686 and 15,395,057 issued and outstanding at June 30, 2006  and December 31, 2005, respectively                                            |       | 16,015                  |       | 15,395                      |       |
| Additional paid-in capital                                                                                                                                                                                       |       | 17,742,545              |       | 17,348,728                  |       |
| Accumulated deficit during development stage                                                                                                                                                                     |       | (18,022,107             | )          | (14,552,227                 | )          |
|                                                                                                                                                                                                             |       |                    |       |                        |       |
| Total shareholders’ equity (deficit)                                                                                                                                                                        |       | (261,168                | )          | 2,814,582                   |       |
|                                                                                                                                                                                                             |       |                    |       |                        |       |
| Total liabilities and  shareholders’ equity                                                                                                                                                                 |       | $                       | 1,601,405  |                        | $          | 3,505,699 |   |

* *

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

3

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Uni-Pixel, Inc.

(A DevelopmentStage Company)

Consolidated Statements of Operations

(unaudited)

 
| ** **                                                                                      | ** ** | **Six Months Ended  June 30,** | ** ** | **Cumulative  Period from  February 17, 1998  (date of inception)  to June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                      | ** ** | **2005**                                                                                                  | ** ** | **2006** | ** ** |
|                                                                                            |       |                                          |       |                                                                                                      |       |   |   |
| Revenues                                                                                        |       |                                          |       |                                                                                                      |       |   |   |
| Development  contract revenue                                                                   |       | $                                             | 200,000    |                                                                                                      | $          | 19,689 |   | $ | 1,158,201 |   |
|                                                                                            |       |                                          |       |                                                                                                      |       |   |   |
| Total revenues                                                                                  |       | 200,000                                       |       | 19,689                                                                                                    |       | 1,158,201 |   |
|                                                                                            |       |                                          |       |                                                                                                      |       |   |   |
| Cost of revenues                                                                                |       | —                                        |       | 9,844                                                                                                     |       | 456,648 |   |
|                                                                                            |       |                                          |       |                                                                                                      |       |   |   |
| Gross margin                                                                                    |       | 200,000                                       |       | 9,845                                                                                                     |       | 701,553 |   |
|                                                                                            |       |                                          |       |                                                                                                      |       |   |   |
| Selling, general  and administrative expenses                                                   |       | 1,610,988                                     |       | 1,117,147                                                                                                 |       | 8,491,745 |   |
| Research and  development                                                                       |       | 1,818,306                                     |       | 1,321,683                                                                                                 |       | 8,779,492 |   |
|                                                                                            |       |                                          |       |                                                                                                      |       |   |   |
| Operating loss                                                                                  |       | (3,229,294                                    | )          | (2,428,985                                                                                                | )          | (16,569,684 | ) |
|                                                                                            |       |                                          |       |                                                                                                      |       |   |   |
| Other income  (expense)                                                                         |       |                                          |       |                                                                                                      |       |   |   |
| Net increase in  fair value of derivative liability                                             |       | (147,709                                      | )          | —                                                                                                    |       | (147,709 | ) |
| Other income                                                                                    |       | —                                        |       | —                                                                                                    |       | 886,886 |   |
| Debt issuance  expense                                                                          |       | (9,623                                        | )          | —                                                                                                    |       | (509,623 | ) |
| Interest income  (expense), net                                                                 |       | (73,551                                       | )          | 63,597                                                                                                    |       | (862,832 | ) |
|                                                                                            |       |                                          |       |                                                                                                      |       |   |   |
| Net loss                                                                                        |       | $                                             | (3,460,177 | )                                                                                                         | $          | (2,365,388 | ) | $ | (17,202,962 | ) |
|                                                                                            |       |                                          |       |                                                                                                      |       |   |   |
| Preferred stock  dividends                                                                      |       | (257,406                                      | )          | (381,951                                                                                                  | )          | (1,066,848 | ) |
| Net loss  attributable to common shareholders                                                   |       | $                                             | (3,717,583 | )                                                                                                         | $          | (2,747,339 | ) | $ | (18,269,810 | ) |
|                                                                                            |       |                                          |       |                                                                                                      |       |   |   |
| Per share  information                                                                          |       |                                          |       |                                                                                                      |       |   |   |
| Net loss — basic and diluted                                                               |       | $                                             | (0.22      | )                                                                                                         | $          | (0.18 | ) | $ | (2.65 | ) |
| Preferred stock dividends                                                                       |       | (0.02                                         | )          | (0.03                                                                                                     | )          | (0.16 | ) |
| Net loss  attributable to common shareholders — basic and diluted                          |       | $                                             | (0.24      | )                                                                                                         | $          | (0.21 | ) | $ | (2.81 | ) |
|                                                                                            |       |                                          |       |                                                                                                      |       |   |   |
| Weighted average number  of basic and diluted common shares outstanding     |       | 15,825,954                                    |       | 12,800,580                                                                                                |       | 6,494,319 |   |

* *

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

4

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Uni-Pixel, Inc.

(A DevelopmentStage Company)

Consolidated Statements of Operations

(unaudited)

 
| ** **                                                              | ** ** | **Three Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
|                                                                    |       |                                            |       |   |   |
| Revenues                                                                |       |                                            |       |   |   |
| Development  contract revenue                                           |       | $                                               | —     |   | $ | 1,470 |   |
|                                                                    |       |                                            |       |   |   |
| Total revenues                                                          |       | —                                          |       | 1,470 |   |
|                                                                    |       |                                            |       |   |   |
| Cost of revenues                                                        |       | —                                          |       | 735 |   |
|                                                                    |       |                                            |       |   |   |
| Gross margin                                                            |       | —                                          |       | 735 |   |
|                                                                    |       |                                            |       |   |   |
| Selling, general  and administrative expenses                           |       | 780,725                                         |       | 604,766 |   |
| Research and  development                                               |       | 738,194                                         |       | 814,140 |   |
|                                                                    |       |                                            |       |   |   |
| Operating loss                                                          |       | (1,518,919                                      | )          | (1,418,171 | ) |
|                                                                    |       |                                            |       |   |   |
| Other income  (expense)                                                 |       |                                            |       |   |   |
| Net increase in fair value of derivative liability                      |       | (147,709                                        | )          | — |   |
| Other income                                                            |       | —                                          |       | — |   |
| Debt issuance expense                                                   |       | (9,623                                          | )          | — |   |
| Interest income (expense), net                                          |       | (87,318                                         | )          | 39,991 |   |
|                                                                    |       |                                            |       |   |   |
| Net loss                                                                |       | $                                               | (1,763,569 | ) | $ | (1,378,180 | ) |
|                                                                    |       |                                            |       |   |   |
| Preferred stock  dividends                                              |       | (125,366                                        | )          | (196,098 | ) |
| Net loss  attributable to common shareholders                           |       | $                                               | (1,888,935 | ) | $ | (1,574,278 | ) |
|                                                                    |       |                                            |       |   |   |
| Per share  information                                                  |       |                                            |       |   |   |
| Net loss — basic and diluted                                       |       | $                                               | (0.11      | ) | $ | (0.11 | ) |
| Preferred stock dividends                                               |       | (0.01                                           | )          | (0.01 | ) |
| Net loss  attributable to common shareholders — basic and diluted  |       | $                                               | (0.12      | ) | $ | (0.12 | ) |
|                                                                    |       |                                            |       |   |   |
| Weighted average number  of basic and diluted common shares outstanding |       | 15,982,274                                      |       | 12,800,580 |   |

* *

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

5

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Uni-Pixel, Inc.

(A Development Stage Company)

Consolidated Statements of Shareholders’ Equity

 
| ** **                                                                               | ** ** | ** **               | ** ** | ** **            | ** ** | ** **         | ** ** | ** **   | ** ** | ** **  | ** ** | **Accumulated**        | ** ** | ** **      | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|--------------------|------------|--------------|------------|-------------|------------|------------------------|------------|-----------------|------------|
| ** **                                                                               | ** ** | **Series A**        | ** ** | ** **            | ** ** | ** **         | ** ** | ** **   | ** ** | ** **  | ** ** | **Deficit**            | ** ** | **Total**       | ** ** |
| ** **                                                                               | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional**     | ** ** | **Deferred** | ** ** | **During**  | ** ** | **Shareholders’** | ** ** |
| ** **                                                                               | ** ** | **Number**               | ** ** | ** **            | ** ** | **Number of** | ** ** | ** **   | ** ** | **Paid-In** | ** ** | **Stock-Based**        | ** ** | **Development** | ** ** | **Equity** | ** ** |
| ** **                                                                               | ** ** | **of Shares**            | ** ** | **Amount**            | ** ** | **Shares**         | ** ** | **Amount**   | ** ** | **Capital** | ** ** | **Compensation**       | ** ** | **Stage**       | ** ** | **(Deficit)** | ** ** |
| Founder shares issued at inception at February 17,  1998                                 |       | —                   |       | $                     | —     |               | 4,500,000  |         | $          | 4,500       |       | $                      | (500       | )               | $          | — |   | $ | — |   | $ | 4,000 |   |
| Stock issued during 1999 (prices ranging from $0.50 -  $0.62 per share)                  |       | —                   |       | —                |       | 180,000            |       | 180          |       | 183,820     |       | —                 |       | —          |       | 184,000 |   |
| Stock issued during 2000 (prices ranging from $11.34  - $17.00 per share)                |       | —                   |       | —                |       | 63,750             |       | 64           |       | 956,186     |       | —                 |       | —          |       | 956,250 |   |
| Stock issued during 2001 (prices ranging from $10.00  - $17.00 per share)                |       | —                   |       | —                |       | 28,176             |       | 28           |       | 404,227     |       | —                 |       | —          |       | 404,255 |   |
| Stock issued during 2002 (prices ranging from $2.00 -  $10.00 per share)                 |       | —                   |       | —                |       | 157,327            |       | 157          |       | 353,783     |       | —                 |       | —          |       | 359,940 |   |
| Deferral of stock-based compensation                                                     |       | —                   |       | —                |       | —             |       | —       |       | 1,100,000   |       | (1,100,000             | )          | —          |       | — |   |
| Amortization of stock-based compensation                                                 |       | —                   |       | —                |       | —             |       | —       |       | —      |       | 206,250                |       | —          |       | 206,250 |   |
| Net loss                                                                                 |       | —                   |       | —                |       | —             |       | —       |       | —      |       | —                 |       | (3,968,540      | )          | (3,968,540 | ) |
| Balance, December 31, 2002                                                               |       | —                   |       | $                     | —     |               | 4,929,253  |         | $          | 4,929       |       | $                      | 2,997,516  |            | $          | (893,750 | ) | $ | (3,968,540 | ) | $ | (1,859,845 | ) |
| Stock issued during 2003 (prices ranging from $1.00 -  $2.00 per share)                  |       | —                   |       | —                |       | 210,827            |       | 211          |       | 263,943     |       | —                 |       | —          |       | 264,154 |   |
| Amortization of stock-based compensation                                                 |       | —                   |       | —                |       | —             |       | —       |       | —      |       | 275,000                |       | —          |       | 275,000 |   |
| Warrants issued                                                                          |       | —                   |       | —                |       | —             |       | —       |       | 500,000     |       | —                 |       | —          |       | 500,000 |   |
| Net loss                                                                                 |       | —                   |       | —                |       | —             |       | —       |       | —      |       | —                 |       | (2,492,123      | )          | (2,492,123 | ) |
| Balance, December 31, 2003                                                               |       | —                   |       | $                     | —     |               | 5,140,080  |         | $          | 5,140       |       | $                      | 3,761,459  |            | $          | (618,750 | ) | $ | (6,460,663 | ) | $ | (3,312,814 | ) |
| Issuance of common stock for services                                                    |       | —                   |       | —                |       | 738,309            |       | 738          |       | 316,975     |       | —                 |       | —          |       | 317,713 |   |
| Conversion of note payable for common stock                                              |       | —                   |       | —                |       | 51,008             |       | 51           |       | 95,052      |       | —                 |       | —          |       | 95,103 |   |
| Exercise of stock options                                                                |       | —                   |       | —                |       | 1,490,000          |       | 1,490        |       | 28,310      |       | —                 |       | —          |       | 29,800 |   |
| Exercise of warrants                                                                     |       | —                   |       | —                |       | 512,500            |       | 513          |       | 34,487      |       | —                 |       | —          |       | 35,000 |   |
| Amortization of stock-based compensation                                                 |       | —                   |       | —                |       | —             |       | —       |       | —      |       | 618,750                |       | —          |       | 618,750 |   |
| Conversion of bridge loans                                                               |       | 256,643                  |       | 257                   |       | 850,625            |       | 851          |       | 1,834,242   |       | —                 |       | —          |       | 1,835,350 |   |
| Issuance of preferred stock                                                              |       | 2,565,000                |       | 2,565                 |       | —             |       | —       |       | 7,646,765   |       | —                 |       | —          |       | 7,649,330 |   |
| Issuance of common stock for net assets of REFL                                          |       | —                   |       | —                |       | 1,100,808          |       | 1,101        |       | (1,101      | )          | —                 |       | —          |       | — |   |
| Issuance of common stock for net assets of Gemini                                        |       | —                   |       | —                |       | 2,917,250          |       | 2,917        |       | 26,255      |       | —                 |       | —          |       | 29,172 |   |
| Net loss                                                                                 |       | —                   |       | —                |       | —             |       | —       |       | —      |       | —                 |       | (2,315,332      | )          | (2,315,332 | ) |
| Balance, December 31, 2004                                                               |       | 2,821,643                |       | $                     | 2,822      |               | 12,800,580 |         | $          | 12,801      |       | $                      | 13,742,444 |            | $          | — |   | $ | (8,775,995 | ) | $ | 4,982,072 |   |
| Issuance of preferred stock                                                              |       | 930,000                  |       | 930                   |       | —             |       | —       |       | 2,798,370   |       | —                 |       | —          |       | 2,799,300 |   |
| Conversion of preferred stock into common stock and  payment of preferred stock dividend |       | (1,222,499               | )          | (1,223                | )          | 2,594,477          |       | 2,594        |       | 260,296     |       | —                 |       | (261,667        | )          | — |   |
| Issuance of preferred stock for dividends                                                |       | 156,507                  |       | 157                   |       | —             |       | —       |       | 547,618     |       | —                 |       | (547,775        | )          | — |   |
| Net loss                                                                                 |       | —                   |       | —                |       | —             |       | —       |       | —      |       | —                 |       | (4,966,790      | )          | (4,966,790 | ) |
| Balance, December 31, 2005                                                               |       | 2,685,651                |       | $                     | 2,686      |               | 15,395,057 |         | $          | 15,395      |       | $                      | 17,348,728 |            | $          | — |   | $ | (14,552,227 | ) | $ | 2,814,582 |   |
| Conversion of preferred stock into common stock and  payment of preferred stock dividend |       | (307,045                 | )          | (307                  | )          | 619,629            |       | 620          |       | 9,390       |       | —                 |       | (9,703          | )          | — |   |
| Stock compensation expense                                                               |       | —                   |       | —                |       | —             |       | —       |       | 384,427     |       | —                 |       | —          |       | 384,427 |   |
| Net loss                                                                                 |       | —                   |       | —                |       | —             |       | —       |       | —      |       | —                 |       | (3,460,177      | )          | (3,460,177 | ) |
| Balance, June 30,  2006 (unaudited)                                                      |       | 2,378,606                |       | $                     | 2,379      |               | 16,014,686 |         | $          | 16,015      |       | $                      | 17,742,545 |            | $          | — |   | $ | (18,022,107 | ) | $ | (261,168 | ) |

* *

*The accompanying notes are anintegral part of these consolidated financial statements.*

6

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Uni-Pixel, Inc.

(A DevelopmentStage Company)

Consolidated Statements of Cash Flows

(unaudited)

 
| ** **                                                                             | ** ** | **Six Months Ended  June 30,** | ** ** | **Cumulative Period  from February 18,  1998 (date of  inception) to  June 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                      | ** ** | **2005**                                                                                                            | ** ** | **2006** | ** ** |
| Cash flows from  operating activities                                                  |       |                                          |       |                                                                                                                |       |   |   |
| Net loss                                                                               |       | $                                             | (3,460,177 | )                                                                                                                   | $          | (2,365,388 | ) | $ | (17,202,962 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:           |       |                                          |       |                                                                                                                |       |   |   |
| Interest forgiven                                                                      |       | —                                        |       | —                                                                                                              |       | (91,421 | ) |
| Interest earned, but not received                                                      |       | 3,117                                         |       | —                                                                                                              |       | (3,180 | ) |
| Employee compensation notes payable forgiven                                           |       | —                                        |       | —                                                                                                              |       | (795,465 | ) |
| Depreciation and amortization                                                          |       | 132,019                                       |       | 66,802                                                                                                              |       | 403,476 |   |
| Stock issued for services                                                              |       | —                                        |       | —                                                                                                              |       | 460,062 |   |
| Stock compensation expense                                                             |       | 384,427                                       |       | —                                                                                                              |       | 384,427 |   |
| Non-cash compensation expense                                                          |       | —                                        |       | —                                                                                                              |       | 1,100,000 |   |
| Amortization of debt issuance costs                                                    |       | 2,163                                         |       | —                                                                                                              |       | 502,163 |   |
| Amortization of discounts on notes payable                                             |       | 77,137                                        |       | —                                                                                                              |       | 77,137 |   |
| Net increase in fair value of derivative                                               |       | 147,709                                       |       | —                                                                                                              |       | 147,709 |   |
| Cash restricted for note payable and lease  obligations                                |       | 220,000                                       |       | —                                                                                                              |       | (80,000 | ) |
| Change in  operating assets and liabilities:                                           |       |                                          |       |                                                                                                                |       |   |   |
| Increase in related party receivables                                                  |       | —                                        |       | —                                                                                                              |       | — |   |
| (Increase) decrease in prepaid expenses and other  current assets                      |       | (21,750                                       | )          | (21,140                                                                                                             | )          | (38,715 | ) |
| Increase (decrease) in accounts payable                                                |       | (87,512                                       | )          | 268,192                                                                                                             |       | 191,234 |   |
| Increase (decrease) in accrued interest payable                                        |       | —                                        |       | (7,635                                                                                                              | )          | 180,943 | ) |
| Increase (decrease) in accrued expenses and other  liabilities     |       | (10,812                                       | )          | (17,778                                                                                                             | )          | 795,465 | ) |
| Decrease in deferred revenue                                                           |       | (200,000                                      | )          | —                                                                                                              |       | — |   |
| Net cash used in operating activities                                                  |       | (2,813,679                                    | )          | (2,076,947                                                                                                          | )          | (13,969,127 | ) |
|                                                                                   |       |                                          |       |                                                                                                                |       |   |   |
| Cash flows from  investing activities                                                  |       |                                          |       |                                                                                                                |       |   |   |
| Purchase of property and equipment                                                     |       | (48,187                                       | )          | (682,294                                                                                                            | )          | (1,133,738 | ) |
| Proceeds from the sale of property and equipment                                       |       | —                                        |       | —                                                                                                              |       | 27,792 |   |
| Purchases of patents, trademarks and organization  costs                               |       | —                                        |       | —                                                                                                              |       | (67,748 | ) |
| Net cash used in investing activities                                                  |       | (48,187                                       | )          | (682,294                                                                                                            | )          | (1,173,694 | ) |
|                                                                                   |       |                                          |       |                                                                                                                |       |   |   |
| Cash flows from  financing activities                                                  |       |                                          |       |                                                                                                                |       |   |   |
| Proceeds from notes payable to related party                                           |       | —                                        |       | —                                                                                                              |       | 115,103 |   |
| Payments on notes payable to related party                                             |       | (33,607                                       | )          | (66,048                                                                                                             | )          | (158,174 | ) |
| Proceeds from convertible notes payable                                                |       | —                                        |       | —                                                                                                              |       | 3,390,000 |   |
| Payments on convertible notes payable                                                  |       | —                                        |       | —                                                                                                              |       | (1,470,672 | ) |
| Proceeds (payments) from notes payable, net                                            |       | 1,278,541                                     |       | 211,173                                                                                                             |       | 1,440,337 |   |
| Proceeds from the issuance of preferred stock, net                                     |       | —                                        |       | 2,799,300                                                                                                           |       | 10,448,630 |   |
| Proceeds from the issuance of common stock, net                                        |       | —                                        |       | —                                                                                                              |       | 2,089,050 |   |
| Net cash provided by financing activities                                              |       | 1,244,934                                     |       | 2,944,425                                                                                                           |       | 15,854,274 |   |
|                                                                                   |       |                                          |       |                                                                                                                |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                  |       | (1,616,932                                    | )          | 185,184                                                                                                             |       | 711,453 |   |
| Cash and cash  equivalents, beginning of period                                        |       | 2,328,385                                     |       | 5,342,641                                                                                                           |       | — |   |
| Cash and cash  equivalents, end of period                                              |       | $                                             | 711,453    |                                                                                                                | $          | 5,527,825 |   | $ | 711,453 |   |
|                                                                                   |       |                                          |       |                                                                                                                |       |   |   |
| Supplemental  disclosures of cash flow information:                                    |       |                                          |       |                                                                                                                |       |   |   |
| Cash paid for interest                                                                 |       | $                                             | 21,289     |                                                                                                                | $          | 12,458 |   | $ | 763,282 |   |
| Interest capitalized into notes payable                                                |       | $                                             | —     |                                                                                                                | $          | — |   | $ | 8,250 |   |
| Debt issuance cost for warrant issued                                                  |       | $                                             | —     |                                                                                                                | $          | — |   | $ | 500,000 |   |

 

7

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| Preferred stock dividend                        |   | $ | 257,406 |   | $ | 381,951 |   | $ | 1,066,848 |   |
|-------------------------------------------------|--------|---|---------|--------|---|---------|--------|---|-----------|--------|
| Conversion of notes payable for preferred stock |   | $ | —  |   | $ | —  |   | $ | 898,250   |   |
| Conversion of notes payable for common stock    |   | $ | —  |   | $ | —  |   | $ | 980,103   |   |
| Stock issued for services                       |   | $ | —  |   | $ | —  |   | $ | 1,560,062 |   |
| Stock issued for  interest                      |   | $ | —  |   | $ | —  |   | $ | 81,272    |   |

* *

*The accompanying notes are anintegral part of these consolidated financial statements.*

8

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**Uni-Pixel, Inc.**

**(A Development Stage Company)**

**Notes toUnaudited Consolidated Financial Statements**

 

**Note 1 -Basis of Presentation, Business and Organization**

Uni-Pixel, Inc.,a Delaware corporation, is the parent company of our wholly-owned operatingsubsidiary, Uni-Pixel Displays, Inc.  As used herein, “Uni-Pixel,” “we,”“us,” and “our” refer to Uni-Pixel, Inc. and our wholly-owned consolidatedsubsidiary, Uni-Pixel Displays, Inc.  Our common stock, par value$0.001 per share, is quoted on the Over the Counter — Bulletin Board (“OTCBB”)under the ticker symbol “UNXL.”

Uni-Pixel is adevelopment stage company that has developed, patented and demonstrated a newcolor display technology in the form of proof of concept prototypes which wecall Time Multiplexed Optical Shutter (“TMOS”).  We intend to be a leaderin the research, development and commercialization of new flat panel displaysusing TMOS in a variety of applications, such as mobile phones, digitalcameras, notebook computers, televisions and other consumer electronic devices.As of June 30, 2006, we had accumulated a total deficit of $18.0 million fromoperations in pursuit of this objective.

We anticipate thatour TMOS displays will be thin, lightweight, and power-efficient devices, whichare highly suitable for use in full-color display applications.  Webelieve TMOS displays will be able to capture a share of the growing$60+ billion flat panel display market due to the significant advantagesit should provide over competing displays with respect to manufacturing andmaterials cost, brightness, power efficiency, viewing angle, video responsetime and image quality.  We believe that our technology leadership andintellectual property position will enable us to generate revenues initiallyfrom TMOS displays for existing vertical market segments such as the military,avionics, and automotive segments, and then subsequently from consumerelectronics markets (i.e., TVs, monitors, personal computers, cameras, games,etc.).

Our strategy is todevelop further our proprietary TMOS technology to the point of initiallymanufacturing small volumes of high performance displays for militaryapplications.  We intend to utilize contract manufacturing for productfabrication to augment our internal capabilities in the short term.  Wealso plan to enter into joint ventures in certain vertical market segments toexploit the existing manufacturing and distribution channels of our targetedpartners.  We further plan to license our technology to display manufacturersfor use in applications such as mobile phones, digital cameras, laptopcomputers, and other consumer electronic devices. Through our internal researchand development efforts we have established a portfolio of TMOS-related patentsand patent applications and other intellectual property rights that supportthese joint venture and licensing strategies.  We currently have nineissued patents and twenty-three pending patent applications worldwide andcontemplate obtaining exclusive field-of-use licenses, with the right tosublicense, to complementary technologies from targeted strategic partners andU.S. national laboratories.

Through June 30,2006, we have been primarily engaged in developing our initial producttechnology, recruiting personnel, commencing our U.S. operations and raisingcapital. In the course of our development activities, we have sustained lossesand expect such losses to continue through at least 2006. We will finance ouroperations primarily through our existing cash and possible future financing transactions.

Our ability tooperate profitably under our current business plan is largely contingent uponour success in developing beyond proof of concept to final prototypes andmanufacturing for sale our products and upon our successful development of marketsfor our products and profitable manufacturing processes.  We may berequired to obtain additional capital in the future to expand our operations.No assurance can be given that we will be able to develop our products,successfully develop the markets for our products or profitable manufacturingmethods, or raise any such additional capital as we might need, either throughequity or debt financing, on satisfactory terms or at all. Additionally, noassurance can be given that any such financing, if obtained, will be adequateto meet our ultimate capital needs and to support our growth. If adequatecapital cannot be obtained on satisfactory terms, our operations could benegatively impacted.

If we achievegrowth in our operations in the next few years, such growth could place astrain on our management, administrative, operational and financialinfrastructure. Our ability to manage our current operations and future growthrequires the continued improvement of operational, financial and managementcontrols, reporting systems and procedures. In addition, we may find itnecessary to hire additional management, financial and sales and marketingpersonnel to manage our expanding operations. If we are unable to manage thisgrowth effectively and successfully, our business, operating results andfinancial condition may be materially adversely affected.

As of June 30,2006, we had cash and cash equivalents of $0.7 million.  We believe thatour existing capital resources are adequate to finance our operations until September2006. However, our long-term viability is dependent upon successful operation 

9

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of our business, ourability to develop our manufacturing process, the development of our productsand our ability to raise additional debt and equity to meet our businessobjectives.

*Acquisitionand merger and basis of presentation*

Uni-Pixel, Inc.was originally incorporated in the State of Nevada as Super Shops, Inc. OnNovember 15, 1999, Super Shops and its sister companies filed an amendedpetition under Chapter 11 of the United States Bankruptcy Code. OnJuly 31, 2000, the court approved Super Shops’ Amended Joint Plan ofReorganization. On October 13, 2000, and in accordance with the Plan ofReorganization, the management of Super Shops changed its state of incorporationfrom Nevada to Delaware by merging with and into NEV Acquisition Corp., aDelaware corporation formed solely for the purpose of effecting thereincorporation. On June 13, 2001, NEV Acquisition Corp. changed itscorporate name to Real-Estateforlease.com, Inc., as a result of the mergertransaction discussed in the following paragraph.

Real-Estateforlease.com, Inc.was incorporated on May 24, 2001, in the State of Delaware to serve as abusiness-to-business internet information intermediary providing turnkeymarketing services to facilitate the leasing of commercial real estateproperties. On June 13, 2001, the management of NEV Acquisition Corp.entered into an Agreement and Plan of Merger withReal-Estateforlease.com, Inc. pursuant to which the sole stockholder andfounder of Real-Estateforlease.com, Inc. exchanged his equity ownershipinterest in Real-Estateforlease.com, Inc. for 9,500,000 shares (orapproximately 96%) of NEV Acquisition Corp.’s common stock. At the time of themerger between Real-Estateforlease.com, Inc. and NEV Acquisition Corp.,Real-Estateforlease.com, Inc. had no operations and essentially no assets.Efforts by Real-Estateforlease.com, Inc. to implement its business planceased in June 2002. Prior to Real-Estateforlease.com, Inc.’s mergerwith Uni-Pixel Displays, Inc., as described in the next paragraph,Real-Estateforlease.com, Inc. had no operations and no material assets orliabilities.

Our wholly-ownedsubsidiary, Uni-Pixel Displays, Inc., was originally incorporated asTralas Technologies, Inc., a Texas corporation, on February 17, 1998.Tralas Technologies, Inc. changed its name to Uni-PixelDisplays, Inc. during 2001. On December 7, 2004,Real-Estateforlease.com, Inc. entered into a merger agreement withUni-Pixel Displays, Inc. and certain other parties pursuant to whichUni-Pixel Displays, Inc. became a wholly-owned subsidiary ofReal-Estateforlease.com, Inc. Pursuant to the merger, we changed our nameto “Uni-Pixel, Inc.” at the annual meeting of our stockholders held in January 2005.

The financialstatements presented in this quarterly report include Uni-Pixel, Inc. andour wholly-owned subsidiary, Uni-Pixel Displays, Inc. All significantintercompany transactions and balances have been eliminated. Uni-PixelDisplays, Inc. was, for accounting purposes, the surviving entity of themerger, and accordingly for the periods prior to the merger, the financialstatements reflect the financial position, results of operations and cash flowsof Uni-Pixel Displays, Inc.  The assets, liabilities, operations andcash flows of Real-Estateforlease.com, Inc. are included in theconsolidated financial statements from December 10, 2004 onward.

**Note 2 -Going Concern**

The accompanyingfinancial statements have been prepared assuming Uni-Pixel will continue as agoing concern.  Uni-Pixel has sustained losses and negative cash flowsfrom operations since its inception. The Company’s ability to meet itsobligations in the ordinary course of business is dependent upon its ability toestablish profitable operations, raise additional financing through public orprivate equity financings, enter into collaborative or other arrangements withcorporate sources, or secure other sources of financing to fund operations.These matters raise substantial doubt about the Company’s ability to continueas a going concern. The financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

Management iscurrently in negotiations with a number of strategic investors, who haveexpressed interest in making an investment in Uni-Pixel.  These discussions are ongoing, and some ofthe potential investors are currently conducting their due diligenceprocedures.  However, there can be noassurance of the outcome of these negotiations. In the event Uni-Pixel is not able to secure equity financing onacceptable terms, Uni-Pixel’s ability to develop its technology and achieveprofitability may be adversely affected.

**Note 3 - Summary of SignificantAccounting Policies**

*Interimfinancial information*

The financialstatements included herein, which have not been audited pursuant to therules and regulations of the Securities and Exchange Commission, reflectall adjustments which, in the opinion of management, are necessary for a fairpresentation of financial position, results of operations and cash flows forthe interim periods on a basis consistent with the annual audited statements.All such adjustments are of a normal recurring nature. The results ofoperations for interim periods are not necessarily indicative of the resultsthat may be expected for any other interim period or for a full year. Certaininformation, 

10

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accounting policies andfootnote disclosures normally included in financial statements prepared inconformity with accounting principles generally accepted in the United Statesof America have been omitted pursuant to such rules and regulations,although we believe that the disclosures are adequate to make the informationpresented not misleading. These financial statements should be read inconjunction with our audited financial statements included in ourForm 10-KSB, for the year ended December 31, 2005, filed with theSecurities and Exchange Commission on March 28, 2006.

*Use ofestimates*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities,disclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Examples include provisions for bad debts, useful lives ofproperty and equipment and intangible assets, impairment of property andequipment and intangible assets, deferred taxes, and the provision for anddisclosure of litigation and loss contingencies. Actual results may differmaterially from those estimates.

*Statementof cash flows*

For purposes ofthe statements of cash flows, we consider all highly liquid investments (i.e.,investments which, when purchased, have original maturities of three months orless) to be cash equivalents.

*Concentrationof credit risk*

We maintain ourcash primarily with major U.S. domestic banks. The amounts held in these banksexceed from time to time the insured limit of $100,000 and exceeded thatbalance at June 30, 2006 and December 31, 2005 by $738,169 and $2,063,000,respectively. The terms of these deposits are on demand to minimize risk. We have not incurred losses related to these deposits.

*Restrictedcash*

As of June 30,2006 and December 31, 2005, we had restricted cash of $80,000 and $300,000,respectively.  Of these amounts, $80,000 secured certain obligations underour lease agreement for our principal facility located in The Woodlands, Texasat both June 30, 2006 and December 31, 2005. The remaining $220,000 at December 31, 2005 collateralized a long-termnote payable for the purchase of measurement equipment.  The restricted cash has been segregated intocurrent and long-term classifications based on its anticipated liquidation.

*Propertyand equipment*

Property andequipment, consisting primarily of lab equipment, computer equipment, software,leasehold improvements, and office furniture and fixtures is carried at costless accumulated depreciation and amortization. Depreciation and amortizationfor financial reporting purposes is provided by the straight-line method overthe estimated useful lives of three to five years. Leasehold improvements areamortized using the straight-line method over the remaining lease term or thelife of the asset, whichever is shorter. The cost of repairs and maintenance ischarged as an expense as incurred.  Gainsor losses related to retirements or dispositions of fixed assets are recognizedin the period incurred.

*Intangibleassets*

Our intangibleassets represent patent applications which are recorded at cost.  We havefiled applications for patents in connection with technologies being developed.The patent applications and any patents issued as a result of theseapplications are important to the protection of our technologies that mayresult from our research and development efforts. Costs associated with patentapplications and maintaining patents are capitalized and will be amortized overthe life of the patents.  We review the value recorded for intangibleassets to assess recoverability from future operations using undiscounted cashflows. Impairments are recognized in operating results to the extent thecarrying value exceeds fair value determined based on the net present value ofestimated future cash flows.

Derivative instruments

We account for allderivative financial instruments in accordance with SFAS No.  133, “Accounting for Derivative Instrumentsand Hedging Activities.” Derivative financial instruments are recorded asliabilities in the consolidated balance sheet and are measured at fair value.When available, quoted market prices are used in determining fair value.However, if quoted market prices are not available, we estimate fair valueusing either quoted market prices of financial instruments with similar 

11

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characteristics or othervaluation techniques.  These derivativeliabilities are marked-to-market each quarter with the change in fair valuerecorded in the income statement.

We utilize theBlack-Scholes option-pricing model to determine the fair value of ourfreestanding derivative instruments. Key assumptions of the Black-Scholesoption-pricing model include applicable volatility rates, risk-free interestrates and the instruments’ expected remaining life. We also determined a fairvalue for our various embedded derivatives within our $1.5 million convertiblenotes by using a layered discounted probability-weighted cash flow model.  The assumptions used in both modelingtechniques required significant management judgment and estimates of futurefluctuation in stock price as well as changes in future interest rates. Thereader should reference Note 6 for further details in regards to our derivativeliabilities.

*Revenuerecognition*

We recognizerevenue over the period the service is performed in accordance with SEC StaffAccounting Bulletin No. 104, “Revenue Recognition in Financial Statements”(“SAB 104”). In general, SAB 104 requires that four basic criteriamust be met before revenue can be recognized: (1) persuasive evidence thatan arrangement exists, (2) delivery has occurred or services rendered,(3) the fee is fixed and determinable, and (4) collectibility isreasonably assured.

Revenue fromlicenses and other up front fees are recognized on a ratable basis over theterm of the respective agreement.

Revenue fromdevelopment contracts are recognized when the contract is completed andcollectibility is reasonably assured. Deferred revenue on these contracts of $0 and $200,000 at June 30, 2006and December 31, 2005, respectively, consists of a development contract toproduce and deliver a prototype device.  During the first quarter ended March 31, 2006, the Company fulfilled itsobligation with a customer in providing a product prototype, and has releaseddeferred income of $200,000 into earned revenues during the period.  Thecosts incurred with this prototype were incurred in prior periods as acomponent of research and development expenses.

*Researchand development expenses*

Research anddevelopment costs are expensed as incurred and include salaries and benefits,costs paid to third-party contractors for research, development andmanufacturing of materials and devices, and a portion of facilities costs.Prototype development costs are a significant component of research anddevelopment expenses and include costs associated with third-party contractors.Invoicing from third-party contractors for services performed can lag severalmonths.  We accrue the costs of services rendered in connection withthird-party contractor activities based on our estimate of management fees,site management and monitoring costs and data management costs. Actual costsmay differ from estimated costs in some cases and are adjusted in the period inwhich they become known.

*Stock-basedcompensation*

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123 (Revised 2004) (“SFAS No.123(R)”), *“Share Based Payment,”*which eliminates the use of APB Opinion No. 25 and will require us tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award. That costwill be recognized over the period during which an employee is required to provideservice in exchange for the reward—known as the requisite service period. Nocompensation cost is recognized for equity instruments for which employees donot render the requisite service. The grant-date fair value of employee shareoptions and similar instruments will be estimated using option-pricing modelsadjusted for the unique characteristics of those instruments. We haveimplemented SFAS No. 123(R) effective January 1, 2006.

We may, from timeto time, issue common stock, stock options or common stock warrants to acquireservices or goods from non-employees. Common stock, stock options and commonstock warrants issued to persons other than employees or directors are recordedon the basis of their fair value, as required by SFAS No. 123 (“SFAS No.123”), “*Accounting for Stock Based Compensation”,*which is measured as of the date required by EITF Issue 96-18 (“EITF 96-18”),*“Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring, or in Conjunction with Selling,Goods or Services.”*  In accordance with EITF 96-18, thestock options or common stock warrants are valued using the Black-Scholes modelon the basis of the market price of the underlying common stock on the “valuationdate,” which for options and warrants related to contracts that havesubstantial disincentives to non-performance, is the date of the contract, andfor all other contracts is the vesting date. Expense related to the options andwarrants is recognized on a straight-line basis over the shorter of the periodover which services are to be received or the vesting period. Where expensemust be recognized prior to a valuation date, the expense is computed under theBlack-Scholes model on the basis of the market price of the underlying commonstock at the end of the period, and any subsequent changes in the market priceof the underlying common stock through the valuation date is reflected in theexpense recorded in the subsequent period in which that change occurs.

12

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The followingdisclosures provide information regarding the Company’s stock-basedcompensation awards, all of which are classified as equity awards in accordancewith SFAS No. 123(R):

*Stockoptions.*The Company grants stock options to employees thatallow them to purchase shares of the Company’s common stock. Options are alsogranted to members of the Board of Directors. The Company determines the fair value of stock options at the date ofgrant using the Black-Scholes valuation model. Most options vest annually over a three-year service period.  The Company will issue new shares upon theexercise of stock options.

Total compensationexpense recognized for options was approximately $0.4 million for the sixmonths ended June 30, 2006.

A summary of thechanges in the total stock options outstanding during the six months ended June30, 2006 follows:

|                                          | ** ** | ** **  | ** ** | **Weighted**            | ** ** |
|------------------------------------------|------------|-------------|------------|-------------------------|------------|
| ** **                               | ** ** | ** **  | ** ** | **Average**             | ** ** |
| ** **                               | ** ** | **Options** | ** ** | **Exercise Price** | ** ** |
| Outstanding at  December 31, 2005   |       | 1,805,000   |       | $                       | 4.00       |   |
| Granted                                  |       | 1,010,000   |       | 1.75                    |       |
| Forfeited or  expired                    |       | —      |       | —                  |       |
| Exercised                                |       | —      |       | —                  |       |
| Outstanding at  June 30, 2006            |       | 2,815,000   |       | $                       | 3.19       |   |
| Vested and exercisable  at June 30, 2006 |       | 567,030     |       | $                       | 4.00       |   |

 

The fair value of theCompany’s options were estimated on the date of grant using the Black-Scholesvaluation model with the following weighted-average assumptions:

 

|                        | ** ** | **Three Months  ended  June 30,   2006** | ** ** | **Three Months  ended  June 30,   2005** | ** ** | **Six Months  ended  June 30,   2006** | ** ** | **Six Months  ended  June 30,   2005** | ** ** |
|------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Expected life  (years) |       | 5 years                                            |       | 5 years                                            |       | 5 years                                          |       | 5 years                                          |       |
| Interest rate          |       | 4                                                       | %          | 4                                                       | %          | 4                                                     | %          | 4                                                     | %          |
| Dividend yield         |       | —                                                  |       | —                                                  |       | —                                                |       | —                                                |       |
| Volatility             |       | 63.74                                                   | %          | 40.05                                                   | %          | 63.74                                                 | %          | 40.05                                                 | %          |
| Forfeiture rate        |       | —                                                  |       | —                                                  |       | —                                                |       | —                                                |       |

 

The following tablepresents information on net loss and diluted loss per share for the three andsix months ended June 30, 2006 determined in accordance with SFASNo. 123(R), compared to the pro forma information determined under SFASNo. 123 for the three and six months ended June 30, 2005:

 
| ** **                                                                                                                                                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Net loss  attributable to common shareholders — as reported                                                                                                      |       | $                                                   | (1,888,935 | )                                                 | $          | (1,574,278 | ) | $ | (3,717,583 | ) | $ | (2,747,339 | ) |
| Add: stock-based  compensation                                                                                                                                        |       | N/A                                                 |       | N/A                                               |       | N/A |   | N/A |   |
| Less: total  stock-based employee compensation expense determined under fair value based  method for all awards granted to employees, net of related tax effect of $0 |       | NA                                                  |       | (147,641                                          | )          | NA |   | (177,800 | ) |
| Net loss — pro  forma                                                                                                                                            |       | $                                                   | (1,888,935 | )                                                 | $          | (1,721,919 | ) | $ | (3,717,583 | ) | $ | (2,925,139 | ) |
|                                                                                                                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Net loss per  share attributable to common shareholders — as reported                                                                                            |       |                                                |       |                                              |       |   |   |   |   |
| Basic and diluted                                                                                                                                                     |       | $                                                   | (0.12      | )                                                 | $          | (0.12 | ) | $ | (0.24 | ) | $ | (0.21 | ) |
| Net loss per  share attributable to common shareholders — pro forma                                                                                              |       |                                                |       |                                              |       |   |   |   |   |
| Basic and  diluted                                                                                                                                                    |       | $                                                   | (0.12      | )                                                 | $          | (0.13 | ) | $ | (0.24 | ) | $ | (0.23 | ) |

 

13

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*Incometaxes*

An asset andliability approach is used for financial accounting and reporting for incometaxes. Deferred income taxes arise from temporary differences between incometax and financial reporting and principally relate to recognition of revenueand expenses in different periods for financial and tax accounting purposes andare measured using currently enacted tax rates and laws. In addition, adeferred tax asset can be generated by net operating loss carryforwards.   If it is more likely than not that someportion or all of a deferred tax asset will not be realized, a valuationallowance is recognized.

No benefit hasbeen recognized on the net loss as the realization of the net operating losscarryforward cannot be assured.

*Lossper share data*

Basic loss pershare is calculated based on the weighted average common shares outstandingduring the period, after giving effect to the manner in which the merger wasaccounted for as described in Note 1. Diluted earnings per share alsogives effect to the dilutive effect of stock options, warrants (calculatedbased on the treasury stock method) and convertible notes and convertiblepreferred stock. The Company does not present diluted earnings per share foryears in which it incurred net losses as the effect is antidilutive.

At June 30, 2006,options and warrants to purchase 3,863,500 shares of common stock at exerciseprices ranging from $1.75 to $4.00 per share were outstanding, but were notincluded in the computation of diluted earnings per share as their effect wouldbe antidilutive.  This number does notinclude the Warrants issued to Trident Growth Fund, L.P. and CapSource Fund,L.P., which are discussed below.

On May 26, 2006,Uni-Pixel, Inc. entered into a Securities Purchase Agreement with TridentGrowth Fund, L.P. and CapSource Fund, L.P. pursuant to which Uni-Pixel issued12% Senior Secured Convertible Debentures for the principal amount of$1,500,000.  The principal sum of$1,500,000 is due on the earlier of (a) May 23, 2007; (b) the consummation of aChange of Control Transaction; or (c) upon the closing of a QualifyingTransaction, all as defined in the Securities Purchase Agreement.

In connection withthe Securities Purchase Agreement the Company also agreed to issue Warrants asfollows: 1,500,000 divided by the lesser of (i) $1.75; or (ii) 70% of theaverage price per share of the Common Stock and Common Stock Equivalentssold to any Person in the first Qualifying Transaction to be consummatedfollowing the Original Issue Date.

The exercise priceof each share of Common Stock under theWarrants shall be equal to the lesser of (i) 90% of the average priceper share of the Common Stock and Common Stock Equivalents sold to anyPerson in the first Qualifying Transaction to be consummated following theInitial Exercise Date; or (ii) $1.75 per share.

*Fairvalue of financial instruments*

Our financialinstruments consist of accounts receivable, accounts payable, notes payable andderivative liabilities. We believe the fair values of our accounts receivable,accounts payable, notes payable and derivative liabilities reflect theirrespective carrying amounts.

*Recentaccounting pronouncements*

On July 14,2005, FASB issued its Exposure Draft, “Accounting for Uncertain Tax Positions”,which is a proposed interpretation to FASB Statement No. 109, “Accountingfor Income Taxes.” This proposed interpretation would require an enterprise torecognize, in its financial statements, the best estimate of the impact of atax position. In evaluating whether the probable recognition threshold has beenmet, this proposed interpretation would require the presumption that the taxposition will be evaluated during an audit by taxing authorities. The termprobable is used in this proposed interpretation consistent with its use inFASB Statement No. 5, “Accounting Contingencies”, to mean “the futureevent or events are likely to occur.” Individual tax positions that fail tomeet the probable recognition threshold will generally result in either(a) a reduction in the deferred tax asset or an increase in a deferred taxliability or (b) an increase in a liability for income taxes payable orthe reduction of an income tax refund receivable. The impact may also includeboth (a) and (b). The proposed interpretation would be effective as of the endof the first fiscal year ending after December 15, 2005. The initialrecognition of the effect of applying the proposed interpretation would be acumulative effect of a change in accounting principle. The comment period forthe proposed interpretation ended on October 28, 2005. The Company iscurrently evaluating the impact of the Exposure Draft on its financialstatements.

Effective July 1,2005, the Company adopted SFAS No. 153, Exchanges of Nonmonetary Assets, anamendment of Accounting Principles Board (“APB”) Opinion No. 29 (“SFAS 153”).SFAS 153 amended prior guidance to eliminate the exception for nonmonetaryexchanges of similar productive assets and replaced it with a general exceptionfor exchanges of 

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nonmonetary assets thatdo not have commercial substance. A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. The provisions of SFAS 153 wererequired to be applied prospectively. SFAS 153 did not have a material impacton the Company’s consolidated financial statements.

In May 2005, FASBissued SFAS No. 154, Accounting Changes and Error Corrections, a replacement ofAPB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). The statement requiresretrospective application to prior periods’ financial statements for avoluntary change in accounting principle unless it is deemed impracticable. Italso requires that a change in the method of depreciation, amortization, ordepletion for long-lived, non-financial assets be accounted for as a change inaccounting estimate rather than a change in accounting principle. SFAS 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. SFAS 154 is not expected to have a materialimpact on the Company’s consolidated financial statements.

In March 2006,FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—anamendment of FASB Statement No. 140,” that provides guidance on accounting forseparately recognized servicing assets and servicing liabilities. In accordancewith the provisions of SFAS No. 156, separately recognized servicing assets andservicing liabilities must be initially measured at fair value, if practicable.Subsequent to initial recognition, the Company may use either the amortizationmethod or the fair value measurement method to account for servicing assets andservicing liabilities within the scope of this Statement. The Company willadopt SFAS No. 156 in fiscal year 2007. SFAS 156 is not expected to have amaterial impact on the Company’s consolidated financial statements.

In February 2006,the FASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments—an amendment of FASB Statements No. 133 and 140,” to permit fairvalue remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation in accordance withthe provisions of SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities.” The Company will adopt SFAS No. 155 in fiscal year 2007. SFAS 155is not expected to have a material impact on the Company’s consolidatedfinancial statements.

In April 2006, theFASB issued FASB Staff Position (FSP) FIN 46(R)-6, “Determining the Variabilityto Be Considered in Applying FASB Interpretation No. 46(R),” that will becomeeffective beginning third quarter of 2006. FSP FIN No. 46(R)-6 clarifies thatthe variability to be considered in applying Interpretation 46(R) shall be basedon an analysis of the design of the variable interest entity. The adoption ofthis FSP is not expected to have a material effect on the Company’s unauditedinterim consolidated financial statements.

**Note 4 -****Commitments andContingencies**

Leases

The Company has enteredinto a lease for office, warehouse and laboratory facilities in The Woodlands,Texas under a third party non-cancelable operating lease through 2010. Futureminimum lease commitments as of June 30, 2006 are as follows:

 

| Year Ending December 31 | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| 2006                                   |       | $          | 98,365     |   |
| 2007                                   |       | 199,727    |       |
| 2008                                   |       | 202,997    |       |
| 2009                                   |       | 206,267    |       |
| 2010                                   |       | 191,825    |       |
| Thereafter                             |       | —     |       |
| Total                                  |       | $          | 899,181    |   |

 

This lease provides the Company with a 5-year renewaloption.

**Note 5 -****Equity, Stock Planand Warrants**

*Equity instruments issued to non-employees*

From time to time, in order to preserve cash and tofund our operating activities, common stock or other equity instruments may beissued for cash or in exchange for goods or services. Equity instruments issuedfor goods or services are recorded at the fair value of the goods or servicesreceived or the fair value of the equity instruments issued, whichever is morereliably measurable.  During the sixmonths ended June 30, 2006, we did not issue equity instruments tonon-employees.

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*Common Stock*

During the six months ended June 30, 2006, we issuedno shares of common stock for cash in connection with the exercise of stockoptions and issued no shares of common stock in exchange for cashless exerciseof warrants.

*2005 Stock Incentive Plan*

Effective January 27, 2005, we adopted theUni-Pixel, Inc. 2005 Stock Incentive Plan. The Stock Incentive Plan isdiscretionary and allows for an aggregate of up to 2,000,000 shares of ourcommon stock to be awarded through incentive and non-qualified stock optionsand stock appreciation rights. The Stock Incentive Plan is administered by ourBoard of Directors, which has exclusive discretion to select participants whowill receive the awards and to determine the type, size and terms of each awardgranted.

In the first quarter of 2006, we did not grant anyoptions.  In the second quarter of 2006,we granted a total of 10,000 options to purchase our common stock with anexercise price of $1.90 per share to one employee under the Stock IncentivePlan.  The options vest over periods of 36 months from the date of grant.

*Other Stock Options*

In the second quarter of 2006, we granted a total of1,000,000 options to purchase our common stock with an exercise price of $1.75per share to Mr. Carl Yankowski.  250,000of these options vest on the date Mr. Yankowski is appointed CEO of Uni-Pixel;an additional 250,000 options of such options shall vest on the one yearanniversary of the date Mr. Yankowski is appointed CEO of Uni-Pixel, Inc.; andthe remaining 500,000 options of such options shall vest monthly over a 24month period beginning on the one year anniversary of the date Mr. Yankowski isappointed CEO of Uni-Pixel.  If Mr.Yankowski never becomes CEO of Uni-Pixel, the 1,000,000 options will becancelled.   Mr. Yankowski has joined theCompany effective April 1, 2006 as a Consultant and under the terms of theagreement will become the CEO and a member of the Company’s Board of Directorsupon the Company completing a minimum equity round of $10 million.

**Note 6 -****Financing Activity**

Secured convertible note-

On May 26, 2006,Uni-Pixel, Inc. entered into Securities Purchase Agreements with Trident GrowthFund, L.P. and CapSource Fund, L.P. pursuant to which Uni-Pixel issued 12%Senior Secured Convertible Debentures (the “Convertible Note”) for theprincipal amount of $1,500,000.  Theprincipal sum of $1,500,000 is due on the earlier of (a) May 23, 2007; (b) theconsummation of a Change of Control Transaction; or (c) upon the closing of aQualifying Transaction, all as defined in the Securities PurchaseAgreement.  The Convertible Note isconvertible at any time at a price equal to the lesser of (a) $1.75 per shareor (b) 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 Initial Exercise Date, as defined in the SecuritiesPurchase Agreements.

The ConvertibleNote bears interest at 12% and is payable monthly, in arrears.

The conversionprice and number of shares to be issued upon conversion shall be subject toadjustment upon the occurrence of the following events during the period thatthis conversion right remains outstanding: common stock reclassification; stocksplits, combinations and dividends; and share issuances.  Share issuances would include options,warrants or other issuances of shares to third parties or employees for anoffer price less than the conversion price. The occurrence of one of these events would result in the conversionprice or number of shares convertible to be adjusted, or reset, to the loweroffer price at the time of share issuance.

In connection withthe financing, Trident Growth Fund, L.P. and CapSource Fund, L.P. have acontinuing security interest in all of the assets of Uni-Pixel, Inc.

Events of  default under the Convertible Note include,among other provisions, bankruptcy, material adverse event,  breach of Covenant, and change in control,whereby upon occurrence, Trident Growth Fund, L.P. and CapSource Fund, L.P. maydemand immediate repayment of the Convertible Note and accrued interest.Following the occurrence and during the continuance of an Event of Default,Trident Growth Fund, L.P. and CapSource Fund, L.P., at their option, may demandrepayment in full of all obligations and liabilities owing by Uni-Pixel, Inc.The default payment shall be 100% of the outstanding principal amount of theConvertible Note. Additionally, Uni-Pixel, Inc. must pay additional interest onthe Convertible Note equal to 6% per month on all outstanding amounts until theevents of default are cured or waived.

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The ConvertibleNote is a hybrid instrument which contains both freestanding derivativefinancial instruments and an embedded derivative feature which would individuallywarrant separate accounting as a derivative instrument under SFAS No. 133. Thefreestanding derivative financial instrument includes the Trident Growth Fund,L.P. Warrant and the CapSource Fund, L.P. Warrant, which were valuedindividually, and totaled $1,298,031 at inception on May 24, 2006. The Companyidentified an embedded derivative feature related to the conversion pricewithin the Convertible Note. However, its fair market is insignificant atinception.

Uni-Pixel, Inc.also incurred closing costs of $96,750 in connection with the closing of theConvertible Note.  Net fees and costs tonon-lenders in the amount of $21,750 were capitalized as deferred loan costs atinception on May 24, 2006, and shall be recognized over the life of the ConvertibleNote, or 12 months, by using the effective interest method. The remainingfinancing costs of $75,000 paid to Trident Growth Fund, L.P. and CapSourceFund, L.P. were recorded to unamortized discount on the Convertible Note andare amortized to interest expense over 12 months under the effective interestmethod.

Common stock purchasewarrants-

In connection withthe Securities Purchase Agreement, both Trident Growth Fund, L.P. and CapSourceFund, L.P. received Common Stock Purchase Warrants (“Warrant”) to purchase anumber of shares of our Common Stock subject to adjustments as follows: 750,000divided by the lesser of (a) $1.75 per share or (b) 70% of the average priceper share of the Common Stock and Common Stock Equivalents sold to anyPerson in the first Qualifying Transaction to be consummated following theOriginal Issue Date, all as defined in the Common Stock Purchase Warrants.  The Common Stock Purchase Warrants may beexercised at any time within 5 years at a price equal to the lesser of (a) $1.75per share or (b) 90% of the average price per share of the Common Stock andCommon Stock Equivalents sold to any Person in the first Qualifying Transactionto be consummated following the Initial Exercise Date, as defined in the CommonStock Purchase Warrants.

The Warrant is afreestanding derivative financial instrument. Using the  Black-Scholes Method,  the  fair value of the derivative was computed at $1,298,031 at inception on May24, 2006 and recorded as a derivative liability which  resulted in  a  reduction of the initial carrying amount (asunamortized discount) of the Convertible Note.  This derivative liability is marked-to-market each quarter with thechange in fair value recorded in the income statement.  Unamortized discount is amortized to interestexpense using the effective interest method over the life of the ConvertibleNote, or 12 months.  If the Warrant isexercised during this 12 month period, the derivative liability will bereleased and recorded as additional paid in capital.

The components of Notespayable at inception and at June 30, 2006 are as follows:

Convertible Note atInception (May 24, 2006) -

As a result ofthese contract provisions, the Convertible Note balance at Inception (May 24,2006) was adjusted as follows:

| Notional balance of Convertible  Note at May 24, 2000                               |   | $          | 1,500,000 |   |
|-------------------------------------------------------------------------------------|--------|------------|-----------|--------|
| Adjustments:                                                                        |   |       |      |
| Discount for derivative liability - Warrant                                         |   | (1,298,031 | )         |
| Discount for deferred loan costs paid to Trident and  CapSource on Convertible Note |   | (75,000    | )         |
|                                                                                |   |       |      |
| Convertible Note  balance, net of unamortized discount at May 24, 2006              |   | $          | 126,969   |   |

 

Convertible Note at June30, 2006 -

The Convertible Notebalance on the consolidated balance sheet as of June 30, 2006 is comprised ofthe following:
| Notional balance  of Convertible Note at June 30, 2006                              |   | $          | 1,500,000 |   |
|-------------------------------------------------------------------------------------|--------|------------|-----------|--------|
| Adjustments:                                                                        |   |       |      |
| Discount for derivative liability - Warrant                                         |   | (1,228,354 | )         |
| Discount for deferred loan costs paid to Trident and  CapSource on Convertible Note |   | (67,540    | )         |
|                                                                                |   |       |      |
| Convertible Note balance,  net of unamortized discount at June 30, 2006             |   | $          | 204,106   |   |

 

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Change in unamortizeddiscount and loan costs of Notes payable -

For the six monthsended June 30, 2006, the discount on Notes payable changed for amortization ofdiscounts for derivative liabilities related to the Convertible Note andWarrant and for amortization of loan costs paid in connection with both theConvertible Note. The total discount on Notes payable changed from $1,373,031to $1,295,894 at June 30, 2006.

| Accretion of unamortized  discount to Convertible Note for derivative liabilities for Warrant |   | $      | (69,677 | ) |
|-----------------------------------------------------------------------------------------------|--------|--------|---------|---|
| Amortization of  unamortized discount of loan costs                                           |   | (7,460 | )       |
|                                                                                          |   |   |    |
| Total change in  discount on Notes Payable during six months ended June 30, 2006              |   | $      | (77,137 | ) |

 

The followingassumptions were used in the preparation of the above valuations at June 30,2006:

Black-ScholesMethodology:

| Assumptions              | ** ** | **Warrant** | ** **  |
|--------------------------|------------|-------------|-------------|
| Dividend yield           |       | 0.00        | %           |
| Risk-free  interest rate |       | 5.10        | %           |
| Volatility               |       | 63.74       | %           |
| Expected Term            |       | 4.90        |  years |

 

Change in fair value ofderivatives instruments-

The net increasein derivative liability for the Warrant (marked-to-market) of $147,709 for thesix months ended June 30, 2006, has been recorded under Other income in theaccompanying consolidated statements of operations.

The values of thisderivative liability is subject to the changes in the trading value of theCompany’s common stock. As a result, our financial statements may fluctuatefrom quarter to quarter based on factors, such as the trading value of ourcommon stock and the amount of shares which may be converted by Trident GrowthFund, L.P. and CapSource Fund, L.P. in connection with the Convertible Note orexercised in connection with the Warrants. Consequently, our consolidated financial position and results of operationsmay vary significantly from quarter to quarter, based on factors other than ourrevenues and expenses.

**ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OR PLAN OF OPERATON.**

**Forward Looking Statements**

Some of theinformation in this report contains forward-looking information that involverisks and uncertainties.  Ourforward-looking statements express our current expectations or forecasts ofpossible future results or events, including projections of future performance,statements of management’s plans and objectives, future contracts, andforecasts of trends and other matters. You can identify these statements by the fact that they do not relatestrictly to historic or current facts and often use words such as “anticipate,”“believe,” “plan,” “expect,” “future,” “intend,” “may,” “will,” “should,” “estimate,”“predict,” “potential,” “continue,” and other words and expressions of similarmeaning.  No assurance can be given thatthe results in any forward-looking statement will be achieved and actual resultscould be affected by one or more factors, which could cause them to differmaterially.  For these statements, weclaim the protection of the safe harbor for forward-looking statementscontained in the Private Securities Litigation Reform Act. You should alsoconsider carefully the statements under “Description of Business - Risk Factors”in our 2005 Form 10-KSB, which address factors that could cause our actualresults to differ from those set forth in the forward-looking statements.

*CRITICAL ACCOUNTING POLICIES*

The following discussion and analysis of financialcondition and results of operations is based upon our consolidated financialstatements, which have been prepared in conformity with accounting principlesgenerally accepted in the United States of America. Our significant accountingpolicies are more fully described in Note 3 of Notes to the unauditedConsolidated Financial Statements. However, certain accounting policies andestimates are particularly important to the understanding of our financialposition and results of operations and require the application of significantjudgment by our management or can be materially affected by changes from periodto period in economic factors or conditions that are outside of ourcontrol.  As a result, they are subject to an inherent degree ofuncertainty. In applying these policies, our management uses their judgment todetermine the 

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appropriateassumptions to be used in the determination of certain estimates. Thoseestimates are based on our historical operations, our future business plans andprojected financial results, the terms of existing contracts, our observance oftrends in the industry, information provided by our customers and informationavailable from other outside sources, as appropriate. The following discussesour significant accounting policies and estimates.

*Revenue Recognition:* We recognize revenue over the period the service is performed in accordancewith SEC Staff Accounting Bulletin No. 104, “Revenue Recognition inFinancial Statements” (“SAB 104”). In general, SAB 104 requires that four basiccriteria must be met before revenue can be recognized: (1) persuasiveevidence that an arrangement exists, (2) delivery has occurred or servicesrendered, (3) the fee is fixed and determinable, and(4) collectibility is reasonably assured.

Advance payments are deferred until shipment. Theamount of the revenue deferred represents the fair value of the remainingundelivered products measured in accordance with Emerging Issues Task ForceIssue (“EITF”) 00-21, *“Accounting forRevenue Arrangements with Multiple Deliverables,”* which addressesthe issue of accounting for arrangements that involve the delivery of multipleproducts or services.

Revenue from licenses and other up-front fees arerecognized on a ratable basis over the term of the respective agreement.

*Cost of Revenues and Selling,General and Administrative Expenses and Research and Development Expenses:* In an effort to consolidate our executive management team, we moved ourheadquarters from Austin, Texas to The Woodlands, Texas during the thirdquarter of 2005.  The primary purpose of our facility in The Woodlands,Texas is to conduct research on the development, testing and delivery of ourprototype devices, and the commercialization of our products.

If, in the future, the purposes for which we operateour facility in The Woodlands, Texas, or any new facilities we open, changes,the allocation of the costs incurred in operating that facility between cost ofsales and research and development expenses could change to reflect suchoperational changes.

*Research and Development Expenses:* Research and development costs are expensed as incurred and include salariesand benefits, costs paid to third-party contractors for research, developmentand manufacturing of materials and devices, and a portion of facilities cost.Prototype development costs are a significant component of research anddevelopment expenses and include costs associated with third-party contractors.Invoicing from third-party contractors for services performed can lag severalmonths. We accrue the costs of services rendered in connection with third-partycontractor activities based on our estimate of management fees, site managementand monitoring costs and data management costs. Actual costs may differ in somecases from estimated costs and are adjusted for in the period in which theybecome known.

*Intangible Assets:* Our intangible assets represent patent applications which are recorded at cost.We have filed applications for patents in connection with technologies beingdeveloped. The patent applications and any patents issued as a result of theseapplications are important to the protection of our technologies that mayresult from our research and development efforts. Costs associated with patentapplications and maintaining patents are capitalized and will be amortized overthe life of the patents. We review the value recorded for intangibles to assessrecoverability from future operations using undiscounted cash flows. Impairmentsare recognized in operating results to the extent the carrying value exceedsfair value determined based on the net present value of estimated future cashflows. The projection of future cash flows requires us to make estimates aboutwhen product approvals may be obtained, and the amount of future revenues. Theactual future results could differ significantly from these estimates, andresulting changes in the estimates of future cash flows could be significantand could affect the recoverability of intangible assets.

*Stock-Based Compensation:* Beginning in the quarter beginning January 1, 2006, we adopted SFASNo. 123 (Revised 2004), *“Share BasedPayment,”* which eliminates the use of APB Opinion No. 25 and wewill be required to measure the cost of employee services received in exchangefor an award of equity instruments based on the grant-date fair value of theaward. That cost will be recognized over the period during which an employee isrequired to provide service in exchange for the reward—the requisite serviceperiod. No compensation cost will be recognized for equity instruments forwhich employees do not render the requisite service. The grant-date fair valueof employee share options and similar instruments will be estimated usingoption-pricing models adjusted for the unique characteristics of thoseinstruments. SFAS No. 123 (Revised 2004) must be applied to all optionsgranted or modified after its effective date and also to recognize the costassociated with the portion of any option awards made before its effective datefor which the associated service has not been rendered as of its effectivedate.

Prior to January 1, 2006, we accounted for ourstock-based compensation under the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 123— “Accounting for Stock BasedCompensation.” Under SFAS No. 123, we are permitted to either recordexpenses for stock options and other employee compensation plans based on theirfair value at the date of grant or to continue to apply the provisions ofAccounting Principles Board Opinion No. 25 “Accounting for Stock Issued toEmployees,” (“APB No. 25”), and recognize compensation expense, if any,based on the intrinsic value of the equity instrument at the 

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measurementdate. We have elected to continue following the provisions of APB No. 25.Stock options issued to persons other than employees or directors are recordedon the basis of their fair value as required by SFAS No. 123.

*RESULTS OF OPERATIONS*

Comparisonof the six months ending June 30, 2006 and 2005

REVENUES.  We are a development stage companythat has developed, patented and demonstrated a new color display technology inthe form of proof of concept prototypes which we call Time Multiplexed OpticalShutter (“TMOS”).  We intend to be a leader in the research, developmentand commercialization of new flat panel displays using TMOS in a variety ofapplications, such as mobile phones, digital cameras, notebook computers,televisions and other consumer electronic devices. From inception, we have hada limited amount of revenue that is derived from development contracts.

Revenues increased to $200,000 for the six monthsended June 30, 2006, as compared to $19,689 for the six months ended June 30,2005, due to the revenues recognized from the work specific to a developmentcontract during each of those respective periods.

COST OF REVENUES.  Cost of revenues include alldirect expenses associated with the delivery of services including internallabor costs. Cost of revenues for the six months ended June 30, 2006 decreasedto $0 as compared to $9,844 for the six months ended June 30, 2005.  No cost of revenues was recognized in 2006 asthe cost of revenues was expensed in the period incurred prior to 2006 as a componentof research and development expenses.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,general and administrative expenses increased by 44% or $493,841, to $1,610,988for the six months ended June 30, 2006 from $1,117,147 for the six months endedJune 30, 2005.  The major components of the increase are as follows:

a)  Salaries and benefits increased byapproximately $428,000 to $885,000 for the six months ended June 30, 2006compared to $457,000 for the six months ended June 30, 2005 due to a increasein the number of selling, general and administrative employees and a stockcompensation expense of $294,000 for the six months ended June 30, 2006;

b) Contract labor decreased by approximately $23,000to $117,000 for the six months ended June 30, 2006 compared to $140,000 for thesix months ended June 30, 2005;

c) Legal expense decreased by approximately $50,000 to$190,000 for the six months ended June 30, 2006 compared to $240,000 for thesix months ended June 30, 2005;

d) Accounting expense increased by approximately$11,000 to $37,000 for the six months ended June 30, 2006 compared to $26,000for the six months ended June 30, 2005;

e) Office expense increased by approximately $15,000to $60,000 for the six months ended June 30, 2006 compared to $45,000 for thesix months ended June 30, 2005;

f) Travel expense increased by approximately $14,000to $50,000 for the six months ended June 30, 2006 compared to $36,000 for sixmonths ended June 30, 2005;  and

g) Depreciation and amortization expense increased byapproximately $65,000 to $132,000 for the six months ended June 30, 2006compared to $67,000 for the six months ended June 30, 2005 as a result of anincrease in property and equipment during the six months ended June 30, 2006.

RESEARCH AND DEVELOPMENT. Research and developmentexpenses increased by approximately $496,623 during the six months ended June30, 2006 to $1,818,306 from $1,321,683 for the six months ended June 30, 2005.The major components of the increase are as follows:

a) Salaries and benefits attributable to research anddevelopment increased by approximately $184,000 to $795,000 for the six monthsended June 30, 2006 compared to $611,000 for the six months ended June 30, 2005due to an increase in the number of research and development employees and thelevel of compensation for these employees, including executive pay increasesand a stock compensation expense of $90,000 for the six months ended June 30,2006;

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b) Consulting expense attributable to research anddevelopment increased by approximately $282,000 to $734,000 for the six monthsended June 30, 2006 compared to $452,000 for the six months ended June 30, 2005primarily due to increased services related to prototype development;

c) Lab expense decreased by approximately $11,000 to$94,000 for the six months ended June 30, 2006 compared to $105,000 for the sixmonths ended June 30, 2005; and

d) Travel expense attributable to research anddevelopment decreased by approximately $21,000 to $64,000 for the six monthsended June 30, 2006 compared to $85,000 for the six months ended June 30, 2005.

OTHER INCOME (EXPENSE).

a) Net increase in fair value of derivative liabilityincreased to an expense of $147,709 for the six months ended June 30, 2006 ascompared to $0 during the six months ended June 30, 2005, due to the Warrantissued in connection with the 12% Senior Secured Convertible Debentures in May2006.   The Warrant is a freestandingderivative financial instrument. This derivative liability is marked-to-marketeach quarter with the change in fair value recorded in the income statement.

b) Debt issuance expense increased to $9,623 for thesix months ended June 30, 2006 as compared to $0 during the six months endedJune 30, 2005, due to the debt raised in May 2006.

c)****Interestincome (expense), net decreased to ($73,551) for the six months ended June 30,2006 as compared to $63,597 for the six months ended June 30, 2005 primarilydue to less cash on hand, the payment of interest on the $1,500,000 loanreceived in May 2006 and the unamortized discount on the Warrant issued inconnection with the 12% Senior Secured Convertible Debentures in May 2006.

NET LOSS.**  **Net loss increased to $3,460,177 for the six months ended June 30,2006, as compared to $2,365,388 for the six months ended June 30, 2005. Wecompute our net loss per share on the basis of net loss attributable to commonstockholders, which included the effects of certain items not included in thedetermination of net loss. Net loss attributable to common stockholders for thesix months ended June 30, 2006 was $3,717,583 as compared to a net lossattributable to common stockholders of $2,747,339 for the six months ended June30, 2005. The net loss attributable to common stockholders for the six monthsended June 30, 2006 includes $257,406 of accrued but unpaid preferred stockdividends.  The net loss attributable tocommon stockholders for the six months ended June 30, 2005 includes $381,951 ofaccrued but unpaid preferred stock dividends.

Comparisonof the three months ending June 30, 2006 and 2005

REVENUES.  Revenues decreased to $0 for the threemonths ended June 30, 2006, as compared to $1,470 for the three months endedJune 30, 2005, due to the revenues recognized from the work specific to adevelopment contract during each of those respective periods.

COST OF REVENUES.  Cost of revenues include alldirect expenses associated with the delivery of services including internallabor costs. Cost of revenues for the three months ended June 30, 2006decreased to $0 as compared to $735 for the three months ended June 30, 2005.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,general and administrative expenses increased by 29% or $175,959, to $780,725for the three months ended June 30, 2006 from $604,766 for the three monthsended June 30, 2005.  The major components of the increase are as follows:

a)  Salaries and benefits increased byapproximately $151,000 to $437,000 for the three months ended June 30, 2006compared to $286,000 for the three months ended June 30, 2005 due to a increasein the number of selling, general and administrative employees and a stockcompensation expense of $147,000 for the three months ended June 30, 2006;

b) Contract labor increased by approximately $13,000to $65,000 for the three months ended June 30, 2006 compared to $52,000 for thethree months ended June 30, 2005;

c) Legal expense decreased by approximately $26,000 to$79,000 for the three months ended June 30, 2006 compared to $105,000 for thethree months ended June 30, 2005;

d) Accounting expense increased by approximately$12,000 to $16,000 for the three months ended June 30, 2006 compared to $4,000for the three months ended June 30, 2005;

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e) Office expense decreased by approximately $5,000 to$21,000 for the three months ended June 30, 2006 compared to $26,000 for thethree months ended June 30, 2005;

f) Travel expense increased by approximately $2,000 to$19,000 for the three months ended June 30, 2006 compared to $17,000 for threemonths ended June 30, 2005;  and

g) Depreciation and amortization expense increased byapproximately $17,000 to $66,000 for the three months ended June 30, 2006compared to $49,000 for the three months ended June 30, 2005 as a result of anincrease in property and equipment during the three months ended June 30, 2006.

RESEARCH AND DEVELOPMENT. Research and developmentexpenses decreased by approximately $75,946 during the three months ended June30, 2006 to $738,194 from $814,140 for the three months ended June 30, 2005.The major components of the decrease are as follows:

a) Salaries and benefits attributable to research anddevelopment increased by approximately $78,000 to $398,000 for the three monthsended June 30, 2006 compared to $320,000 for the three months ended June 30,2005 due to an increase in the number of research and development employees andthe level of compensation for these employees, including executive payincreases and a stock compensation expense of $45,000 for the three monthsended June 30, 2006;

b) Consulting expense attributable to research anddevelopment decreased by approximately $96,000 to $213,000 for the three monthsended June 30, 2006 compared to $309,000 for the three months ended June 30,2005 primarily due to decreased services related to prototype development;

c) Lab expense decreased by approximately $70,000 to$30,000 for the three months ended June 30, 2006 compared to $100,000 for thethree months ended June 30, 2005; and

d) Travel expense attributable to research anddevelopment decreased by approximately $22,000 to $23,000 for the three monthsended June 30, 2006 compared to $45,000 for the three months ended June 30,2005.

OTHER INCOME (EXPENSE).

a) Net increase in fair value of derivative liabilityincreased to an expense of $147,709 for the three months ended June 30, 2006 ascompared to $0 during the three months ended June 30, 2005, due to the Warrantissued in connection with the 12% Senior Secured Convertible Debentures in May2006.   The Warrant is a freestandingderivative financial instrument. This derivative liability is marked-to-marketeach quarter with the change in fair value recorded in the income statement.

b) Debt issuance expense increased to $9,623 for thethree months ended June 30, 2006 as compared to $0 during the three monthsended June 30, 2005, due to the debt raised in May 2006.

b)****Interestincome (expense), net decreased to ($87,318) for the three months ended June30, 2006 as compared to $39,991 for the three months ended June 30, 2005primarily due to less cash on hand, the payment of interest on the $1,500,000loan received in May 2006 and the unamortized discount on the Warrant issued inconnection with the 12% Senior Secured Convertible Debentures in May 2006.

NET LOSS.**  **Net loss increased to $1,763,569 for the three months ended June 30,2006, as compared to $1,378,180 for the three months ended June 30, 2005. Wecompute our net loss per share on the basis of net loss attributable to commonstockholders, which included the effects of certain items not included in thedetermination of net loss. Net loss attributable to common stockholders for thethree months ended June 30, 2006 was $1,888,935 as compared to a net lossattributable to common stockholders of $1,574,278 for the three months endedJune 30, 2005. The net loss attributable to common stockholders for the threemonths ended June 30, 2006 includes $125,366 of accrued but unpaid preferredstock dividends.  The net lossattributable to common stockholders for the three months ended June 30, 2005includes $196,098 of accrued but unpaid preferred stock dividends.

**Off-Balance Sheet Transactions**

We do not engage in material off-balance sheettransactions.

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*LIQUIDITY AND CAPITAL RESOURCES*

OperatingActivities

Cash used in operating activities during the sixmonths ended June 30, 2006 increased to $2,813,679 as compared to $2,076,947 usedfor the six months ended June 30, 2005. The increase is primarily a result ofincreases in the first six months of 2006 in research and development spendingand general and administrative expenses resulting from additional employeesalary and related employee costs.

InvestingActivities

Cash used for investing activities during the sixmonths ended June 30, 2006 amounted to $48,187, as compared to $682,294 usedfor investing activities for the six months ended June 30, 2005 due to ourdecreased spending on computers, furniture, laboratory, metrology and testingequipment in the six months ended June 30, 2006.

FinancingActivities

We have financed our operating and investingactivities primarily from the proceeds of private placements of common stock,convertible investor notes, and a preferred stock offering which we closed inDecember 2004 and January 2005. During the six months ended June 30,2006, the total net cash provided by financing activities was $1,244,934.  The $1,244,934 includes: a) $33,607 paymentson notes payable to related party and b) $1,278,541 net proceeds from notespayable.  The total net cash provided byfinancing activities was $2,944,425 for the six months ended June 30, 2005. The$2,944,425 includes: a) $66,048 payments on notes payable to related party; b)$211,173 net proceeds from notes payable; and c) $2,799,300 net from cash salesof shares of our Series A Preferred Stock.

WorkingCapital

As of June 30, 2006, we had a cash balance of $0.7million.  We project that current cash reserves will sustain ouroperations at least through September 2006. We had negative working capital of $1.1 million at June 30, 2006.

We are a development stage company and have notexperienced significant operations since our formation. We reached a positiveworking capital position as of the first quarter of 2005 as a result of ourfinancing activities. We have incurred significant operating losses during eachof the years 2002 through 2005 and the six months ended June 30, 2006.  We intend to utilize a proprietarymethodology for development of our displays. Our principal activities, from thebeginning of the development stage, have been organizational matters, capitalraising activities including issuance of stock, product research and development,fund raising, and market research.

To date, we have had only a few revenue-generatingservices or development contracts.  These include a prototype developmentagreement with a large personal computer company, and a Small BusinessInnovation Research (SBIR) Phase One agreement with the U.S. Air Force for$98,214 and a follow-on Phase Two agreement for $686,966.  We also enteredinto a prototype development agreement with Lockheed Martin, a large militarycontractor, in October 2005, for which we have received full payment fromLockheed Martin.  Our immediate customer prospects are limited to LockheedMartin, with which we entered into a License and Strategic Business Agreementdated October 5, 2005.   See “RiskFactors” included in our Form 10K-SB, filed with the Securities andExchange Commission on March 28, 2006.

Management will work to establish specificapplications for our display technology that will generate significantrevenues, and cash flows to support operations. Our ability to continue as a goingconcern will be dependent upon achieving profitable operations, and obtainingadditional funding from current shareholders and new investors.

On May 26, 2006,Uni-Pixel entered into a Securities Purchase Agreement with Trident GrowthFund, L.P. and CapSource Fund, L.P. pursuant to which Uni-Pixel issued 12%Senior Secured Convertible Debentures for the principal amount of$1,500,000.  The principal sum of$1,500,000 is due on the earlier of (a) May 23, 2007; (b) the consummation of aChange of Control Transaction; or (c) upon the closing of a QualifyingTransaction, all as defined in the Securities Purchase Agreement.

Management iscurrently in negotiations with a number of strategic investors, who haveexpressed an interest in making an investment in Uni-Pixel.  These discussions are ongoing, and some ofthe potential investors are currently conducting their due diligenceprocedures.  However, there can be noassurance of the outcome of these negotiations. In the event Uni-Pixel is not able to secure equity financing onacceptable terms, Uni-Pixel’s ability to develop its technology and achieveprofitability may be adversely affected.

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**ITEM 3.  CONTROLS ANDPROCEDURES.**

DisclosureControls and Procedures

As of June 30, 2006, management, including our Presidentand Chief Financial Officer, performed an evaluation of the effectiveness ofthe design and operation of our disclosure controls and procedures, as definedin Rules 13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934.  Based on their evaluation,management, including our President and our Chief Financial Officer, concludedthat, as of June 30, 2006, our disclosure controls and procedures are effectiveto ensure that material information required to be disclosed by us in thereports that we file or submit under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized and reported, within the timeperiods specified in the Securities and Exchange Commission’s rules andforms, and that it is accumulated and communicated to management, including ourPresident and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

Changesin Internal Control Over Financial Reporting

We maintain a system of internal control overfinancial reporting that is designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with accounting principlesgenerally accepted in the United States.  Based on the most recent evaluation, ourPresident and Chief Financial Officer have determined that no significantchanges in our internal control over financial reporting occurred during ourmost recent fiscal quarter that have materially affected, or are reasonablylike to materially affect, our internal control over financial reporting.

**PART II - OTHER INFORMATION**

**ITEM 2.  UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS.**

On May 26, 2006,we entered into a Securities Purchase Agreement for the sale of an aggregate of$1,500,000 of 12% Senior Secured Convertible Debentures (the “Debentures”) toTrident Growth Fund, L.P. and CapSource Fund, L.P.   The Debentures are convertible, at theoption of the holder, at any time on or prior to maturity into share of ourCommon Stock at a conversion price of the lesser of (a) 90% of the averageprice per share of the Common Stock and Common Stock Equivalents sold to anyPerson in the first Qualifying Transaction to be consummated following theOriginal Issue Date or (b) $1.75 per share (which such Conversion Price shallapply in the event no Qualifying Transaction has closed on or by the ConversionDate), each of which is subject to adjustment. Our obligations under the Securities Purchase Agreement are secured byall of our assets.

In connection with the Securities Purchase Agreement,each of Trident Growth Fund, L.P. and CapSource Fund, L.P. received CommonStock Purchase Warrants to purchase a number of shares of our Common Stocksubject to adjustments as follows: 750,000 divided by the lesser of (a) $1.75per share or (b) 70% of the average price per share of the CommonStock and Common Stock Equivalents sold to any Person in the firstQualifying Transaction to be consummated following the Original Issue Date, allas defined in the Common Stock Purchase Warrants.  The Common Stock Purchase Warrants may beexercised at any time within 5 years at a price equal to the lesser of (a)$1.75 per share or (b) 90% of the average price per share of the Common Stock andCommon Stock Equivalents sold to any Person in the first Qualifying Transactionto be consummated following the Initial Exercise Date, as defined in the CommonStock Purchase Warrants.

These securities were issued without registration inreliance upon the exemption from registration provided by Section 4(2) of theSecurities Act of 1933 because of the limited number of purchasers, theseparate negotiation of each transaction with each purchaser, the absence ofany public solicitation or advertising and the restriction of such securitiesfrom resale.

**ITEM 5.  OTHER INFORMATION.**

See the disclosure contained in Item 2 of this PartII.

**ITEM6. EXHIBITS.**

 
| Exhibit  No. | ** ** | **Description**                                                                                        |
|--------------|------------|--------------------------------------------------------------------------------------------------------|
| 3.1          |       | Amended and Restated Certificate of Incorporation of  Real-Estateforlease.com, Inc. (1)                |
| 3.2          |       | Amended and Restated Bylaws of Uni-Pixel, Inc.  (1)                                                    |
| 4.1          |       | Certificate of Designations of Real-Estateforlease.com,  Inc. Series A Convertible Preferred Stock (1) |
| 4.2          |       | Junior Subordinated Unsecured Promissory Note (1)                                                      |
| 4.3          |       | Common Stock Purchase Warrant No. 1 (1)                                                                |

 

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| 4.4  |   | Common Stock Purchase Warrant No. 2 (1)                                                                                                                                   |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.5  |   | Common Stock Purchase Warrant No. 3 (1)                                                                                                                                   |
| 4.6  |   | Form of Common Stock certificate (2)                                                                                                                                      |
| 4.7  |   | Uni-Pixel, Inc. 12% Senior Secured Convertible  Debenture No. 1 issued to Trident Growth Fund, L.P., dated May 24, 2006. (3)                                              |
| 4.8  |   | Uni-Pixel, Inc. 12% Senior Secured Convertible  Debenture No. 1 issued to CapSource Fund, L.P., dated May 24, 2006. (3)                                                   |
| 4.9  |   | Common Stock Purchase Warrant No. 1 issued to  Trident Growth Fund, L.P., dated May 24, 2006. (3)                                                                         |
| 4.10 |   | Common Stock Purchase Warrant No. 1 issued to  CapSource Fund, L.P., dated May 24, 2006. (3)                                                                              |
| 10.1 |   | Securities Purchase Agreement dated May 24, 2006, by  and between Uni-Pixel, Inc., Uni-Pixel Displays, Inc., Trident Growth  Fund, L.P. and CapSource Fund, L.P. (3) |
| 10.2 |   | Security Agreement dated May 24, 2006, by and  between Uni-Pixel, Inc., Uni-Pixel Displays, Inc., Trident Growth Fund, L.P.  and CapSource Fund, L.P. (3)                 |
| 31.1 |   | Certification of the President and Principal  Executive Officer of Uni-Pixel, Inc., pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 (3)              |
| 31.2 |   | Certification of the Chief Financial Officer of  Uni-Pixel, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 (3)                                |
| 32.1 |   | Certification of the President and Principal  Executive Officer of Uni-Pixel, Inc., pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 (3)              |
| 32.2 |   | Certification of the Chief Financial Officer of  Uni-Pixel, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 (3)                                |

 

(1)                                  Previously filed as an exhibit to the Company’sForm 10-SB, filed on February 18, 2005, and incorporated by reference hereto.

(2)                                  Previously filed as an exhibit to the Company’sForm 10-KSB, filed on March 28, 2006, and incorporated by reference hereto.

(3)                                  Filed herewith

 

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**SIGNATURES**

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                 | **UNI-PIXEL, INC.** |
|-----------------|---------------------|
|            | ** **          |
|            |                |
| August 14, 2006 |                | By: | /s/ James A. Tassone |   |
| Date            |                | James A. Tassone, Chief Financial Officer |
|            |                |
|                 |                     |  |  |  |

 

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