** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-KSB**

 

| **ý** | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                       |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                 |
|       |       | **For the fiscal year ended December 31, 2005**                                                                                                                                            |
|       |       |                                                                                                                                                                                       |
| ** ** | ** ** | **or**                                                                                                                                                                                     |
| ** ** | ** ** | ** **                                                                                                                                                                                 |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                   |
| ** ** | ** ** | ** **                                                                                                                                                                                 |
|       |       | **For the Transition Period from                         to** |
|       |       |                                                                                                                                                                                       |
|       |       | **COMMISSION FILE NUMBER: 0-49737**                                                                                                                                                        |

 

**UNI-PIXEL,INC.**

(Exact Name of Small Business Issuer as Specified in Its Charter)

 
| **DELAWARE**                                                    | ** ** | **75-2926437**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 
| **8708 Technology Forest Place, Suite 100  The Woodlands, Texas 77381** |
|------------------------------------------------------------------------------|
| (Address of Principal Executive Offices)                                     |

 
| **(281) 825-4500**                                    |
|-------------------------------------------------------|
| (Issuer’s Telephone Number, Including Area Code) |

 

Securities Registered Pursuant toSection 12(b) of the Act: **None**

 

Securities Registered Pursuant toSection 12(g) of the Act:

 

**COMMON STOCK, PAR VALUE $0.001PER SHARE**

(Title of Class)

 

Check whether the issuer isnot required to file reports pursuant to Section 13 or 15(d) of the ExchangeAct: o

 

Check whether the issuer:(1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.   ý Yes o No

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B containedin this form, and no disclosure will be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.   ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.   o Yes ý No

 

The registrant’s revenue forits most recent fiscal year were: $19,689

 

As of February 28, 2006, theaggregate market value of the voting and non-voting common equity held bynon-affiliates of the registrant based upon the price at which such common equitywas sold on the Over-the-Counter Bulletin Board Exchange as of such date was $26,690,704.

 

As of February 28, 2006, theregistrant had 15,716,786 shares of common stock, par value $0.001, outstanding.

 

Documents incorporated byReference: None

 

Transitional Small BusinessDisclosure Format (Check One):   Yes o   No ý

 

 

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**TABLE OF CONTENTS**

 
|     | PART I                                                                                           |
|----------|--------------------------------------------------------------------------------------------------|
| ITEM 1.  | DESCRIPTION OF BUSINESS                                                                          |
| ITEM 2.  | DESCRIPTION OF  PROPERTY                                                                         |
| ITEM 3.  | LEGAL PROCEEDINGS                                                                                |
| ITEM 4.  | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                             |
|     |                                                                                             |
|     | PART II                                                                                          |
| ITEM 5.  | MARKET FOR  COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                        |
| ITEM 6.  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                                  |
| ITEM 7.  | FINANCIAL STATEMENTS                                                                             |
| ITEM 8.  | CHANGES IN  AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE            |
| ITEM 8A. | CONTROLS AND  PROCEDURES                                                                         |
| ITEM 8B. | OTHER INFORMATION                                                                                |
|     |                                                                                             |
|     | PART III                                                                                         |
| ITEM 9.  | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                              |
| ITEM 10. | EXECUTIVE  COMPENSATION                                                                          |
| ITEM 11. | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS |
| ITEM 12. | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                                  |
| ITEM 13. | EXHIBITS                                                                                         |
| ITEM 14. | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                          |

 

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**Cautionary Statement for Purposesof the “Safe Harbor” Provisions of the Private Securities Litigation Reform Actof 1995**

 

Some of the information inthis report contains forward-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 related 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, weclaim the protection of the safe harbor for forward-looking statementscontained in the Private Securities Litigation Reform Act. You should alsoconsider carefully the statements under “Description of Business - Risk Factors”,which address factors that could cause our actual results to differ from thoseset forth in the forward-looking statements.

 

**PART I**

 

**ITEM 1.  DESCRIPTION OF BUSINESS**

 

**OVERVIEW**

 

Uni-Pixel, Inc. is a development stage company thathas patented a next generation color display technology it calls TimeMultiplexed Optical Shutter (“TMOS”). The Company is a leader in the research,development and future commercialization of new flat panel displays using TMOSfor a variety of applications including:

 

| • | Mobile phones      |   | • | Televisions                 |
|--------|--------------------|--------|--------|-----------------------------|
| • | Digital cameras    |   | • | Consumer electronic devices |
| • | Notebook computers |   | • | Digital Signage             |

 

Uni-Pixel’s TMOS technology offers significant advantagesover existing alternatives including:

 

•                  **LowerManufacturing Cost:** Up to80% Cheaper

•                  **GreaterPower Efficiency:** Up to tentimes more efficient

•                  **ImprovedPicture Quality:** Daylightreadability for portable devices (e.g. notebook computers)

•                  **Increased Durability andReliability**

•                  **VersatileProduction:** Available in awide range of sizes from cell phones to stadium displays

•                  **Flexible, Shapeable andTransparent Displays**

 

We expect reduced cost, enhanced viewing quality, uniquedesign attributes, and improved reliability of the TMOS display architecture overcurrent Flat Panel Display alternatives to drive the demand for TMOS-basedproducts. Uni-Pixel anticipates that TMOS displays will be thin, lightweight,and power-efficient devices highly suitable for use in full-color displayapplications.

 

Uni-Pixel’s technology leadership and intellectualproperty position is expected to enable it to generate revenues in two phases.The initial phase is expected to generate revenue from existing verticalmarkets such as the military, avionics, and targeted mobile applications (e.g.cell phones, PDAs and hand held games) where small volumes and uniquerequirements will provide high margins. The second phase is expected to focuson additional applications for automotive, active signage, medical and consumerelectronics (i.e., TVs, monitors, personal computers, cameras, games, etc.)where higher unit volumes will require expanded production capacity.

 

Through its research and development efforts, the Companyhas established a portfolio of TMOS-related patents, patent applications andother intellectual property rights. Uni-Pixel currently has 7 issued, 2 allowedand 20 pending patent applications worldwide providing a defensible strategythat will support:

 

•                  Further developingproprietary TMOS technology

•                  Utilizing contractmanufacturing and an internal pilot line for product fabrication: Initiallymanufacturing small volumes of high performance displays for militaryapplications

 

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•                  Entering into jointventures in specific vertical market segments to exploit existing manufacturingand distribution channels of its targeted partners

•                  Actively licensingtechnology to display manufacturers for use in applications such as mobilephones, digital cameras, laptop computers, and other consumer electronicdevices

 

Through December 31, 2005 we have been primarily engagedin research and development efforts that have expanded our portfolio ofintellectual property, building prototype devices that demonstrate thetechnology, recruiting personnel, engaging various strategic partners, andcapital raising activities consistent with our strategy.  As of December 31, 2005 we had accumulated atotal deficit of $14.6 million and expect such losses to continue through atleast 2006. We will finance our continuing efforts and operations primarilythrough our existing cash, through license fees being pursued from strategicpartners, and additional fund raising activities.

 

Duringthe 2005 year, Uni-Pixel accomplished a number of milestones in both itstechnical and business advancement. This included construction of a 32 x 32pixel display device further demonstrating our TMOS technology’s attributes tothe industry and potential partners.   Astrategic business and license agreement was completed with Lockheed Martin pursuant to which Uni-Pixel granted LockheedMartin the exclusive market rights for Uni-Pixel’s flat panel displaytechnology in the Military/Aerospace Field in consideration of certainfinancial and engineering resources provided by Lockheed Martin for theresearch and development of such technology.  Uni-Pixel relocated its headquarters to The Woodlands,TX., and established laboratory and clean room operations suitable to furtheradvancing the technology development effort. Additionally, an agreement to license aerogel formulations for use inour display technology was reached with Sandia National Laboratories.

 

**Formation History**

 

Uni-Pixel, Inc. was originally incorporated in theState of Nevada as Super Shops, Inc. On November 15, 1999, SuperShops and its sister companies filed an amended petition under Chapter 11of the United States Bankruptcy Code. On July 31, 2000, the court approvedSuper Shops’ Amended Joint Plan of Reorganization. On October 13, 2000,and in accordance with the Plan of Reorganization, the management of SuperShops changed its state of incorporation from Nevada to Delaware by mergingwith and into NEV Acquisition Corp., a Delaware corporation formed solely forthe purpose of effecting the reincorporation. On June 13, 2001, NEVAcquisition Corp. changed its corporate name toReal-Estateforlease.com, Inc., as a result of the merger transactiondiscussed in the following paragraph.

 

Real-Estateforlease.com, Inc. was incorporated onMay 24, 2001, in the State of Delaware to serve as a business-to-businessinternet information intermediary providing turnkey marketing services tofacilitate the leasing of commercial real estate properties. On June 13,2001, the management of NEV Acquisition Corp. entered into an Agreement andPlan of Merger with Real-Estateforlease.com, Inc. pursuant to which thesole stockholder and founder of Real-Estateforlease.com, Inc. exchangedhis equity ownership interest in Real-Estateforlease.com, Inc. for9,500,000 shares (or approximately 96%) of NEV Acquisition Corp.’s commonstock. At the time of the merger between Real-Estateforlease.com, Inc. andNEV Acquisition Corp., Real-Estateforlease.com, Inc. had no operations andessentially no assets. Efforts by Real-Estateforlease.com, Inc. to implementits business plan ceased in June 2002. Prior toReal-Estateforlease.com, Inc.’s merger with Uni-Pixel Displays, Inc.,as described in the next paragraph, Real-Estateforlease.com, Inc. had nooperations and no material assets or liabilities.

 

Our wholly owned subsidiary, Uni-PixelDisplays, Inc. was originally incorporated as TralasTechnologies, Inc., a Texas corporation, on February 17, 1998. TralasTechnologies, Inc. changed its name to Uni-Pixel Displays, Inc.during 2001. On December 7, 2004, Real-Estateforlease.com, Inc.entered into a merger agreement with Uni-Pixel Displays, Inc. and certainother parties pursuant to which Uni-Pixel Displays, Inc. became a wholly-ownedsubsidiary of Real-Estateforlease.com, Inc. Pursuant to the merger, wechanged our name to “Uni-Pixel, Inc.” at the annual meeting of ourstockholders held in January 2005.

 

Uni-Pixel, Inc. is now the parent company of ourwholly-owned operating subsidiary, Uni-Pixel Displays, Inc. As usedin this document, “Uni-Pixel,” “we,” “us,” and “our” refer toUni-Pixel, Inc. and our wholly-owned consolidated subsidiary,Uni-Pixel Displays, Inc.

 

The common stock, par value $0.001 per share, ofUni-Pixel is quoted on the Bulletin Board as of January 18, 2006 under theticker symbol “UNXL.OB”. Between December 7, 2004 and January 18, 2006, Uni-Pixeltraded on the pink sheets as a result of a merger between publicly heldReal-Estateforlease.com and privately held Uni-Pixel Displays, Inc.

 

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**INDUSTRY OVERVIEW**

 

***The Flat Panel Display Market***

 

**History**

 

The commercialization of theliquid crystal display (LCD) began in 1973, with the launch of the world’sfirst electronic calculator, incorporating a segmented, black-and-white(monochrome) display.  The technology wasquickly adopted in applications such as watches, and evolved into more complexdot matrix displays using passive addressing — or passive matrix (PM) —systems.  In time, the emergence ofpassive Super Twisted Nematic (STN) PM-LCDs and the development of color STN (CSTN)PM-LCDs, facilitated new applications such as notebook PCs.  Eventually, the demand for higher resolution,full-color video images and faster refresh rates, saw the commercialization ofactive matrix (AM) amorphous, (a-Si) Thin-Film-Transistor (TFT) LCDs.  This technology quickly gained acceptance inthe notebook PC market, where it completely replaced the incumbent CSTNtechnology.  Similarly, there has beenrapid, supply driven penetration of TFT-LCDs in desktop monitors and TVs as asubstitute for the traditional cathrode ray tube (CRT) screen.

 

**Replacementof Older CRT Technology by FPDs**

 

Although flat panel displays(FPDs) were initially adopted in the mobile consumer electronics market and innotebook computers, they are displacing cathode ray tube displays in largerproduct applications such as desktop computer monitors and televisions. FPD’sunique form factor and digital interface is enabling the delivery and accuratedisplay of video, telecommuting, information, data, analysis and instructionsin both mobile and fixed environments previously unsuitable to CRTs.  This transition is being driven by consumerpreferences for appliances that are thinner and lighter, particularly in largerdisplay sizes.  For example, according toDisplaySearch, an independent market research firm tracking the FPD industry,the 2002 revenues from the sale of FPD computer monitors exceeded the revenuesfrom the sale of cathode ray tube computer monitors for the first time and, in2004, unit shipments of FPD computer monitors exceeded unit shipments ofcathode ray tube computer monitors for the first time.

 

**Proliferationof Mobile Consumer Electronics Devices**

 

Consumers throughout theworld are rapidly adopting mobile consumer electronics devices such as mobilephones, personal digital assistants, or PDAs, MP3 players, portable DVDplayers, mobile gaming devices and digital cameras and camcorders. Advances incomponent technology are driving down the cost of these products and expandingtheir functionality. Early mobile devices were equipped with simple, smallmonochrome displays with limited functionality. As the cost of color displaysdecreased and quality improved, consumers began rapidly adopting mobile deviceswith color displays. This trend towards greater display functionality in mobiledevices continues with the introduction of new phones with dual displays,embedded cameras and television tuner video functionality.

 

The overall FPD industry iscurrently experiencing significant growth. According to DisplaySearch, the worldwide FPD market grew from $24.0billion in 2000 to $62.2 billion in 2004. DisplaySearch expects this market to grow to an estimated $104.2 billionin 2009, representing a compounded annual growth rate since 2000 of approximately18%.  In addition to the rapidreplacement of CRT applications such as monitors and TVs, the FPD industrygrowth is being driven by a number of other market forces including:

 

•                  Increased demand for large format highresolution TV’s and computer monitors

•                  Steady growth in usage of notebook computers

•                  A migration to color screens for mobilephones and other handheld devices

•                  Decreasing cost economics, increasingthroughput and improving efficiency of FPD production as newer generation LCDand plasma fabs are increasing production

 

These factors in combinationwith additional market forces are driving overall growth and a shifting mix ofproduct applications within the FPD industry.

 

**Applications**

 

With the proliferation ofthe Internet, there has not only been an explosion in the amount of availablecontent, but a rapid paced evolution of the form in which it appears.  No longer a two-dimensional, text-onlyexperience, online content is being delivered in graphic rich, animated andvideo formats.  As the sophistication ofthe user continues to heighten, and bandwidth continues to increase, there willbe a demand for a superior, high resolution visual experience that only FPDswill

 

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be able to deliver – particularly in mobilewireless devices.  Flowing from this, newtypes of applications and functionality will evolve, that in turn will enhanceexisting markets and create new ones.

 

Industry drivers such as newcontent explosion, high resolution capability, increased bandwidth and improvedmanufacturing efficiencies are driving new functionality in existingapplications, as well as enabling the creation of new application markets thatwill drive the FPD industry through high volumes.

 

With the emergence of newtechnologies such as MP3 Players, TV Tuners and Bluetooth, new functionality inexisting applications will be enabled that will continually fuel demand growthin what have become relatively mature markets. For instance, while the mobile phone market has seen relatively slowgrowth rates, a large pool of relatively sophisticated users now exists who areproviding the demand for new technologies such as Phone Cameras and PhoneTVs.  These enhanced devices will incorporatehigh performance, next generation displays that will see a move away fromPassive Matrix-LCDs towards Active Matrix-LCDs as well as other emergingdisplay types such as OLEDs. Additionally, FPD technology is increasingly taking forms beyond consumerelectronic devices.  FPDs are increasinglyused in emerging applications including retail signage, car navigation systems,instrumentation, and household appliances.

 

Global FPD consumption hasgrown by the ongoing replacement of cathode ray tube (CRT) monitors and TV’s,as well as by the increasing popularity of notebooks (laptops) and portablehandheld devices.  In summary, the FPDindustry is currently being driven by 5 major trends:

 

•                  Increasing acceptance and penetration of FPDTV’s

•                  Rapid replacement of CRT monitors and TV’s

•                  Steady growth of notebooks

•                  Movement to larger screen areas in FPD TV’s,computer monitors and notebooks

•                  Migration to video capable color screens inmobile phones and other handheld devices

 

The FPD market is currentlydominated by liquid crystal displays (LCDs), which accounted for an estimated88% of total FPD sales in 2004 and demand is increasing across multipleapplications with FPD formats generating industry-wide momentum.

 

Below is a displaytechnology continuum which illustrates the pros and cons of varioustechnologies.  As a disruptive technologyentering the FPD landscape, TMOS has strong technological advantages whencompared against its competition.

 
| ** ** | ** ** | **CRT**                                                                                       | ** ** | **LCD**                                                                                                | ** ** | **PLASMA**                                                                                 | ** ** | **OLED**                                                                                                                   | ** ** | **DLP / LCoS**                                                     | ** ** | **TMOS**                                                                                                  |
|------------|------------|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
| **Pros**   |       | +  Inexpensive

+  Proven technology with long lifetime                                       |       | +  Thin form-  factor

+  Large industry base from PC segment                                          |       | + Large size

+ Brightness

+ Viewing angle                                                |       | +  Superior image: viewing angle, contrast ratio, fast response time

+  Thinnest form factor

+  Potential cost advantage |       | +  Potential cost advantage Thinner than CRT, but thicker than LCD or plasma |       | + Vivid Color

+ Readability

+ Resolution

+ Energy  Efficiency

+ Ruggedness

+ Size

+ Miniaturization |
| ** ** |       |                                                                                          |       |                                                                                                   |       |                                                                                       |       |                                                                                                                       |       |                                                                         |       |                                                                                                      |
| **Cons**   |       | – Thickness, weight, bulky form-factor

– Brightness drops as screen size increases |       | – Ghosting effect with moving images

– Higher price relative to plasma and rear  projection |       | – Lifespan issues, dimming with age

– High power consumption relative to others |       | – Not yet in commercial production

– Brightness

– Material lifetime                                       |       | – Limited viewing angle                                                 |       | – Not yet in commercial production                                                                   |

 

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As the leading technology,LCD is facing increased pressure and competition from existing and emergingtechnologies.  Industry analysts indicatethat this trend will continue in the near term. The proliferation of newer FPD technologies is primarily driving theadoption of FPD technology into newer applications.

 

**TECHNOLOGY**

 

**Overview**: Uni-Pixel, Inc. has developed a new color display technology itcalls Time Multiplexed Optical Shutter (“TMOS”). A TMOS display is constructedby layering a series of materials on top of a single planar surface constructedof glass or a polycarbonate substrate.

 

Currently layers arecomposed of:

•                  Rows of transparent conductor stripes,currently indium tin oxide

•                  A stand off layer currently of Aerogel

•                  A layer of polyester film, or PET film, withsurface microlenses constructed of an acrylate material

•                  Columns of transparent conductor stripes

•                  A protective top layer

 

These layers of materialcreate a matrix of optical shutters on the surface controlled at the crossingpoints (columns and rows) of the transparent conductors.  The unit is made more durable than Plasma orLiquid Crystal Displays (“LCD”) through the ability of the columns and rows tobe driven from either end (this means that a single break in any stripe willnot disable its ability to function).

 

**Reduced Complexity**: In contrast to plasma or LCD, a TMOS single pixel shutter emits thethree primary colors (red, green, and blue) without the use of three separatesub-pixels. Because TMOS displays have one-third the number of features for thesame number of pixels, they benefit from reduced manufacturing complexity.

 

LCD and plasma complexity isalso driven through the use of Thin Film Transistors (“TFT”). Currently LCD orplasma displays require each individual sub-pixel to be driven by a single TFT,(three TFTs per each pixel) which increases the necessity of additionalelectrical traces from the control mechanism.

 

In contrast, a TMOS panelwill have no TFTs and will be controlled by the voltage differential betweenthe row stripe and the column stripe charging and discharging (opening andclosing) the capacitor structure/optical shutter (also known as the pixel).This architecture advancement radically improves manufacturing tolerances aswell as resilience to impact or intrusion.

 

Uni-Pixel’s TMOS technologywill offer significant advantages over existing flat panel display technologiesincluding:

•                  Proprietary technology protected by Uni-Pixel’spatent portfolio;

•                  1/5 the manufacturing cost of existingtechnologies;

•                  10X better power efficiency in specificapplications over existing technologies (i.e., resulting in lighter, longerlasting notebook computers);

•                  Picture quality that is daylight readable inportable devices (i.e., cell phones, PDAs, and notebook computers);

•                  Displays capable of being flexible, shapeableand transparent;

•                  Increased durability and reliability; and

•                  Ability to be manufactured in a wide range ofsizes spanning from cell phone screens to Jumbotron stadium displays.

 

Uni-Pixel’s advantages inits TMOS technology over LCD or plasma are derived from the relative simplicityof the architecture and material make up. This advantage will translate into amore economical manufacturing process requiring dramatically less capitalinvestment for the construction of a plant and significantly lower cost for rawmaterials.

 

Currently, LCD or plasmapanel displays take over 100 individual steps in the manufacturing process.This process is necessary to yield intricately developed, small and tightlypacked features. However, these manufacturing processes are difficult to manageand are prone to defects.

 

In contrast, Uni-Pixelanticipates that the TMOS manufacturing process will have between ten tofifteen steps composed of the laying down and aligning of materials as thinfilms built layer upon layer in a roll to roll method. Benefiting

 

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from larger and less tightly packedconstruction, the manufacturing process will have significantly fewer numbersof break or fail elements, and an enhanced potential for longer life andresilience over LCD or plasma panels.

 

**Comparative Costs**: Because the construction process creating TMOS panels includes aglass or polycarbonate light guide with only several layers of thin films, Uni-Pixelbelieves the equipment to manufacture the panels will be relatively simple andwill not require advanced clean room technology. Current estimates for thinfilm equipment for manufacturing lead Uni-Pixel to believe that a TMOS plantcan be enabled with an investment of under $100 million. Comparatively, awell-equipped LCD fab costs in excess of $3 billion.

 

DisplaySearch, anindependent research company focused on the flat panel display industry,disclosed in March of 2005 in a presentation titled “Survival of the Fittest:Managing the Peaks and Valleys of Supply/Demand” that the total materials andcomponents manufacturing cost for a 40 inch LCD panel will be over $728 during2005. Comparatively, Uni-Pixel estimates that in the worst case, the componentsmanufacturing cost for a TMOS 40 inch panel will be less than $188 orapproximately 26% of the bill of materials for an equal size LCD panel.

 

Based on the Company’sestimates of infrastructure cost (less than 5%) and bill of materials costs(less than 30%) relative to LCD panel manufacturing operations, Uni-Pixelmanagement believes that TMOS technology will be a more economical alternativeto LCD or plasma.

 

**Light Efficiency**: LCD display technologies functions by emitting light from a backplane (a back light) and then screening, masking, polarizing, and filtering thelight until it is emitted from the front of the panel in the appropriate colorintensity. This method yields a maximum efficiency of light of less than 10%.This means that if 1000 nits (a measure of brightness) are created by thebacklight, less than 100 nits are displayed out the front.

 

A TMOS panel uses lightinjected into the edge of the glass panel much the way a fiber optic cableworks. Light is injected into one edge of the TMOS panel, with mirrors on theother three opposing sides/edges. Light goes into the guide and travelsuninhibited bouncing through out the plane creating a “photon cloud”. TMOSoptical shutters then open and close on the surface of the panel to let thelight escape. The ratio of light injected into the panel to light released fromthe surface is tunable. Uni-Pixel’s modeling and experimentation have shownthat a panel tuned to 61% efficiency provides the most uniform release of lightacross the entire display surface. Therefore if one were to inject 1000 nits oflight into a TMOS display panel, at a tuned 61% efficiency, 610 nits will bedisplayed out of the front of the display panel.

 

**Power Efficiency**: Plasma display technology functions by using high voltage electricityto excite encapsulated gases that emit electrons. These electrons excitephosphors that emit photons, which are the light elements that are seen by theviewer. This process of continued materials excitement requires significantamounts of energy that convert to photonic light.

 

TMOS technology uses aseries of industry standard light emitting diodes, or LEDs, attached to oneedge of the panel to inject light into the system. LEDs require very littlepower to create light and have a very high efficiency in converting power tolight. Therefore, very little power translates into a very high light outputfor Uni-Pixel’s TMOS displays.

 

**Successful Prototypes**: Uni-Pixel has built prototypes that havedemonstrated proof of concept, technical viability, and full operation of everysub-system within its TMOS technology. The Company’s current prototypingefforts are focused on the process of optimizing the materials and assembly ofthe display to advance to manufacturability and then on to commercialization.

 

**Technology Progress**: In early 2004, Uni-Pixel delivered its first proof of conceptprototype device under a development contract. In mid 2004, Uni-Pixel was awarded a Phase II SBIR contract by the USAir force to advance its designs as modeled during its Phase I contract thatsolve image break-up issues traditional in Field Sequential Color displaysystems.  In December 2004, Uni-Pixelclosed its first significant funding round and began work on opening its owndevelopment laboratories including metrology capabilities.  These efforts through 2004 resulted in thefirst recognition of the viability of our TMOS invention by external partnersand the first opportunity for Uni-Pixel to materially implement its displayarchitecture design.

 

In 2005, Uni-Pixel built itsdevelopment platform capability, advanced its display prototypes, and signedits first development partner and commercialization agreements.  During early 2005, Uni-Pixel advanced itsdevelopment efforts through its small advanced materials laboratory inAlbuquerque, NM which is adjacent to Sandia National Laboratory.  In July of 2005, Uni-Pixel moved into newfacilities including electronics labs, clean room space, and machining systemsin Houston, TX.  During the course ofthis time, the initial 8x8 pixel prototypes were dramatically improved,advanced in their operation, optical system models were built, electroniccontrol designs completed and implemented, and the prototypes were

 

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scaled up to a fully operational, full color,32x32 pixel device.  Uni-Pixel hassuccessfully constructed and tested every sub-system in the display architectureand is in position to optimize the display materials and advance the assemblytechniques.

 

Through 2006, Uni-Pixelexpects that it will further scale up the display prototypes in both the sizeof the panels and the pixel counts, demonstrate multiple pixel pitches inprototypes, and complete the design and implementation of the microlenses thatwill optimize the optical performance of the TMOS pixels.  These efforts will result in a finalmaterials implementation of the architecture that will optimize displayperformance and manufacturability.

 

**STRATEGY**

 

Uni-Pixel’s businessstrategy is to penetrate existing display applications with its TMOS technologyfor widespread use in all varieties of color displays and other related displayapplications. The Company is presently focused on the following steps toimplement its business strategy:

 

•                  **Develop StrategicRelationships. **Uni-Pixel plans to target strategic partnersto further the Company’s efforts in the development and commercialization ofTMOS displays. Uni-Pixel believes that if these efforts are successful, theycould result in TMOS flat panel displays reaching commercial markets inproducts faster than any other display technology previously.  Uni-Pixel’s display architecture leveragesthe application of existing materials and optical technologies in new ways thathave previously been mastered by other companies in other applications.  Uni-Pixel management understands that gainingthe assistance of some of these various technology leaders in the developmentof TMOS can accelerate the commercialization effort dramatically.  As a result, Uni-Pixel will seek to buildrelationships that will allow it to leverage existing knowledge, scale, andexpertise in thin films, control circuitry, assembly, and logistics.

 

•                  **Enhance the Company’sExisting TMOS Technology.** Uni-Pixel believes that continuing developmentand enhancement of its TMOS technology is critical to the Company’s success inthe display industry. Consequently, Uni-Pixel will continually seek to enhanceits competitive technology position through internal development efforts thatexpand our intellectual property portfolio, collaborative relationships, andother strategic opportunities. Uni-Pixel’s primary focus is to expand ourintellectual property through development of additional prototypes andmaterials that enhance and extend the Company’s product capabilities, therebyallowing them to be used in a broader array of display applications and tomaintain performance leadership over time.

 

•                  **Develop Prototypes Suitableto Military Requirements. **Working with Lockheed Martin, Uni-Pixel plansto produce prototypes that will demonstrate the Company’s ability to meet themost demanding military requirements with a superior performing display system.**** Uni-Pixel plans to establish a small volumepilot production line in conjunction with subcontractors that will providelimited quantities of displays to meet Lockheed’s demand for existing militaryapplications.

 

•                  **Finalize a Transferable,Licensable Manufacturing Process.** Uni-Pixel plans to complete thedevelopment of its manufacturing processes and protect the intellectualproperty in the developed processes; and establish a technology transfer teamto enable transition of the Company’s manufacturing processes to targetedmanufacturing partners and licensees.

 

•                  **Target LeadingManufacturers.** Uni-Pixel plans to target leading display,materials and electronics manufacturers as potential partners and/or licenseesof its TMOS technology. The Company will provide extensive technical assistanceand support to manufacturers who are early evaluators, developers, or users ofits TMOS technology and materials. Uni-Pixel believes that successfulincorporation of its technology into the first military or commercial applicationswill place competitive pressure on other industry participants to adopt a TMOSdisplay technology solution. Uni-Pixel believes that this approach will alsoencourage potential new market entrants as licensees seek to capture or defendoriginal equipment manufacturer supply contracts.  Uni-Pixel will support “pull through” of itsTMOS technology by actively marketing its advantages to end product OEMs thatincorporate display technology into their devices.  This will allow UniPixel’s production partnersto gain access to the original equipment manufacturer supply chain driven byend OEMs seeking the competitive product advantages offered by the Company’sTMOS technology.  This group is targetedto construct TMOS panel packages for incorporation into OEM products.

 

•                  **Drive Adoption byEnd-Product Original Equipment Manufacturers.** Uni-Pixelplans to use prototype devices to demonstrate its technology to originalequipment manufacturers that produce end user products. The Company believesthat the significant advantages that Uni-Pixel’s displays will offer inperformance and

 

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packagingdesign can position it to be a “plug and play” replacement for existing LCDdisplays and will induce original equipment manufacturers to request productionof TMOS displays from their existing display suppliers. This is considered a “pull-through”approach to gaining market acceptance and entry of TMOS displays into end-userproducts and applications.  This groupwill acquire and integrate the panel packages into end user products.

 

•                  **Build the Company’s FourRevenue Sources.** Uni-Pixel believes that it will be able toproduce revenues from four distinct sources, including licensing revenues(initial license fees and royalties), subcontracted manufacturing revenues(from the Company’s low volume military production, joint ventures, or productsproduced by third party contract manufacturers), materials revenues (from thematerials Uni-Pixel plans to supply to prospective partners, contractmanufacturers, and licensees), and funded research revenues.

 

Uni-Pixel’s contemplatedTMOS future initiatives include applications involving flexible displays,transparent displays and unique military applications. Uni-Pixel also plans toconduct research on the use of a variety of different thin-film technology inTMOS applications and the construction of TMOS displays. The Company’s focus onnext-generation technologies is designed to extend Uni-Pixel’s position as theleading provider of TMOS solutions as new markets and applications emerge.

 

**MILESTONES TO COMMERCIALIZATION**

 

Uni-Pixel will continue tofocus on technical and business development milestones. The execution of itsoverall business plan includes a planned push (targeting panel manufacturers)and pull (targeting end device OEMs) strategy for accelerating productdevelopment, supporting market entry, and the expansion of productioncapability and capacity.  Over the courseof two years, Uni-Pixel will pursue a technical development roadmap thatincludes:

 

•                  Finalization of display pixel mechanismmaterials

•                  Optimization of the light management system(light injection and microlens designs)

•                  Completion of supporting drive controlcircuitry

•                  Finalized bonding techniques for completionof the active layer structure

•                  Assembly and testing of large formatprototype devices

•                  Finalization of specifications for continuousflow manufacturing

 

Specifically this includes:

 

**HighLevel Post Financing Milestones**

 

| **6 Months** | ** **                 | **12 Months**     | ** **           | **18 Months**  | ** **            | **24 Months** |
|-------------------|----------------------------|------------------------|----------------------|---------------------|-----------------------|--------------------|
| •            | Identify potential         | •                 | Complete             | •              | Complete assembly     | •             | Refine and test pilot |
|              | materials for inclusion in |                   | development          |                | and testing of pilot  |               | line procedures |
|              | thin film stacks           |                   | agreements and       |                | line                  |               |
|              |                       | partnering efforts for |                 | •              | Implement continuous  |
| •            | Identify leading           |                   | thin film materials  | •              | Refine specifications |               | flow manufacturing |
|              | semiconductor partners     |                   |                 | for continuous flow |                  | system             |
|              | to provide design and      | •                 | Complete design and  |                | manufacturing system  |               |
|              | development services       |                   | implementation of    |                | with the help of      | •             | Form partnerships |
|              | for controller chips       |                   | proprietary drive    |                | partnerships with     |               | with OEM firms to |
|              |                       | control circuitry      |                 | system specialists  |                  | implement TMOS     |
| •       | Identify targeted          |                   |                 |                | technology in their   |
|              | partnerships with OEM      | •                 | Identify contractors | •              | Form partnerships     |               | end user products |
|              | firms who could benefit    |                   | and partners for     |                | with OEM firms to     |               |
|              | from TMOS technology       |                   | implementation of    |                | implement TMOS        |               |
|              |                       | continuous flow        |                 | technology in their |                  |
|              |                       | system                 |                 | end user products   |                  |

 

Uni-Pixel’s seniormanagement team will work with various targeted strategic partners in each stepof the process to provide certain market and technical support resources.

 

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Over time, Uni-Pixel expectsit will pursue discussions with a variety of potential assembly andmanufacturing partners.  Uni-Pixel willseek to leverage its own internal pilot line in growing a continuous flowmanufacturing system.  The pilot linewill be the initial platform for the finalization of the specifications to beincluded in the continuous flow manufacturing system.

 

**CUSTOMERS AND PARTNERS**

 

The future customers for theTMOS panel “packages” will be the OEMs that currently use existing displaytechnologies such as LCD, Plasma, and OLED in their final products.  Therefore the end customer for a Uni-PixelTMOS panel package will be an integrator, assembler, or the OEM itself.  Initially, Uni-Pixel’s strategic partnerswill be its primary customers through the commercialization process.  This will include its development partnerssuch as Lockheed Martin, its manufacturing partners, and its other verticalmarket partners.

 

Uni-Pixel expects that itwill pursue discussions with a variety of potential assembly and manufacturingpartners as it achieves its technical milestones.  This will include the demonstration of panelpackages that can either directly displace alternative technologies, or allowfor unique new design implementations. Once design wins for its panels are secured, Uni-Pixel will leveragethese OEM customers for product unit demand to target potential manufacturingpartners to expand production capacity.

 

Uni-Pixel has completeddevelopment work within several contracts and partners that providecomprehensive validation of TMOS technology and will serve as a basis forfuture customer growth.

 

Current Partners

•                  *Xerox PARC:*Uni-Pixel engaged Xerox PARC as a developmentpartner working on certain prototyping tasks to advance the displayarchitecture, assembly process, and engineering development system testbed.  It is expected that this effortwill provide Uni-Pixel with a next wave of further advanced prototypes and withadditional subsystems that further the optimization process for themanufacturing materials.

 

•                  *Sandia National Laboratory:*Sandia has been engaged withUni-Pixel directly and through a Lockheed Martin Cooperative Research andDevelopment Agreement (CRADA).  Sandia isdeveloping an aerogel formulation as one layer within the display architecturethat meets Uni-Pixel’s operational and production requirements.  In 2005, Sandia and Uni-Pixel reached anAgreement to License the Sandia aerogel patents exclusively within the displayindustry.  Under this agreement, Sandiawill receive a royalty from Uni-Pixel tied to the net sales price of unit salesonce Uni-Pixel reaches commercial production.

 

•                  *Lockheed Martin:*Uni-Pixel reached its first targeted verticalmarket milestone by securing Lockheed Martin as its first exclusive partner forMilitary and Aerospace applications. A License and Strategic Business Agreementwas executed on October 5, 2005 (“the Agreement”), pursuant to which Uni-Pixelgranted Lockheed the exclusive market rights for Uni-Pixel’s flat panel displaytechnology in the Military/Aerospace Field in exchange for certain financialand engineering resources provided by Lockheed for the research and developmentof Uni-Pixel’s TMOS display technology. Lockheed Martin has committed resources to assist Uni-Pixel withelectronics development, environmental, life cycle testing and ruggedization ofdisplays for military requirements.  Itis expected that TMOS displays will be inherently more rugged off the shelfthan LCD displays and would not require the significant cost required for LCDto become ruggedized for military applications. Lockheed will be able to derive significantly higher yields supplyingdisplays to the military using TMOS in place of LCD technology as well as beingable to design unique systems leveraging TMOS capabilities and attributes thatother military contractors will not be able to match.

 

Target Partners

•                  *Optical Thin FilmProduction:*Uni-Pixel hasentered into discussions with a set of potential partners for assistance in thedevelopment and manufacturing of its thin film stack.  Implementation of the TMOS architecture canbe accomplished using a variety of materials that can achieve the requiredproperties’ relationship between layers. No new or unique materials will be required, rather just theoptimization of existing materials as implemented within the process andsystem.  Initially Uni-Pixel willcontract for development work with the objective of reaching a productionagreement or joint venture with one or more thin film manufacturers.

 

•                  *Drive Control Circuitry:*Uni-Pixel has entered into discussions with aset of potential partners for assistance in the development and manufacturingof its unique drive control circuitry.  Uni-Pixelhas developed unique IP that will be implemented through a “fabless”semiconductor model.  This may includepotential development of new IP, cross licensing, and the use of certainexisting semiconductor capabilities from one or more partners.  Uni-Pixel has

 

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developeda means to use off the shelf parts for certain drive control requirements thatwill allow it to produce products in the short term, as well as leveraging theenhancements that its own unique drive control provides over the longerterm.  Uni-Pixel is working with itspotential partners to negotiate terms and plans for both the short and longerterm execution of its strategy.

 

•                  *Manufacturing and AssemblyPartners:*****Uni-Pixel has launched workwith a set of strategic partners under an umbrella project with the Center forAdvanced Microelectronics Manufacturing (CAMM) in Binghamton, NY.  CAMM’s mission is to assist companies withadvancing their technologies into a roll to roll (or continuous flow)manufacturing process.  Uni-Pixel hasengaged with CAMM and its partners on a development project to leverage thegroup’s resources and expertise to its requirements for production.

 

Target Customers

•                  *Lockheed Martin:* Uni-Pixel plans to sell TMOS panels toLockheed Martin for implementation into unique military and avionics systemsfor resale to the government and industry. These panels will be produced in small volumes and sold to Lockheed atrelatively high margins attributable to their unique capabilities and lesserruggedization requirements.

 

•                  *Large Computer OEM:*****Uni-Pixel has delivered a unique proof ofconcept prototype device to a large computer system OEM under the terms of anengineering development agreement.  Thisearly prototype established the first system for testing and evaluation of thearchitecture and operation of the system for gathering direct performancefeedback.  Additional work continuesspecific to advancing this prototype to implementation within an end userproduct.

 

•                  *Large Active Signage OEM:* Uni-Pixel is in discussions with variouspotential partners in the vertical market of Active Signage.  Two dominant technologies exist in thisvertical market, plasma displays for indoor applications and LED displays foroutdoor applications.  Uni-Pixel’stechnology offers unique and new capabilities that strongly differentiate itfrom both of these, and open a market not currently able to be targeted byeither.

 

•                  *Consumer ElectronicsManufacturers (OEMs*): Uni-Pixelhas held initial exploratory meetings with a variety of consumer electronicsOEMs that have all expressed a desire to leverage TMOS’ unique attributes intheir products.  This includes a cellphone manufacturer, PDA manufacturer, and television producer.  Each of these interactions has resulted in astanding invitation to return for further engineering specific meetings as productdevelopment advances at Uni-Pixel.

 

**SALES AND MARKETING**

 

Uni-Pixel has begundiscussions with end user product OEMs that have a strong desire to integrateTMOS flat panels into their products. The OEMs that have been parties to these discussions are compelled bythe advantages of TMOS flat panels as a significant differentiator for theirproducts relative to their competition in their individual marketsegments.   Uni-Pixel believes that theproven entry into a single vertical market or application will drive the demandfor expanded applications of TMOS flat panels to other product markets.

 

Uni-Pixel’s sales strategyintends to build a diverse revenue base that will derive revenues from multiplesources:

•                  Licensing revenues – Strategic manufacturingpartners that license Uni-Pixel manufacturing processes for a manufacturingoperation, cross licensed partners that produce portions of the materials ortechnology incorporated into TMOS displays, a silicon foundry partner thatproduces the display controller semiconductors.

•                  Product revenues – Integrators of displaypanel packages designed and built for small volume requirements such asmilitary and avionics applications, or unique custom displays.

•                  Critical materials – Integrators ormanufacturers that produce or assemble display panel packages.  For integrators this can include controldriver chips from Uni-Pixel’s foundry partner. For manufacturers this can include materials such as aerogel, nano –optical lens arrays, and transparent conductors that are used in the thin filmlayers of the display panel.

•                  Research contracts – Integrators that areseeking to leverage unique attributes that TMOS can potentially provide such ascurved or shaped displays, transparent displays, or uniquely applied displays.  Uni-Pixel expects that initially the USGovernment will be a principal customer of this variety.

 

The Company plans tocontinue to create demand for its products by utilizing a “pull through”strategy with specific targeted OEMs in various market segments.  Uni-Pixel will actively pursue OEMs by usingits prototypes to demonstrate the

 

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advantages that TMOS panels can provide bothin cost and performance. Uni-Pixel expects to create OEM “pull” by gainingdesign wins for integration of TMOS display panel technology into establishedend user devices.

 

Uni-Pixel will advance its “SimplySuperior” tag line and actively demonstrate the elegance and performanceadvantages of its unique pixel architecture within the industry in support ofits direct sales work with OEMs.  Oncethe initial products reach the market featuring TMOS displays and Uni-Pixelbegins to build momentum and manufacturing capacity within the industry, amarketing program will be launched to drive awareness of Uni-Pixel’s TMOSdisplays as a component “brand” within the end user products.   This marketing program will be designed todrive awareness and education among end users supporting TMOS’ uniquecapabilities and enhanced performance.  Uni-Pixelbelieves that it will be able to promote its brand as a valued component brandincluded within the OEM products as a part of its relationship with the endproduct OEMs.  Ultimately the goal ofthis marketing program will be to establish Uni-Pixel and its unique displaysindependently as a differentiating factor in end user products and to helppromote the TMOS component value proposition for Uni-Pixel and its partner OEMsthat implement TMOS displays in their products similar to what has been done inthe PC industry by certain semiconductor companies.

 

**RESEARCH AND DEVELOPMENT**

 

From inception throughDecember 31, 2005, Uni-Pixel has spent approximately $7.0 million on researchand development activities with $2.8 million and $1.1 million invested in 2005and 2004, respectively. Uni-Pixel continues conducting research and developmentboth internally and externally and anticipates significantly higher investmentsgoing forward.

 

As of December 31, 2005, Uni-Pixelhas two principal locations conducting internal research.  The Company’s headquarters and primarydevelopment site are located in Houston, TX and an advanced materialslaboratory in Albuquerque, NM. The headquarters location includes a Class 100clean room where display materials testing and assembly is conducted, anelectronics lab, optical testing facilities, test and measurement equipment,and electronics development systems. The Albuquerque facility includes a wetlab station, a clean room, a scanning electron microscope and various other chemicaland materials handling capabilities.

 

Currently, Uni-Pixel isengaged in the development of second phase prototypes to demonstrate the fullfunctionality of the TMOS technology across multiple pixel sizes and a varietyof commercial applications. The Company has engaged a set of external vendorsto produce the material requirements of each layer that makes up Uni-Pixel’sdisplay prototypes. These vendors will deliver to the Company the individuallycontracted elements as specified. Working with Lockheed Martin and otherstrategic partners, Uni-Pixel is advancing the individual elements into theCompany’s next generation working prototype devices.

 

Uni-Pixel expects that theseprototype devices will demonstrate the image and color generation capabilitiesof the Company’s TMOS displays in three pixel sizes, .25mm, .5mm, and 1mm.These devices will then be used to identify the specific issues related toperformance optimization and to their integration into unique end-productapplications.

 

The phase two prototypeswill be the next phase of a product roadmap that targets the production ofviable commercial display panels within twenty-four to thirty six months. Thedevelopment process will also include selecting and completing the preferablemanufacturing processes that will be transferable to joint venture partneroperations or licensees.

 

Uni-Pixel plans to completethe development of the preferred manufacturing process within the Company’slaboratory environment and create a small-scale pilot production line that willbe the research and development proving ground for a continuous flowmanufacturing process followed by a roll to roll manufacturing process.

 

Research and developmentcosts are expensed as incurred and include salaries and benefits, costs to thirdparty contractors to perform research or other activities related to theCompany’s research, professional fees related to intellectual property work,and a portion of facilities costs.

 

**COMPETITION**

 

The display industry inwhich Uni-Pixel operates is highly competitive. While existing flat paneldisplay technologies such as LCDs and Plasma currently dominate themarketplace, Uni-Pixel will be more specifically competing against otheremerging technologies such as OLED and LCoS.

 

Compared to its competition,Uni-Pixel believes it follows a more developed business model allowing the Companyto benefit from the following factors:

 

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•                  A wide range of opportunity to enter the market;

•                  The flexibility to pursue any and all marketsegments;

•                  The ability to be a supplier of keymaterials;

•                  The ability to profitably produce smallvolumes of unique displays;

•                  The ability to enable localized manufacturing

 

At the same time Uni-Pixel’scompetitors typically follow only one or a subset of these factors providing astrategic advantage to Uni-Pixel.

 

Existing Technologies:

•                  *Liquid Crystal Display(LCD) Competitors:* LCD iscurrently the dominant technology in the FPD sector with 88% market share in2005. Samsung Electronics and LG Philips LCD Co. Ltd. are market leaders whileadditional competitors include:  SharpElectronics Corp., NEC Corp., Hitachi Ltd., AU Optronics Corp., Chi MeiOptoelectronics Corp., Chunghwa Picture Tubes Ltd., Quanta Corp. and HannStarDisplay Corp.

 

•                  *Plasma*: Another technology in the FPD marketsuffering from high power consumption and limited life span. Major competitorsinclude:  Matsushita Electric IndustryCo. Ltd., LG Electronics, Inc., Hitachi Ltd., LG Philips LCD Co. Ltd., SamsungElectronics, Pioneer Electronics and Sony Corp.

 

•                  *Digital Light Processing(DLP) Competitors:* TexasInstruments has pioneered the DLP technology, which is a micro-mechanicalstructure of moving mirrors on a silicon backplane. Texas Instruments has hadsignificant success selling its DLP products to its customers in the businessfront projector market and the rear projection television market.  Its customers include:  Toshiba Corp., Thomson Multimedia, MitsubishiDigital Electronics, LG Electronics and Samsung Electronics.

 

•                  *High TemperaturePolysilicon LCD (HTPS-LCD) Competitors*: The HTPS-LCD technology, a transmissive FPD technology, is championedby Epson Corp., Sony Corp, Panasonic Corp., Hitachi Ltd., Skyworth Digital Hld.,and Konka Group.  HTPS-LCD work especially well and have gained popularity in near-to-eyedisplays (for use in a camcorder viewfinder), front projectors (which uses afront-lens to stretch the image), and rear-projection TV sets.

 

•                  *Amorphous Silicon (A-SiLCD):*Operates through depositingamorphous silicon materials onto glass, building arrays of Field EffectTransistors (FETs). Competitors in this market include: Samsung Electronics,Sanyo Epson, International Display Technology Co. Ltd. and IBM Corp.

 

Emerging Technologies:

•                  *OLED Competitors:* Eastman Kodak Company has licensed afluorescent OLED technology and other patents for display applications to anumber of display manufacturers. In addition, Eastman Kodak and Sanyo Electric,through a joint venture known as SK Display Corporation, Samsung NEC MobileDisplay Co., Ltd., RiTdisplay and Pioneer are presently manufacturing OLEDproducts using OLED technologies. Eastman Kodak, Covion Organic SemiconductorsGmbH, Universal Display Corp., and Idemitsu Kosan Co. are selling and licensingvarious forms of OLED materials and processes that will compete with Uni-Pixel’sproprietary TMOS technology. Another OLED industry participant, CambridgeDisplay Technology (CDT), Ltd., has licensed and is working with a numberof display manufacturers on its polymer OLED technology. CDT recently formed ajoint venture with Sumitomo Chemicals to produce and manufacture P-OLEDs.

 

•                  *Liquid Crystal on Silicon(LCoS) Competitors:*Thesecompanies are all producing different forms of a liquid crystal display on asilicon backplane, which are considered reflective technologies.  Companies competing in the reflectivemicrodisplay market include Sony, JVC, Aurora, Syntax-Brillian, Spatialight,eLCOS and others.  We believe, LCoS hasbeen perceived as a very difficult technology to manufacture as multiple majorcorporations have terminated their LCoS manufacturing efforts.

 

•                  *Other Technologies*: There are a number of other technologiesunder development that may some day compete with Uni-Pixel. These include “electronicpaper,” “Non-Organic Thick Film Dielectric Electro Luminescent Technology”developed by iFire Technologies a unit of Westaim Corporation and flat CRT.

 

**INTELLECTUAL PROPERTY**

 

Starting in 2004, Uni-Pixelbegan a significant expansion of its Intellectual Property (IP) portfolio.  As a pioneer in the arena of near fieldoptics applied to a MEMS based display technology, in many cases when Uni-Pixelsolves a

 

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technology issue it creates a new invention.  Uni-Pixel has engaged one of the technologyindustry’s largest and most experienced IP firms (Fish and Richardson, LLP) toassist in the prosecution of a lengthy list of over forty potential inventionsrecently discovered in addition to over 21 new patent filings as of the end of2005.  TMOS represents a “green field”technology in that it is a new approach to displays leveraging well knownconcepts in new ways.  This has createdan unexplored arena for Uni-Pixel bearing new inventions and IP on a continuingbasis.

 

The Company currently holds7 granted patents relating to its TMOS technology. These patents have beenfiled in the United States as well as the largest markets across Europeincluding Austria, Belgium, Switzerland, Germany, France and Great Britain.These existing patents are set to expire 2011.

 

**PatentTable**

 

| ** **                                                                                                                                      | ** ** | **Number of Patents** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| **Description**                                                                                                                                 | ** ** | **Patents****Issued**           | ** ** | **Patents****Allowed** | ** ** | **Patents Pending** | ** ** | **Total Patents** | ** ** |
| Optical Display (base TMOS Patent)                                                                                                              |       | 7                               |       |   |   |   |   | 7 |   |
| Field Sequential Color Efficiency Enhancement                                                                                                   |       |                            |       | 1 |   | 4 |   | 5 |   |
| Common Ground Plane Discharge Circuit                                                                                                           |       |                            |       | 1 |   | 3 |   | 4 |   |
| Double-Electret MEMS Actuator                                                                                                                   |       |                            |       |   |   | 2 |   | 2 |   |
| Z-Axis Redundant Display/Multilayer Display                                                                                                     |       |                            |       |   |   | 2 |   | 2 |   |
| Simple Matrix Addressing                                                                                                                        |       |                            |       |   |   | 2 |   | 2 |   |
| Enhanced Bandwidth Data Encoding Method                                                                                                         |       |                            |       |   |   | 3 |   | 3 |   |
| Reducing Light Leakage and Improving  Contrast Ratio Performance in FTIR Display Devices                                                        |       |                            |       |   |   | 1 |   | 1 |   |
| Electromechanical Dynamic Force Profile  Articulating Mechanism                                                                                 |       |                            |       |   |   | 1 |   | 1 |   |
| Optical Microstructures for More Optical Light  Extraction and Control (combined Microlens Extraction Structure & Microlens  Anti-Stiction) |       |                            |       |   |   | 1 |   | 1 |   |
| Mechanism to Mitigate Color Breakup  Artifacts in Field Sequential Color Display Systems                                                        |       |                            |       |   |   | 1 |   | 1 |   |
|                                                                                                                                            |       | 7                               |       | 2 |   | 20 | ** ** | 29 | ** ** |

 

**EMPLOYEES**

 

We have eighteen full-time employees and two part-timeemployees. None of these employees is covered by a collective bargainingagreement, and we believe our relations with our employees are good. We mayalso employ consultants on an as-needed basis to supplement existing staff.

 

**OUR COMPLIANCE WITH ENVIRONMENTALPROTECTION LAWS**

 

We are not aware of any current federal, state or localenvironmental compliance regulations that have a material effect on ourbusiness activities. We have not expended material amounts to comply with anyenvironmental protection statutes and do not anticipate having to do so in theforeseeable future.

 

**RISK FACTORS**

 

Certain factors that mayaffect our business and could cause actual results to differ materially fromthose expressed in any forward-looking statements include the following:

 

**Risks Related to our Business andIndustry**

 

**We are a new business withlimited operating history and our future profitability is uncertain and weanticipate future losses and negative cash flow, which may limit or delay ourability to become profitable.**

 

We are attempting to obtainthe necessary working capital for operations, but there can be no assurance wewill obtain such financing. We have not yet demonstrated our ability togenerate revenue, and there is no assurance that we will produce any materialrevenues for ourselves or our stockholders, or that we will operate on aprofitable basis. As of December 31, 2005, we had an accumulated a totaldeficit during development stage of $14.6 million.

 

We are a development stagecompany with a limited operating history and no significant revenues to date.To date, we have had only a few revenue-generating services or developmentcontracts.  We expect to expendsignificant resources on consultants, intellectual property protection,research and development, advertising, hiring of personnel and startup costs.As a result, we have incurred losses since our inception and expect toexperience operating losses and negative cash flow for the

 

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foreseeable future. We anticipate our losseswill continue to increase from current levels because we expect to incuradditional costs and expenses related to prototype development, consultingcosts, laboratory development costs, marketing and other promotionalactivities, the addition of engineering and manufacturing personnel, and thecontinued development of relationships with strategic business partners.

 

Since inception, we havegenerated limited revenues while incurring significant losses. We expect toincur losses for the foreseeable future and until such time, if ever, as we areable to achieve sufficient levels of revenue from the commercial exploitationof our TMOS technology and materials to support our operations. However,planned products based upon our TMOS technology may never become commerciallyviable. Markets for flat panel displays utilizing our proprietary TMOStechnology may be limited. We may never generate sufficient revenues from thecommercial exploitation of our TMOS technology and materials to becomeprofitable. Even if we find commercially viable applications for our TMOStechnology and materials, we may never recover our research and developmentexpenses.

 

**If we do not receive additionalfinancing when and as needed in the future, we may not be able to continue theresearch, development and commercialization of our TMOS technology andmaterials.**

 

Our capital requirementshave been and will continue to be significant. We will likely requiresubstantial additional funds in excess of our current financial resources inthe future for research, development and commercialization of our TMOStechnology and materials, to obtain and maintain patents and other intellectualproperty rights in these technologies and materials, and for working capitaland other purposes, the timing and amount of which are difficult to ascertain.Our cash on hand will likely not be sufficient to meet all of our future needs.When and as we need additional funds, such funds may not be available oncommercially reasonable terms or at all. If we cannot obtain additional fundingwhen and as needed, our business might fail. Additionally, if we attempt toraise funds in a future offering of shares of our common stock, preferredstock, warrants or depositary shares, or if we engage in acquisitions involvingthe issuance of such securities, the issuance of these shares could, subject toany anti-dilution provisions, dilute the ownership of our then-existingstockholders.

 

**Our quarterly operating resultsare subject to substantial fluctuations, and you should not rely on them as anindication of our future results**.

 

Our quarterly operatingresults may fluctuate significantly in the future as a result of a variety offactors, many of which are outside our control. These factors include the levelof demand for our technology and products; our ability to attract and retainpersonnel with the necessary strategic, technical and creative skills requiredfor effective operations; the amount and timing of expenditures by customers;the amount and timing of capital expenditures and other costs relating to theexpansion of our operations; government regulation and legal developments;improvement of existing LCD and OLED technologies and introduction of other newflat panel display technologies; and general economic conditions. As astrategic response to changes in the competitive environment, we may from timeto time make certain pricing, service, technology or marketing decisions orbusiness or technology acquisitions that could have a material adverse effecton our quarterly results. Due to all of these factors, our operating resultsmay fall below the expectations of securities analysts, stockholders andinvestors in any future quarter.

 

**Our brand name and technology maynot be recognized in our marketplace so our results of operations and financialcondition may suffer**.

 

Our brand name andtechnology is new and unproven. If we are unable to effectively develop andtimely promote our brand and technology and establish a leading position in ourmarketplace, our results of operations and financial condition will suffer. Webelieve that the importance of brand recognition and technology will increaseover time. In order to gain brand recognition, we may increase our marketingand advertising budgets to create and maintain brand loyalty.

 

**We may fail to protect adequatelyour proprietary technology, which would allow our competitors to take advantageof our research and development efforts.**

 

Our long-term success largelydepends on our ability to market technologically competitive processes andproducts. We rely on a combination of patent, trade secret and otherintellectual property laws, confidentiality and security procedures andcontractual provisions to establish and protect our proprietary rights in ourtechnology, products and processes. If we fail to obtain or maintain theseprotections, we may not be able to prevent third parties from using ourproprietary technologies. Our currently pending or future patent applicationsmay not result in issued patents. In addition, our issued patents may notcontain claims sufficiently broad to protect us against third parties withsimilar technologies or products or from third parties infringing our patentsor misappropriating our trade secrets or provide us with any competitiveadvantage. In addition, effective patent and other intellectual propertyprotection may be unenforceable or limited in foreign countries. If a third

 

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party initiates litigation regarding thevalidity of our patents, and is successful, a court could revoke our patents orlimit the scope of coverage for those patents.

 

We also rely upon tradesecrets, proprietary know-how and continuing technological innovation to remaincompetitive. We protect this information with reasonable security measures,including the use of confidentiality and invention assignment agreements withour employees and consultants and confidentiality agreements with strategicpartners. It is possible that these individuals or companies will breach theseagreements and that any remedies for a breach will be insufficient to allow usto recover our costs. Furthermore, our trade secrets, know-how and othertechnology may otherwise become known or be independently discovered by ourcompetitors.

 

**If we fail to enter cooperativeresearch agreements, which we are presently negotiating with our projectedresearch partners, we might not succeed in commercializing our TMOS technologyand materials.**

 

Research and development ofcommercially viable applications for our TMOS technology and materials may atsome point depend substantially on the success of the work conducted by andwith our present and future research partners. We cannot be certain that theseresearch partners will make the additional advances in the research anddevelopment of these technologies and materials that may be essential tosuccessfully commercialize our TMOS technology and materials. Moreover,although we fund TMOS technology research, the scope of and technical aspectsof this research and the resources and efforts directed to this researchcurrently are and may remain in large part subject to the control of ourresearch partners.

 

**If we cannot form and maintainlasting business relationships with flat panel display manufacturers or othertargeted partners, or if we cannot obtain proprietary TMOS materials, ourbusiness strategy could suffer or fail.**

 

Our business strategyincludes some dependence upon our development and maintenance of commerciallicensing and material supply relationships with high-volume manufacturers offlat panel displays. All of our current relationship discussions with displaymanufacturers are limited to technology exploration and the evaluation of ourTMOS technology and materials for possible use in commercial displayapplications. Some or all of these relationships may not succeed or, even ifthey are successful, may not result in the display manufacturers’ entering intocommercial licensing and material supply relationships with us.

 

Under our planned technologydevelopment and evaluation agreements, we intend to work with strategicpartners to incorporate their technologies into our products for the commercialproduction of TMOS displays. However, many of these technology development andevaluation agreements may last for limited periods of time, such that ourrelationships with these partners could expire unless they continually arerenewed. Our partners may not agree to renew their relationships with us on acontinuing basis. In addition, we may continue working with certain strategicpartners in evaluating our TMOS technology and materials after our existingagreements with them have expired while we are attempting to negotiate contractextensions or new agreements with them. Should our relationships with thesepartners not materialize, or once in place, not continue to be renewed, ourbusiness could suffer.

 

Our ability to enter intocommercial licensing and material supply relationships, or to maintain ourexisting technology development and evaluation relationships, may require us tomake financial or other commitments. We might not be able, for financial orother reasons, to enter into or continue these relationships on commerciallyacceptable terms, or at all. Failure to do so will likely harm our businessstrategy, operating results and long-term business prospects.

 

Our business prospectsdepend significantly on our ability to obtain proprietary materials for our ownuse and for potential sale to display manufacturers. Our currently proposeddevelopment and license agreement with the national laboratory may provide uswith a source for certain of these materials for research, development andevaluation purposes. The current agreement with the national laboratory willpotentially provide us with a source for these materials for commercialpurposes. However, this license agreement is not yet effective. Our inabilityto reach a further agreement to obtain these certain materials from thisnational laboratory or another source would have a materially adverse effect onour ability to generate revenues from sales of these materials, as well as onour ability to perform research and development work. Further, failure tocomplete an agreement could preclude our ability to support displaymanufacturers that would choose to license our TMOS technology and materialsfor possible commercial use. Also, a license from the national laboratory maybe subject to significant United States government rights and restrictions thatmay reduce the Company’s ability to enter into overseas manufacturingagreements and licenses.

 

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**The United States government willhave certain rights to our TMOS technology that might prevent us from realizingthe benefits of these technologies**.

 

The United Statesgovernment, through various government agencies, has provided and continues toprovide funding to us for research activities related to certain applicationsof our TMOS technology. Because we have been provided with this funding, thegovernment has rights to certain applications of our technology that couldrestrict our ability or our licenses to market products to the government formilitary and other applications, or to third parties for commercialapplications. Moreover, if the government determines that we have not takeneffective steps to achieve practical application of our patented inventionsthat were funded by the government in any field-of-use in a reasonable time,the government could require us to grant licenses to other parties in thatfield of use. Any of these occurrences would limit our ability to obtain thefull benefits of our TMOS technology.

 

**We may incur substantial costs asa result of litigation or other proceedings relating to patent and otherintellectual property rights.**

 

A third party may sue us orone of our strategic collaborators for infringing its intellectual propertyrights. Likewise, we may need to resort to litigation to enforce our patentrights or to determine the scope and validity of third-party intellectualproperty rights.

 

The cost to us of anylitigation or other proceeding relating to intellectual property rights, evenif resolved in our favor, could be substantial, and the litigation would divertour efforts. Some of our competitors may be able to sustain the costs ofcomplex patent litigation more effectively than we can because they havesubstantially greater resources. If we do not prevail in this type oflitigation, we or our strategic collaborators may be required to pay monetarydamages; stop commercial activities relating to the affected products orservices; obtain a license in order to continue manufacturing or marketing theaffected products or services; or compete in the market with a substantiallysimilar product.

 

Uncertainties resulting fromthe initiation and continuation of any litigation could limit our ability tocontinue some of our operations. In addition, a court may require that we payexpenses or damages, and litigation could disrupt our commercial activities.

 

**If we are unable to keep up withrapid technological changes, our processes, products or services may becomeobsolete.**

 

The flat panel displaymarket is characterized by significant and rapid technological change. Althoughwe will continue to expand our technological capabilities in order to remaincompetitive, research and discoveries by others may make our processes,products or services less attractive or even obsolete. If we cannot competeeffectively in the marketplace, our potential for profitability and financialposition will suffer.

 

**If our TMOS technology andmaterials are not technically and commercially feasible for broad-based productapplications, we may never generate revenues sufficient to support ongoingoperations**.

 

To generate revenuessufficient to support ongoing operations, our business strategy ultimatelyrequires the development and maintenance of commercial licensing and materialsupply relationships with high-volume display manufacturers. Before displaymanufacturers will agree to utilize our TMOS technology and materials forwide-scale commercial production, they will likely require us to demonstrate totheir satisfaction that our TMOS technology and materials are feasible forbroad-based product applications of which there can be no assurances given.This, in turn, will require substantial advances in our research anddevelopment efforts in a number of areas, including: manufacturability; thedevelopment of feasible TMOS materials for TMOS displays; and issues related toscalability and cost-effective fabrication technologies for productapplications.

 

**Our efforts may never demonstratethe feasibility of our TMOS technology and materials for broad-based productapplications.**

 

Our research and developmentefforts remain subject to all of the risks associated with the development ofnew products based on emerging and innovative technologies, including, withoutlimitation, unanticipated technical or other problems and the possibleinsufficiency of funds for completing development of these products. Technicalproblems may result in delays and cause us to incur additional expenses thatwould increase our losses. If we cannot complete, or if we experiencesignificant delays in completing, research and development of our TMOStechnology and materials for use in potential commercial applications,particularly after incurring significant expenditures, our business may fail.

 

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**Even if our TMOS technology is technicallyfeasible, it may not be adopted by display manufacturers**.

 

The potential size, timingand viability of market opportunities targeted by us are uncertain at thistime. Market acceptance of our TMOS technology and materials will depend, inpart, upon the technology’s providing benefits greater than or comparable tocathode ray tubes, or CRT, plasma display and LCD technologies (the currentstandard display technologies) at an appropriate cost, and the adoption of ourTMOS technology by consumers and manufacturers, neither of which has beenachieved. Also, many potential licensees of our TMOS technology currentlymanufacture flat panel displays utilizing competing technologies, and may,therefore, be reluctant to redesign their products or manufacturing processesto incorporate our TMOS technology. Moreover, there may be a number ofadditional technologies that display manufacturers need to utilize inproduction or may need to be used in conjunction with our TMOS technology inorder to bring TMOS displays and products containing them to the market. Ifdisplay manufacturers are unable to obtain access to these additionaltechnologies, they may not utilize our TMOS technology.

 

The flat panel displaymarket is currently, and we believe will likely continue to be for some time,dominated by displays based on LCD technology. Numerous companies are makingsubstantial investments in, and conducting research to improve characteristicsof LCDs. Additionally, several other flat panel display technologies have been,or are being, developed, including technologies for the production of fieldemission, inorganic electroluminescence, gas plasma and vacuum fluorescentdisplays. Of particular note, competing OLED technologies have entered themarketplace prior to TMOS and may become entrenched in the flat panel industrybefore our TMOS technology has a chance to become widely utilized. In eachcase, advances in LCD, OLED, or other flat panel display technologies couldresult in technologies that are more cost-effective, have fewer displaylimitations, or can be brought to market faster than our TMOS technology. Theseadvances in competing technologies might cause display manufacturers to avoidentering into commercial relationships with us, or not renew planned or existingrelationships with us.

 

We believe that TMOS displaytechnologies ultimately may be able to overcome certain existing limitations ofLCD and other flat panel display technologies, such as high power consumption,costly manufacturing methods, poor contrast ratios and limited viewing angles,for many product applications. However, other companies may succeed inimproving these competing display technologies, or in developing new displaytechnologies, that are superior to our TMOS display technology in variousrespects. We cannot predict the timing or extent to which such improvements ordevelopments may occur. If our TMOS technology is unable to capture asubstantial portion of the overall display market for these competitivereasons, our business strategy may fail.

 

**Many of our competitors havegreater resources, and it may be difficult to compete against them.**

 

The flat panel displayindustry is characterized by intense competition. Many of our competitors havebetter name recognition and substantially greater financial, technical,manufacturing, marketing, personnel and/or research capabilities than we do.They have made and continue to make substantial investments in improving theirtechnologies and manufacturing processes. In addition, we believe that at timesin the past, some plasma and LCD display panel manufacturers have priced theirproducts below the marginal cost of production in an attempt to establish,retain or increase market share. Because of these circumstances, it may bedifficult to compete successfully in the display market.

 

**The loss of the services of ourkey management and personnel or the failure to attract additional key personnelcould adversely affect our ability to operate our business**.

 

A loss of one or more of ourcurrent officers or key employees could severely and negatively impact ouroperations. Specifically, the loss of services of Frank M. DeLape,Chairman of the Board, Reed J. Killion, President, Jim Tassone, Chief FinancialOfficer, Martin G. Selbrede, Chief Science Officer, Dan Van Ostrand,Executive Vice President, William Walker, Chief Technology Officer or B. TodCox, Vice President of Engineering, none of whom has an employment agreementwith us except for Mr. DeLape, Mr. Killion and Mr. Tassone, could significantlyharm our business. We have no present intention of obtaining key-man lifeinsurance on any of our executive officers or management. While we intend toenter into new employment agreements with our management and other keypersonnel, there is no guarantee that these will be found to be enforceable ifchallenged. Additionally, competition for highly skilled technical, managerialand other personnel is intense. As our business develops, we might not be ableto attract, hire, train, retain and motivate the highly skilled managers andemployees we need to be successful. If we fail to attract and retain thenecessary technical and managerial personnel, our business will suffer andmight fail.

 

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**Uni-Pixel is receiving limitedindemnification from certain current and former principals of our predecessorcompany, Real-Estateforlease.com, Inc.**

 

Although the predecessorcompany to Uni-Pixel and Real-Estateforlease.com, Inc., SuperShops, Inc., filed for bankruptcy and received plan confirmation for itsplan of reorganization on July 31, 2000, Uni-Pixel, Inc. has neverfiled nor been a party to any reorganization, liquidation or other proceedingunder the Federal Bankruptcy Code and may therefore have liabilities of whichwe are currently unaware. Uni-Pixel received typical representations andwarranties from the former principals of Real-Estateforlease.com, Inc.pursuant to the merger agreement by and amongReal-Estateforlease.com, Inc., Uni-Pixel Displays, Inc., GeminiV, Inc. and Uni-Pixel Merger Sub, Inc. However, Uni-Pixel will onlyreceive the following indemnification protection from the former principals ofReal-Estateforlease.com, Inc. for its liabilities and claims: (i) forthe period of July 31, 2000 (the confirmation date of SuperShops, Inc.’s plan of reorganization) through June 13, 2001 fromHalter Financial Group, Inc., a stockholder ofReal-Estateforlease.com, Inc.; (ii) for the period of June 14,2001 through November 14, 2004 from David DiSalvo, the former President,Secretary, Treasurer and sole board member forReal-Estateforlease.com, Inc.; and (iii) for the period ofNovember 15, 2004 going forward from Frank M. DeLape, the currentChairman of the Board of Uni-Pixel, Inc.

 

The indemnificationprotection provided by Halter Financial Group, Inc., David DiSalvo andFrank M. DeLape is further limited, in the aggregate, to the value of ourCommon Stock received by each of the indemnitors in the merger transaction withReal-Estateforlease.com, Inc. determined by multiplying the number ofshares of Common Stock received by each pursuant to the merger by $1.75.Frank M. DeLape received approximately 1,812,800 shares of Common Stock,Halter Financial Group received approximately 380,000 shares of Common Stockand David DiSalvo received approximately 75,000 shares of Common Stock.Therefore, the highest dollar amount that any one of these parties willindemnify us for during his or its indemnification period as described in thepreceding paragraph, is $3,172,400.

 

If indemnification claims doarise with respect to any liabilities or claims of or againstReal-Estateforlease.com, Inc., and either (i) Messrs. DiSalvo,Halter and DeLape are unable to satisfy their indemnification obligations tous, or (ii) such liabilities or claims exceed $3,172,400, we would suffera loss, which loss would impact our financial condition and the value of ourCommon Stock and Series A Preferred Stock. If the liability or claim issubstantially in excess of $3,172,400, we might be forced to seek bankruptcyprotection.

 

**The flat panel display industryhas historically experienced significant downturns, which may adversely affectthe demand for and pricing of our TMOS technology and materials.**

 

The flat panel display industryhas experienced significant periodic downturns, often in connection with, or inanticipation of, declines in general economic conditions. These downturns havebeen characterized by lower product demand, production overcapacity and erosionof average selling prices. Our business strategy to some degree is dependent ondisplay manufacturers building and selling displays that incorporate our TMOStechnologies and materials. Industry-wide fluctuations and downturns in thedemand for flat panel displays, and low power consumption or high performancedisplays in particular, would likely affect the demand for and pricing of ourTMOS technologies and materials and could cause significant harm to ourbusiness.

 

**RisksRelated to Owning Our Securities**

 

**Sincefirst trading on February 3, 2005, our Common Stock has traded onlysporadically and is expected to experience significant price and volumevolatility in the future which substantially increases the risk of loss topersons owning our Common Stock.**

 

There was no public marketfor our Common Stock prior to February 3, 2005. At best, only a limited markethas developed and is expected to continue to develop in the foreseeable futurefor our Common Stock. Because of the limited trading market for our CommonStock, and the possible price volatility, you may not be able to sell yourshares of Common Stock when you desire to do so. The inability to sell yourshares in a rapidly declining market may substantially increase your risk ofloss because of such illiquidity and because the price for our Common Stock maysuffer greater declines because of its price volatility.

 

We cannot predict the extentto which investor interest in our stock will create or sustain an active andorderly trading market. If such a market were to develop, the market price ofour Common Stock may continue to be highly volatile. The sale of a large blockof shares could depress the price of our Common Stock to a greater degree thana company that typically has a higher volume of trading in its securities. Thevalue of your investment could decline due to the impact of any of thefollowing factors upon the market price of our Common Stock:

 

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**•**                                          Disappointing results from ourdevelopment efforts;

•                                          Failure to meet our revenue or profitgoals or operating budget;

•                                          Decline in demand for our Common Stock;

•                                          Downward revisions in securities analysts’estimates or changes in general market conditions;

•                                          Technological innovations by competitorsor in competing technologies;

•                                          Investor perception of our industry orour prospects;

•                                          General economic trends;

•                                          Variation in our quarterly operatingresults, including our inability to increase revenues;

•                                          Announcement of new customerrelationships by our competitors;

•                                          Departures of our executive officers;

•                                          General conditions in the worldwideeconomy, including fluctuations in interest rates;

•                                          Developments in patents or otherintellectual property rights and litigation;

•                                          Developments in our relationships with ourcustomers and suppliers;

•                                          Any significant acts of terrorism againstthe United States; and

•                                          Our currently limited public float.

 

Our Common Stock has tradedas low as $3.00 and as high as $5.50 during a period of less than six months. Inaddition to volatility associated with Bulletin Board securities in general,the markets for high technology stocks have experienced extreme volatility thathas often been unrelated to the operating performance of the particularcompanies. These broad market fluctuations may adversely affect the tradingprice of our common shares.

** **

**We are not required to meet ormaintain any listing standards for our Common Stock to be quoted on the OTCBulletin Board, which could affect our stockholders’ ability to access tradinginformation about our Common Stock**

 

The OTC**Bulletin Board isseparate and distinct from the Nasdaq Stock Market. Although the OTC BulletinBoard is a regulated quotation service operated by the National Association ofSecurities Dealers, Inc. (“NASD”) that displays real-time quotes, last saleprices, and volume information in over-the-counter equity securities like ourCommon Stock, we are not required to meet or maintain any qualitative orquantitative listing standards for our Common Stock to be quoted on the OTC**Bulletin Board. OurCommon Stock does not presently meet the minimum listing standards for listingon the Nasdaq Stock Market or any national securities exchange which couldaffect our stockholders’ ability to access trading information about our CommonStock.

 

The OTC**Bulletin Board isgenerally considered to be a less efficient market than the establishedexchanges or the Nasdaq markets. While we anticipate seeking to be listed onthe Nasdaq Stock Market or a national exchange at some time in the future, itis impossible at this time to predict when, if ever, such application will bemade or whether such application will be successful.

** **

**OurCommon Stock may be subject to penny stock rules, which make it more difficultfor our stockholders to sell their Common Stock**

 

OurCommon Stock is subjectto certain rules and regulations relating to “penny stocks” (generally definedas any equity security that is not quoted on the Nasdaq Stock Market and thathas a price less than $5.00 per share, subject to certain exemptions). Broker-dealerswho sell penny stocks are subject to certain “sales practice requirements” forsales in certain non-exempt transactions *(i.e.,*sales to persons other than established customers and institutional “accreditedinvestors”), including requiring delivery of a standardized risk disclosuredocument relating to the penny stock market and monthly statements disclosingrecent bid and offer quotations for the penny stock held in the account, andcertain other restrictions. If the broker-dealer is the sole market maker, thebroker-dealer must disclose this, as well as the broker-dealer’s presumedcontrol over the market. In addition, the penny stock rules generally requirethat prior to a transaction in a penny stock the broker-dealer make a specialwritten determination that the penny stock is a suitable investment for thepurchaser and receive the purchaser’s written agreement to the transaction. Thesedisclosure requirements may have the effect of reducing the level of tradingactivity in the secondary market for a stock that becomes subject to the pennystock rules. For as long as our securities are subject to the rules on pennystocks, the liquidity of our Common Stock could be significantly limited. Thislack of liquidity may also make it more difficult for us to raise capital inthe future.

** **

**ITEM 2. DESCRIPTION OF PROPERTY**

 

Our main corporate officesand research and development facility are located at 8708 Technology ForestPlace, Suite 100, The Woodlands, TX 77381. We currently lease approximately13,000 square feet of space at this facility.

 

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The Company has an advancedmaterials laboratory located on Kirtland Air Force base in Albuquerque, NM. Wecurrently lease approximately 4,000 square feet of space at this facility.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

TheCompany from time to time may be involved in litigation relating to claimsarising out of its ordinary course of business. Management believes that thereare no claims or actions pending or threatened against the Company, theultimate disposition of which would have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

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

 

No matters were submitted toa vote of security holders during the fourth quarter of 2005.

 

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**PART II**

 

**ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERMATTERS**

 

**MarketInformation**

 

Since January 18, 2006, ourCommon Stock has been traded on the OTC Bulletin Board under the symbol “UNXL”.From February 3, 2005 to January 18, 2006, our Common Stock was quoted on the “pinksheets” published by the Pink Sheets LLC under the symbol “UNXL.” Prior to February 3, 2005, our shares ofCommon Stock were traded under the symbol “REFL.” We changed our name to “Uni-Pixel, Inc.”from “Real-Estateforlease.com, Inc.” at the annual meeting of ourstockholders held in January 2005. The market for our common stockis limited and volatile. The following table sets forth the range of high andlow bid quotations or high and low closing prices, as applicable, for ourCommon Stock for each of the periods indicated as reported by the Pink Sheetsor the OTC Bulletin Board. The prices for the Pink Sheets and the OTC BulletinBoard reflect inter-dealer prices, without retail mark-up, mark-down orcommissions. The OTC Bulletin Board and AMEX prices listed below may notrepresent actual transaction prices.

 

| ** **     | ** ** | **Year Ended  December 31, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|----------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **     | ** ** | **High**                          | ** ** | **Low**                           | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $                                 | 4.00       |                              | $          | 0.15 |   | $ | 0.01 |   | $ | 0.01 |   |
| Second Quarter |       | 5.20                              |       | 4.40                              |       | 0.01 |   | 0.001 |   |
| Third Quarter  |       | 5.50                              |       | 3.75                              |       | 0.002 |   | 0.001 |   |
| Fourth Quarter |       | 5.00                              |       | 3.00                              |       | 0.15 |   | 0.002 |   |
|                |            |                                   |            |                                   |            |  |  |  |  |  |  |  |  |

 

**Holders**

 

As of February 28, 2006, wehad 1,056 stockholders of record of our Common Stock.

 

**Dividends**

 

The Company has never paiddividends on Common Stock. Currently, the Company anticipates that it willretain earnings, if any, to support operations and to finance the growth anddevelopment of its business and does not anticipate paying cash dividends onthe Common Stock in the foreseeable future. The holders of Series A PreferredStock will receive cumulative annual dividends, payable in shares of Series APreferred Stock or cash, at the option of the Board of Directors, at an annualrate of 6% ($0.21 per share), payable on December 31 of each year commencingDecember 31, 2005. Unpaid dividends will accumulate and be payable prior to thepayment of dividends on shares of Common Stock. Cash dividends will only bepayable from funds legally available therefore, when and as declared by theBoard of Directors of the Company, and unpaid dividends will accumulate untilthe Company can legally pay the dividends. In 2005, the Company paidaccumulated dividends to the holders of Series A Preferred Stock in the amountof 156,507 shares of Series A Preferred Stock, as well as 149,479 commonshares.

** **

**Recent Sales of Unregistered Securities**

 

The information set forthbelow describes our issuance of securities without registration under theSecurities Act of 1933 during the year ended December 31, 2005, that were notpreviously disclosed in one of our periodic reports during the year.

 

During the 4thquarter of 2005, we issued 330,000 options to purchase our Common Stock with anexercise price of $4.00 per share to various employees. The options vestratably over a three year period from the date of grant. The issuance wasexempt from registration under the Securities Act pursuant to Rule 701 thereunder.

 

**ITEM 6. MANAGEMENT’S DISCUSSION ANDANALYSIS OR PLAN OF OPERATION**

 

The following discussion andanalysis should be read in conjunction with the consolidated financialstatements including the notes thereto.

 

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Overview

 

Uni-Pixel is a developmentstage company that has developed, patented and demonstrated a new color displaytechnology in the form of proof of concept prototypes which we call TimeMultiplexed Optical Shutter (“TMOS”).  We intend to be a leader in theresearch, development and commercialization of new flat panel displays usingTMOS in a variety of applications, such as mobile phones, digital cameras,notebook computers, televisions and other consumer electronic devices. As ofDecember 31, 2005, we had accumulated a total deficit of $14.6 million fromoperations in pursuit of this objective.

 

We anticipate that our TMOSdisplays will be thin, lightweight, and power-efficient devices, which arehighly suitable for use in full-color display applications.  We believeTMOS displays will be able to capture a share of the growing $60+ billionflat panel display market due to the significant advantages it should provideover competing displays with respect to manufacturing and materials cost, brightness,power efficiency, viewing angle, video response time and image quality. We believe that our technology leadership and intellectual property positionwill enable us to generate revenues initially from TMOS displays for existingvertical market segments such as the military, avionics, and automotivesegments, and then subsequently from consumer electronics markets (i.e., TVs,monitors, personal computers, cameras, games, etc.).

 

Our strategy is to developfurther our proprietary TMOS technology to the point of initially manufacturingsmall volumes of high performance displays for military applications.  Weintend to utilize contract manufacturing for product fabrication to augment ourinternal capabilities in the short term.  We also plan to enter into jointventures in certain vertical market segments to exploit the existingmanufacturing and distribution channels of our targeted partners.  Wefurther plan to license our technology to display manufacturers for use inapplications such as mobile phones, digital cameras, laptop computers, andother consumer electronic devices. Through our internal research anddevelopment efforts we have established a portfolio of TMOS-related patents andpatent applications and other intellectual property rights that support thesejoint venture and licensing strategies.  We currently have seven issuedpatents and fifteen pending patent applications worldwide and contemplateobtaining exclusive field-of-use licenses, with the right to sublicense, tocomplementary technologies from targeted strategic partners and U.S. nationallaboratories.

 

Through December 31, 2005,we have been primarily engaged in developing our initial product technology,recruiting personnel, commencing our U.S. operations and raising capital. In thecourse of our development activities, we have sustained losses and expect suchlosses to continue through at least 2006. We will finance our operationsprimarily through our existing cash and possible future financing transactions.

 

Our ability to operateprofitably under our current business plan is largely contingent upon oursuccess 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 achieve growth in ouroperations in the next few years, such growth could place a strain on ourmanagement, administrative, operational and financial infrastructure. Ourability to manage our current operations and future growth requires thecontinued 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 December 31, 2005, wehad cash and cash equivalents of $2.3 million.  We believe that ourexisting capital resources are adequate to finance our operations until May2006, however our long-term viability is dependent upon successful operation ofour business, our ability to develop our manufacturing process, the developmentof our products and our ability to raise additional debt and equity to meet ourbusiness objectives.

 

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

 

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*CRITICAL ACCOUNTING POLICIES*

 

The following discussion andanalysis of financial condition and results of operations is based upon ourconsolidated financial statements, which have been prepared in conformity withaccounting principles generally accepted in the United States of America. Oursignificant accounting policies are more fully described in Note 3 ofNotes to the audited Consolidated Financial Statements. However, certainaccounting policies and estimates are particularly important to theunderstanding of our financial position and results of operations and requirethe application of significant judgment by our management or can be materiallyaffected by changes from period to period in economic factors or conditionsthat are outside of our control.  As a result, they are subject to aninherent degree of uncertainty. In applying these policies, our management usestheir judgment to determine the appropriate assumptions to be used in thedetermination of certain estimates. Those estimates are based on our historicaloperations, our future business plans and projected financial results, theterms of existing contracts, our observance of trends in the industry,information provided by our customers and information available from otheroutside sources, as appropriate. The following discusses our significantaccounting policies and estimates.

 

*Revenue Recognition:*  We recognize revenue over the periodthe service is performed in accordance with SEC Staff Accounting BulletinNo. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). Ingeneral, SAB 104 requires that four basic criteria must be met before revenuecan be recognized: (1) persuasive evidence that an arrangement exists,(2) delivery has occurred or services rendered, (3) the fee is fixedand determinable, and (4) collectibility is reasonably assured.

 

Advance payments aredeferred until shipment. The amount of the revenue deferred represents the fairvalue of the remaining undelivered products measured in accordance withEmerging Issues Task Force Issue (“EITF”) 00-21, *“Accounting for Revenue Arrangements with Multiple Deliverables,”*which addresses the issue of accounting for arrangements that involve thedelivery of multiple products or services.

 

Revenue from licenses andother up-front fees are recognized on a ratable basis over the term of therespective agreement.

 

*Cost of Sales and Selling, General and AdministrativeExpenses and Research and Development Expenses:*  In an effort to consolidate ourexecutive management team, we moved our headquarters from Austin, Texas to TheWoodlands, Texas during the third quarter of 2005.  The primary purpose ofour facility in The Woodlands, Texas is to conduct research on the development,testing and delivery of our prototype devices, and the commercialization of ourproducts so the costs incurred in operating our facility in The Woodlands,Texas have been classified as research and development expenses.

 

If, in the future, thepurposes for which we operate our facility in The Woodlands, Texas, or any newfacilities we open, changes, the allocation of the costs incurred in operatingthat facility between cost of sales and research and development expenses couldchange to reflect such operational changes.

 

*Research and Development Expenses:*  Research and development costs areexpensed as incurred and include salaries and benefits, costs paid tothird-party contractors for research, development and manufacturing ofmaterials and devices, and a portion of facilities cost. Prototype developmentcosts are a significant component of research and development expenses andinclude costs associated with third-party contractors. Invoicing fromthird-party contractors for services performed can lag several months. Weaccrue the costs of services rendered in connection with third-party contractoractivities based on our estimate of management fees, site management andmonitoring costs and data management costs. Actual costs may differ in somecases from estimated costs and are adjusted for in the period in which theybecome known.

 

*Intangible Assets:*  Our intangible assets represent patent applications which arerecorded at cost. We have filed applications for patents in connection withtechnologies being developed. The patent applications and any patents issued asa result of these applications are important to the protection of our technologiesthat may result from our research and development efforts. Costs associatedwith patent applications and maintaining patents are capitalized and will beamortized over the life of the patents. We review the value recorded forintangibles to assess recoverability from future operations using undiscountedcash flows. Impairments are recognized in operating results to the extent thecarrying value exceeds fair value determined based on the net present value ofestimated future cash flows. The projection of future cash flows requires us tomake estimates 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:*  We account for our stock-basedcompensation under the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123— “Accounting for Stock Based Compensation.”Under SFAS No. 123,

 

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we are permitted to either record expensesfor stock options and other employee compensation plans based on their fairvalue at the date of grant or to continue to apply the provisions of AccountingPrinciples Board Opinion No. 25 “Accounting for Stock Issued to Employees,”(“APB No. 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.

 

Beginning in the quarterbeginning January 1, 2006, we will be required to adopt SFAS No. 123(Revised 2004), *“Share Based Payment,”*which eliminates the use of APB Opinion No. 25 and we will be required 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—the requisite service period. Nocompensation cost will be recognized for equity instruments for which employeesdo not render the requisite service. The grant-date fair value of employeeshare options and similar instruments will be estimated using option-pricingmodels adjusted for the unique characteristics of those instruments. SFASNo. 123 (Revised 2004) must be applied to all options granted or modifiedafter its effective date and also to recognize the cost associated with theportion of any option awards made before its effective date for which theassociated service has not been rendered as of its effective date. We are stillstudying the requirements of SFAS No. 123 (Revised 2004) and have not yetdetermined what impact it will have on our results of operations and financialposition.

 

*RESULTS OF OPERATIONS*

 

Comparisonof Fiscal Years Ending December 31, 2005 and 2004

 

REVENUES.  We are 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.From inception, we have had a limited amount of revenue that is derived fromdevelopment contracts.

 

Revenuesdecreased to $19,689 for the year ended December 31, 2005, as compared to$290,387 for the year ended December 30, 2004, due to the revenues recognized from the workspecific to a development contract during each of those respective periods.

 

COST OF REVENUES.  Cost of revenues include all direct expensesassociated with the delivery of products or services including internal laborcosts. Cost of revenues for the year ended December 31, 2005 decreased to$9,844 as compared to $145,194 for the previous year, due to thedecrease in revenues recognized from the work specific to a developmentcontract.

 

SELLING, GENERAL ANDADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increasedby 39% or $651,121, to $2,331,743 for theyear ended December 31, 2005 from $1,680,622 for the year endedDecember 31, 2004. The major components of the increase are asfollows:

 

a)  Salaries andbenefits decreased by approximately $72,000 to $1,005,000 for the year endedDecember 31, 2005 from $1,077,000 for the year ended December 31, 2004, due toa decrease in the number of selling, general and administrative employees;

 

b) Contract labor increasedby approximately $132,000 to $183,000 for the year ended December 31, 2005 from$51,000 for the year ended December 31, 2004;

 

c) Legal expense decreasedby approximately $16,000 to $402,000 for the year ended December 31, 2005 from$418,000 for the year ended December 31, 2004;

 

d) Accounting expenseincreased by approximately $12,000 to $36,000 for the year ended December 31,2005 from $24,000 for the year ended December 31, 2004 due to an increase inaccounting expenses related to audits and

reporting required for thepreparation of the Form 10-SB, as amended, filed with the Securities andExchange Commission on July 22, 2005;

 

e) Office expense increasedby approximately $64,000 to $88,000 for the year ended December 31, 2005 from$24,000 for the year ended December 31, 2004;

 

26

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f) Travel expense increasedby approximately $54,000 to $79,000 for the year ended December 31, 2005 from$25,000 for the year ended December 31, 2004; and

 

g) Depreciation andamortization expense increased by approximately $178,000 to $190,000 for theyear ended December 31, 2005 from $12,000 for the year ended December 31, 2004as a result of an increase in property and equipment during the twelve monthsended December 31, 2005.

 

RESEARCH AND DEVELOPMENT.Research and development expenses increased by approximately $1,617,400 duringthe year ended December 31, 2005 to $2,758,739 from $1,141,339 for the yearended December 31, 2004. The major components of the increase are as follows:

 

a) Salaries and benefitsattributable to research and development increased by approximately $285,000 to$1,203,000 for the year ended December 31, 2005 from $918,000 for the yearended December 31, 2004 due to an increase in the number of research anddevelopment employees and the level of compensation for these employees,including executive pay increases;

 

b) Consulting expenseattributable to research and development increased by approximately $817,000 to$964,000 for the year ended December 31, 2005 from $147,000 for the year endedDecember 31, 2004 primarily due to increased services related to prototypedevelopment;

 

c) Lab expense increased byapproximately $197,000 to $202,000 for the year ended December 31, 2005 from$5,000 for the year ended December 31, 2004; and

 

d) Travel expenseattributable to research and development increased by approximately $164,000 to$201,000 for the year ended December 31, 2005 from $37,000 for the year endedDecember 31, 2004.

 

OTHER INCOME (EXPENSE).

 

a) Other income decreased to$0 for the year ended December 31, 2005 as compared to $886,886 for the yearended December 31, 2004, primarily due to a one time gain on forgiveness ofaccrued wages, employee notes and related accrued interest.

 

b) Debt issuance expensedecreased to $0 for the year ended December 31, 2005 as compared to $125,000for the year ended December 31, 2004, due to the finalization of debtutilization for funding in 2004.

 

c)****Interest income (expense), net increased to $113,847 for theyear ended December 31, 2005 as compared to an expense of $400,450 for the yearended December 31, 2004 primarily due to the investment of proceeds from thesale of shares of our Series A Preferred Stock 2005.  During 2004, weincurred interest expense because of the impact of debt associated with loansthat were repaid in December 2004 with the proceeds from the sale of ourSeries A Preferred Stock.

 

NET LOSS.**  **Net loss increased to$4,966,790 for the year ended December 31, 2005, as compared to $2,315,332 forthe year ended December 31, 2004. We compute our net loss per share on thebasis of net loss attributable to common stockholders, which included theeffects of certain items not included in the determination of net loss. Netloss attributable to common stockholders for the year ended December 31, 2005was $5,740,517 as compared to a net loss attributable to common stockholders of$2,351,047 for the year ended December 31, 2004. The net loss attributable tocommon stockholders for the twelve months ended December 31, 2005 andDecember 31, 2004, includes $773,727 and $35,715 of accrued but unpaidpreferred stock dividends, respectively.

 

Comparisonof Fiscal Years Ending December 31, 2004 and 2003

 

REVENUES.  Revenues increased to $290,387 for the year endedDecember 31, 2004, as compared to $98,543 for the year endedDecember 30, 2003, primarily due to the recognition of deferred revenuesresulting from the delivery of a prototype associated with a developmentcontract.

 

COST OF REVENUES.  Cost of revenues include all direct expensesassociated with the delivery of products or services including internal laborcosts. Cost of revenues for the year ended December 31, 2004 increased to$145,194 as compared to $49,133 for the previous year due to the associatedincrease in contract engineering and prototype development revenue.

 

27

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SELLING, GENERAL ANDADMINISTRATIVE EXPENSES. General andadministrative expenses increased by 83% or $762,181, to $1,680,622 for theyear ended December 31, 2004 from $918,441 for the year endedDecember 31, 2003 due primarily to an increase of $279,000 in salaryexpense and an increase in legal fees of $361,000.

 

RESEARCH AND DEVELOPMENT. Research and Development expenses increased byapproximately $211,000 during the year ended December 31, 2004 to$1,141,339 from $930,678 for the year ended December 31, 2003. Thisincrease in costs was attributable to the increase of additional developmentstaffing with salary costs increasing by approximately $300,000 to $1,069,000for the year ended December 31, 2004 from $739,000 for the year endedDecember 31, 2003.

 

OTHERINCOME. Other income increased to $886,886 for the year ended December 31,2004 as compared to $0 during the year ended December 31, 2003, primarilydue to a one time gain on forgiveness of accrued wages, employee notes andrelated accrued interest.

 

INTEREST EXPENSE. Interestexpense increased to $400,450 for the year ended December 31, 2004 ascompared to $268,281 for the year ended December 31, 2003, primarily todue to the impacts of additional debt financing.

 

NETLOSS. Net loss decreased to $2,315,332 for the year ended December 31,2004, as compared to $2,492,123 for the year ended December 31, 2003.

 

**Off-Balance Sheet Transactions**

 

We do not engage in materialoff-balance sheet transactions.

 

*LIQUIDITY AND CAPITAL RESOURCES*

 

OperatingActivities

 

Cash used in operatingactivities during the year ended December 31, 2005 increased to $4,852,594 ascompared to $2,285,500 used for the year ended December 31, 2004. The increaseis primarily a result of increases in research and development spending andgeneral and administrative expenses resulting from additional employee salaryand related employee costs.

 

InvestingActivities

 

Cash used for investingactivities during the year ended December 31, 2005 amounted to $1,018,191, ascompared to $15,077 used for investing activities for the year ended December31, 2004 due to our increased spending on computers, furniture, laboratory,metrology and testing equipment in Fiscal 2005.

 

FinancingActivities

 

We have financed ouroperating and investing activities primarily from the proceeds of privateplacements of common stock, convertible investor notes, and a preferred stockoffering which we closed in December 2004 and January 2005.

 

The total net cash providedby financing activities was $2,856,529 for the year ended December 31, 2005,which includes:

 

•                  $104,567 payments on notes payable to arelated party;

•                  $161,796 net proceeds from a note payablefrom Bank of America to purchase equipment; and

•                  $2,799,300 net from cash sales of shares ofour Series A Preferred Stock.

 

The total net cash providedby financing activities was $7,623,458 for the year ended December 31, 2004,which includes:

 

•                  $20,000 payments on notes payable to arelated party;

•                  $1,400,000 received from cash sales ofconvertible investor notes provided by financing activities for the year endedDecember 31, 2004 which were converted to our common stock during December 2004;

•                  $1,470,672 payments on convertible notespayable;

•                  $7,649,330 net from cash sales of shares ofour Series A Preferred Stock; and

•                  $64,800 net from proceeds from the issuanceof common stock .

 

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WorkingCapital

 

Asof December 31, 2005, we had a cash balance of $2.6 million.  We projectthat current cash reserves will sustain our operations at least through May2006, and we are not aware of any trends or potential events that are likely toimpact our short term liquidity through this term.  As discussed above,during the year ended December 31, 2005, we had unusually high expensesassociated with independent contractors, accountants and attorneys associatedwith the preparation and filing of our Form 10-SB, and associatedsecurities work.  As a result, we do not believe that those expenses arereflective of future expenses through the end of 2006.

 

We are a development stagecompany and have not experienced significant operations since our formation. Wereached a positive working capital position as of the first quarter of 2005 asa result of our financing activities. We have incurred significant operatinglosses during the years ended December 31, 2002, 2003, 2004 and 2005. Weintend to utilize a proprietary methodology for development of our displays.Our principal activities, from the beginning of the development stage, havebeen organizational matters, capital raising activities including issuance ofstock, product research and development, fund raising, and market research.

 

To date, we have had only afew revenue-generating services or development contracts.  These include aprototype development agreement with a large personal computer company, and aSmall Business Innovation Research (SBIR) Phase One agreement with the U.S. AirForce for $98,214 and a follow-on Phase Two agreement for $686,966.  Wealso entered into a prototype development agreement with Lockheed Martin, alarge military contractor, in October 2005, for which we have receivedfull payment from Lockheed Martin.  Our immediate customer prospects arelimited to Lockheed Martin, with which we entered into a License and StrategicBusiness Agreement dated October 5, 2005.   See“Risk Factors” included in this report.

 

Management will work toestablish specific applications for our display technology that will generatesignificant revenues, and cash flows to support operations. Our ability tocontinue as a going concern will be dependent upon achieving profitableoperations, and obtaining additional funding from current shareholders and newinvestors.

 

InDecember 2005, we entered into an agreement with CIBC World Markets Corp. (“CIBC”)whereby we retained CIBC to act, on an exclusive basis, as our agent in aprivate placement of one or more classes of series of securities to a limitednumber of sophisticated investors. Management is currently in negotiations witha number of strategic investors, who have expressed an interest in making aninvestment in the Company. These discussions are ongoing, and some of thepotential investors are currently conducting their due diligence procedures. However,there can be no assurance of the outcome of these negotiations. In the eventthe Company is not able to secure equity financing on acceptable terms, theCompany’s ability to develop its technology and achieve profitability may beadversely affected.

 

**ITEM 7. FINANCIAL STATEMENTS**

 

The financial statements ofthe Company, including the notes thereto and report of the independent auditorsthereon, are included in this report as set forth in the “Index to FinancialStatements.” See F-1 for Index to Consolidated Financial Statements.

 

**ITEM 8. CHANGES IN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 8A. CONTROLS AND PROCEDURES**

 

The term “disclosurecontrols and procedures” is defined in Rules 13a -15(e) and 15d – 15(e) of theSecurities Exchange Act of 1934 (the Act). The rules refer to the controls andother procedures designed to ensure that information required to be disclosedin reports that we file or submit under the Act is recorded, processed,summarized and reported within the time period specified. As of December 31,2005, management, including the Principal Executive Officer and the ChiefFinancial Officer, performed an evaluation of the effectiveness of the designand operation of our disclosure controls and procedures. Based on thatevaluation, management, including the Principal Executive Officer and the ChiefFinancial Officer, concluded that as of December 31, 2005, our disclosurecontrols and procedures were effective at ensuring that material informationrelated to us or our consolidated subsidiaries is made known to them and isdisclosed on a timely basis in our reports filed under the Act.

 

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We maintain a system ofinternal control over financial reporting that is designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withaccounting principles, generally accepted in the United States. Bases on themost recent evaluation, we have concluded that no significant changes in ourinternal control over financial reporting occurred during the last fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect , our internal control over financial reporting.

 

**ITEM 8B. OTHER INFORMATION**

 

None.

 

**PART III**

 

**ITEM 9. DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT**

 

The following table setsforth the names and ages of all of our directors and executive officers as ofFebruary 28, 2006. Our officers are appointed by, and serve at the pleasure of,the Board of Directors.

 
| **Name**           | ** ** | **Age** | ** ** | **Title**                                            |
|--------------------|------------|---------|------------|------------------------------------------------------|
| Reed J. Killion    |       | 43      |       | President, Principal  Executive Officer and Director |
| Frank DeLape       |       | 52      |       | Chairman of the Board                                |
| James A. Tassone   |       | 42      |       | Chief Financial Officer                              |
| William Walker     |       | 50      |       | Chief Technology Officer                             |
| B. Tod Cox         |       | 36      |       | Vice President of  Engineering                       |
| Martin G. Selbrede |       | 47      |       | Chief Science Officer                                |
| Dan Van Ostrand    |       | 40      |       | Vice President Research  and Development             |

 

Biographical informationwith respect to our executive officers and directors is provided below. Thereare no family relationships between any of our executive officers or directors.

 

***Reed J. Killion, President, PrincipalExecutive Officer and Director*** – Mr. Killion is a member of Uni-Pixel’s board of directors and hasserved as the President and Principal Executive Officer of the Company sinceSeptember 2004. Previously, Mr. Killion served as Uni-Pixel’sExecutive Vice President of Business Development and has been a member ofUni-Pixel’s Board of Directors since April 2002. Prior to joiningUni-Pixel, Mr. Killion was Vice President of Business Development forLogiCom from 1999 until 2002. LogiCom is a technology consulting firm andmanufacturers’ representative based in Austin, Texas. Compaq, Dell, Siemens,NVIDIA, Vanguard, Atmel, Foxconn, Seiko (SMOS) and DCM Technologies are amongthe companies Mr. Killion has worked with over the years. Mr. Killionholds a Bachelors Degree in Finance from the University of Mississippi.

 

***Frank DeLape, Chairman***– Mr.DeLape has served as Uni-Pixel’s Chairman of the Board since November 15,2004. Mr. DeLape has been Founder, Chairman and CEO of Benchmark EquityGroup, Inc. since 1994. Benchmark provides private equity and debtfinancing from various funds and other investors. Prior to founding Benchmarkin 1994, Mr. DeLape spent eleven years in executive management roles forvarious companies. Mr. DeLape is also Founder and Managing General Partnerof Trident Growth Fund, a government-licensed Small Business InvestmentCorporation, SBIC. From August 2001 to November 2005, Mr. DeLapeserved as Executive Chairman of the Board and a major shareholder of Isolagen, Inc.,a company listed on the American Stock Exchange (symbol: ILE).Isolagen, Inc. specializes in the development and commercialization ofautologous cellular therapies for soft and hard tissue regeneration.

 

***James A. Tassone, Chief Financial Officer*** – Mr. Tassone has been the Chief FinancialOfficer of Uni-Pixel since he joined the Company in August 2003.Mr. Tassone served as a part-time consultant to the Company fromJune 2002 to August 2003. Mr. Tassone was appointed Secretary ofthe Company in January 2005. From June 1999 to August 2003,Mr. Tassone was the Managing Director and Chief Financial Officer ofMindwave Research, Inc., a company he founded in June 1999, and forwhich he continues to serve on the board of directors. Mindwave Research is aprimary market research company for high technology clients. From 1997 untilJune 1999, Mr. Tassone was the Director of Research for RealityResearch, a subsidiary of CMP Media (a high tech industry-focused publishingcompany). Mr. Tassone has a Bachelors Degree in Finance and EngineeringManagement from the University of Texas at Austin.

 

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***William Walker, Chief Technology Officer –*** Mr. Walker joined Uni-PixelDisplays, Inc. in November 2005, after having served Hewlett-Packard(formerly Compaq) (“HP/Compaq”) for the previous 15 years. As a DistinguishedTechnologist on the HP/Compaq Technical Staff, Mr. Walker defined and developedarchitectures and VLSI/ASIC for a wide variety of products and technology overthe years. (These include keyboards, desktop, portables, network switches, aswell as file/computer server chipsets.) Prior to joining HP/Compaq in 1989, Mr.Walker was a VLSI/ASIC developer and subsystems architect for Sperry Univac intheir mainframe group in Roseville, MN. Mr. Walker has over 20 patents invarious areas of technology, and holds a Bachelors Degree in Engineering fromthe Bluefield State College in West Virginia.

 

***Tod Cox, Vice President of Engineering***- B. Tod Cox joined Uni-Pixel in 2004 as VicePresident of Engineering.  Prior to joining Uni-Pixel, Mr. Cox was atHP/Compaq where he served most recently as the Director of Blade ServerEngineering leading the initiative to design and deliver enterpriseclass blade servers.  His prior hardware engineering leadership atHP/Compaq resulted in the introduction of numerous productsin that company’s server lines.  Mr. Cox holds a BS and anMS in Electrical Engineering from Texas A&M University, anMS in Industrial Engineering from the University of Houston, and an MBAfrom Rice University.

 

***Martin G. Selbrede, Chief Science Officer*** – Mr. Selbrede is the inventor of Uni-Pixel’score TMOS technology and has served as Uni-Pixel’s Chief Science Officer sinceFebruary 2001, and as Chief Technology Officer from November 2000 toFebruary 2001. Mr. Selbrede worked at Continental ImagingCenter, Inc., a privately held Los Angeles-based computer graphicscompany, that he co-founded, for 23 years prior to joining Uni-Pixel.Mr. Selbrede holds no college level degrees, but attended Harvey MuddCollege of Science and Engineering from 1974 to 1977. He also participated inthe founding of CTXT Systems, Inc. (1985) and TicomTechnologies, Inc. (1990), serving as Chief Technology Officer for bothcompanies.

 

***Dan Van Ostrand, Vice President of Researchand Development*** –Mr. Van Ostrand has served as a Vice President of Uni-Pixel since its inceptionin February of 1998. Mr. Van Ostrand has over twenty-four years experiencein corporate operations, project management, systems engineering and systemsdesign and has been involved in the establishment, funding and management ofUni-Pixel as well as leading the development of its TMOS technology. Asco-owner from 1984 through 1992 of a closely-held company that designedruggedized VME-based tactical computer systems for the United States Army, hewas exposed to and became interested in the design, development and engineeringprinciples of flat panel display technology. Mr. Van Ostrand was a SystemsEngineer from 1980 until 1992 for Informatics General, Magnavox, Teledyne andthe Jet Propulsion Laboratory. He has a Bachelors of Administration Degree witha double major in Math and Computer Science from Mid-America NazareneUniversity.

 

TheBoard members serve for a period of one year until the next annual meeting ofour shareholders. Our executive officers are appointed by our board ofdirectors and hold office until removed by the board.

 

**Audit Committee Financial Expert**

 

We are not currently alisted company within the meaning of Rule 10A-3 of the Exchange Act and,therefore, are not required to have an audit committee or, accordingly, anaudit committee financial expert. Nevertheless, our Board of Directors performsthe functions of an audit committee and Frank DeLape, one of our directors,serves in a capacity similar to that of an audit committee financial expert.

** **

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Section 16(a) of theExchange Act requires the Company’s directors and executive officers and personswho beneficially own more than 10% of the registered class of the Company’sequity securities to file with the SEC reports of ownership and changes inownership of the Company’s Common Stock. Directors, executive officers andgreater than 10% beneficial stockholders are required by SEC regulations tofurnish the Company with copies of all Section 16(a) forms they file. Basedsolely on a review of the copies of these reports furnished, managementbelieves that the directors, executive officers and greater than 10%stockholders filed all reports required by Section 16(a) of the Exchange Actwith respect to the year ended December 31, 2005 on a timely basis.

** **

**Code of Ethics Disclosure**

 

As of December 31, 2005, wehad not adopted a Code of Ethics for our principal executive, financial andaccounting officers or persons performing similar functions, as required forlisted issuers by sections 406 and 407 of the Sarbanes-Oxley Act of 2002.

 

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As of March 15, 2006, ourCode of Ethics has been adopted by the board of directors and is filed as anexhibit to this10K-SB.

** **

**ITEM 10. EXECUTIVE COMPENSATION**

** **

**Executive Officer Compensation.**

 

The following table setsforth information regarding annual and long-term compensation with respect tothe fiscal years ended December 31, 2005 and 2004, paid or accrued by usto or on behalf of those persons who were, during the fiscal year endedDecember 31, 2005, our President and our most highly compensated executiveofficers (the “Named Executive Officers”).

** **

**Summary Compensation Table**

 
| ** **                                            | ** ** | **Annual  Compensation** | ** ** | **Long  Term Compensation Awards** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|------------------------------------|------------|
| **Name and Principal Position**                       | ** ** | **Year**                 | ** ** | **Salary  ($)**                    | ** ** | **Bonus  ($)** | ** ** | **Other  Annual  Compensation  ($) (1)** | ** ** | **Restricted  Stock  Awards ($)** | ** ** | **Securities  Underlying  Options (#)** | ** ** |
| Reed J. Killion                                       |       | 2005                     |       | 195,000                            |       | 12,000 |   | 12,000 |   | — |   | 450,000 | (2) |
| President  (Principal Executive Officer) and Director |       | 2004                     |       | 150,000                            |       | 10,000 |   | — |   | — |   | — |   |
|                                                  |       |                     |       |                               |       |   |   |   |   |   |   |   |   |
| Frank DeLape                                          |       | 2005                     |       | 250,000                            |       | — |   | 15,000 |   | — |   | 600,000 | (3) |
| Chairman of the  Board of Directors                   |       | 2004                     |       | —                             |       | — |   | — |   | — |   | — |   |
|                                                  |       |                     |       |                               |       |   |   |   |   |   |   |   |   |
| James A. Tassone                                      |       | 2005                     |       | 145,000                            |       | 5,000 |   | 6,000 |   | — |   | 200,000 | (4) |
| Chief Financial  Officer                              |       | 2004                     |       | 120,000                            |       | 5,000 |   | — |   | — |   | — |   |
|                                                  |       |                     |       |                               |       |   |   |   |   |   |   |   |   |
| William Walker  (5)                                   |       | 2005                     |       | 110,000                            |       | 500 |   | — |   | — |   | 100,000 | (6) |
| Chief Technology  Officer                             |       | 2004                     |       | —                             |       | — |   | — |   | — |   | — |   |
|                                                  |       |                     |       |                               |       |   |   |   |   |   |   |   |   |
| B. Tod Cox                                            |       | 2005                     |       | 120,000                            |       | 5,000 |   | — |   | — |   | 150,000 | (7) |
| Vice President of  Engineering                        |       | 2004                     |       | 5,000                              |       | 500 |   | — |   | — |   | — |   |
|                                                       |            |                          |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

 

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(1).            Excludes perquisites and other personal benefitsunless such compensation was greater than $50,000 or 10% of the total annualsalary and bonus of the individual.

(2).            Mr. Killion was granted 450,000 stock optionson March 5, 2005 at $4.00 per share of which 150,000 options vest on March 5,2006, 150,000 options vest on March 5, 2007 and 150,000 options vest on March5, 2008.

(3).            Mr. DeLape was granted 600,000 stock optionson March 5, 2005 at $4.00 per share which vest monthly over 46 months beginningMarch 31, 2005.

(4).            Mr. Tassone was granted 200,000 stock optionson April 19, 2005 at $4.00 per share of which 66,667 options vest on April 19,2006, 66,667 options vest on April 19, 2007 and 66,666 options vest on April19, 2008.

(5).            Mr. Walker’s annual salary is $215,000. Mr.Walker became a full time employee during 2005.

(6).            Mr. Walker was granted 100,000 stock optionson November 15, 2005 at $4.00 per share of which 33,334 options vest onNovember 15, 2006, 33,333 options vest on November 15, 2007 and 33,333 optionsvest on November 15, 2008.

(7).            Mr. Cox was granted 150,000 stock options onApril 19, 2005 at $4.00 per share of which 50,000 options vest on April 19,2006, 50,000 options vest on April 19, 2007 and 50,000 options vest on April19, 2008

 

**Stock Options**

 

The following table setsforth information concerning individual grants of stock options made during ourlast fiscal year to our Named Executive Officers. No stock appreciation rightswere issued during the fiscal year.

 

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** **

**OptionGrants in Last Fiscal Year**

**IndividualGrants**

 
| **Name**          | ** ** | **Number of  securities  underlying  options  granted (#)** | ** ** | **Percent of total  options  granted to   employees  in fiscal year** | ** ** | **Market  price on  date of  issuance  ($/Sh)** | ** ** | **Exercise  or  base price  ($/Sh)** | ** ** | **Expiration  date** | ** ** |
|-------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------|------------|----------------------|------------|
| Reed J.  Killion  |       | 450,000                                                     |       | 24.9                                                                  | %          | 3.35                                            |       | 4.00                                 |       | 3/15/2015            |       |
| Frank DeLape      |       | 600,000                                                     |       | 33.2                                                                  | %          | 3.35                                            |       | 4.00                                 |       | 3/15/2015            |       |
| James A.  Tassone |       | 200,000                                                     |       | 11.1                                                                  | %          | 4.00                                            |       | 4.00                                 |       | 4/19/2015            |       |
| William  Walker   |       | 100,000                                                     |       | 5.5                                                                   | %          | 3.75                                            |       | 4.00                                 |       | 11/15/2015           |       |
| B. Tod Cox        |       | 150,000                                                     |       | 8.3                                                                   | %          | 4.00                                            |       | 4.00                                 |       | 4/19/2015            |       |

 

During fiscal year endedDecember 31, 2005, there were no options exercised. The following table setsforth information concerning option holdings as of December 31, 2005 withrespect to our Named Executive Officers.

 

**Aggregated Option Exercises in Last Fiscal Year and FY-EndOption Values**

 
| ** **       | ** ** | **Shares  Acquired on** | ** ** | **Value**             | ** ** | **Number of Securities  Underlying  Unexercised Options  at FY-End (#)** | ** ** | **Value of Unexercised  In-the-Money  Options at FY-End ($)(1)** | ** ** |
|------------------|------------|------------------------------|------------|-----------------------|------------|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| **Name**         | ** ** | **Exercise (#)**        | ** ** | **Realized ($)** | ** ** | **Exercisable**                                                                                   | ** ** | **Unexercisable**                                                                         | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Reed J. Killion  |       | —                       |       | —                |       | —                                                                                            |       | 450,000                                                                                   |       | — |   | 180,000 |   |
| Frank DeLape     |       | —                       |       | —                |       | 130,435                                                                                           |       | 469,565                                                                                   |       | 52,174 |   | 187,826 |   |
| James A. Tassone |       | —                       |       | —                |       | —                                                                                            |       | 200,000                                                                                   |       | — |   | 80,000 |   |
| William Walker   |       | —                       |       | —                |       | —                                                                                            |       | 100,000                                                                                   |       | — |   | 40,000 |   |
| B. Tod Cox       |       | —                       |       | —                |       | —                                                                                            |       | 150,000                                                                                   |       | — |   | 60,000 |   |

 

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(1)Based on the closing price of our common stock on December 31,2005 of $4.40 per share less the exercise price payable for such shares.

** **

**Compensation of Directors**

 

Wecurrently have no non-employee directors. Each of our directors receivescompensation pursuant to the terms of his respective employment agreementdescribed below, and receives no additional compensation for serving on ourboard.

** **

**Employment agreements**

 

The Company has entered intoemployment agreements with Frank DeLape, Reed Killion and James Tassone.

 

Mr. DeLape, Chairman ofthe Board, entered into an employment agreement dated March 5, 2005, with aninitial term ending December 31, 2008, and providing for a base annual salaryof $250,000, subject to the right of the Board of Directors to increase hissalary from time to time. Mr. DeLape is entitled to receive an annualbonus in an amount to be determined by the Board of Directors. IfMr. DeLape’s performance satisfies criteria to be established by the Boardof Directors, his target bonus will be 45% of his annual salary. The agreementalso provides that Mr. DeLape will receive employee stock options topurchase 600,000 shares of common stock at an exercise price of $4.00 pershare. The option has a term of ten years and will vest and become exercisableratably over 46 months beginning on March 31, 2005. The agreement also providesMr. DeLape with disability and life insurance benefits, a car allowanceand wireless communications benefits. Mr. DeLape’s employment may beterminated at any time, provided that if his employment is terminated without “Cause,”or if he terminates his employment for “Good Reason,” as those terms aredefined in the agreement, he will be entitled to receive a severance paymentequal to the greater of (i) the salary payable over the remaining term ofhis agreement or (ii) twenty four months salary, as well as a bonuscomputed on the basis of the greater of (a) the amount determined under theagreement by the Board of Directors; or (b) $70,000.

 

33

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Mr. Killion, President,entered into an employment agreement dated March 5, 2005, with an initial termending December 31, 2008, and providing for a base salary of $195,000, subjectto the right of the Board of Directors to increase his salary from time totime. Mr. Killion is entitled to receive an annual bonus in an amount tobe determined by the Board of Directors. If Mr. Killion’s performance satisfiescriteria to be established by the Board of Directors, his target bonus will be35% of his annual salary. The agreement also provides that Mr. Killionwill receive employee stock options to purchase 450,000 shares of common stockat an exercise price of $4.00 per share. The option has a term of ten years andvests ratably on an annual basis over three years. The agreement also providesMr. Killion with disability and life insurance benefits, a car allowanceand wireless communications benefits. The vesting provisions of the optionwould accelerate and Mr. Killion would be entitled to a severance paymentequal to his base salary for six months, if Mr. Killion were terminatedwithout “Cause,” or if Mr. Killion were to terminate his employment withUni-Pixel for “Good Reason” (each of the terms as defined in the Agreement).

 

Mr. Tassone, ChiefFinancial Officer, entered into an employment agreement dated April 15, 2005,with an initial term ending December 31, 2008 and providing for a base salaryof $145,000, subject to the right of the Board of Directors to increase hissalary from time to time. Mr. Tassone is entitled to receive an annualbonus in an amount to be determined by the Board of Directors. IfMr. Tassone’s performance satisfies criteria to be established by theBoard of Directors, his target bonus will be 30% of his annual salary. Theagreement also provides that Mr. Tassone will receive employee stockoptions to purchase 200,000 shares of common stock at an exercise price of$4.00 per share. The option has a term of ten years and vests ratably on anannual basis over three years. The agreement also provides Mr. Tassonewith disability and life insurance benefits, a car allowance and wirelesscommunications benefits. The vesting provisions of the option would accelerateand Mr. Tassone would be entitled to a severance payment equal to his basesalary for six months, if Mr. Tassone were terminated without “Cause,” orif Mr. Tassone were to terminate his employment with Uni-Pixel for “GoodReason” (each of the terms as defined in the Agreement).

 

As of December 31, 2005,there was no bonus accrual for Mr. DeLape, Mr. Killion or Mr. Tassone.

 

**ITEM 11. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

We haveset forth in the following table certain information regarding our commonstock, on an as converted basis, beneficially owned as of February 28, 2006 for(i) each stockholder we know to be the beneficial owner of 5% or more ofour outstanding Common Stock, (ii) each of our directors and namedexecutive officers, and (iii) all executive officers and directors as agroup. Generally, a person is deemed to be a “beneficial owner” of a securityif that person has or shares the power to dispose or to direct the dispositionof such security. A person is also deemed to be a beneficial owner of anysecurities of which the person has the right to acquire beneficial ownershipwithin 60 days pursuant to options, warrants, conversion privileges andsimilar rights. At February 28, 2006, we had 15,716,786 issued and outstandingshare of Common Stock and 2,525,601 issued and outstanding shares ofSeries A Convertible Preferred Stock, which were convertible, as ofFebruary 28, 2006, into 5,051,202 shares of our Common Stock.

 
| **Name and  Address of Beneficial Owner**                                          | ** ** | **Amount of Beneficial Ownership(1)** | ** ** | **Percent of Class** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------------|------------|
| *Directors and Officers:*                                                          |       |                                  |       |                 |       |
| Frank M. DeLape                                                                    |       | 2,195,409                             | (2)        | 10.5                 | %          |
| Martin G. Selbrede                                                                 |       | 1,427,500                             |       | 6.9                  | %     |
| Dan Van Ostrand                                                                    |       | 827,500                               |       | 4.0                  | %          |
| Reed J. Killion                                                                    |       | 700,000                               | (3)        | 3.3                  | %          |
| James A. Tassone                                                                   |       | 442,917                               | (4)        | 2.1                  | %          |
| B. Tod Cox                                                                         |       | 50,000                                | (5)        | 0.2                  | %          |
| William Walker                                                                     |       | —                                |       | —               |       |
| All Directors and Executive Officers as a  Group (7 persons)                       |       | 5,643,326                             |       | 27.0                 | %          |
| *5% Stockholders:*                                                                 |       |                                  |       |                 |       |
| Fordham Financial Management, Inc.  14 Wall Street, 18th Floor  New York, NY 10005 |       | 2,061,140                             | (6)        | 9.4                  | %          |
| Bob Weatherly  14505 Torrey Chase  Suite 325  Houston, TX 77014                    |       | 1,069,267                             | (7)        | 5.2                  | %          |
| James Herndon  14505 Torrey Chase  Suite 325  Houston, TX 77014                    |       | 1,069,267                             | (7)        | 5.2                  | %          |

 

34

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(1)                          Beneficial ownership isdetermined in accordance with Rule 13d-3 under the Securities Exchange Actof 1934, as amended, and is generally determined by voting powers and/orinvestment powers with respect to securities. Unless otherwise noted, all ofsuch shares of Common Stock listed above are owned of record by each individualnamed as beneficial owner and such individual has sole voting and dispositivepower with respect to the shares of Common Stock owned by each of them.

 

(2)                          Includes 1,700,300shares of Common Stock owned by Benchmark Equity Group of which Frank M. DeLapeis the Chief Executive Officer and sole owner and 312,500 shares of CommonStock held by Lakeview Investment Trust, a United States trust fund, of whichMr. DeLape’s children are the beneficiaries and Mr. DeLape is theTrustee. Also consists of options to purchase 182,609 shares of Common Stockexercisable within 60 days from February 28, 2006.

 

(3)                          Includes options topurchase 150,000 shares of Common Stock exercisable within 60 days fromFebruary 28, 2006.

 

(4)                          Includes options topurchase 66,667 shares of Common Stock exercisable within 60 days from February28, 2006.

 

(5)                          Represents options topurchase 50,000 shares of Common Stock exercisable within 60 days from February28, 2006.

 

(6)                          Includes 312,500 sharesof Common Stock held by William Baquet, Chief Executive Officer and controllingstockholder of Fordham Financial Management, Inc.  Also includes a warrant held by Fordham FinancialManagement, Inc. to acquire 1,048,500 shares of our Common Stock at $1.75per share, exercisable within 60 days of February 28, 2006.

 

(7)                          Includes 23,327 sharesof Common Stock held by CapSources, Inc., 250,000 shares of Common Stockheld by CapSource Fund, L.P. and 250,000 shares of Common Stock held byCapSource 2000 Fund, L.P. Also includes 136,485 shares of our Series APreferred held by CapSource Fund, L.P. and 136,485 shares of our Series APreferred held by CapSource 2000 Fund, L.P., on an as-converted to Common Stockbasis, for a total number of shares of our Common Stock beneficially owned byMessrs. Weatherly and Herndon of 1,069,267. Messrs. Weatherly andHerndon are the sole shareholders of CapSources, Inc., the limitedpartners of CapSource Fund, L.P. and CapSource 2000 Fund, L.P. and the soleshareholders of the general partner for each of CapSource Fund, L.P. andCapSource 2000 Fund, L.P.

 

**Equity Compensation PlanInformation**

 

The following table providesinformation about shares of Common Stock that may be issued upon the exerciseof options under all of the Company’s existing equity compensation plans as ofDecember 31, 2005. For a complete description of the Company’s equitycompensation plans, see Note 9 to the Consolidated Financial Statementsincluded under Item 7 of this Report.

 
| **Plan Category**                                       | ** ** | **Number of shares of  Common Stock to be  issued upon exercise of  outstanding options** | ** ** | **Weighted-average  exercise price of  outstanding  options ($)** | ** ** | **Number of shares of  Common Stock remaining  available for future issuance  under equity compensation  plans** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  stockholders     |       | 1,805,000                                                                                 |       | $                                                                 | 4.00       |                                                                                                             | 195,000    |   |
|                                                    |       |                                                                                      |       |                                                              |       |                                                                                                             |       |
| Equity compensation plans not approved by  stockholders |       | —                                                                                    |       | —                                                            |       | —                                                                                                           |       |
|                                                    |       |                                                                                      |       |                                                              |       |                                                                                                             |       |
| Total                                                   |       | 1,805,000                                                                                 |       | $                                                                 | 4.00       |                                                                                                             | 195,000    |   |

 

35

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**ITEM 12. CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS**

 

**The Merger Agreement**

 

***The Agreement.*** We entered into aMerger Agreement with Uni-Pixel Displays, Inc., Uni-Pixel MergerSub, Inc. (“Merger Sub”), Gemini V, Inc. (“Gemini V”) and certain ofour principal stockholders, which was effective on December 8, 2004 (the “*Merger*”). Pursuant to the Merger, MergerSub and Gemini V were merged with and into Uni-Pixel Displays, Inc. withUni-Pixel Displays, Inc. as the surviving corporation, and Uni-PixelDisplays, Inc. became a wholly-owned subsidiary of the Company.Prior to the Merger, we had no operations and no material assets orliabilities. Pursuant to the Merger, of the total number of shares of ourCommon Stock outstanding immediately subsequent to the Merger (12,800,580),former Uni-Pixel stockholders owned approximately 68.6% of our Common Stock,former Gemini V stockholders owned approximately 22.8% of our Common Stock, andthe stockholders of the Company owned approximately 8.6% of our Common Stock.

 

***Indemnification.*** The Merger Agreementprovides for limited indemnification of Uni-Pixel Displays, Inc. and itsofficers, directors, employees, attorneys, representatives, stockholders,controlling persons and affiliates (the “Uni-Pixel Indemnitees”) from certainof the Company’s stockholders for possible liabilities and claims in connectionwith the operation and ownership of the Company including (i) from andincluding June 14, 2001 through and including November 14, 2004 fromDavid DiSalvo, the former President, Secretary, Treasurer and sole board memberfor the Company; and (ii) from and including November 15, 2004 goingforward from Frank M. DeLape, the current Chairman of the Board of the Company.Frank M. DeLape will also indemnify the Uni-Pixel Indemnitees for inaccuraciesor breaches of certain terms of the Merger Agreement by the Company, forbreaches of covenants or obligations of the Merger Agreement by the Company,for costs and expenses incurred in connection with any stockholder suitchallenging the validity of the Merger Agreement, and for any claims by brokersor finders for fees or commissions alleged to be due from the Company inconnection with the Merger.

 

Theindemnification protection provided by David DiSalvo and Frank M. DeLape isfurther limited, in the aggregate, to the value of the our common stockreceived by each of the indemnitors as merger consideration in the proposedMerger, determined by multiplying the number of shares of our common stockreceived by each by $1.75. As consideration in the Merger, Frank M. DeLapebeneficially owns approximately 1,812,800 shares of our common stock and DavidDiSalvo beneficially owns approximately 75,000 shares of our common stock.Therefore, the highest dollar amount that any one of these parties willindemnify the Uni-Pixel Indemnitees for during his or its indemnificationperiod as described in the preceding paragraph, is $3,172,400. None of theparties shall be entitled to indemnification unless and until the aggregateamount of all of their damages subject to indemnification exceeds $50,000.

 

**Conversionof CapSource Notes**

 

Weissued promissory notes to CapSource Fund, L.P. and CapSource 2000 Fund, L.P.(collectively “CapSource”) in the aggregate principal amount of $1,398,250during 2001. As of December 2004, the notes had accrued approximately $181,692in unpaid interest. CapSource agreed to convert $898,250 of the indebtedness weowed to CapSource into an aggregate of 256,643 shares of our Series A PreferredStock at the issuance price of $3.50 per share in the private offering thereofwhich initially closed on December 9, 2004. Additionally, we paid to CapSource,for the remaining principal and interest due on the notes, $671,692 in cash outof the proceeds of the private offering of shares of our Series A PreferredStock, and the notes have been cancelled. CapSource also exercised warrants forapproximately 1,000,000 shares of our common stock, which converted to 500,000shares of our common stock pursuant to the Merger. The aggregate exercise pricefor the warrants was $10,000, which was netted against the amounts we owed toCapSource pursuant to the notes.

 

**Payment of Accrued Salaries andReduction of Trade Debt**

 

As ofDecember 31, 2003, we owed accrued payroll of $651,749 to our then employees,Ken Loudermilk, Ann Loudermilk, Kevin Derichs, Reed J. Killion, Dan VanOstrand, Martin G. Selbrede and Lance Parker, and entered into a series ofpromissory notes bearing interest at 13%. Effective October 2004, these pastand present employees agreed to cancel amounts we owed to them which wererepresented by promissory notes aggregating $447,230 plus accrued interestthereon of $83,500 and additional accrued wages payable of $364,735 (for atotal aggregate accrued payroll of $895,465), except for approximately $100,000which was paid out of the proceeds of the Series A Preferred Stock offering. Wehad accrued interest payable related to the employee notes payable of $47,164at December 31, 2003. During 2004, the employee notes payable accruedadditional interest of $44,257. Employees agreed to cancel these notes in full,including accrued interest of $91,400, and to settle accrued payrollobligations, representing a total forgiveness of debt of $886,885, which wasrecorded on our books as other income in 2004. The Company did not assume anyrelated liabilities as a result of the transaction.

 

36

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**Settlement of Employee Payroll**

 

As ofDecember 31, 2003, we had loaned $117,846 to our officers, Reed J. Killion, DanVan Ostrand and Martin G. Selbrede. Effective November 2004, we settled theloans receivable between the Company and all employees. We processed theemployee loans through our 2004 payroll and we were fully repaid by theemployees. We have disclosed these amounts as changes in operating assets andliabilities in our Consolidated Statements of Cash Flows for 2004.

 

**Leased Office Space**

 

During2004 and 2003, the Company leased office space from a stockholder of theCompany under a month-to-month lease for $3,900 per month. EffectiveDecember 15, 2004, this lease was terminated and the Company began leasingoffice space from an unrelated lessor.

 

**Placement Agent Agreements**

 

Inconnection with the private offering of up to 3,495,000 shares of ourSeries A Preferred, we entered into a Placement Agent Agreement, datedNovember 22, 2004, with Fordham Financial Management, Inc., theCompany’s exclusive placement agent in connection with the offering and thebeneficial owner of more than 5% of our outstanding capital stock. Asconsideration for the placement agent’s services in connection with theoffering, the placement agent received a warrant to purchase 4,500 shares ofour common stock for every 15,000 shares of Series A Preferred sold in theoffering. Each warrant will expire five years after the respective closing ofthe offering and will have an exercise price of $1.75 per share. The offeringwas fully subscribed for 3,495,000 shares of our Series A Preferred (grossproceeds of $12,232,500) and we issued to the placement agent warrants topurchase 1,048,500 shares of our common stock.

 

Inaddition, the placement agent received a commission equal to 10%, or $5,250 per15,000 shares of Series A Preferred sold, a non-accountable expenseallowance equal to 3% or $1,575 per 15,000 shares of Series A Preferredsold and a financial consulting fee, pursuant to the consulting agreementdescribed below, of 1% or $525 per 15,000 shares of Series A Preferredsold, payable in advance at each closing of the offering. Pursuant to theplacement agent agreement, the placement agent was also entitled to receivereimbursement for travel and travel-related expenses on an accountablebasis up to a maximum of $10,000. In connection with the sale of 3,495,000shares of our Series A Preferred, we paid to the placement agent a totalof $1,714,050 pursuant to the placement agent agreement ($1,223,250 incommissions, $366,975 as a non-accountable expense allowance, $122,325 inconsulting fees, and $1,500 in travel reimbursement).

 

Inaccordance with the terms and provisions of the placement agent agreement, weagreed to indemnify and hold harmless the placement agent and each person whocontrols the placement agent against any and all losses, claims, damages orliabilities resulting from any untrue statement in or omission from theoffering memorandum.

 

**ITEM 13. 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 (6)                                                                                                                                   |
| 10.1                   |       | Cancellation and Transfer Agreement (1)                                                                                                                                |
| 10.2                   |       | Placement Agent Agreement (1)                                                                                                                                          |
| 10.3                   |       | Uni-Pixel Display, Inc. Lock-Up Agreement  (1)                                                                                                                         |
| 10.4                   |       | Consulting Agreement (1)                                                                                                                                               |
| 10.5                   |       | Office Lease Agreement for Synergy North By and Between  First Metro Limited Partnership (“Landlord”) and Uni-Pixel Displays,  Inc. (“Tenant”) (1) |
| 10.6                   |       | Employee Intellectual Property Assignment and Nondisclosure  Agreement (1) (5)                                                                                         |
| 10.7                   |       | Uni-Pixel, Inc. 2005 Stock Incentive Plan (1) (5)                                                                                                                      |
| 10.8                   |       | Uni-Pixel, Inc. 2005 Stock Incentive Plan —  Notice of Stock Option Award (1) (5)                                                                                 |
| 10.9                   |       | Agreement and Plan of Merger and Reorganization Among  Real-Estateforlease.com, Inc., Uni-Pixel Merger Sub,                                                            |

 

37

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|   |   | Inc., Gemini V, Inc., Uni-Pixel Displays, Inc.  and those Stockholders of Real-Estateforlease.com, Inc. Listed on  Exhibit “A” as “Company Stockholders” (1)                                                                                                                                                                                                                                                                            |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10  |   | Employment Agreement – Frank M. DeLape (2) (5)                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.11  |   | Employment Agreement – Reed J. Killion (2) (5)                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.12  |   | Lockheed Martin Purchase Order (2) (portions of this  exhibit have been omitted pursuant to a request for confidential treatment)                                                                                                                                                                                                                                                                                                                           |
| 10.13  |   | Small Business Innovation Research Phase I Contract (3)                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.14  |   | Small Business Innovation Research Phase II Contract  (3)                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.15  |   | License  and Strategic Business Agreement between Uni-Pixel Displays, Inc. and  Lockheed Martin Corporation, acting by and through Lockheed Martin Systems  Integration-Owego, dated as of October 5, 2005.(4) (The portions of this  Exhibit marked “******” have been omitted and confidentially filed with the  Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under  the Securities Exchange Act of 1934, as amended.) |
| 10.16  |   | Employment  Agreement – James A. Tassone (5) (6)                                                                                                                                                                                                                                                                                                                                                                                                       |
| 14     |   | Code  of Ethics (6)                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 21     |   | Subsidiaries  (6)                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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 (6)                                                                                                                                                                                                                                                                                                |
| 31.2   |   | Certification  of the Chief Financial Officer of Uni-Pixel, Inc., pursuant to  Section 302 of the Sarbanes-Oxley Act of  2002 (6)                                                                                                                                                                                                                                                                                                                 |
| 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 (6)                                                                                                                                                                                                                                                                                                |
| 32.2   |   | Certification  of the Chief Financial Officer of Uni-Pixel, Inc., pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (6)                                                                                                                                                                                                                                                                                                                  |

 

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(1)                                  Previously filed as anexhibit to the Company’s Form 10-SB, filed on February 18, 2005, andincorporated by reference hereto.

(2)                                  Previously filed as anexhibit to the Company’s Amendment #1 Form 10-SB, filed on April 1, 2005, andincorporated by reference hereto.

(3)                                  Previously filed as anexhibit to the Company’s Amendment #2 Form 10-SB, filed on April 27, 2005, andincorporated by reference hereto.

(4)                                  Previously filed as anexhibit to the Company’ Form 10-QSB, filed on November 10, 2005, andincorporated by reference hereto.

(5)                                  Management contract orcompensation plan or arrangement

(6)                                  Filed herewith

 

**ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

**Audit Fees**

 

The following table presentsaggregate fees for professional audit services rendered by Helin, Donovan,Trubee & Wilkinson, LLP (“HDT&W”) for the audit of the Company’s annualfinancial statements for the fiscal years ended December 31, 2005 and2004, respectively, and fees billed for other services rendered by HDT&W.

 
| ** **          | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Audit Fee  (1)      |       | $        | 21,775     |     | $          | 10,000 |   |
| Audit-Related  Fees |       | $        | —     |     | $          | — |   |
| Tax Fees            |       | $        | —     |     | $          | — |   |
| All Other  Fees     |       | $        | —     |     | $          | — |   |

 

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(1)          Audit fees represent the aggregate feesbilled for professional services rendered by HDT&W for the audit of ourannual financial statements, review of financial statements included in ourquarterly reports, review of registration statements or services that arenormally provided in connection with statutory and regulatory filings orengagements for those fiscal years.

 

38

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**SIGNATURES**

 

In accordance withSection 13 or 15(d) of the Exchange Act, the Registrant has caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized. 

 
| UNI-PIXEL, INC.                                                              |
|------------------------------------------------------------------------------|
|                                                                         |
| By:                                                                          | /s/  JAMES A.  TASSONE |   |
| James A. Tassone, Chief  Financial Officer and  Principal Accounting Officer |
|                                                                         |   |
|  Date:                                                                  | March 28, 2006 |

 

In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated. 

 
| **Signature**               | ** ** | **Title**                                                 | ** **     | **Date** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------|----------------|----------|------------|
|                             |       |                                                      |
| /s/  REED J.  KILLION  |       | President, Principal  Executive Officer and Director      | March 28, 2006 |
| Reed J. Killion                  |
|                             |       |                                                      |
| /s/  FRANK  DELAPE     |       | Chairman of the Board and  Director                       | March 28, 2006 |
| Frank DeLape                     |
|                             |       |                                                      |
| /s/  JAMES A.  TASSONE |       | Chief Financial Officer  and Principal Accounting Officer | March 28, 2006 |
| James A. Tassone                 |

 

39

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**PART F/S**

 

**INDEX TO FINANCIAL STATEMENTS**

**OF UNI-PIXEL, INC.**

 
| Report  of Independent Registered Public Accounting Firm                                                                                   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                       |   |
| Consolidated  Balance Sheets, December 31, 2005 and 2004                                                                                   |   |
|                                                                                                                                       |   |
| Consolidated  Statements of Operations for the period February 17, 1998 (date of inception)  to December 31, 2005                          |   |
|                                                                                                                                       |   |
| Consolidated  Statements of Shareholders’ Equity (Deficit) for the period February 17, 1998  (date of inception) to December 31, 2005 |   |
|                                                                                                                                       |   |
| Consolidated  Statements of Cash Flows for the period February 17, 1998 (date of inception)  to December 31, 2005                          |   |
|                                                                                                                                       |   |
| Notes  to Financial Statements                                                                                                             |   |

 

F-1

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***Report of Independent Registered PublicAccounting Firm***

 

TheBoard of Directors and Shareholders

Uni-Pixel, Inc.:

 

Wehave audited the accompanying balance sheets of Uni-Pixel, Inc. (theCompany) (a development stage company) as of December 31, 2005 and 2004,and the related consolidated statements of operations, shareholders’ equity(deficit), and cash flows for the years ended December 31, 2005 and 2004,and the period from inception (February 17, 1998) throughDecember 31, 2005. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Uni-Pixel, Inc.as of December 31, 2005 and 2004, and the results of their operations andtheir cash flows for the years ended December 31, 2005 and 2004, and theperiod from inception (February 17, 1998) through December 31, 2005,in conformity with generally accepted accounting principles in the UnitedStates of America.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. The Company has sustained losses and negative cash flows from operationssince its inception, whereby its accumulated deficit during the developmentstage is $14.6 million as of December 31, 2005. The Company’s ability to meet its obligations in the ordinary course ofbusiness is dependent upon its ability to establish profitable operations,raise additional financing through public or private equity financings, enterinto collaborative or other arrangements with corporate sources, or secureother sources of financing to fund operations. These matters raise substantial doubt about the Company’s ability tocontinue as a going concern.  Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 
| **Helin, Donovan, Trubee & Wilkinson, LLP** |
|------------------------------------------------------|
|                                                 |
| /s/  Helin, Donovan, Trubee & Wilkinson, LLP     |   |
|                                                 |
| February 16,  2006                              |
| Houston,  Texas                                      |

 

F-2

----

 

Uni-Pixel, Inc.

(A Development StageCompany)

Consolidated Balance Sheets

 
| ** **                                                                                                                                                                                  | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                  |       |                        |       |                        |       |
| Current  assets                                                                                                                                                                             |       |                        |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                   |       | $                           | 2,328,385  |                        | $          | 5,342,641 |   |
| Restricted cash                                                                                                                                                                             |       | 40,000                      |       | —                      |       |
| Interest receivable                                                                                                                                                                         |       | 6,297                       |       | —                      |       |
| Prepaid expenses                                                                                                                                                                            |       | 16,965                      |       | 18,163                      |       |
|                                                                                                                                                                                        |       |                        |       |                        |       |
| Total current assets                                                                                                                                                                        |       | 2,391,647                   |       | 5,360,804                   |       |
|                                                                                                                                                                                        |       |                        |       |                        |       |
| Property and equipment, net of accumulated  depreciation of $203,709 and $27,092, at December 31, 2005 and 2004,  respectively                                                              |       | 854,052                     |       | 12,474                      |       |
| Restricted cash, less current portion                                                                                                                                                       |       | 260,000                     |       | —                      |       |
| Intangible assets, net                                                                                                                                                                      |       | —                      |       | 13,520                      |       |
|                                                                                                                                                                                        |       |                        |       |                        |       |
| Total assets                                                                                                                                                                                |       | $                           | 3,505,699  |                        | $          | 5,386,798 |   |
|                                                                                                                                                                                        |       |                        |       |                        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                              |       |                        |       |                        |       |
|                                                                                                                                                                                        |       |                        |       |                        |       |
| Current liabilities                                                                                                                                                                         |       |                        |       |                        |       |
| Accounts payable                                                                                                                                                                            |       | $                           | 278,749    |                        | $          | 33,213 |   |
| Accrued expenses                                                                                                                                                                            |       | 10,812                      |       | 27,185                      |       |
| Deferred revenue                                                                                                                                                                            |       | 200,000                     |       | 200,000                     |       |
| Current portion of note payable                                                                                                                                                             |       | 144,019                     |       | 75,000                      |       |
|                                                                                                                                                                                        |       |                        |       |                        |       |
| Total current liabilities                                                                                                                                                                   |       | 633,580                     |       | 335,398                     |       |
|                                                                                                                                                                                        |       |                        |       |                        |       |
| Note payable, less current portion                                                                                                                                                          |       | 57,537                      |       | 69,328                      |       |
|                                                                                                                                                                                        |       |                        |       |                        |       |
| Total liabilities                                                                                                                                                                           |       | 691,117                     |       | 404,726                     |       |
|                                                                                                                                                                                        |       |                        |       |                        |       |
| Commitments and contingencies (Note 8)                                                                                                                                                      |       | —                      |       | —                      |       |
|                                                                                                                                                                                        |       |                        |       |                        |       |
| Shareholders’ equity                                                                                                                                                                   |       |                        |       |                        |       |
| Preferred stock, $0.001 par value; $3.50  liquidation preference; 10,000,000 shares authorized, 2,685,651 and 2,821,643  issued and outstanding at December 31, 2005 and 2004, respectively |       | 2,686                       |       | 2,822                       |       |
| Common stock, $0.001 par value; 40,000,000  shares authorized, 15,395,057 and 12,800,580 issued and outstanding at  December 31, 2005 and 2004, respectively                                |       | 15,395                      |       | 12,801                      |       |
| Additional paid-in capital                                                                                                                                                                  |       | 17,348,728                  |       | 13,742,444                  |       |
| Accumulated deficit during development  stage                                                                                                                                               |       | (14,552,227                 | )          | (8,775,995                  | )          |
|                                                                                                                                                                                        |       |                        |       |                        |       |
| Total shareholders’ equity                                                                                                                                                             |       | 2,814,582                   |       | 4,982,072                   |       |
|                                                                                                                                                                                        |       |                        |       |                        |       |
| Total liabilities and shareholders’ equity                                                                                                                                             |       | $                           | 3,505,699  |                        | $          | 5,386,798 |   |

 

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

 

F-3

----

 

Uni-Pixel, Inc.

(A Development StageCompany)

ConsolidatedStatements of Operations

 
| ** **                                                              | ** ** | **Year Ended   December 31,** | ** ** | **Cumulative   Period from   February 17, 1998  (date of inception)   to December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                                     | ** ** | **2004**                                                                                                                             | ** ** | **2005** | ** ** |
|                                                                    |       |                                         |       |                                                                                                                                 |       |   |   |
| Development contract revenue                                            |       | $                                            | 19,689     |                                                                                                                                 | $          | 290,387 |   | $ | 958,201 |   |
|                                                                    |       |                                         |       |                                                                                                                                 |       |   |   |
| Cost of development contract revenue                                    |       | 9,844                                        |       | 145,194                                                                                                                              |       | 456,648 |   |
|                                                                    |       |                                         |       |                                                                                                                                 |       |   |   |
| Gross margin                                                            |       | 9,845                                        |       | 145,193                                                                                                                              |       | 501,553 |   |
|                                                                    |       |                                         |       |                                                                                                                                 |       |   |   |
| Selling, general and administrative expenses                            |       | 2,331,743                                    |       | 1,680,622                                                                                                                            |       | 6,880,757 |   |
| Research and development                                                |       | 2,758,739                                    |       | 1,141,339                                                                                                                            |       | 6,961,186 |   |
|                                                                    |       |                                         |       |                                                                                                                                 |       |   |   |
| Operating loss                                                          |       | (5,080,637                                   | )          | (2,676,768                                                                                                                           | )          | (13,340,390 | ) |
|                                                                    |       |                                         |       |                                                                                                                                 |       |   |   |
| Other income (expense)                                                  |       |                                         |       |                                                                                                                                 |       |   |   |
| Other income                                                            |       | —                                       |       | 886,886                                                                                                                              |       | 886,886 |   |
| Debt issuance expense                                                   |       | —                                       |       | (125,000                                                                                                                             | )          | (500,000 | ) |
| Interest income (expense), net                                          |       | 113,847                                      |       | (400,450                                                                                                                             | )          | (789,281 | ) |
|                                                                    |       |                                         |       |                                                                                                                                 |       |   |   |
| Net loss                                                                |       | $                                            | (4,966,790 | )                                                                                                                                    | $          | (2,315,332 | ) | $ | (13,742,785 | ) |
|                                                                    |       |                                         |       |                                                                                                                                 |       |   |   |
| Preferred stock dividends                                               |       | (773,727                                     | )          | (35,715                                                                                                                              | )          | (809,442 | ) |
| Net loss attributable to common shareholders                            |       | $                                            | (5,740,517 | )                                                                                                                                    | $          | (2,351,047 | ) | $ | (14,552,227 | ) |
|                                                                    |       |                                         |       |                                                                                                                                 |       |   |   |
| Per share information                                                   |       |                                         |       |                                                                                                                                 |       |   |   |
| Net loss – basic and diluted                                       |       | $                                            | (0.39      | )                                                                                                                                    | $          | (0.39 | ) | $ | (2.32 | ) |
| Preferred stock dividends                                               |       | (0.06                                        | )          | (0.01                                                                                                                                | )          | (0.14 | ) |
| Net loss attributable to common shareholders –  basic and diluted  |       | $                                            | (0.45      | )                                                                                                                                    | $          | (0.40 | ) | $ | (2.46 | ) |
|                                                                    |       |                                         |       |                                                                                                                                 |       |   |   |
| Weighted average number of basic and diluted  common shares outstanding |       | 12,854,968                                   |       | 5,834,521                                                                                                                            |       | 5,906,627 |   |

 

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

 

F-4

----

 

Uni-Pixel, Inc.

(A Development StageCompany)

ConsolidatedStatements of Shareholders’ Equity (Deficit)

 
|                                                                                     |   | **Series A  Preferred Stock** |       |       |         |                   |       |           |   | **Accumulated  Deficit** |   | **Total**                     |            |
|------------------------------------------------------------------------------------------|--------|------------------------------------|------------|------------|--------------|------------------------|------------|----------------|--------|--------------------------|--------|-------------------------------|-----------------|
|                                                                                     |   | **Number**                         | ** ** | ** ** |         | **Common  Stock**      |       | **Additional** |   | **Deferred**             |   | **During**                    |            | **Shareholders’** |   |
|                                                                                     |   | **of  Shares**                     | ** ** | **Amount** |         | **Number  of  Shares** | ** ** | **Amount**     |   | **Paid-In  Capital**     |   | **Stock-Based  Compensation** |            | **Development  Stage** |   | **Equity  (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            |   | 34,488                   |   | —                        |            | — |   | 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 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

F-5

----

 

Uni-Pixel, Inc.

(A Development StageCompany)

ConsolidatedStatements of Cash Flows

 
| ** **                                                                   | ** ** | **Year Ended  December 31,** | ** **      | **Cumulative Period  from February 18,  1998 (date of  inception) to  December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|-----------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                     | ** **      | **2004**                                                                                  | ** ** | ** 2005** | ** ** |
| Cash flows from operating activities                                         |       |                         |            |                                                                                      |       |   |   |
| Net loss                                                                     |       | $                            | (4,966,790      | )                                                                                         | $          | (2,315,332 | ) | $ | (13,742,785 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                         |            |                                                                                      |       |   |   |
| Interest forgiven                                                            |       | —                       |            | (91,421                                                                                   | )          | (91,421 | ) |
| Interest earned, but not received                                            |       | (6,297                       | )               | —                                                                                    |       | (6,297 | ) |
| Employee compensation notes payable  forgiven                                |       | —                       |            | (795,465                                                                                  | )          | (795,465 | ) |
| Depreciation and amortization                                                |       | 190,135                      |            | 11,538                                                                                    |       | 271,457 |   |
| Stock issued for services                                                    |       | —                       |            | 317,713                                                                                   |       | 460,062 |   |
| Non-cash compensation expense                                                |       | —                       |            | 618,750                                                                                   |       | 1,100,000 |   |
| Amortization of debt issuance costs                                          |       | —                       |            | 125,000                                                                                   |       | 500,000 |   |
| Cash restricted for note payable and lease  obligations                      |       | (300,000                     | )               | —                                                                                    |       | (300,000 | ) |
| Change in operating assets and liabilities:                                  |       |                         |            |                                                                                      |       |   |   |
| Decrease in related party receivables                                        |       | —                       |            | 117,846                                                                                   |       | — |   |
| (Increase) decrease in prepaid expenses and  other current assets            |       | 1,198                        |            | (1,933                                                                                    | )          | (16,965 | ) |
| Increase (decrease) in accounts payable                                      |       | 245,533                      |            | (349,706                                                                                  | )          | 278,746 |   |
| Increase (decrease) in accrued interest  payable                             |       | (7,635                       | )               | (1,977                                                                                    | )          | 180,943 |   |
| Increase (decrease) in accrued expenses and  other liabilities               |       | (8,738                       | )               | 129,487                                                                                   |       | 806,277 |   |
| Increase in deferred revenue                                                 |       | —                       |            | (50,000                                                                                   | )          | 200,000 |   |
| Net cash used in operating activities                                        |       | (4,852,594                   | )               | (2,285,500                                                                                | )          | (11,155,448 | ) |
|                                                                         |       |                         |            |                                                                                      |       |   |   |
| Cash flows from investing activities                                         |       |                         |            |                                                                                      |       |   |   |
| Purchase of property and equipment                                           |       | (1,018,191                   | )               | (15,077                                                                                   | )          | (1,085,551 | ) |
| 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                                        |       | (1,018,191                   | )               | (15,077                                                                                   | )          | (1,125,507 | ) |
|                                                                         |       |                         |            |                                                                                      |       |   |   |
| Cash flows from financing activities                                         |       |                         |            |                                                                                      |       |   |   |
| Proceeds (payments) from notes payable to  related party                     |       | —                       |            | —                                                                                    |       | 115,103 |   |
| Payments on notes payable to related party                                   |       | (104,567                     | )               | (20,000                                                                                   | )          | (124,567 | ) |
| Proceeds from convertible notes payable                                      |       | —                       |            | 1,400,000                                                                                 |       | 3,390,000 |   |
| Payments on convertible notes payable                                        |       | —                       |            | (1,470,672                                                                                | )          | (1,470,672 | ) |
| Net proceeds from notes payable                                              |       | 161,796                      |            | —                                                                                    |       | 161,796 |   |
| Proceeds from the issuance of preferred  stock, net                          |       | 2,799,300                    |            | 7,649,330                                                                                 |       | 10,448,630 |   |
| Proceeds from the issuance of common stock,  net                             |       | —                       |            | 64,800                                                                                    |       | 2,089,050 |   |
| Net cash provided by financing activities                                    |       | 2,856,529                    |            | 7,623,458                                                                                 |       | 14,609,340 |   |
|                                                                         |       |                         |            |                                                                                      |       |   |   |
| Net increase (decrease) in cash and cash equivalents                         |       | (3,014,256                   | )               | 5,322,881                                                                                 |       | 2,328,385 |   |
| Cash and cash equivalents, beginning of period                               |       | 5,342,641                    |            | 19,760                                                                                    |       | — |   |
| Cash and cash equivalents, end of period                                     |       | $                            |  2,328,385 |                                                                                      | $          |  5,342,641 |   | $ |  2,328,385 |   |
|                                                                         |       |                         |            |                                                                                      |       |   |   |
| Supplemental disclosures of cash flow information:                           |       |                         |            |                                                                                      |       |   |   |
| Cash paid for interest                                                       |       | $                            |  19,808    |                                                                                      | $          |  410,062 |   | $ |  741,993 |   |
| Interest capitalized into notes payable                                      |       | $                            |  —    |                                                                                      | $          |  — |   | $ |  8,250 |   |
| Debt issuance cost for warrant issued                                        |       | $                            |  —    |                                                                                      | $          |  — |   | $ |  500,000 |   |
| Preferred stock dividend paid with  preferred and common stock               |       | $                            |  773,727   |                                                                                      | $          |  35,715 |   | $ |  809,442 |   |
| Conversion of notes payable for preferred  stock                             |       | $                            |  —    |                                                                                      | $          |  898,250 |   | $ |  898,250 |   |
| Conversion of notes payable for common  stock                                |       | $                            |  —    |                                                                                      | $          |  980,103 |   | $ |  980,103 |   |
| Stock issued for services                                                    |       | $                            |  —    |                                                                                      | $          |  317,713 |   | $ |  1,560,062 |   |
| Stock issued for interest                                                    |       | $                            |  —    |                                                                                      | $          |  81,272 |   | $ |  81,272 |   |

* *

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

 

F-6

----

 

**UNI-PIXEL, INC.**

**(A Development Stage Company)**

**Notes to the Audited Consolidated Financial Statements**

 

**Note 1 – Basis of Presentation, Business andOrganization**

 

Uni-Pixel, Inc., a Delaware corporation, is theparent company of our wholly-owned operating subsidiary, Uni-PixelDisplays, Inc.  As used herein, “Uni-Pixel,” “we,” “us,” and “our”refer to Uni-Pixel, Inc. and our wholly-owned consolidated subsidiary,Uni-Pixel Displays, Inc.  Our common stock, par value $0.001 pershare, is quoted on the Over the Counter — Bulletin Board (“OTCBB”) under theticker symbol “UNXL.”

 

Uni-Pixel is a development stage company that hasdeveloped, patented and demonstrated a new color display technology in the formof proof of concept prototypes which we call Time Multiplexed Optical Shutter(“TMOS”).  We intend to be a leader in the research, development andcommercialization 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. As of December 31, 2005, wehad accumulated a total deficit of $14.6 million from operations in pursuit ofthis objective.

 

We anticipate that our TMOS displays will be thin,lightweight, and power-efficient devices, which are highly suitable for use infull-color display applications.  We believe TMOS displays will be able tocapture a share of the growing $60+ billion flat panel display market dueto the significant advantages it should provide over competing displays with respectto manufacturing and materials cost, brightness, power efficiency, viewingangle, video response time and image quality.  We believe that ourtechnology leadership and intellectual property position will enable us togenerate revenues initially from TMOS displays for existing vertical marketsegments such as the military, avionics, and automotive segments, and thensubsequently from consumer electronics markets (i.e., TVs, monitors, personalcomputers, cameras, games, etc.).

 

Our strategy is to develop further our proprietaryTMOS technology to the point of initially manufacturing small volumes of highperformance displays for military applications.  We intend to utilizecontract manufacturing for product fabrication to augment our internal capabilitiesin the short term.  We also plan to enter into joint ventures in certainvertical market segments to exploit the existing manufacturing and distributionchannels of our targeted partners.  We further plan to license ourtechnology to display manufacturers for use in applications such as mobilephones, digital cameras, laptop computers, and other consumer electronicdevices. Through our internal research and development efforts we haveestablished a portfolio of TMOS-related patents and patent applications andother intellectual property rights that support these joint venture andlicensing strategies.  We currently have seven issued patents and fifteenpending patent applications worldwide and contemplate obtaining exclusivefield-of-use licenses, with the right to sublicense, to complementarytechnologies from targeted strategic partners and U.S. national laboratories.

 

Through December 31, 2005, we have been primarilyengaged in developing our initial product technology, recruiting personnel,commencing our U.S. operations and raising capital. In the course of ourdevelopment activities, we have sustained losses and expect such losses tocontinue through at least 2006. We will finance our operations primarilythrough our existing cash and possible future financing transactions.

 

Our ability to operate profitably under our currentbusiness plan is largely contingent upon our success in developing beyond proofof concept to final prototypes and manufacturing for sale our products and uponour successful development of markets for our products and profitablemanufacturing processes.  We may be required to obtain additional capitalin the future to expand our operations. No assurance can be given that we willbe able to develop our products, successfully develop the markets for ourproducts or profitable manufacturing methods, or raise any such additionalcapital as we might need, either through equity or debt financing, onsatisfactory terms or at all. Additionally, no assurance can be given that anysuch financing, if obtained, will be adequate to meet our ultimate capitalneeds and to support our growth. If adequate capital cannot be obtained onsatisfactory terms, our operations could be negatively impacted.

 

If we achieve growth in our operations in the nextfew years, such growth could place a strain on our management, administrative,operational and financial infrastructure. Our ability to manage our currentoperations and future growth requires the continued improvement of operational,financial and management controls, reporting systems and procedures. Inaddition, we may find it necessary to hire additional management, financial andsales and marketing personnel to manage our expanding operations. If we areunable to manage this growth effectively and successfully, our business,operating results and financial condition may be materially adversely affected.

 

As of December 31, 2005, we had cash and cashequivalents of $2.3 million.  We believe that our existing capitalresources are adequate to finance our operations until May 2006, however ourlong-term viability is dependent upon successful

 

F-7

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operationof our business, our ability to develop our manufacturing process, thedevelopment of our products and our ability to raise additional debt and equityto meet our business objectives.

 

*Acquisition and merger and basis of presentation*

 

Uni-Pixel, Inc. was originally incorporated inthe State of Nevada as Super Shops, Inc. On November 15, 1999, SuperShops and its sister companies filed an amended petition under Chapter 11of the United States Bankruptcy Code. On July 31, 2000, the court approvedSuper Shops’ Amended Joint Plan of Reorganization. On October 13, 2000,and in accordance with the Plan of Reorganization, the management of SuperShops changed its state of incorporation from Nevada to Delaware by mergingwith and into NEV Acquisition Corp., a Delaware corporation formed solely forthe purpose of effecting the reincorporation. On June 13, 2001, NEV AcquisitionCorp. changed its corporate name to Real-Estateforlease.com, Inc., as aresult of the merger transaction discussed in the following paragraph.

 

Real-Estateforlease.com, Inc. was incorporatedon 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 with Real-Estateforlease.com, Inc.pursuant to which the sole stockholder and founder ofReal-Estateforlease.com, Inc. exchanged his equity ownership interest inReal-Estateforlease.com, Inc. for 9,500,000 shares (or approximately 96%)of NEV Acquisition Corp.’s common stock. At the time of the merger betweenReal-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-owned subsidiary, Uni-PixelDisplays, Inc., was originally incorporated as TralasTechnologies, Inc., a Texas corporation, on February 17, 1998. TralasTechnologies, Inc. changed its name to Uni-Pixel Displays, Inc.during 2001. On December 7, 2004, Real-Estateforlease.com, Inc.entered into a merger agreement with Uni-Pixel Displays, Inc. and certainother parties pursuant to which Uni-Pixel Displays, Inc. became awholly-owned subsidiary of Real-Estateforlease.com, Inc. Pursuant to themerger, we changed our name to “Uni-Pixel, Inc.” at the annual meeting ofour stockholders held in January 2005.

 

The financial statements presented in this annualreport include Uni-Pixel, Inc. and our wholly-owned subsidiary, Uni-PixelDisplays, Inc. All significant intercompany transactions and balances havebeen eliminated. Uni-Pixel Displays, Inc. was, for accounting purposes,the surviving entity of the merger, and accordingly for the periods prior tothe merger, the financial statements reflect the financial position, results ofoperations and cash flows of Uni-Pixel Displays, Inc.  The assets,liabilities, operations and cash flows of Real-Estateforlease.com, Inc.are included in the consolidated financial statements from December 10,2004 onward.

 

**Note 2 -****     ****Going Concern**

 

Theaccompanying financial statements have been prepared assuming Uni-Pixel willcontinue as a going concern.  Uni-Pixel has sustained losses and negativecash flows from operations since its inception. The Company’s ability to meetits obligations in the ordinary course of business is dependent upon itsability to establish profitable operations, raise additional financing throughpublic or private equity financings, enter into collaborative or otherarrangements with corporate sources, or secure other sources of financing tofund operations. These matters raise substantial doubt about the Company’sability to continue as a going concern. The financial statements do not includeany adjustments that might result from the outcome of this uncertainty.

 

InDecember 2005, Uni-Pixel entered into an agreement with CIBC World MarketsCorp. (“CIBC”) whereby Uni-Pixel retained CIBC to act, on an exclusive basis,as Uni-Pixel’s agent in a private placement of one or more classes of series ofsecurities to a limited number of sophisticated investors.  Management is currently in negotiations witha number of strategic investors, who have expressed an interest in making aninvestment in Uni-Pixel.  These discussionsare ongoing, and some of the potential investors are currently conducting theirdue diligence procedures.  However, therecan be no assurance of the outcome of these negotiations.  In the event Uni-Pixel is not able to secureequity financing on acceptable terms, Uni-Pixel’s ability to develop itstechnology and achieve profitability may be adversely affected.

 

**Note 3 -****     ****Summary of SignificantAccounting Policies**

 

*Use of estimates*

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, disclosures of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during

 

F-8

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thereporting period. Examples include provisions for bad debts, useful lives ofproperty and equipment and intangible assets, impairment of property andequipment and intangible assets, deferred taxes, and the provision for anddisclosure of litigation and loss contingencies. Actual results may differmaterially from those estimates.

 

*Reclassificationsof prior year amounts*

 

Certainprior year amounts have been reclassified to conform to the current yearpresentation.

 

*Statement of cash flows*

 

For purposes of the statements of cash flows, weconsider all highly liquid investments (i.e., investments which, whenpurchased, have original maturities of three months or less) to be cashequivalents.

 

*Concentration of credit risk*

 

We maintain our cash primarily with major U.S.domestic banks. The amounts held in these banks exceed the insured limit of$100,000 from time to time and exceeded that balance at December 31, 2005 andDecember 31, 2004 by $2,062,767 and $4,742,641, respectively.  The terms of these deposits are on demand tominimize risk.  We have not incurred losses related to these deposits.

 

*Restricted cash*

 

Asof December 31, 2005, we had restricted cash of $300,000.  Of this amount,$220,000 collateralizes a long-term note payable for the purchase ofmeasurement equipment.  Additionally, $80,000 of this amount securescertain obligations under our lease agreement for our principal facilitylocated in The Woodlands, Texas.  Therestricted cash has been segregated into current and long-term classificationsbased on its anticipated liquidation.

 

*Property and equipment*

 

Property and equipment, consisting primarily of labequipment, computer equipment, software, leasehold improvements, and officefurniture and fixtures is carried at cost less accumulated depreciation andamortization. Depreciation and amortization for financial reporting purposes isprovided by the straight-line method over the estimated useful lives of threeto five years. Leasehold improvements are amortized using the straight-linemethod over the remaining lease term or the life of the asset, whichever isshorter. The cost of repairs and maintenance is charged as an expense asincurred.  Gains or losses related toretirements or dispositions of fixed assets are recognized in the periodincurred.

 

*Intangible assets*

 

Our intangible assets represent patent applicationswhich are recorded at cost.  We have filed applications for patents inconnection with technologies being developed. The patent applications and anypatents issued as a result of these applications are important to theprotection of our technologies that may result from our research anddevelopment efforts. Costs associated with patent applications and maintainingpatents are capitalized and will be amortized over the life of thepatents.  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 carrying valueexceeds fair value determined based on the net present value of estimatedfuture cash flows.

 

*Revenue recognition*

 

We recognize revenue over the period the service isperformed in accordance with SEC Staff Accounting Bulletin No. 104,“Revenue Recognition in Financial Statements” (“SAB 104”). In general,SAB 104 requires that four basic criteria must be met before revenue canbe recognized: (1) persuasive evidence that an arrangement exists,(2) delivery has occurred or services rendered, (3) the fee is fixed anddeterminable, and (4) collectibility is reasonably assured.

 

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

 

Revenue from development contracts are recognizedwhen the contract is complete and collectibility is reasonably assured.  Deferred revenue on these contracts of$200,000 at both December 31, 2005 and 2004 consists of a development contractto produce and deliver a prototype device.

 

F-9

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*Research and development expenses*

 

Research and development costs are expensed asincurred and include salaries and benefits, costs paid to third-partycontractors for research, development and manufacturing of materials anddevices, and a portion of facilities cost. Prototype development costs are asignificant component of research and development expenses and include costsassociated with third-party contractors. Invoicing from third-party contractorsfor services performed can lag several months.  We accrue the costs ofservices rendered in connection with third-party contractor activities based onour estimate of management fees, site management and monitoring costs and datamanagement costs. Actual costs may differ from estimated costs in some casesand are adjusted for in the period in which they become known.

 

*Stock-based compensation*

 

We may, from time to time, issue common stock, stockoptions or common stock warrants to acquire services or goods fromnon-employees. Common stock, stock options and common stock warrants issued topersons other than employees or directors are recorded on the basis of theirfair value, as required by SFAS No. 123—”*Accountingfor Stock Based Compensation”,* which is measured as of the daterequired by EITF Issue 96-18, *“Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services.”*  Inaccordance with EITF 96-18, the stock options or common stock warrants arevalued using the Black-Scholes model on the basis of the market price of theunderlying common stock on the “valuation date,” which for options and warrantsrelated to contracts that have substantial disincentives to non-performance, isthe date of the contract, and for all other contracts is the vesting date.Expense related to the options and warrants is recognized on a straight-linebasis over the shorter of the period over which services are to be received orthe vesting period. Where expense must be recognized prior to a valuation date,the expense is computed under the Black-Scholes model on the basis of themarket price of the underlying common stock at the end of the period, and anysubsequent changes in the market price of the underlying common stock throughthe valuation date is reflected in the expense recorded in the subsequentperiod in which that change occurs.

 

Had compensation costs for our stock option planbeen determined based on the fair value at the grant date for the year endedDecember 31, 2005, consistent with the provisions of SFAS No. 123 andSFAS 148, our net loss and net loss per share would have increased to thepro forma amounts indicated below:

 
| ** **                                                                                                                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **2005**                    | ** ** | **2004** | ** ** |
|                                                                                                                                                                               |       |                        |       |   |   |
| Net loss attributable to common  shareholders – as reported                                                                                                                   |       | $                           | (5,740,517 | ) | $ | (2,351,047 | ) |
| Add: stock–based compensation                                                                                                                                                 |       | —                      |       | 618,750 |   |
| Less: stock–based employee compensation  expense determined under fair value based method for all awards granted to  employees and directors, net of related tax effect of $0 |       | (540,806                    | )          | (638,810 | ) |
| Net loss – pro forma                                                                                                                                                          |       | $                           | (6,281,323 | ) | $ | (2,371,107 | ) |
|                                                                                                                                                                               |       |                        |       |   |   |
| Net loss per share attributable to common  shareholders – as reported                                                                                                         |       |                        |       |   |   |
| Basic and diluted                                                                                                                                                                  |       | $                           | (0.45      | ) | $ | (0.40 | ) |
| Net loss per share attributable to common  shareholders – pro forma                                                                                                           |       |                        |       |   |   |
| Basic and diluted                                                                                                                                                                  |       | $                           | (0.49      | ) | $ | (0.41 | ) |

 

As required under SFAS 123 and SFAS 148,the pro forma effects of stock-based compensation on net loss per share havebeen estimated at the date of grant using the Black Scholes option-pricing modelbased on the following weighted average assumptions:

 

F-10

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|                   | ** ** | **Year  ended  December 31  2005** | ** ** | **Year  ended  December 31,  2004** | ** ** |
|------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|
| Expected  life (years) |       | 5 years                            |       | 4 years                             |       |
| Interest  rate         |       | 4                                       | %          | 5                                   | %          |
| Dividend yield         |       | —                                  |       | —                              |       |
| Volatility             |       | 40.05                                   | %          | 50.00                               | %          |

 

*Income taxes*

 

An asset and liability approach is used forfinancial accounting and reporting for income taxes. Deferred income taxesarise from temporary differences between income tax and financial reporting andprincipally relate to recognition of revenue and expenses in different periodsfor financial and tax accounting purposes and are measured using currentlyenacted tax rates and laws. In addition, a deferred tax asset can be generatedby net operating loss carryforwards.   Ifit is more likely than not that some portion or all of a deferred tax assetwill not be realized, a valuation allowance is recognized.

 

No benefit has been recognized on the net loss asthe realization of the net operating loss carryforward cannot be assured.

 

*Loss per share data*

 

Basic loss per share is calculated based on theweighted average common shares outstanding during the period, after givingeffect to the manner in which the merger was accounted for as described inNote 1. Diluted earnings per share also gives effect to the dilutiveeffect of stock options, warrants (calculated based on the treasury stockmethod) and convertible notes and convertible preferred stock. The Company doesnot present diluted earnings per share for years in which it incurred netlosses as the effect is antidilutive.

 

At December 31, 2005, options and warrants topurchase 2,853,500 shares of common stock at exercise prices ranging from $1.75to $4.00 per share were outstanding, but were not included in the computationof diluted earnings per share as their effect would be antidilutive.

 

*Fair Value of Financial Instruments*

 

Our financial instruments consist of accountsreceivable, accounts payable and note payable. The fair values of our accountsreceivable, accounts payable and note payable, in our opinion, reflect theirrespective carrying amounts.

 

*Recent accounting pronouncements*

 

In December 2004, the FASB issued SFASNo. 123 (Revised 2004) (“SFAS No. 123(R)”), *“Share Based Payment,”* which eliminates the use of APBOpinion No. 25 and will require us to measure the cost of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award. That cost will be recognized over theperiod during which an employee is required to provide service in exchange forthe reward—known as the requisite service period. No compensation cost isrecognized for equity instruments for which employees do not render therequisite service. The grant-date fair value of employee share options andsimilar instruments will be estimated using option-pricing models adjusted forthe unique characteristics of those instruments. SFAS No. 123(R) was to beeffective for the first interim or annual reporting period that began afterJune 15, 2005 (the quarter beginning July 1, 2005 for us) and was tobe applied to all options granted or modified after its effective date and alsoto recognize the cost associated with the portion of any option awards madebefore its effective date for which the associated service has not beenrendered as of its effective date.  On April 14, 2005, the U.S.Securities and Exchange Commission announced a deferral of the effective dateof FAS 123(R) for calendar year companies until the beginning of 2006. We are stillstudying the requirements of SFAS No. 123(R) and have not yet determinedwhat impact it will have on our results of operations and financialposition.  We believe our disclosure in the accompanying notes of theproforma impact on earnings and earnings per share is our best estimate of theimpact of this new pronouncement.

 

OnJuly 14, 2005, the FASB issued its Exposure Draft, “Accounting forUncertain Tax Positions”, which is a proposed interpretation to FASB StatementNo. 109, “Accounting for Income Taxes.” This proposed interpretation wouldrequire an enterprise to recognize, in its financial statements, the bestestimate of the impact of a tax position. In evaluating whether the probablerecognition threshold has been met, this proposed interpretation would requirethe presumption that the tax position will be evaluated during an audit bytaxing authorities. The term probable is used in this proposed interpretationconsistent with its use in FASB Statement No. 5, “Accounting forContingencies,” to mean “the future event or events are likely to occur.”Individual tax positions that fail to meet the probable recognition thresholdwill generally result in either (a) a reduction in the deferred tax asset

 

F-11

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oran increase in a deferred tax liability or (b) an increase in a liabilityfor income taxes payable or the reduction of an income tax refund receivable.The impact may also include both (a) and (b). The proposed interpretation wouldbe effective as of the end of the first fiscal year ending afterDecember 15, 2005. The initial recognition of the effect of applying theproposed interpretation would be a cumulative effect of a change in accountingprinciple. The comment period for the proposed interpretation ended onOctober 28, 2005. The Company is currently evaluating the impact of theExposure Draft on its financial statements.

 

**Note 4 – Property and Equipment**

 

Asummary of the components of property and equipment at December 31:

 
| ** **                          | ** ** | **Estimated  Useful  Lives** | ** ** | **2005**  | ** ** | **2004** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------|------------|----------|------------|
| Research and  development equipment |       | 3 to 5 years                 |       | $         | 698,452    |     | $          | — |   |
| Leasehold  improvements             |       | 5 years                      |       | 186,708   |       | —   |       |
| Computer  equipment                 |       | 5 years                      |       | 86,485    |       | 27,395   |       |
| Office  equipment                   |       | 3 to 5 years                 |       | 66,025    |       | 12,171   |       |
| Automobile                          |       | 5 years                      |       | 20,091    |       | —   |       |
|                                |       |                         |       | 1,057,761 |       | 39,566   |       |
| Accumulated  depreciation           |       |                         |       | (203,709  | )          | (27,092  | )          |
| Property and  equipment, net        |       |                         |       | $         | 854,052    |     | $          | 12,474 |   |

 

Depreciationand amortization expense of property and equipment, organizational and patentcosts for the years ended December 31, 2005 and 2004 and the period frominception through December 31, 2005 was $190,135, $11,538, and $271,457,respectively.

 

**Note 5 – Related Party Transactions**

 

Uni-Pixelhad a second business unit called Skywave. In May 2001, the Skywavebusiness unit was split out of Uni-Pixel into a new entity, Skywave, Inc.Skywave, Inc. has since ceased operations. Uni-Pixel Displays, Inc.had a note payable to Skywave, Inc. for $95,103. During 2004, the notepayable plus accrued interest was converted into 51,008 shares of common stock.Uni-Pixel Displays, Inc. also had a note payable to one of itsstockholders for $20,000. The note bore interest at 13%. During 2004, the notepayable plus accrued interest was paid in full.

 

Asof December 31, 2003, the Company had advanced $117,846 to officers of theCompany. Effective November 2004, the employee advances receivable weresettled between the Company and all employees.

 

Asof December 31, 2003, the Company had accrued payroll to its employees of$651,749. These amounts have been extended under a mutual agreement of theCompany and the employees. Effective October 2004, the Company gainedagreement with various past and present employees to cancel debts in the formof promissory notes and accrued wages payable totaling $895,465, except forapproximately $100,000 which was paid out of the proceeds from theSeries A Preferred Stock offering. The Company had accrued interestpayable related to the employee notes payable of $47,164 at December 31,2003. During 2004, the employee notes payable accrued additional interest of$44,257. In 2004, the notes payable accrued interest was forgiven.

 

During2004 and 2003, the Company leased office space from a stockholder of theCompany under a month-to-month lease for $3,900 per month. EffectiveDecember 15, 2004, this lease was terminated and the Company began leasingoffice space from an unrelated lessor.

 

**Note 6 – Note Payable**

 

During2004, the Company entered into an unsecured note payable agreement with a thirdparty with an original balance of $150,000, that is repayable in monthlyinstallments of principal and interest of $6,922 at 10.00% per annum andmatures July 2006. This note payable had an outstanding balance of $39,761at December 31, 2005.

 

During2005, the Company entered into a note payable agreement to purchase a vehiclewith an original balance of $20,092, that is repayable in monthly installmentsof principal and interest of $391 at 6.31% per annum and matures March 2010.  This note payable had an outstanding balanceof $17,166 at December 31, 2005.

 

F-12

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During2005, the Company entered into a note payable agreement to purchase measurementequipment with an original balance of $200,000, that is repayable in monthlyinstallments of principal and interest of $8,979 at 7.27% per annum and maturesMay 2007.  This note payable had anoutstanding balance of $144,629 at December 31, 2005 and is secured by therelated measurement equipment and a long-term certificate of deposit.

 

Futurepayments under outstanding note payables as of December 31, 2005 are asfollows:

 
| **Year ended December 31:** | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------|------------|
| 2006                        |       | $          | 144,019    |   |
| 2007                        |       | 48,051     |       |
| 2008                        |       | 4,218      |       |
| 2009                        |       | 4,492      |       |
| 2010                        |       | 776        |       |
| Thereafter                  |       | —     |       |
|                        |       | $          | 201,556    |   |

 

**Note 7 – Income Taxes**

 

TheCompany accounts for income taxes in accordance with SFAS No. 109, *Accounting for Income Taxes*. ThisStatement prescribes the use of the liability method whereby deferred tax assetand liability account balances are determined based on differences betweenfinancial reporting and tax bases of assets and liabilities and are measuredusing the enacted tax rates and laws that will be in effect when thedifferences are expected to reverse. The Company has a net operating loss forfinancial accounting purposes of approximately $11.8 million and$7.2 million at December 31, 2005 and 2004, respectively. The Companyhas a potential deferred tax asset of approximately $4.1 million as aresult of this net operating loss carry forward. In assessing the realizationof deferred tax assets, management considers whether it is likely that someportion or all of the deferred tax assets will be realized. The ultimaterealization of deferred tax assets is dependent upon the Company attainingfuture taxable income during periods in which those temporary differencesbecome deductible. Due to the uncertainty surrounding the realization of thebenefits of its tax attributes, including net operating loss carryforwards, infuture tax returns, the Company has provided a 100% valuation allowance on itsdeferred tax assets. The valuation allowance increased by approximately $1.4million and $0.6 million for the years ended December 31, 2005 and 2004,respectively.

 

                The net operating losscarryforward will begin to expire in 2015, if not utilized. The InternalRevenue Code Section 382 limits net operating loss and tax creditcarryforwards when an ownership change of more than fifty percent of the valueof the stock in a loss corporation occurs within a three-year period. Thischange occurred during the year ended December 31, 2004. Accordingly, theability to utilize remaining net operating loss and tax credit carryforwardshas been significantly restricted with the recent equity transactions.

 

**Note 8 – Commitments and Contingencies**

 

*Leases*

 

The Company has entered into a lease for office,warehouse and laboratory facility in The Woodlands, Texas, under a third partynon-cancelable operating lease through 2010. Future minimum lease commitmentsare as follows as of December 31, 2005:

 

| **Year Ending December 31** | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------|------------|
| 2006                        |       | $          | 196,000    |   |
| 2007                        |       | 200,000    |       |
| 2008                        |       | 203,000    |       |
| 2009                        |       | 206,000    |       |
| 2010                        |       | 192,000    |       |
| Thereafter                  |       | —     |       |
| Total                       |       | $          | 997,000    |   |

 

This lease provides the Company with one 5-yearrenewal option.

 

Rentexpense for 2005 and 2004 was $193,000 and $51,000, respectively.

 

F-13

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*Litigation*

 

The Company from time to time may be involved in litigation relating toclaims arising out of its ordinary course of business. Management believes thatthere are no claims or actions pending or threatened against the Company, theultimate disposition of which would have a material impact on the Company’sfinancial position, results of operations or cash flows.

* *

*Employment agreements*

 

The Company has entered into employment agreementswith Frank DeLape, Reed Killion and James Tassone.

 

Mr. DeLape, Chairman of the Board, entered into anemployment agreement dated March 5, 2005, with an initial term ending December31, 2008, and providing for a base annual salary of $250,000, subject to theright of the Board of Directors to increase his salary from time to time.Mr. DeLape is entitled to receive an annual bonus in an amount to bedetermined by the Board of Directors. If Mr. DeLape’s performance satisfiescriteria to be established by the Board of Directors, his target bonus will be45% of his annual salary. The agreement also provides that Mr. DeLape willreceive employee stock options to purchase 600,000 shares of common stock at anexercise price of $4.00 per share.  Theoption has a term of ten years and will vest and become exercisable ratablyover 46 months beginning on March 31, 2005. The agreement also provides Mr. DeLape with disability and lifeinsurance benefits, a car allowance and wireless communications benefits.Mr. DeLape’s employment may be terminated at any time, provided that ifhis employment is terminated without “Cause,” or if he terminates hisemployment for “Good Reason,” as those terms are defined in the agreement, hewill be entitled to receive a severance payment equal to the greater of(i) the salary payable over the remaining term of his agreement or(ii) twenty four months salary, as well as a bonus computed on the basisof the greater of (a) the amount determined under the agreement by theBoard of Directors; or (b) $70,000.

 

Mr. Killion, President, entered into an employmentagreement dated March 5, 2005, with an initial term ending December 31, 2008,and providing for a base salary of $195,000, subject to the right of the Boardof Directors to increase his salary from time to time. Mr. Killion isentitled to receive an annual bonus in an amount to be determined by the Boardof Directors. If Mr. Killion’s performance satisfies criteria to beestablished by the Board of Directors, his target bonus will be 35% of hisannual salary. The agreement also provides that Mr. Killion will receiveemployee stock options to purchase 450,000 shares of common stock at anexercise price of $4.00 per share.  Theoption has a term of ten years and vest ratably on an annual basis over threeyears.  The agreement also providesMr. Killion with disability and life insurance benefits, a car allowanceand wireless communications benefits. The vesting provisions of the optionwould accelerate and Mr. Killion would be entitled to a severance paymentequal to his base salary for six months, if Mr. Killion were terminatedwithout “Cause,” or if Mr. Killion were to terminate his employment withUni-Pixel for “Good Reason” (each of the terms as defined in the Agreement).

 

Mr.Tassone, Chief Financial Officer, entered into an employment agreement datedApril 15, 2005, with an initial term ending December 31, 2008 and providing fora base salary of $145,000, subject to the right of the Board of Directors toincrease his salary from time to time. Mr. Tassone is entitled to receivean annual bonus in an amount to be determined by the Board of Directors. IfMr. Tassone’s performance satisfies criteria to be established by theBoard of Directors, his target bonus will be 30% of his annual salary. Theagreement also provides that Mr. Tassone will receive employee stockoptions to purchase 200,000 shares of common stock at an exercise price of$4.00 per share.  The option has a termof ten years and vest ratably on an annual basis over three years.  The agreement also provides Mr. Tassonewith disability and life insurance benefits, a car allowance and wirelesscommunications benefits. The vesting provisions of the option would accelerateand Mr. Tassone would be entitled to a severance payment equal to his basesalary for six months, if Mr. Tassone were terminated without “cause,” orif Mr. Tassone were to terminate his employment with Uni-Pixel for “goodreason” (each of the terms as defined in the Agreement).

 

Asof December 31, 2005, there was no bonus accrual for Mr. DeLape, Mr. Killion orMr. Tassone.

 

*Placement Agent Agreement*

 

InDecember 2005, we entered into an agreement with CIBC World Markets Corp.(“CIBC”) whereby we retained CIBC to act, on an exclusive basis, as our agentin a private placement of one or more classes of series of securities to alimited number of sophisticated investors.

 

F-14

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**Note 9 -****                 ****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 yearsended December 31, 2005 and December 31, 2004, we did not issue equityinstruments to non-employees for services.

 

*Common Stock*

 

During the year ended December 31, 2005, (1) weissued no shares of common stock for cash in connection with the exercise ofstock options; (2) issued no shares of common stock in exchange for cashlessexercise of warrants; and (3) issued 2,594,477 shares of common stock inconnection with the conversion of 1,222,499 shares of Series A Preferred Stockand accrued dividends.

 

During the year ended December 31, 2004, (1) weissued no shares of common stock for cash in connection with the exercise ofstock options; (2) issued no shares of common stock in exchange for cashlessexercise of warrants; and (3) issued no shares of common stock in connectionwith the conversion of Series A Preferred Stock and accrued dividends.

 

*Series A Convertible Preferred Stock*

 

In January 2005, the Company completed a private offering of 3,495,000shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) at$3.50 per share for total proceeds of $12,232,500, net of offering costs of$2,066,222 which includes the fair market value of warrants to the placementagent of $352,172.   Each share of Series A Preferred Stock isconvertible into two shares of common stock at any time after issuance,together with accrued dividends at 6% per annum payable in cash or additionalshares of Series A Preferred Stock at the option of the Company. OnDecember 31, 2007, all outstanding shares of Series A PreferredStock, if any, shall automatically convert on that date into common stock. Cumulativeannual dividends, payable in shares of Series A Preferred Stock or cash atthe option of the Board of Directors, accrue at an annual rate of 6% ($0.21 pershare). The shares of Series A Preferred Stock have a liquidationpreference of $3.50 per share over the common stock, plus all accumulated andunpaid dividends in arrears. The shares of Series A Preferred Stock areentitled to a number of votes equal to the number of shares of common stockinto which such shares are convertible. The holders of the Series APreferred Stock also have the right to receive all information, includingnotices, reports, and other information, provided to the holders of commonstock.  The offering costs comprise thecommissions and fees to the placement agent, as well as the Company’s issuanceof warrants to the placement agent to purchase 1,048,500 shares of common stockat an exercise price of $1.75 per share.  The warrants are exercisableimmediately upon grant and expire five years thereafter.  TheCompany utilized the Black-Scholes methodology in determining thefair market value of the warrants of $352,172, which was charged toadditional paid-in capital.

 

Duringthe year ended December 31, 2005, the Company issued an additional 156,507shares of Series A Preferred Stock in lieu of cash for payment of accrueddividends on the Series A Preferred Stock totaling $547,775.  We also paid $261,667 in Preferred Stockaccrued dividends through the issuance of 149,479 common shares during 2005.

 

*2005 Stock Incentive Plan*

 

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

 

In the first quarter of 2005, we issued under theStock Incentive Plan a total of 1,050,000 options to purchase our common stockwith an exercise price of $4.00 per share to two employees.  The optionsvest over periods of a maximum of 36 to 46 months from the date of grant.

 

In the second quarter of 2005, we issued under theStock Incentive Plan a total of 625,000 options to purchase our common stockwith an exercise price of $4.00 per share to four employees.  The optionsvest over periods of a maximum of 36 months from the date of grant.

 

In the third quarter of 2005, we did not issue anyoptions.

 

F-15

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In the fourth quarter of 2005, we issued under theStock Incentive Plan a total of 130,000 options to purchase our common stockwith an exercise price of $4.00 per share to five employees.  The optionsvest over periods of a maximum of 36 months from the date of grant.

* *

*Summary Stock Option and Warrant Information*

 

Informationregarding the options and warrants granted in 2005 and 2004 is as follows: 

 
| ** **                       | ** ** | **Options  Year Ended December 31,** | ** ** | **Warrants  Year Ended December 31,** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                  | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Outstanding, beginning of year   |       | —                                    |       | —                                     |       | 769,500 |   | — |   |
| Granted                          |       | 1,805,000                                 |       | —                                     |       | 279,000 |   | 769,500 |   |
| Exercised                        |       | —                                    |       | —                                     |       | — |   | — |   |
| Expired or cancelled             |       | —                                    |       | —                                     |       | — |   | — |   |
|                             |       |                                      |       |                                       |       |   |   |   |   |
| Outstanding, end of year         |       | 1,805,000                                 |       | —                                     |       | 1,048,500 |   | 769,500 |   |
|                             |       |                                      |       |                                       |       |   |   |   |   |
| Exercisable, end of year         |       | 130,435                                   |       | —                                     |       | 1,048,500 |   | 769,500 |   |
|                             |       |                                      |       |                                       |       |   |   |   |   |
| Available for grant, end of year |       | 195,000                                   |       | —                                     |       |   |   |   |   |

 

Theweighted average option and warrant exercise price information for 2005 and2004 is as follows: 

 
| ** **                            | ** ** | **Options  Year Ended December 31,** | ** ** | **Warrants  Year Ended December 31,** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2005**                                  | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Outstanding,  beginning of year       |       | $                                         | —     |                                       | $          | — |   | $ | 1.75 |   | $ | — |   |
| Granted  during the year              |       | $                                         | 4.00       |                                       | $          | — |   | $ | 1.75 |   | $ | 1.75 |   |
| Exercised  during the year            |       | $                                         | —     |                                       | $          | — |   | $ | — |   | $ | — |   |
| Expired or  cancelled during the year |       | $                                         | —     |                                       | $          | — |   | $ | — |   | $ | — |   |
| Outstanding  at end of year           |       | $                                         | 4.00       |                                       | $          | — |   | $ | 1.75 |   | $ | 1.75 |   |
| Exercisable  at end of year           |       | $                                         | 4.00       |                                       | $          | — |   | $ | 1.75 |   | $ | 1.75 |   |

 

Significantoption and warrant groups outstanding at December 31, 2005, and relatedweighted average exercise price and life information is as follows: 

 
| **Grant date**     | ** ** | **Options  Outstanding** | ** ** | **Warrants  Outstanding** | ** ** | **Exercisable** | ** ** | **Weighted  Exercise  Price** | ** ** | **Remaining  Life  (Years)** | ** ** |
|--------------------|------------|--------------------------|------------|---------------------------|------------|-----------------|------------|-------------------------------|------------|------------------------------|------------|
| December 9,  2004  |       | —                   |       | 769,500                   |       | 769,500         |       | $                             | 1.75       |                         | 3.91       |   |
| January 10,  2005  |       | —                   |       | 168,750                   |       | 168,750         |       | $                             | 1.75       |                         | 4.00       |   |
| January 26,  2005  |       | —                   |       | 110,250                   |       | 110,250         |       | $                             | 1.75       |                         | 4.08       |   |
| March 5,  2005     |       | 600,000                  |       | —                    |       | 130,435         |       | $                             | 4.00       |                         | 9.17       |   |
| March 5,  2005     |       | 450,000                  |       | —                    |       | —          |       | $                             | 4.00       |                         | 9.17       |   |
| April 19,  2005    |       | 625,000                  |       | —                    |       | —          |       | $                             | 4.00       |                         | 9.33       |   |
| November 15,  2005 |       | 130,000                  |       | —                    |       | —          |       | $                             | 4.00       |                         | 9.83       |   |
|               |       |                     |       |                      |       |            |       |                          |       |                         |       |
| Total              |       | 1,805,000                |       | 1,048,500                 |       | 1,178,935       |       |                          |       |                         |       |

 

F-16

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