**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-QSB**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe Quarterly Period Ended September 30, 2006**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe Transition Periodfrom                         to                         **

**COMMISSIONFILE 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 ForestPlace, Suite 100**

**The Woodlands, Texas77381**

(Address of PrincipalExecutive Offices)

**(281) 825-4500**

(Issuer’s TelephoneNumber, Including Area Code)

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   x Yes o No

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct).   Yes o   No x

As of November 9, 2006, the issuer had 16,311,973shares of issued and outstanding common stock, par value $0.001 per share.

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

 

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**TABLE OF CONTENTS**
| Part I.  |   | Financial  Information                                                                                                                                       |   |   |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|          |   |                                                                                                                                                         |   |   |
| Item 1.       |   | Financial  Statements                                                                                                                                        |   |   |
|          |   |                                                                                                                                                         |   |   |
|          |   | Consolidated  Balance Sheets                                                                                                                                 |   |   |
|          |   | September 30, 2006 (unaudited) and  December 31, 2005                                                                                                   |   |   |
|          |   |                                                                                                                                                         |   |   |
|          |   | Consolidated  Statements of Operations                                                                                                                       |   |   |
|          |   | Nine months ended September  30, 2006 (unaudited) and September 30, 2005 (unaudited) and cumulative period  from inception to September 30, 2006 (unaudited) |   |   |
|          |   |                                                                                                                                                         |   |   |
|          |   | Three months  ended September 30, 2006 (unaudited) and September 30, 2005 (unaudited)                                                                   |   |   |
|          |   |                                                                                                                                                         |   |   |
|          |   | Consolidated  Statements of Shareholders’ Equity (Deficit)                                                                                              |   |   |
|          |   | From inception  to September 30, 2006 (unaudited)                                                                                                            |   |   |
|          |   |                                                                                                                                                         |   |   |
|          |   | Consolidated  Statements of Cash Flows                                                                                                                       |   |   |
|          |   | Nine months  ended September 30, 2006 (unaudited) and September 30, 2005 (unaudited) and  cumulative period from inception to September 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

----

 

**PART I -FINANCIAL INFORMATION**

**ITEM 1.**                    FINANCIALSTATEMENTS.

Uni-Pixel, Inc.

(A DevelopmentStage Company)

Consolidated BalanceSheets
| ** **                                                                                                                                                                                                 | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                 | ** ** | **(unaudited)**              | ** ** | **(audited)**               | ** ** |
| **ASSETS**                                                                                                                                                                                                 |       |                         |       |                        |       |
| Current assets                                                                                                                                                                                             |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                 |       | $                            | 754,172    |                        | $          | 2,328,385 |   |
| Current portion  of restricted cash                                                                                                                                                                        |       | 5,123                        |       | 40,000                      |       |
| Interest  receivable                                                                                                                                                                                       |       | —                       |       | 6,297                       |       |
| Deferred loan  costs                                                                                                                                                                                       |       | 130,275                      |       | —                      |       |
| Prepaid expenses                                                                                                                                                                                           |       | 16,965                       |       | 16,965                      |       |
|                                                                                                                                                                                                       |       |                         |       |                        |       |
| Total current  assets                                                                                                                                                                                      |       | 906,535                      |       | 2,391,647                   |       |
|                                                                                                                                                                                                       |       |                         |       |                        |       |
| Property and equipment,  net of accumulated depreciation of $400,260 and $203,709, at September 30, 2006  and December 31, 2005, respectively                                                              |       | 705,689                      |       | 854,052                     |       |
| Restricted cash, less  current portion                                                                                                                                                                     |       | 34,877                       |       | 260,000                     |       |
|                                                                                                                                                                                                       |       |                         |       |                        |       |
| Total assets                                                                                                                                                                                               |       | $                            | 1,647,101  |                        | $          | 3,505,699 |   |
|                                                                                                                                                                                                       |       |                         |       |                        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                             |       |                         |       |                        |       |
|                                                                                                                                                                                                       |       |                         |       |                        |       |
| Current liabilities                                                                                                                                                                                        |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                                           |       | $                            | 228,504    |                        | $          | 278,749 |   |
| Accrued expenses                                                                                                                                                                                           |       | —                       |       | 10,812                      |       |
| Deferred revenue                                                                                                                                                                                           |       | 33,333                       |       | 200,000                     |       |
| Derivative  liabilities for Warrants                                                                                                                                                                       |       | 1,164,924                    |       | —                      |       |
| Current portion  of notes payable, net of unamortized discounts of $1,235,173 and $0 at  September 30, 2006 and December 31, 2005, respectively                                                            |       | 1,168,736                    |       | 144,019                     |       |
|                                                                                                                                                                                                       |       |                         |       |                        |       |
| Total current  liabilities                                                                                                                                                                                 |       | 2,595,497                    |       | 633,580                     |       |
|                                                                                                                                                                                                       |       |                         |       |                        |       |
| Note payable, less  current portion                                                                                                                                                                        |       | 10,500                       |       | 57,537                      |       |
|                                                                                                                                                                                                       |       |                         |       |                        |       |
| Total  liabilities                                                                                                                                                                                         |       | 2,605,997                    |       | 691,117                     |       |
|                                                                                                                                                                                                       |       |                         |       |                        |       |
| Shareholders’ equity  (deficit)                                                                                                                                                                       |       |                         |       |                        |       |
| Preferred stock,  $0.001 par value; $3.50 liquidation preference; 10,000,000 shares authorized,  2,235,334 and 2,685,651 issued and outstanding at September 30, 2006 and  December 31, 2005, respectively |       | 2,235                        |       | 2,686                       |       |
| Common stock,  $0.001 par value; 40,000,000 shares authorized, 16,311,973 and 15,395,057  issued and outstanding at September 30, 2006 and December 31, 2005,  respectively                                |       | 16,312                       |       | 15,395                      |       |
| Additional  paid-in capital                                                                                                                                                                                |       | 18,122,924                   |       | 17,348,728                  |       |
| Accumulated  deficit during development stage                                                                                                                                                              |       | (19,100,367                  | )          | (14,552,227                 | )          |
|                                                                                                                                                                                                       |       |                         |       |                        |       |
| Total  shareholders’ equity (deficit)                                                                                                                                                                 |       | (958,896                     | )          | 2,814,582                   |       |
|                                                                                                                                                                                                       |       |                         |       |                        |       |
| Total liabilities and shareholders’ equity (deficit)                                                                                                                                                  |       | $                            | 1,647,101  |                        | $          | 3,505,699 |   |

 

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

3

----

 

Uni-Pixel, Inc.

(A DevelopmentStage Company)

Consolidated Statements of Operations

(unaudited)
| ** **                                                              | ** ** | **Nine Months Ended  September 30,** | ** ** | **Cumulative  Period from  February 17, 1998  (date of inception)  to September 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                           |       | 2,358,037                                           |       | 1,715,098                                                                                                                |       | 9,238,794 |   |
| Research and  development                                               |       | 2,290,039                                           |       | 2,028,155                                                                                                                |       | 9,251,225 |   |
|                                                                    |       |                                                |       |                                                                                                                     |       |   |   |
| Operating loss                                                          |       | (4,448,076                                          | )          | (3,733,408                                                                                                               | )          | (17,788,466 | ) |
|                                                                    |       |                                                |       |                                                                                                                     |       |   |   |
| Other income (expense)                                                  |       |                                                |       |                                                                                                                     |       |   |   |
| Net decrease in  fair value of derivative liability                     |       | 240,523                                             |       | —                                                                                                                   |       | 240,523 |   |
| Other income                                                            |       | —                                              |       | —                                                                                                                   |       | 886,886 |   |
| Debt issuance  expense                                                  |       | (38,297                                             | )          | —                                                                                                                   |       | (538,297 | ) |
| Interest income  (expense), net                                         |       | (273,785                                            | )          | 88,723                                                                                                                   |       | (1,063,066 | ) |
|                                                                    |       |                                                |       |                                                                                                                     |       |   |   |
| Net loss                                                                |       | $                                                   | (4,519,635 | )                                                                                                                        | $          | (3,644,685 | ) | $ | (18,262,420 | ) |
|                                                                    |       |                                                |       |                                                                                                                     |       |   |   |
| Preferred stock  dividends                                              |       | (379,609                                            | )          | (580,531                                                                                                                 | ))         | (1,189,051 | ) |
| Net loss attributable  to common shareholders                           |       | $                                                   | (4,899,244 | )                                                                                                                        | $          | (4,225,216 | ) | $ | (19,451,471 | ) |
|                                                                    |       |                                                |       |                                                                                                                     |       |   |   |
| Per share information                                                   |       |                                                |       |                                                                                                                     |       |   |   |
| Net loss — basic  and diluted                                      |       | $                                                   | (0.28      | )                                                                                                                        | $          | (0.28 | ) | $ | (2.69 | ) |
| Preferred stock  dividends                                              |       | (0.02                                               | )          | (0.05                                                                                                                    | )          | (0.18 | ) |
| Net loss attributable  to common shareholders — basic and diluted  |       | $                                                   | (0.30      | )                                                                                                                        | $          | (0.33 | ) | $ | (2.87 | ) |
|                                                                    |       |                                                |       |                                                                                                                     |       |   |   |
| Weighted average number of basic and diluted common shares  outstanding |       | 15,938,440                                          |       | 12,800,580                                                                                                               |       | 6,776,879 |   |

 

*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  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                                                                    |       |                                                 |       |   |   |
| Revenues                                                                |       |                                                 |       |   |   |
| Development contract  revenue                                           |       | $                                                    | —     |   | $ | — |   |
|                                                                    |       |                                                 |       |   |   |
| Total revenues                                                          |       | —                                               |       | — |   |
|                                                                    |       |                                                 |       |   |   |
| Cost of revenues                                                        |       | —                                               |       | — |   |
|                                                                    |       |                                                 |       |   |   |
| Gross margin                                                            |       | —                                               |       | — |   |
|                                                                    |       |                                                 |       |   |   |
| Selling, general and  administrative expenses                           |       | 747,049                                              |       | 597,951 |   |
| Research and  development                                               |       | 471,733                                              |       | 706,472 |   |
|                                                                    |       |                                                 |       |   |   |
| Operating loss                                                          |       | (1,218,782                                           | )          | (1,304,423 | ) |
|                                                                    |       |                                                 |       |   |   |
| Other income (expense)                                                  |       |                                                 |       |   |   |
| Net decrease in  fair value of derivative liability                     |       | 388,232                                              |       | — |   |
| Debt issuance  expense                                                  |       | (28,674                                              | )          | — |   |
| Interest income  (expense), net                                         |       | (200,234                                             | )          | 25,126 |   |
|                                                                    |       |                                                 |       |   |   |
| Net loss                                                                |       | $                                                    | (1,059,458 | ) | $ | (1,279,297 | ) |
|                                                                    |       |                                                 |       |   |   |
| Preferred stock  dividends                                              |       | (122,203                                             | )          | (198,580 | ) |
| Net loss attributable  to common shareholders                           |       | $                                                    | (1,181,661 | ) | $ | (1,477,877 | ) |
|                                                                    |       |                                                 |       |   |   |
| Per share information                                                   |       |                                                 |       |   |   |
| Net loss — basic  and diluted                                      |       | $                                                    | (0.06      | ) | $ | (0.10 | ) |
| Preferred stock  dividends                                              |       | (0.01                                                | )          | (0.02 | ) |
| Net loss attributable  to common shareholders — basic and diluted  |       | $                                                    | (0.07      | ) | $ | (0.12 | ) |
|                                                                    |       |                                                 |       |   |   |
| Weighted average number of basic and diluted common shares  outstanding |       | 16,161,339                                           |       | 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)

ConsolidatedStatements of Shareholders’ Equity (deficit)
| ** **                                                                               | ** ** | **Series A**        | ** ** | ** **            | ** ** | ** **       | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|------------------|------------|------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                               | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | ** **       | ** ** | ** ** | ** ** | **Deficit**     | ** ** | **Total**        | ** ** |
| ** **                                                                               | ** ** | **Number **         | ** ** | ** **            | ** ** | **Number ** | ** ** | ** ** | ** ** | **Additional**  | ** ** | **Deferred**     | ** ** | **During** | ** ** | **Shareholders’** | ** ** |
| ** **                                                                               | ** ** | **of**                   | ** ** | ** **            | ** ** | **of**           | ** ** | ** ** | ** ** | **Paid-In**     | ** ** | **Stock-Based**  | ** ** | **Development** | ** ** | **Equity** | ** ** |
| ** **                                                                               | ** ** | **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 |       | (450,317                 | )          | (451                  | )          | 916,916          |       | 917        |       | 28,039          |       | —           |       | (28,505 | ) | — |   |
| Stock compensation expense                                                               |       | —                   |       | —                |       | —           |       | —     |       | 708,561         |       | —           |       | — |   | 708,561 |   |
| Issuance of warrants to placement agent                                                  |       | —                   |       | —                |       | —           |       | —     |       | 37,596          |       | —           |       | — |   | 37,596 |   |
| Net loss                                                                                 |       | —                   |       | —                |       | —           |       | —     |       | —          |       | —           |       | (4,519,635 | ) | (4,519,635 | ) |
| Balance, September 30,  2006 (unaudited)                                                 |       | 2,235,334                |       | $                     | 2,235      |             | 16,311,973 |       | $          | 16,312          |       | $                | 18,122,924 |   | $ | — |   | $ | (19,100,367 | ) | $ | (958,896 | ) |

 

*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)
| ** **                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** | **Cumulative Period  from February 18,  1998 (date of  inception) to  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                            | ** ** | **2005**                                                                                                                 | ** ** | **2006** | ** ** |
| Cash flows from  operating activities                                        |       |                                                |       |                                                                                                                     |       |   |   |
| Net loss                                                                     |       | $                                                   | (4,519,635 | )                                                                                                                        | $          | (3,644,685 | ) | $ | (18,262,420 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                                |       |                                                                                                                     |       |   |   |
| Interest forgiven                                                            |       | —                                              |       | —                                                                                                                   |       | (91,421 | ) |
| Interest earned, but not received                                            |       | 6,297                                               |       | —                                                                                                                   |       | — |   |
| Employee compensation notes payable forgiven                                 |       | —                                              |       | —                                                                                                                   |       | (795,465 | ) |
| Depreciation and amortization                                                |       | 196,551                                             |       | 127,108                                                                                                                  |       | 468,008 |   |
| Stock issued for services                                                    |       | —                                              |       | —                                                                                                                   |       | 460,062 |   |
| Stock compensation expense                                                   |       | 708,561                                             |       | —                                                                                                                   |       | 708,561 |   |
| Non-cash compensation expense                                                |       | —                                              |       | —                                                                                                                   |       | 1,100,000 |   |
| Issuance of warrants to placement agent                                      |       | 37,598                                              |       | —                                                                                                                   |       | 37,598 |   |
| Amortization of debt issuance costs                                          |       | 12,087                                              |       | —                                                                                                                   |       | 512,087 |   |
| Amortization of discounts on notes payable                                   |       | 245,274                                             |       | —                                                                                                                   |       | 245,274 |   |
| Net decrease in fair value of derivatives                                    |       | (240,523                                            | )          | —                                                                                                                   |       | (240,523 | ) |
| Cash restricted for note payable and lease  obligations                      |       | 260,000                                             |       | —                                                                                                                   |       | (40,000 | ) |
| Change in operating assets and liabilities:                                  |       |                                                |       |                                                                                                                     |       |   |   |
| (Increase) in prepaid expenses and other current  assets                     |       | (142,362                                            | )          | (15,151                                                                                                                  | )          | (159,327 | ) |
| Increase (decrease) in accounts payable                                      |       | (50,245                                             | )          | 183,524                                                                                                                  |       | 228,501 |   |
| Increase (decrease) in accrued interest payable                              |       | —                                              |       | (7,635                                                                                                                   | )          | 180,943 |   |
| Increase (decrease) in accrued expenses and other  liabilities               |       | (10,812                                             | )          | (14,679                                                                                                                  | )          | 795,465 |   |
| Increase (decrease) in deferred revenue                                      |       | (166,667                                            | )          | —                                                                                                                   |       | 33,333 |   |
| Net cash used in operating activities                                        |       | (3,663,876                                          | )          | (3,371,518                                                                                                               | )          | (14,819,324 | ) |
|                                                                         |       |                                                |       |                                                                                                                     |       |   |   |
| Cash flows from  investing activities                                        |       |                                                |       |                                                                                                                     |       |   |   |
| Purchase of property and equipment                                           |       | (48,187                                             | )          | (992,120                                                                                                                 | )          | (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                                             | )          | (992,120                                                                                                                 | )          | (1,173,694 | ) |
|                                                                         |       |                                                |       |                                                                                                                     |       |   |   |
| Cash flows from  financing activities                                        |       |                                                |       |                                                                                                                     |       |   |   |
| Proceeds from notes payable to related party                                 |       | —                                              |       | —                                                                                                                   |       | 115,103 |   |
| Payments on notes payable to related party                                   |       | (39,761                                             | )          | (85,068                                                                                                                  | )          | (164,328 | ) |
| Proceeds from convertible notes payable                                      |       | —                                              |       | —                                                                                                                   |       | 3,390,000 |   |
| Payments on convertible notes payable                                        |       | —                                              |       | —                                                                                                                   |       | (1,470,672 | ) |
| Proceeds from notes payable, net                                             |       | 2,177,611                                           |       | 186,707                                                                                                                  |       | 2,339,407 |   |
| 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                                    |       | 2,137,850                                           |       | 2,900,939                                                                                                                |       | 16,747,190 |   |
|                                                                         |       |                                                |       |                                                                                                                     |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                        |       | (1,574,213                                          | )          | (1,462,699                                                                                                               | )          | 754,172 |   |
| Cash and cash  equivalents, beginning of period                              |       | 2,328,385                                           |       | 5,342,641                                                                                                                |       | — |   |
| Cash and cash  equivalents, end of period                                    |       | $                                                   | 754,172    |                                                                                                                     | $          | 3,879,942 |   | $ | 754,172 |   |
|                                                                         |       |                                                |       |                                                                                                                     |       |   |   |
| Supplemental  disclosures of cash flow information:                          |       |                                                |       |                                                                                                                     |       |   |   |
| Cash paid for interest                                                       |       | $                                                   | 66,536     |                                                                                                                     | $          | 14,419 |   | $ | 808,529 |   |
| Interest capitalized into notes payable                                      |       | $                                                   | —     |                                                                                                                     | $          | — |   | $ | 8,250 |   |
| Debt issuance cost for warrant issued                                        |       | $                                                   | —     |                                                                                                                     | $          | — |   | $ | 500,000 |   |
| Preferred stock dividend                                                     |       | $                                                   | 379,609    |                                                                                                                     | $          | 580,531 |   | $ | 1,189,051 |   |
| 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.*

 

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**Uni-Pixel, Inc.(A Development Stage Company)**

**Notes to Unaudited Consolidated FinancialStatements**

**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 September 30, 2006, we had accumulated a total deficit of $19.1 millionfrom operations 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 forty-one 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 September30, 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 financingtransactions.

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 ofmarkets for our products and profitable manufacturing processes.  We maybe required to obtain additional capital in the future to expand ouroperations. No assurance can be given that we will be able to develop ourproducts, successfully develop the markets for our products or profitablemanufacturing methods, or raise any such additional capital as we might need,either through equity or debt financing, on satisfactory terms or at all.Additionally, no assurance can be given that any such financing, if obtained,will be adequate to meet our ultimate capital needs and to support our growth.If adequate capital cannot be obtained on satisfactory terms, our operationscould be negatively 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 management controls,reporting systems and procedures. In addition, we may find it necessary to hireadditional management, financial and sales and marketing personnel to manageour expanding operations. If we are unable to manage this growth effectivelyand successfully, our business, operating results and financial condition maybe materially adversely affected.

As of September30, 2006, we had cash and cash equivalents of $0.8 million.  We believethat our existing capital resources are adequate to finance our operationsuntil December 2006. However, our long-term viability is dependent upon 

8

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successful operation of our business, our ability todevelop our manufacturing process, the development of our products and ourability to raise additional debt and equity to meet our business objectives.

*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 ofincorporation from Nevada to Delaware by merging with and into NEV AcquisitionCorp., a Delaware 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 inJanuary 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-Pixel Displays, Inc.was, for accounting purposes, the surviving entity of the merger, andaccordingly for the periods prior to the merger, the financial statementsreflect the financial position, results of operations and cash flows ofUni-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, 

9

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accounting policies and footnote disclosures normallyincluded in financial statements prepared in conformity with accountingprinciples generally accepted in the United States of America have been omittedpursuant to such rules and regulations, although we believe that thedisclosures are adequate to make the information presented not misleading.These financial statements should be read in conjunction with our auditedfinancial statements included in our Form 10-KSB, for the year endedDecember 31, 2005, filed with the Securities and Exchange Commission onMarch 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 and equipmentand intangible assets, deferred taxes, and the provision for and disclosure oflitigation and loss contingencies. Actual results may differ materially fromthose 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 September 30, 2006 and December 31, 2005 by $741,882 and$2,063,000, respectively. The terms of these deposits are on demand to minimizerisk.  We have not incurred losses related to these deposits.

*Restrictedcash*

As of September30, 2006 and December 31, 2005, we had restricted cash of $40,000 and $300,000,respectively.  Of these amounts, $40,000 and $80,000, respectively,secured certain obligations under our lease agreement for our principalfacility located in The Woodlands, Texas at both September 30, 2006 andDecember 31, 2005.  The remaining$220,000 at December 31, 2005 collateralized a long-term note payable for thepurchase of measurement equipment.  Therestricted cash has been segregated into current and long-term classificationsbased 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 intangible assetsrepresent patent applications which are recorded at cost.  We have filedapplications for patents in connection with technologies being developed. Thepatent applications and any patents issued as a result of these applicationsare important to the protection of our technologies that may result from ourresearch and development efforts. Costs associated with patent applications andmaintaining patents are capitalized and will be amortized over the life of thepatents.  We review the value recorded for intangible assets to assessrecoverability from future operations using undiscounted cash flows.Impairments are recognized in operating results to the extent the carryingvalue exceeds fair value determined based on the net present value of estimatedfuture 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 

10

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characteristics or other valuation techniques.  These derivative liabilities aremarked-to-market each quarter with the change in fair value recorded in theincome 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 and $0.9million convertible notes by using a layered discounted probability-weightedcash flow model.  The assumptions used inboth modeling techniques required significant management judgment and estimatesof future fluctuation in stock price as well as changes in future interestrates. The reader should reference Note 6 for further details in regards to ourderivative liabilities.

*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 and collectibilityis reasonably assured.  Deferred revenueon these contracts of $33,333 and $200,000 at September 30, 2006 and December31, 2005, respectively, consists of a development contract to produce anddeliver a prototype device.   During thefirst quarter ended March 31, 2006, the Company fulfilled its obligation with acustomer in providing a product prototype, and has released deferred income of$200,000 into earned revenues during the period.  The costs incurred withthis prototype were incurred in prior periods as a component of research anddevelopment 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 and manufacturingof materials and devices, and a portion of facilities costs. Prototypedevelopment costs are a significant component of research and developmentexpenses and include costs associated with third-party contractors. Invoicingfrom 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 toprovide service in exchange for the reward—known as the requisite serviceperiod. No compensation cost is recognized for equity instruments for whichemployees do not render the requisite service. The grant-date fair value ofemployee share options and similar instruments will be estimated usingoption-pricing models adjusted for the unique characteristics of thoseinstruments. We have implemented 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.

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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 $0.7 million for the ninemonths ended September 30, 2006.

A summary of thechanges in the total stock options outstanding during the nine months endedSeptember 30, 2006 follows:

|                                               | ** ** | ** **  | ** ** | **Weighted**            | ** ** |
|-----------------------------------------------|------------|-------------|------------|-------------------------|------------|
| ** **                                    | ** ** | ** **  | ** ** | **Average**             | ** ** |
| ** **                                    | ** ** | **Options** | ** ** | **Exercise Price** | ** ** |
| Outstanding at  December 31, 2005        |       | 1,805,000   |       | $                       | 2.00       |   |
| Granted                                       |       | 1,010,000   |       | 1.25                    |       |
| Forfeited or  expired                         |       | (145,000    | )          | 4.00                    |       |
| Exercised                                     |       | —      |       | —                  |       |
| Outstanding at  September 30, 2006            |       | 2,670,000   |       | $                       | 1.72       |   |
| Vested and exercisable  at September 30, 2006 |       | 631,160     |       | $                       | 2.00       |   |

 

The fair value ofthe Company’s options were estimated on the date of grant using theBlack-Scholes valuation model with the following weighted-average assumptions:

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

 

The followingtable presents information on net loss and diluted loss per share for the threeand nine months ended September 30, 2006 determined in accordance with SFASNo. 123(R), compared to the pro forma information determined under SFASNo. 123 for the three and nine months ended September 30, 2005:

|                                                                                                                                                                       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss  attributable to common shareholders — as reported                                                                                                      |       | $                                                        | (1,181,661 | )                                                       | $          | (1,477,877 | ) | $ | (4,899,244 | ) | $ | (4,225,216 | ) |
| 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                                                       |       | (176,223                                                | )          | NA |   | (354,023 | ) |
| Net loss — pro  forma                                                                                                                                            |       | $                                                        | (1,181,661 | )                                                       | $          | (1,654,100 | ) | $ | (4,899,244 | ) | $ | (4,579,239 | ) |
|                                                                                                                                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss per  share attributable to common shareholders — as reported                                                                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic and diluted                                                                                                                                                     |       | $                                                        | (0.07      | )                                                       | $          | (0.12 | ) | $ | (0.31 | ) | $ | (0.33 | ) |
| Net loss per  share attributable to common shareholders — pro forma                                                                                              |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic and  diluted                                                                                                                                                    |       | $                                                        | (0.07      | )                                                       | $          | (0.13 | ) | $ | (0.31 | ) | $ | (0.36 | ) |

 

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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 September 30,2006, options and warrants to purchase 5,412,900 shares of common stock atexercise prices ranging from $1.25 to $2.00 per share were outstanding, butwere not included in the computation of diluted earnings per share as theireffect would be antidilutive.

*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 nonmonetary assets that do not have commercial substance. Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange. Theprovisions of SFAS 153 were required to be applied prospectively. SFAS 153 didnot have a material impact on 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 statementrequires retrospective 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.

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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 andHedging Activities.” The Company will adopt SFAS No. 155 in fiscal year 2007.SFAS 155 is not expected to have a material impact on the Company’sconsolidated financial 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 bebased on an analysis of the design of the variable interest entity. Theadoption of this FSP is not expected to have a material effect on the Company’sunaudited interim consolidated financial statements.

**Note 4 — Commitments andContingencies**

*Leases*

The Company has entered into a lease for office,warehouse and laboratory facilities in The Woodlands, Texas under a third partynon-cancelable operating lease through 2010. Future minimum lease commitmentsas of September 30, 2006 are as follows:

| Year Ending December 31 | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| 2006                                   |       | $          | 49,319     |   |
| 2007                                   |       | 199,727    |       |
| 2008                                   |       | 202,997    |       |
| 2009                                   |       | 206,267    |       |
| 2010                                   |       | 191,825    |       |
| Thereafter                             |       | —     |       |
| Total                                  |       | $          | 850,135    |   |

 

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

**Note 5 — Equity, Stock Plan andWarrants**

*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 ninemonths ended September 30, 2006, we did not issue equity instruments tonon-employees.

*Common Stock*

During the nine months ended September 30, 2006, weissued no shares of common stock for cash in connection with the exercise ofstock options and issued no shares of common stock in exchange for cashlessexercise of 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, 

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which has exclusive discretion to select participantswho will receive the awards and to determine the type, size and terms of eachaward granted.

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 overperiods of 36 months from the date of grant. In the third quarter of 2006, a total of 145,000 stock options with anexercise price of $4.00 per share to four employees were forfeited.

On September 5, 2006, the Board of Directors ofUni-Pixel, Inc., reduced the exercise price of 1,660,000 stock options issuedto eight employees, with an exercise price of $4.00 per share to an exerciseprice of $2.00 per share.  This resultedin an additional compensation expense of approximately $140,000 in the thirdquarter of 2006 and an additional compensation expense of approximately$213,000 to be recorded over the remaining vesting period.

*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.   Due to these performancecriteria, compensation expense will not be recognized for these stock optionsuntil such time as Mr. Yankowski is appointed CEO.  Mr. Yankowski has joined the Companyeffective April 1, 2006 as a Consultant and under the terms of the agreementwill become the CEO and a member of the Company’s Board of Directors, at hiselection, upon the Company completing a minimum equity round of $10 million.

On September 5, 2006, the Board of Directors ofUni-Pixel, Inc., reduced the exercise price of 1,000,000 stock options issuedto Mr. Yankowski, with an exercise price of $1.75 per share to an exerciseprice of $1.25 per share.  This resultedin an additional compensation expense of approximately $0 in the third quarterof 2006 and an additional compensation expense of approximately $104,000 to berecorded over the remaining vesting period if Mr. Yankowski becomes CEO.

**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 

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outstanding amounts until the events of default arecured or waived.  On September 9, 2006,Trident Growth Fund, L.P and CapSource Fund, L.P. agreed to waive compliance ofSection 6(m) of the Convertible Note, provided, however, that such waiver isonly temporary and shall expire on December 31, 2006 at which time Uni-Pixelmust be in compliance with such provision. If Uni-Pixel fails to comply with such provision on or by December 31,2006, Trident Growth Fund, L.P and CapSource Fund, L.P. shall have the right todeclare the Convertible Note in default. As a result of this Waiver, Uni-Pixel, Inc. fixed the total number ofwarrants to be issued to Trident Growth Fund, L.P. and CapSource Fund, L.P. at1,500,000 warrants.  Effective September9, 2006, the Common Stock Purchase Warrants may be exercised at any time within5 years at a price equal to the lesser of (a) $1.25 per shares or (b) 100% ofthe average price per share of the Common Stock and Common Stock Equivalentssold to any Person in the first Qualifying Transaction to be consummatedfollowing the Initial Exercise Date, as defined in the Common Stock PurchaseWarrants.  Further, in consideration foran to induce Trident Growth Fund, L.P and CapSource Fund, L.P. to grant theWaiver, Uni-Pixel agreed to pay Trident Growth Fund, L.P and CapSource Fund,L.P. an amount equal to $37,500 each, such amount being due and payable on theearlier to occur of December 31, 2006, the Maturity Date of the ConvertibleNote, or the date upon which the loan is otherwise repaid in full.

The ConvertibleNote is a hybrid instrument which contains both freestanding derivativefinancial instruments and an embedded derivative feature which wouldindividually warrant separate accounting as a derivative instrument under SFASNo. 133. The freestanding derivative financial instrument includes the TridentGrowth Fund, L.P. Warrant and the CapSource Fund, L.P. Warrant, which werevalued individually, and totaled $1,298,031 at inception on May 24, 2006. TheCompany identified an embedded derivative feature related to the conversionprice within 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 theConvertible Note, or 12 months, by using the effective interest method. Theremaining financing costs of $75,000 paid to Trident Growth Fund, L.P. andCapSource Fund, L.P. were recorded to unamortized discount on the ConvertibleNote and are amortized to interest expense over 12 months under the effectiveinterest method.

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)$1.75 per share or (b) 90% of the average price per share of the Common Stockand Common Stock Equivalents sold to any Person in the first QualifyingTransaction to be consummated following the Initial Exercise Date, as definedin the Common Stock Purchase Warrants. In September 2006, the total number of warrants to be issued to TridentGrowth Fund, L.P. and CapSource Fund, L.P. was fixed at 1,500,000 warrants.  Effective in September 2006, the Common StockPurchase Warrants may be exercised at any time within 5 years at a price equalto the lesser of (a) $1.25 per shares or (b) 100% of the average price pershare of the Common Stock and Common Stock Equivalents sold to any Person inthe first Qualifying Transaction to be consummated following the InitialExercise Date, as defined in the Common Stock 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 reductionof the initial carrying amount (as unamortized discount) of the ConvertibleNote.  This derivative liability is marked-to-marketeach quarter with the change in fair value recorded in the incomestatement.  Unamortized discount isamortized to interest expense using the effective interest method over the lifeof the Convertible Note, or 12 months. If the Warrant is exercised during this 12 month period, the derivativeliability will be released and recorded as additional paid in capital.

The components of Notespayable at inception and at September 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, 2006                               |   | $          | 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   |   |

 

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Convertible Note atSeptember 30, 2006 —

The Convertible Notebalance on the consolidated balance sheet as of September 30, 2006 is comprisedof the following:

| Notional balance of  Convertible Note at September 30, 2006                  |   | $          | 1,500,000 |   |
|------------------------------------------------------------------------------|--------|------------|-----------|--------|
| Adjustments:                                                                 |   |       |      |
| Unamortized discount                                                         |   | (1,136,751 | )         |
| Convertible Note  balance, net of unamortized discount at September 30, 2006 |   | $          | 363,249   |   |

 

Change in unamortizeddiscount and loan costs of Notes payable —

For the ninemonths ended September 30, 2006, the discount on Notes payable changed foramortization of discounts for derivative liabilities related to the ConvertibleNote and Warrant and for amortization of loan costs paid in connection withboth the Convertible Note. The total discount on Notes payable changed from$1,373,031 at inception to $1,136,751 at September 30, 2006.

| Accretion of unamortized  discount to Convertible Note for derivative liabilities for Warrant |   | $       | (210,070 | ) |
|-----------------------------------------------------------------------------------------------|--------|---------|----------|---|
| Amortization of  unamortized discount of loan costs                                           |   | (26,210 | )        |
| Total change in  discount on Notes Payable during nine months ended September 30, 2006        |   | $       | (236,280 | ) |

 

The followingassumptions were used in the preparation of the above valuations at September30, 2006:

Black-ScholesMethodology:

| Assumptions              | ** ** | **Warrant** | ** ** |
|--------------------------|------------|-------------|------------|
| Dividend yield           |       | 0.00        | %          |
| Risk-free  interest rate |       | 5.10        | %          |
| Volatility               |       | 63.74       | %          |
| Expected Term            |       | 4.65 years  |       |

 

Change in fair value ofderivatives instruments —

The net decreasein derivative liability for the Warrant (marked-to-market) of $237,699 for thenine months ended September 30, 2006, has been recorded under Other income inthe accompanying 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 ofoperations may vary significantly from quarter to quarter, based on factorsother than our revenues and expenses.

*Unsecured convertible note —*

On September 12,2006, Uni-Pixel, Inc. entered into Securities Purchase Agreements with variousinvestors pursuant to which Uni-Pixel issued 10% Senior Unsecured ConvertibleDebentures (the “Unsecured Convertible Note”) for the principal amount of $900,000.  The principal sum of $900,000 is due on theearlier of (a) September 11, 2007; (b) the consummation of a Change of ControlTransaction; or (c) upon the closing of an equity Offering of $10 million ormore, all as defined in the Securities Purchase Agreement.  The Unsecured Convertible Note is convertibleat any time into shares of the Offering at a price equal to the shares beingsold in the Offering.

 

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In connection withthe Securities Purchase Agreement, the Company issued 144,000 warrants at $1.25per share to the investors.  The warrantswill expire in five years.

As consideration for thePlacement Agent services in connection with the Securities Purchase Agreement,the Company issued 50,400 warrants at $1.25 to the Placement Agent or itsdesignees.  The warrants will expire infive years.   In addition, the PlacementAgent received a commission equal to 5%, or $45,000.

The UnsecuredConvertible Note bears interest at 10% and is payable at the Maturity Date, asdefined in the Securities Purchase Agreement.

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.

Events of  default under the Unsecured Convertible Noteinclude, among other provisions, bankruptcy, material adverse event,  breach of Covenant, and change in control,whereby upon occurrence, the investors may demand immediate repayment of theUnsecured Convertible Note and accrued interest.

The UnsecuredConvertible Note is a hybrid instrument which contains both freestandingderivative financial instruments and an embedded derivative feature which wouldindividually warrant separate accounting as a derivative instrument under SFASNo. 133. The freestanding derivative financial instrument includes theinvestors warrants, which were valued individually, and totaled $107,416 atinception on September 12, 2006. The Company identified an embedded derivativefeature related to the conversion price within the Unsecured Convertible Note.However, its fair market value is insignificant at inception.

Uni-Pixel, Inc.also incurred closing costs of $85,000 in connection with the closing of theUnsecured Convertible Note.  Net fees andcosts to non-lenders in the amount of $85,000 were capitalized as deferred loancosts at inception on September 12, 2006, and shall be recognized over the lifeof the Unsecured Convertible Note, or 12 months, by using the effectiveinterest method.

Common stock purchasewarrants —

In connection withthe Securities Purchase Agreement, the investors received Common Stock PurchaseWarrants (“Warrant”) to purchase a 144,000 shares of our Common Stock at $1.25.

The Warrant is afreestanding derivative financial instrument. Using the  Black-Scholes Method,  the  fair value of the derivative was computed at $107,416 at inception onSeptember 12, 2006 and recorded as a derivative liability which  resulted in  a  reduction of the initial carrying amount (asunamortized discount) of the Unsecured Convertible Note.   This derivative liability ismarked-to-market each quarter with the change in fair value recorded in theincome statement.  Unamortized discountis amortized to interest expense using the effective interest method over thelife of the Unsecured Convertible Note, or 12 months.  If the Warrant is exercised during this 12month period, the derivative liability will be released and recorded asadditional paid in capital.

The components of Notes payableat inception and at September 30, 2006 are as follows:

Unsecured ConvertibleNote at Inception (September 12, 2006) —

As a result ofthese contract provisions, the Unsecured Convertible Note balance at Inception(September 12, 2006) was adjusted as follows:

| Notional balance of  Unsecured Convertible Note at September 12, 2006                  |   | $        | 900,000 |   |
|----------------------------------------------------------------------------------------|--------|----------|---------|--------|
| Adjustments:                                                                           |   |     |    |
| Discount for derivative liability — Warrant                                       |   | (107,416 | )       |
| Unsecured Convertible  Note balance, net of unamortized discount at September 12, 2006 |   | $        | 792,584 |   |

 

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Unsecured ConvertibleNote at September 30, 2006 —

The Unsecured ConvertibleNote balance on the consolidated balance sheet as of September 30, 2006 iscomprised of the following:

| Notional balance of  Unsecured Convertible Note at September 30, 2006                      |   | $       | 900,000 |   |
|--------------------------------------------------------------------------------------------|--------|---------|---------|--------|
| Adjustments:                                                                               |   |    |    |
| Unamortized discount                                                                       |   | (98,422 | )       |
| Unconvertible  Convertible Note balance, net of unamortized discount at September 30, 2006 |   | $       | 801,578 |   |

 

Change in unamortizeddiscount and loan costs of Notes payable —

For the ninemonths ended September 30, 2006, the discount on Notes payable changed foramortization of discounts for derivative liabilities related to the UnsecuredConvertible Note and Warrant and for amortization of loan costs paid inconnection with both the Unsecured Convertible Note. The total discount onNotes payable changed from $107,416 at inception to $98,422 at September 30,2006.

| Accretion of unamortized  discount to Unsecured Convertible Note for derivative liabilities for Warrant |   | $ | (8,994 | ) |
|---------------------------------------------------------------------------------------------------------|--------|---|--------|---|
| Total change in  discount on Notes Payable during nine months ended September 30, 2006                  |   | $ | (8,994 | ) |

 

The followingassumptions were used in the preparation of the above valuations at September30, 2006:

Black-ScholesMethodology:

| Assumptions              | ** ** | **Warrant** | ** ** |
|--------------------------|------------|-------------|------------|
| Dividend yield           |       | 0.00        | %          |
| Risk-free  interest rate |       | 5.10        | %          |
| Volatility               |       | 63.74       | %          |
| Expected Term            |       | 4.95 years  |       |

 

Change in fair value ofderivatives instruments —

The net decreasein derivative liability for the Warrant (marked-to-market) of $2,824 for thenine months ended September 30, 2006, has been recorded under Other income inthe accompanying 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 the various investors inconnection with the Unsecured Convertible Note or exercised in connection withthe Warrants.  Consequently, ourconsolidated financial position and results of operations may varysignificantly from quarter to quarter, based on factors other than our revenuesand expenses.

**Note 7 —****   SubsequentEvent**

 

*Other Stock Options*

On October 1,2006, we granted a total of 1,000,000 options to purchase our common stock withan exercise price of $1.25 per share to Mr. Carl Yankowski.  1,000,000 of these options vest upon theoccurrence of any of the following events: (i) by no later than January 1,2010, upon the closing of the sale of substantially all of the assets ofUni-Pixel or the reorganization, consolidation, merger, dissolution orliquidation of Uni-Pixel; provided that the event results in the payment ordistribution of consideration valued in good faith by the Uni-Pixel Board ofDirectors at $15 per share (on a fully diluted basis) or more; (ii) by no laterthan January 1, 2010, upon the closing of a tender offer or exchange offer to purchase50% or more of the issued and outstanding shares of Uni-Pixel common stock at aprice per share valued in good faith by the Uni-Pixel Board of Directors at $15per share (on a fully diluted basis) or more; or (iii) by no later than January1, 2010, upon the common stock of Uni-Pixel, Inc. trading at $15 per share ormore for 60 (or more) consecutive days and having a daily trading volume of200,000 shares or more for 60 (or more) consecutive days. If (i), (ii) or(iii), as detailed above, do not occur on or before January 1, 2010, thisOption will 

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be cancelled in full. If Mr. Yankowski does not become Chief Executive Officer of Uni-Pixel,Inc. by January 31, 2007, this Option will be cancelled in full.

**ITEM 2.**                    MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATON.

**Forward Looking Statements**

Some of the information in this report containsforward-looking information that involve risks and uncertainties.  Our forward-looking statements express ourcurrent expectations or forecasts of possible future results or events,including projections of future performance, statements of management’s plansand objectives, future contracts, and forecasts of trends and othermatters.  You can identify thesestatements by the fact that they do not relate strictly to historic or currentfacts 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 similar meaning.  No assurance can be given that the results inany forward-looking statement will be achieved and actual results could beaffected by one or more factors, which could cause them to differmaterially.  For these statements, we claimthe protection of the safe harbor for forward-looking statements contained inthe Private Securities Litigation Reform Act. You should also considercarefully the statements under “Description of Business - Risk Factors” in our2005 Form 10-KSB, which address factors that could cause our actual results todiffer 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 appropriate assumptions to be used in the determination ofcertain estimates. Those estimates are based on our historical operations, ourfuture business plans and projected financial results, the terms of existingcontracts, our observance of trends in the industry, information provided byour customers and information available from other outside sources, asappropriate. The following discusses our significant accounting policies andestimates.

*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, 

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site management and monitoring costs and datamanagement costs. Actual costs may differ in some cases from estimated costsand are adjusted for in the period in which they become 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.Impairments are recognized in operating results to the extent the carryingvalue exceeds fair value determined based on the net present value of estimatedfuture cash flows. The projection of future cash flows requires us to makeestimates about when product approvals may be obtained, and the amount offuture revenues. The actual future results could differ significantly fromthese estimates, and resulting changes in the estimates of future cash flowscould be significant and 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 our stock-basedcompensation under the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123— “Accounting for Stock Based Compensation.”Under SFAS No. 123, we are permitted to either record expenses for stockoptions and other employee compensation plans based on their fair value at thedate of grant or to continue to apply the provisions of Accounting PrinciplesBoard Opinion No. 25 “Accounting for Stock Issued to Employees,” (“APBNo. 25”), and recognize compensation expense, if any, based on theintrinsic value of the equity instrument at the measurement date. We haveelected to continue following the provisions of APB No. 25. Stock optionsissued to persons other than employees or directors are recorded on the basisof their fair value as required by SFAS No. 123.

*RESULTS OF OPERATIONS*

Comparisonof the nine months ending September 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 nine monthsended September 30, 2006, as compared to $19,689 for the nine months endedSeptember 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 nine months ended September 30, 2006decreased to $0 as compared to $9,844 for the nine months ended September 30,2005.  No cost of revenues was recognizedin 2006 as the cost of revenues was expensed in the period incurred prior to2006 as a component of research and development expenses.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,general and administrative expenses increased by 37% or $642,939, to $2,358,037for the nine months ended September 30, 2006 from $1,715,098 for the ninemonths ended September 30, 2005.  The major components of the increase areas follows:

a)  Salaries and benefits increased byapproximately $649,000 to $1,372,000 for the nine months ended September 30,2006 compared to $723,000 for the nine months ended September 30, 2005 due to aincrease in the number of selling, general and administrative employees and astock compensation expense of $560,000 for the nine months ended September 30,2006;

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b) Contract labor decreased by approximately $17,000to $146,000 for the nine months ended September 30, 2006 compared to $163,000for the nine months ended September 30, 2005;

c) Legal expense decreased by approximately $2,000 to$255,000 for the nine months ended September 30, 2006 compared to $257,000 forthe nine months ended September 30, 2005;

d) Accounting expense increased by approximately$16,000 to $47,000 for the nine months ended September 30, 2006 compared to$31,000 for the nine months ended September 30, 2005;

e) Office expense increased by approximately $8,000 to$83,000 for the nine months ended September 30, 2006 compared to $75,000 forthe nine months ended September 30, 2005;

f) Travel expense increased by approximately $14,000to $77,000 for the nine months ended September 30, 2006 compared to $63,000 fornine months ended September 30, 2005; and

g) Depreciation and amortization expense increased byapproximately $70,000 to $197,000 for the nine months ended September 30, 2006compared to $127,000 for the nine months ended September 30, 2005 as a resultof an increase in property and equipment during the nine months ended September30, 2006.

RESEARCH AND DEVELOPMENT. Research and developmentexpenses increased by approximately $261,884 during the nine months endedSeptember 30, 2006 to $2,290,039 from $2,028,155 for the nine months endedSeptember 30, 2005. The major components of the increase are as follows:

a) Salaries and benefits attributable to research anddevelopment increased by approximately $171,000 to $1,046,000 for the ninemonths ended September 30, 2006 compared to $875,000 for the nine months endedSeptember 30, 2005 due to an increase in the number of research and developmentemployees and the level of compensation for these employees, includingexecutive pay increases and a stock compensation expense of $148,000 for thenine months ended September 30, 2006;

b) Consulting expense attributable to research anddevelopment increased by approximately $143,000 to $906,000 for the nine monthsended September 30, 2006 compared to $763,000 for the nine months endedSeptember 30, 2005 primarily due to increased services related to prototypedevelopment;

c) Lab expense decreased by approximately $49,000 to$97,000 for the nine months ended September 30, 2006 compared to $146,000 forthe nine months ended September 30, 2005; and

d) Travel expense attributable to research anddevelopment decreased by approximately $69,000 to $78,000 for the nine monthsended September 30, 2006 compared to $147,000 for the nine months endedSeptember 30, 2005.

OTHER INCOME (EXPENSE).

a) Net decrease in fair value of derivativeliabilities decreased to an income of $240,523 for the nine months endedSeptember 30, 2006 as compared to $0 during the nine months ended September 30,2005, due to the Warrant issued in connection with the 12% Senior SecuredConvertible Debentures in May 2006 and the Warrant issued in connection withthe 10% Senior Unsecured Convertible Debentures in September 2006.   The Warrants are a freestanding derivativefinancial instruments. These derivative liabilities are marked-to-market eachquarter with the change in fair value recorded in the income statement.

b) Debt issuance expense increased to $38,297 for thenine months ended September 30, 2006 as compared to $0 during the nine monthsended September 30, 2005, due to the debt raised in May 2006 and September2006.

c)****Interestincome (expense), net decreased to ($273,785) for the nine months endedSeptember 30, 2006 as compared to $88,723 for the nine months ended September30, 2005 primarily due to less cash on hand, the payment of interest on the$1,500,000 loan received in May 2006, the amortization of the discount on theWarrant issued in connection with the 12% Senior Secured Convertible Debenturesin May 2006, the payment of interest on the $900,000 loan received in September2006, and the amortization of the discount on the Warrant issued in connectionwith the 10% Senior Unsecured Convertible Debentures in September 2006.

NET LOSS.**  **Net loss increased to $4,519,635 for the nine months ended September30, 2006, as compared to $3,644,685 for the nine months ended September 30,2005. We compute our net loss per share on the basis of net loss attributableto common stockholders, which included the effects of certain items notincluded in the determination of net loss. Net loss attributable to commonstockholders for the nine months ended September 30, 2006 was $4,899,244 ascompared to a net loss 

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attributable to common stockholders of $4,225,216 forthe nine months ended September 30, 2005. The net loss attributable to commonstockholders for the nine months ended September 30, 2006 includes $379,609 ofaccrued but unpaid preferred stock dividends. The net loss attributable to common stockholders for the nine monthsended September 30, 2005 includes $580,531 of accrued but unpaid preferredstock dividends.

Comparisonof the three months ending September 30, 2006 and 2005

REVENUES.  Revenues stayed constant at $0 for thethree months ended September 30, 2006, as compared to $0 for the three monthsended September 30, 2005.

COST OF REVENUES.  Cost of revenues include alldirect expenses associated with the delivery of services including internallabor costs. There was no cost of revenues recognized for the three monthsended September 30, 2006 and the three months ended September 30, 2005.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,general and administrative expenses increased by 25% or $149,098, to $747,049for the three months ended September 30, 2006 from $597,951 for the threemonths ended September 30, 2005.  The major components of the increase areas follows:

a)  Salaries and benefits increased byapproximately $221,000 to $487,000 for the three months ended September 30,2006 compared to $266,000 for the three months ended September 30, 2005 due tostock compensation expense of $266,000 for the three months ended September 30,2006;

b) Contract labor increased by approximately $7,000 to$29,000 for the three months ended September 30, 2006 compared to $22,000 forthe three months ended September 30, 2005;

c) Legal expense increased by approximately $48,000 to$65,000 for the three months ended September 30, 2006 compared to $17,000 forthe three months ended September 30, 2005;

d) Accounting expense increased by approximately$5,000 to $10,000 for the three months ended September 30, 2006 compared to$5,000 for the three months ended September 30, 2005;

e) Office expense decreased by approximately $7,000 to$23,000 for the three months ended September 30, 2006 compared to $30,000 forthe three months ended September 30, 2005;

f) Travel expense stayed constant at $27,000 for thethree months ended September 30, 2006 compared to $27,000 for three months endedSeptember 30, 2005;  and

g) Depreciation and amortization expense increased byapproximately $5,000 to $65,000 for the three months ended September 30, 2006compared to $60,000 for the three months ended September 30, 2005 as a resultof an increase in property and equipment during the three months endedSeptember 30, 2006.

RESEARCH AND DEVELOPMENT. Research and developmentexpenses decreased by approximately $234,739 during the three months endedSeptember 30, 2006 to $471,733 from $706,472 for the three months endedSeptember 30, 2005. The major components of the decrease are as follows:

a) Salaries and benefits attributable to research anddevelopment decreased by approximately $13,000 to $251,000 for the three monthsended September 30, 2006 compared to $264,000 for the three months endedSeptember 30, 2005 due to an decrease in the number of research and developmentemployees and the level of compensation for these employees, includingexecutive pay increases and a stock compensation expense of $58,000 for thethree months ended September 30, 2006;

b) Consulting expense attributable to research anddevelopment decreased by approximately $140,000 to $172,000 for the threemonths ended September 30, 2006 compared to $312,000 for the three months endedSeptember 30, 2005 primarily due to decreased services related to prototypedevelopment;

c) Lab expense decreased by approximately $38,000 to$3,000 for the three months ended September 30, 2006 compared to $41,000 forthe three months ended September 30, 2005; and

d) Travel expense attributable to research anddevelopment decreased by approximately $47,000 to $15,000 for the three monthsended September 30, 2006 compared to $62,000 for the three months endedSeptember 30, 2005.

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OTHER INCOME (EXPENSE).

a) Net decrease in fair value of derivativeliabilities decreased to an income of $388,232 for the three months endedSeptember 30, 2006 as compared to $0 during the three months ended September30, 2005, related to the Warrant issued in connection with the 12% SeniorSecured Convertible Debentures in May 2006 and the Warrant issued in connectionwith the 10% Senior Unsecured Convertible Debentures in September 2006.   The Warrants are freestanding derivativefinancial instruments. These derivative liabilities are marked-to-market eachquarter with the change in fair value recorded in the income statement.

b) Debt issuance expense increased to $28,674 for thethree months ended September 30, 2006 as compared to $0 during the three monthsended September 30, 2005, due to the debt raised in May 2006 and September2006.

b)****Interestincome (expense), net decreased to ($200,234) for the three months endedSeptember 30, 2006 as compared to $25,126 for the three months ended September30, 2005 primarily due to less cash on hand, the payment of interest on the$1,500,000 loan received in May 2006, the amortization of the discount on theWarrant issued in connection with the 12% Senior Secured Convertible Debenturesin May 2006, the payment of interest on the $900,000 loan received in September2006, and the amortization of the discount on the Warrant issued in connectionwith the 10% Senior Unsecured Convertible Debentures in September 2006.

NET LOSS.**  **Net loss decreased to $1,059,458 for the three months ended September30, 2006, as compared to $1,279,297 for the three months ended September 30,2005. We compute our net loss per share on the basis of net loss attributableto common stockholders, which included the effects of certain items notincluded in the determination of net loss. Net loss attributable to commonstockholders for the three months ended September 30, 2006 was $1,181,661 ascompared to a net loss attributable to common stockholders of $1,477,877 forthe three months ended September 30, 2005. The net loss attributable to commonstockholders for the three months ended September 30, 2006 includes $122,203 ofaccrued but unpaid preferred stock dividends. The net loss attributable to common stockholders for the three monthsended September 30, 2005 includes $198,580 of accrued but unpaid preferredstock dividends.

**Off-Balance Sheet Transactions**

We do not engage in material off-balance sheettransactions.

*LIQUIDITY AND CAPITAL RESOURCES*

OperatingActivities

Cash used in operating activities during the nine monthsended September 30, 2006 increased to $3,663,876 as compared to $3,371,518 usedfor the nine months ended September 30, 2005. The increase is primarily aresult of increases in the first nine months of 2006 in research anddevelopment spending and general and administrative expenses resulting fromadditional employee salary and related employee costs.

InvestingActivities

Cash used for investing activities during the ninemonths ended September 30, 2006 amounted to $48,187, as compared to $992,120used for investing activities for the nine months ended September 30, 2005 dueto our decreased spending on computers, furniture, laboratory, metrology andtesting equipment in the nine months ended September 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 nine months ended September30, 2006, the total net cash provided by financing activities was$2,137,850.  The $2,137,850 includes: a)$39,761 payments on notes payable to related party and b) $2,177,611 netproceeds from notes payable.  During thenine months ended September 30, 2005, the total net cash provided byfinancing activities was $2,900,939, which includes: a) $85,068 to retire notespayable to a related party, b) net proceeds of $186,707 from a note payablefrom Bank of America to purchase equipment, and c) $2,799,300 net from cashsales of shares of our Series A Preferred Stock.

WorkingCapital

As of September 30, 2006, we had a cash balance of$0.8 million.  We project that current cash reserves will sustain ouroperations at least through December 2006. We had negative working capital of $1.7 million at September 30, 2006.

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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 our financingactivities. We have incurred significant operating losses during each of theyears 2002 through 2005 and the nine months ended September 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 anddevelopment, 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 agoing concern will be dependent upon achieving profitable operations, andobtaining additional 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.

On September 12,2006, Uni-Pixel, Inc. entered into Securities Purchase Agreements with variousinvestors pursuant to which Uni-Pixel issued 10% Senior Unsecured ConvertibleDebentures for the principal amount of $900,000.  The principal sum of $900,000 is due on theearlier of (a) September 11, 2007; (b) the consummation of a Change of ControlTransaction; or (c) upon the closing of an equity Offering of $10 million ormore, 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.

**ITEM 3.**                    CONTROLS ANDPROCEDURES.

DisclosureControls and Procedures

As of September 30, 2006, management, including ourPresident and Chief Financial Officer, performed an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934. Based on their evaluation, management, including our President and ourChief Financial Officer, concluded that, as of September 30, 2006, ourdisclosure controls and procedures are effective to ensure that materialinformation required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms, and that it isaccumulated and communicated to management, including our President and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.

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, our President and Chief FinancialOfficer have determined that no significant changes in our internal controlover financial reporting occurred during our most recent fiscal quarter thathave materially affected, or are reasonably like to materially affect, ourinternal control over financial reporting.

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**PART II —OTHER INFORMATION**

**ITEM 2.**                    UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On September 12,2006, Uni-Pixel, Inc. entered into Securities Purchase Agreements with variousinvestors pursuant to which Uni-Pixel issued 10% Senior Unsecured ConvertibleDebentures (the “Debentures”) for the principal amount of $900,000.  The Debentures are convertible, at the optionof the holder, at any time on or prior to maturity into share of our CommonStock at a conversion price of the lesser of (a) 100% of the average price pershare of the Common Stock and Common Stock Equivalents sold to any Person inthe first Qualifying Transaction to be consummated following the Original IssueDate or (b) $1.25 per share (which such Conversion Price shall apply in theevent no Qualifying Transaction has closed on or by the Conversion Date), eachof which is subject to adjustment.

In connection withthe Securities Purchase Agreement, the Company issued 144,000 warrants at $1.25per share to the investors.  The warrantswill expire in five years.

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.**                    OTHERINFORMATION.

See the disclosure contained in Item 2 of this PartII.

**ITEM 6.**                    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) |
|         | 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        |            |   | Uni-Pixel, Inc. 10% Senior Unsecured Convertible  Debenture dated September 12, 2006. (4) |
|         | 4.10       |            |   | Common Stock Purchase Warrant No. 1 issued to  Trident Growth Fund, L.P., dated May 24, 2006. (3) |
|         | 4.11       |            |   | Common Stock Purchase Warrant No. 1 issued to  CapSource Fund, L.P., dated May 24, 2006. (3) |
|         | 4.12       |            |   | Common Stock Purchase Warrant dated September 12,  2006. (4) |
|         | 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) |
|         | 10.3       |            |   | Securities Purchase Agreement dated September 12,  2006 (4) |
|         | 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 (5) |
|         | 31.2       |            |   | Certification of the Chief Financial Officer of  Uni-Pixel, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 (5) |
|         | 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 (5) |
|         | 32.2       |            |   | Certification of the Chief Financial Officer of  Uni-Pixel, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 (5) |

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

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(2)                                  Previouslyfiled as an exhibit to the Company’s Form 10-KSB, filed on March 28, 2006, andincorporated by reference hereto.

(3)                                  Previouslyfiled as an exhibit to the Company’s Form 10-QSB, filed on August 14, 2006, andincorporated by reference hereto.

(4)                                  Previouslyfiled as an exhibit to the Company’s Form 8-K, filed on September, 2006, andincorporated by reference hereto.

(5)                                  Filedherewith

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**SIGNATURES**

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|                  | ** ** | **UNI-PIXEL, INC.** |
|------------------|------------|---------------------|
|             |       |                |   |   |
| November 9, 2006 |       | By:                 |   | /s/ James A. Tassone |
| Date             |       |                |   | James A. Tassone, Chief Financial Officer |
|             |       |                |   |   |

 

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