UNIVERSAL DISPLAY CORP \PA\ (Form: 10-Q, Received: 08/09/2006 16:20:02)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

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 1-12031

UNIVERSAL DISPLAY CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania
(State or other jurisdiction of
incorporation or organization)

23-2372688
(I.R.S. Employer Identification No.)

375 Phillips Boulevard
Ewing, New Jersey
(Address of principal executive offices)

08618
(Zip Code)

Registrant’s telephone number, including area code: (609) 671-0980

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of August 3, 2006, the registrant had outstanding 31,131,119 shares of common stock.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets – June 30, 2006 and December 31, 2005	3

	Consolidated Statements of Operations – Three months ended June 30, 2006 and 2005	4

	Consolidated Statements of Operations – Six months ended June 30, 2006 and 2005	5

	Consolidated Statements of Cash Flows – Six months ended June 30, 2006 and 2005	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17

Item 4.	Controls and Procedures	17

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	18

Item 1A.	Risk Factors	18

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18

Item 3.	Defaults Upon Senior Securities	18

Item 4.	Submission of Matters to a Vote of Security Holders	18

Item 5.	Other Information	18

Item 6.	Exhibits	19

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	June 30, 2006			December 31, 2005

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	25,194,983		$	30,654,249
Short-term investments		21,078,855			17,190,242
Accounts receivable		2,533,583			1,944,099
Inventory		97,987			36,431
Other current assets		701,181			497,746

Total current assets		49,606,589			50,322,767
PROPERTY AND EQUIPMENT, net		14,220,250			13,553,611
ACQUIRED TECHNOLOGY, net		7,167,024			8,014,559
INVESTMENTS		1,557,707			1,828,708
OTHER ASSETS		104,772			99,772

TOTAL ASSETS	$	72,656,342		$	73,819,417

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,146,241		$	1,249,576
Accrued expenses		3,546,396			5,168,223
Deferred license fees		4,228,267			3,478,267
Deferred revenue		768,561			2,078,788

Total current liabilities		9,689,465			11,974,854
DEFERRED LICENSE FEES		3,222,300			3,478,100
DEFERRED REVENUE		750,000			750,000

Total liabilities		13,661,765			16,202,954

COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS’ EQUITY:
Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized, 200,000 shares of Series A Nonconvertible Preferred Stock issued and outstanding (liquidation value of $7.50 per share or $1,500,000)		2,000			2,000
Common Stock, par value $0.01 per share, 50,000,000 shares authorized, 31,127,006 and 29,545,471 shares issued and outstanding		311,270			295,455
Additional paid-in-capital		196,807,455			187,609,407
Accumulated other comprehensive loss		(121,635	)		(120,577	)
Accumulated deficit		(138,004,513	)		(130,169,822	)

Total shareholders’ equity		58,994,577			57,616,463

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	72,656,342		$	73,819,417

The accompanying notes are an integral part of these statements.

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UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended June 30,

	2006			2005

REVENUE:
Contract research	$	901,529		$	1,514,325
Development chemical		296,624			1,123,852
Commercial chemical		336,365			—
License fees		807,185			42,000
Technology development fees		667,613			331,818

Total revenue		3,009,316			3,011,995

OPERATING EXPENSES:
Cost of chemicals sold		44,933			12,303
Research and development		5,416,226			4,552,047
General and administrative		2,234,535			1,760,402
Royalty and license expense		166,794			150,000

Total operating expenses		7,862,488			6,474,752

Operating loss		(4,853,172	)		(3,462,757	)
INTEREST INCOME		544,626			320,930
INTEREST EXPENSE		(4,105	)		(48,153	)

NET LOSS	$	(4,312,651	)	$	(3,189,980	)

BASIC AND DILUTED NET LOSS PER COMMON SHARE	$	(0.14	)	$	(0.11	)

WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON SHARE		30,982,309			28,246,338

The accompanying notes are an integral part of these statements.

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UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Six Months Ended June 30,

	2006			2005

REVENUE:
Contract research	$	1,437,590		$	2,213,380
Development chemical		972,530			1,537,214
Commercial chemical		734,844			31,395
License fees		1,738,031			115,255
Technology development fees		1,397,727			581,818

Total revenue		6,280,722			4,479,062

OPERATING EXPENSES:
Cost of chemicals sold		123,374			39,170
Research and development		10,417,298			9,157,372
General and administrative		4,232,227			3,655,265
Royalty and license expense		353,319			300,000

Total operating expenses		15,126,218			13,151,807

Operating loss		(8,845,496	)		(8,672,745	)
INTEREST INCOME		1,019,016			583,093
INTEREST EXPENSE		(8,211	)		(91,230	)

NET LOSS	$	(7,834,691	)	$	(8,180,882	)

BASIC AND DILUTED NET LOSS PER COMMON SHARE	$	(0.26	)	$	(0.29	)

WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON SHARE		30,508,972			28,137,649

The accompanying notes are an integral part of these statements.

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UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six months ended June 30,

	2006			2005

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(7,834,691	)	$	(8,180,882	)
Non-cash charges to statement of operations:
Depreciation		902,613			738,114
Amortization of intangibles		847,535			847,536
Amortization of premium and discount on investments		(71,031	)		(77,446	)
Common stock, options and warrants issued in connection with Development Agreement		1,955,101			2,729,703
Common stock and options issued to employees		430,882			750,490
Common stock and options issued to Board of Directors and Scientific Advisory Board		—			526,551
Common stock options and warrants issued for services		105,011			(6,713	)
(Increase) decrease in assets:
Accounts receivable		(589,484	)		413,001
Inventory		(61,556	)		(19,750	)
Other current assets		(203,435	)		(176,026	)
Other assets		(5,000	)		(4,414	)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses		(275,593	)		(1,350,932	)
Deferred license fees		494,200			1,208,001
Deferred revenue		(1,310,227	)		618,181

Net cash used in operating activities		(5,615,675	)		(1,984,586	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(1,569,252	)		(2,710,465	)
Purchases of investments		(11,300,639	)		(7,099,319	)
Proceeds from sale of investments		7,753,000			24,807,000

Net cash (used in) provided by investing activities		(5,116,891	)		14,997,216

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of common stock options and warrants		5,273,300			863,562
Payment of loan		—			(150,000	)
Restricted cash		—			150,000

Net cash provided by financing activities		5,273,300			863,562

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(5,459,266	)		13,876,192
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		30,654,249			18,930,581

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	25,194,983		$	32,806,773

Cash paid for interest	$	—		$	89,229

The accompanying notes are an integral part of these statements.

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UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	BACKGROUND

Universal Display Corporation (the “Company”) is engaged in the research, development and commercialization of organic light emitting diode (“OLED”) technologies for use in a variety of flat panel display and other applications. The Company’s primary business strategy is to develop and license its proprietary OLED technologies to display manufacturers for use in these applications. Through internal research and development efforts and relationships with entities such as Princeton University, the University of Southern California (“USC”), University of Michigan and PPG Industries, Inc., the Company has established a significant portfolio of OLED technologies and associated intellectual property rights (Notes 3 and 5). The Company also develops and sells OLED materials to display manufacturers for evaluation and use in commercial display products.

The Company conducts a substantial portion of its OLED technology development activities at its technology development and transfer facility in Ewing, New Jersey. In December 2004, the Company acquired the entire 41,000 square foot building at which the facility is located. The Company recently completed an expansion of its operations into the entire building. The Company also leases 850 square feet of office space in Coeur d’Alene, Idaho.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Information

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of June 30, 2006, the results of operations for the three and six months ended June 30, 2006 and 2005, and cash flows for the six months ended June 30, 2006 and 2005. While management believes that the disclosures presented are adequate to make the information not misleading, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s latest year-end financial statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Management’s Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company classifies its existing marketable securities as available-for-sale. These securities are carried at fair market value, with unrealized gains and losses reported in shareholders’ equity as a component of other comprehensive loss. Gains or losses on securities sold are based on the specific identification method. The Company reported accumulated unrealized holding losses of $121,635 and $120,577 at June 30, 2006 and December 31, 2005, respectively.

Inventory

Inventory is valued at the lower of cost or market, with cost determined using the specific identification method.

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Acquired Technology

Acquired technology consists of acquired license rights for patents and know-how obtained from PD-LD, Inc. and Motorola, Inc. (Note 4). These intangible assets consist of the following:

	June 30, 2006			December 31, 2005

PD-LD, Inc.	$	1,481,250		$	1,481,250
Motorola, Inc.		15,469,468			15,469,468

		16,950,718			16,950,718
Less: Accumulated amortization		(9,783,694	)		(8,936,159	)

Acquired technology, net	$	7,167,024		$	8,014,559

Acquired technology is amortized on a straight-line basis over its estimated useful life of ten years.

Net Loss Per Common Share

Basic net loss per common share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per common share reflects the potential dilution from the exercise or conversion of securities into common stock. For the three and six months ended June 30, 2006 and 2005, the effects of the exercise of the combined outstanding stock options and warrants of 6,983,751and 8,993,379, respectively, were excluded from the calculation of diluted EPS as the impact would be antidilutive.

Research and Development

Expenditures for research and development are charged to operations as incurred.

Share-Based Payment Awards

Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. It requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. The statement eliminates the intrinsic value-based method prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, that the Company used prior to 2006. The Company adopted SFAS No. 123R effective January 1, 2006 using the modified prospective method (Note 7).

The fair value of share-based awards is determined using the Black-Scholes valuation model, which is the same model the Company used previously for valuing share-based awards for footnote disclosure purposes.

The fair value of share-based awards is recognized over the requisite service period, net of estimated forfeitures. The Company relies primarily upon historical experience to estimate expected forfeitures and recognizes compensation expense on a straight-line basis from the date of grant. The Company issues new shares upon exercise of stock options.

Statement of Cash Flow Information

The following non-cash activities occurred:

	Six Months Ended June 30,

	2006			2005

Unrealized gain (loss) on available-for-sale securities	$	(1,058	)	$	(174	)
Common stock issued to Board of Directors and Scientific Advisory Board that were earned in a previous period		588,200			390,720
Common stock issued to employees that were earned in a previous period		838,854			726,414

3.	RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY AND USC

Effective October 9, 1997, the Company entered into a Research Agreement with the Trustees of Princeton University to sponsor OLED technology research at Princeton University and, on a subcontractor basis, at the University of Southern California (“USC”). This Research Agreement (as amended, the “1997 Research Agreement”) had an original term of five years. Through the period ended July 31, 2002, the Company paid Princeton University $2,276,461 under the 1997 Research Agreement.

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In April 2002, the Company amended the 1997 Research Agreement with Princeton University providing, among other things, for an additional five-year term. Under the terms of this amendment, the Company is obligated to pay Princeton University up to $7,477,993 under the 1997 Research Agreement for the period from July 31, 2002 through July 31, 2007. Payments to Princeton University under this agreement are charged to research and development expenses when they become due. Through the period ended June 30, 2006, the Company has paid $3,063,904 under this agreement.

In January 2006, the Principal Investigator conducting research at Princeton University under the 1997 Research Agreement transferred to the University of Michigan (“Michigan”). As a result of this transfer, the Company has entered into a new Sponsored Research Agreement with USC to sponsor OLED technology research at USC and, on a subcontractor basis, Michigan. This new Research Agreement (the “2006 Research Agreement”) was effective as of May 1, 2006, and has a term of three years. Under the terms of the 2006 Research Agreement, the Company is obligated to pay USC up to $4,636,296 for the period from May 1, 2006 through April 30, 2009. Amounts paid to Princeton University under the 1997 Research Agreement offset any amounts the Company is obligated to pay USC under the 2006 Research Agreement. No payments were made to USC under this agreement through June 30, 2006.

Pursuant to a License Agreement between the Trustees of Princeton University and American Biomimetics Corporation (“ABC”) dated August 1, 1994 (as amended, the “1994 License Agreement”), Princeton University granted ABC a worldwide exclusive license, with rights to sublicense, to make, have made, use, lease and/or sell products and to practice processes based on certain patents and patent applications of Princeton University relating to OLED technology. ABC assigned its rights and obligations under the 1994 License Agreement to the Company in June 1995.

On October 9, 1997, the Company, Princeton University and USC entered into an Amended License Agreement that amended and restated the 1994 License Agreement (as amended, the “1997 Amended License Agreement”). Under the 1997 Amended License Agreement, Princeton University and USC granted the Company corresponding license rights with respect to patent applications and issued patents arising out of work performed by Princeton University and USC under the 1997 Research Agreement.

Under the 1997 Amended License Agreement with Princeton University and USC, the Company is required to pay Princeton University royalties for licensed products sold by the Company or its sublicensees. For licensed products sold by the Company, the Company is required to pay Princeton University 3% of the net sales price of these products. For licensed products sold by the Company’s sublicensees, the Company is required to pay Princeton University 3% of the revenues received by the Company from these sublicensees. These royalty rates are subject to renegotiation for products not reasonably conceivable as arising out of the 1997 Research Agreement if Princeton University reasonably determines that the royalty rates payable with respect to these products are not fair and competitive.

The Company is obligated under the 1997 Amended License Agreement to pay to Princeton University minimum annual royalties. The minimum royalty payment is $100,000 per year. The Company accrued $98,319 of royalty expense, in connection with the agreement, for the six months ended June 30, 2006.

The Company also is required under the 1997 Amended License Agreement to use commercially reasonable efforts to bring the licensed OLED technology to market. However, this requirement is deemed satisfied provided the Company performs its obligations under the 1997 Research Agreement and, when that agreement ends, the Company invests a minimum of $800,000 per year in research, development, commercialization or patenting efforts respecting the patent rights licensed to the Company.

In connection with entering into the 2006 Research Agreement, the Company amended the 1997 Amended License Agreement to include Michigan as a party to that agreement effective as of January 1, 2006. Under this amendment, Princeton University, USC and Michigan have granted the Company a worldwide exclusive license, with rights to sublicense, to make, have made, use, lease and/or sell products and to practice processes based on patent applications and issued patents arising out of work performed under the 2006 Research Agreement. The financial terms of the 1997 Amended License Agreement were not impacted by this amendment.

4.	ACQUIRED TECHNOLOGY

On July 19, 2000, the Company, PD-LD, Inc. (“PD-LD”), its president Dr. Vladimir Ban and the Trustees of Princeton University entered into a Termination, Amendment and License Agreement whereby the Company acquired all PD-LD’s rights to certain issued and pending OLED technology patents in exchange for 50,000 shares of the Company’s common stock. Pursuant to this transaction, these patents were included in the patent rights exclusively licensed to the Company under the 1997 Amended License Agreement. These patents had a fair value of $1,481,250 (Note 2) at the time of their acquisition.

On September 29, 2000, the Company entered into a License Agreement with Motorola, Inc. (“Motorola”). Pursuant to this agreement, the Company licensed from Motorola what are now 74 issued U.S. patents and corresponding foreign patents relating to OLED technologies. These patents expire between 2012 and 2018. The Company has the sole right to sublicense these patents to OLED manufacturers. As consideration for this license, the Company issued to Motorola 200,000 shares of the Company’s common stock (valued at $4,412,500) and 300,000 shares of the Company’s Series B Convertible Preferred Stock (valued at $6,618,750). On October 6, 2004, all 300,000 shares of the Series B Convertible Preferred Stock were converted into 418,916 shares of the Company’s common stock based on a specified conversion formula. As part of the original licensing transaction, the Company also issued to Motorola a warrant to purchase 150,000 shares of the Company’s common stock at $21.60 per share. This warrant became exercisable on September 29, 2001, and will remain exercisable until September 29, 2008. The warrant was recorded at a fair market value of $2,206,234 based on the Black- Scholes option-pricing model, and was recorded as a component of the cost of the acquired technology.

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The Company also issued a warrant to an unaffiliated third party to acquire 150,000 shares of common stock as a finder’s fee in connection with the Motorola transaction. This warrant was granted with an exercise price of $21.60 per share and is exercisable immediately and will remain exercisable until September 29, 2007. This warrant was accounted for at its fair value based on the Black-Scholes option pricing model and $2,206,234 was recorded as a component of the cost of the acquired technology. The Company used the following assumptions in the Black-Scholes option pricing model for the 300,000 warrants issued in connection with this transaction: (1) 6.3% risk-free interest rate, (2) expected life of seven years, (3) 60% volatility and (4) zero expected dividend yield. In addition, the Company incurred $25,750 of direct cash transaction costs that have been included in the cost of the acquired technology. In total, the Company recorded an intangible asset of $15,469,468 for the technology acquired from Motorola (Note 2).

The Company is required under the License Agreement to pay Motorola based on gross revenues earned by the Company for its sales of OLED products or components, or from its sublicensees for their sales of OLED products or components, whether or not these products or components are based on inventions claimed in the patent rights licensed from Motorola. Moreover, the Company was required to pay Motorola minimum royalties of $150,000 for the two-year period ended on December 31, 2002, and $500,000 for the two-year period ended on December 31, 2004. The Company is also required to pay Motorola minimum royalties of $1,000,000 for the two-year period ending on December 31, 2006. All royalty payments may be made, at the Company’s discretion, in either all cash or up to 50% in shares of the Company’s common stock and the remainder in cash. The number of shares of common stock used to pay the stock portion of the royalty payment is equal to the amount to be paid in stock divided by the average daily closing price per share of the Company’s common stock over the 10 trading days ending two business days prior to the date the stock is issued.

For the two-year period ending on December 31, 2004, the Company issued to Motorola 35,516 shares of the Company’s common stock, valued at $249,997, and paid Motorola $250,003 in cash to satisfy the minimum royalty obligation of $500,000. Since the minimum royalty obligation exceeded actual royalties for the six months ended June 30, 2006 and for the year ended December 31, 2005, the Company accrued $250,000 and $500,000, respectively, in royalty expense.

5.	EQUITY AND CASH COMPENSATION UNDER THE PPG AGREEMENTS

On October 1, 2000, the Company entered into a five-year Development and License Agreement (“Development Agreement”) and a seven-year Supply Agreement (“Supply Agreement”) with PPG Industries, Inc. (“PPG”). Under the Development Agreement, a team of PPG scientists and engineers assisted the Company in developing its proprietary OLED materials and supplied the Company with these materials for evaluation purposes. Under the Supply Agreement, PPG supplied the Company with its proprietary OLED materials that were intended for resale to customers for commercial purposes.

For the period from inception of the Development Agreement through December 2004, the Company issued shares of its common stock and warrants to acquire its common stock to PPG on an annual basis in consideration of the services provided under the agreement. The consideration to PPG for these services was determined by reference to an agreed-upon annual budget and was subject to adjustment based on costs actually incurred for work performed during the budget period. The specific number of shares of common stock and warrants issued to PPG was determined based on the average closing price of the Company’s common stock during a specified period prior to the start of the budget period. In January 2003, the Company and PPG amended the Development Agreement, providing for additional consideration to PPG for additional services to be provided under that agreement, which services were paid for in cash. All materials provided by PPG under the Supply Agreement were also paid for in cash.

In December 2004 and again in March 2005, the Company and PPG amended both the Development Agreement and the Supply Agreement to alter the charges and method of payment for services and materials provided by PPG under both agreements during 2005. Under the amended Development Agreement, the Company compensated PPG on a cost-plus basis for the services provided during each calendar quarter. The Company was required to pay for some of these services in cash and for other of the services in common stock. Payment for up to 50% of the remaining services was able to be paid, at the Company’s sole discretion, in cash or shares of common stock, with the balance payable in all cash. The actual number of shares of common stock issuable to PPG was determined based on the average closing price for the Company’s common stock during a specified period prior to the end of that quarter. If, however, this average closing price was less than $6.00, the Company was required to compensate PPG in all cash. The Company recorded these expenses to research and development as they were incurred. Under the amended Development Agreement, the Company was no longer required to issue warrants to PPG.

Under the amended Supply Agreement, the Company also compensated PPG on a cost-plus basis for services and materials provided during each calendar quarter of 2005. The Company was required to pay for all materials and for some of these services in cash. Payment for up to 50% of the remaining services was able to be paid, at the Company’s sole discretion, in cash or shares of common stock, with the balance payable in all cash. Again, the specific number of shares of common stock issuable to PPG was determined based on the average closing price for the Company’s common stock during a specified period prior to the end of that quarter. If, however, this average closing price was less than $6.00, the Company was required to compensate PPG in all cash.

On July 29, 2005, the Company entered into an OLED Materials Supply and Service Agreement with PPG. This Agreement superseded and replaced in their entireties the amended Development and Supply Agreements effective as of January 1, 2006, and extended the term of the Company’s existing relationship with PPG through December 31, 2008. Under the new agreement, PPG has continued to assist the Company in developing its proprietary OLED materials and supplying the Company with those materials for evaluation purposes and for resale to its customers. The financial terms of the new agreement are substantially similar to those of the amended Development and Supply Agreements, and include a requirement that the Company pay PPG in a combination of cash and the Company’s common stock.

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On April 19, 2006, the Company issued 1,957 shares of common stock to PPG based on a final accounting for actual costs incurred by PPG under the Development Agreement for the year ended December 31, 2005. Accordingly, the Company accrued $22,515 of additional research and development expense as of December 31, 2005, based on the fair value of these additional shares as of the end of 2005.

On April 19, 2006 and April 20, 2005, the Company issued to PPG 121,141 and 207,893 shares of the Company’s common stock, respectively, as consideration for services provided by PPG under the applicable agreement(s) during the six-month periods ended June 30, 2006 and 2005. The Company recorded a charge of $1,656,791 and $1,758,432 to research and development expense, respectively, for these shares. The charges were determined based on the fair value of the Company’s common stock as of the end of each period. In addition, in October 2006, the Company will be required to issue an additional 3,660 shares of its common stock to PPG based on a final accounting for actual costs incurred by PPG under the amended Development Agreement for the six-month period ended June 30, 2006. Accordingly, the Company accrued $50,878 of additional research and development expense for the six-month period ended June 30, 2006. The Company also recorded $727,496 and $240,826 to research and development for the cash portion of the work performed by PPG during the six-month periods ended June 30, 2006 and 2005, respectively.

Also, in accordance with the agreements with PPG, the Company is required to reimburse PPG for its raw materials and conversion costs for all development chemicals produced on behalf of the Company. The Company recorded $98,516 and $117,406 in research and development expenses related to these costs during the six-month periods ended June 30, 2006 and 2005, respectively.

Through the end of 2006, the Company is required under its agreements with PPG to grant options to purchase the Company’s common stock to PPG employees performing development services for the Company, in a manner consistent with that for issuing options to its own employees. Subject to certain contingencies, these options vest one year following the date of grant and expire 10 years from the date of grant.

On December 30, 2005 and January 18, 2005, the Company granted to PPG employees performing development services under the Development Agreement options to purchase 31,500 and 30,500 shares, respectively, of the Company’s common stock at exercise prices of $10.51 and $8.14, respectively. In April 2006, the Company hired several PPG employees as full-time employees of the Company. As a result of these hirings, the Company accelerated the vesting of 18,500 of the options granted on December 30, 2005. Accordingly, the Company recorded $225,882 in research and development costs related to these options for the period ended June 30, 2006. The Company also recorded $72,428 in research and development costs for the remaining 13,000 options for the period ended June 30, 2006. During the period ended June 30, 2005, the Company recorded $126,234 in research and development costs related to the options granted on January 18, 2005.

The Company determined the fair value of the options earned during the periods ended June 30, 2006 and 2005 using the Black-Scholes option-pricing model with the following assumptions: (1) risk free interest rate of 4.39-5.07% and 4.21%, respectively, (2) no expected dividend yield, (3) contractual life of 10 years and (4) expected volatility of 77.18-77.59% and 79.95%, respectively.

6.	SHAREHOLDERS’ EQUITY

	Preferred Stock, Series A			Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Equity

	Shares	Amount		Shares	Amount

BALANCE, JANUARY 1, 2006	200,000	$	2,000	29,545,471	$	295,455	$	187,609,407	$	(120,577	)	$	(130,169,822	)	$	57,616,463
Exercise of common stock options and warrants (A)	—		—	1,282,705		12,826		5,260,474		—			—			5,273,300
Issuance of common stock to Employees (B)	—		—	123,922		1,239		837,615		—			—			838,854
Issuance of common stock to Board of Directors And Scientific Advisory Board (B)	—		—	53,766		538		587,662		—			—			588,200
Issuance of common stock and options in connection with Development Agreement (C)	—		—	121,142		1,212		1,976,404		—			—			1,977,616
Issuance of common stock options to non-employees	—		—	—		—		105,011		—			—			105,011
Compensation expense under SFAS No. 123R	—		—	—		—		430,882		—			—			430,882
Unrealized loss on available-for-sales securities	—		—	—		—		—		(1,058	)		—			(1,058	)
Net loss	—		—	—		—		—		—			(7,834,691	)		(7,834,691	)

BALANCE, JUNE 30, 2006	200,000	$	2,000	31,127,006	$	311,270	$	196,807,455	$	(121,635	)	$	(138,004,513	)	$	58,994,577

(A)	During the period ended June 30, 2006, the Company issued 1,031,535 shares of common stock relating to the exercise of common stock warrants, resulting in cash proceeds of $3,383,618.

(B)	These amounts were earned in a previous period and charged to expense when earned, but issued in 2006.
(C)	In accordance with the PPG Development Agreement (Note 5), the Company recognized the pro-rata portion of the options to purchase shares of the Company’s common stock that were granted to certain PPG employees for the period ended June 30, 2006.

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7.	STOCK-BASED COMPENSATION

On January 1, 2006, the Company adopted SFAS No. 123R utilizing the modified prospective transition method. SFAS No. 123R requires employee stock options to be valued at fair value on the date of grant and charged to expense over the applicable vesting period. Under the modified prospective method, compensation expense is recognized for all share based payments issued on or after January 1, 2006, and for all share payments issued to employees prior to January 1, 2006 that remain unvested. In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R. The adoption of SFAS No. 123R did not change the Company’s accounting for share based payments issued to non-employees.

Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method of accounting for stock-based employee compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Under the intrinsic value method, no compensation expense was recognized in association with the Company’s stock awards. The following table illustrates the effect on net loss and net loss per share if the Company had applied SFAS No. 123R for the three and six months ended June 30, 2005, using the Black-Scholes option-pricing model.

	Six Months Ended June 30, 2005			Three Months Ended June 30, 2005

Net loss attributable to common shareholders: As reported	$	(8,180,882	)	$	(3,189,980	)
Add stock-based employee compensation expense included in reported net income, net of tax		913,269			371,242
Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax		(3,477,501	)		(631,868	)

Pro forma	$	(10,745,114	)	$	(3,450,606	)
Basic and diluted net loss per share:
As reported	$	(0.29	)	$	(0.11	)
Pro forma		(0.38	)		(0.12	)

Equity Compensation Plan

In 1995, the Board of Directors of the Company adopted a Stock Option Plan (the “1995 Plan”), under which options to purchase a maximum of 500,000 shares of the Company’s common stock were authorized to be granted at prices not less than the fair market value of the common stock on the date of the grant, as determined by the Compensation Committee of the Board of Directors. Through June 30, 2006, the Company’s shareholders have approved increases in the number of shares reserved for issuance under the 1995 Plan to 7,000,000, and have extended the term of the plan through 2015. The 1995 Plan was also amended and restated in 2003 and is now called the Equity Compensation Plan. The Equity Compensation Plan provides for the granting of incentive and nonqualified stock options, stock, stock appreciation rights and performance units to employees, directors and consultants of the Company. Stock options are exercisable over periods determined by the Compensation Committee, but for no longer than 10 years from the grant date.

SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. In 2006 and 2005, the fair value of the grant was estimated using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model considers assumptions related to volatility, risk-free interest rate and dividend yield. Expected volatility was based on the Company’s historical daily stock price volatility. The risk-free rate was based on the average U.S. Treasury security yields in the quarter of the grant. The dividend yield was based on historical information. The expected life was determined from historical information and management’s estimate. The Black-Scholes model incorporated exercise and post vesting forfeiture assumptions based on analysis of historical data. The following table provides the assumptions used in determining the fair value of the stock-based awards for the three and six months ended June 30, 2006 and June 30, 2005, respectively:

	2006		2005

Dividend yield rate	0	%	0	%
Expected volatility	79.36-79.94	%	79.78-86.20	%
Risk-free interest rates	4.56-5.02	%	3.78-4.28	%
Expected life	7 Years		7 Years

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Stock Option Activity

The following table summarizes the stock option activity during the six months ended June 30, 2006 for all grants under the Equity Compensation Plan:

	Shares		Weighted Average Exercise Price

Outstanding at January 1, 2006	4,046,074		$	9.26
Granted	96,750			13.51
Exercised	(251,170	)		7.52
Cancelled	(27,000	)		10.92

Outstanding at June 30, 2006	3,864,654			9.47

Ending vested and expected to vest	3,852,146			9.46

Exercisable at June 30, 2006	3,689,654			9.33

The following table summarizes the status of unvested options at June 30, 2006 and the changes during the six months ended June 30, 2006:

	Shares		Weighted Average Grant Date Fair Value

Unvested options at January 1, 2006	176,500		$	8.78
Granted	96,750			10.90
Vested	(71,250	)		9.73
Cancelled	(27,000	)		11.35

Unvested options at June 30, 2006	175,000			9.74

Stock Options Outstanding and Exercisable

	Outstanding						Exercisable

Exercise Price	Number of Options Outstanding at June 30, 2006	Weighted- Average Remaining Contractual Life (Years)	Weighted- Average Exercise Price		Aggregate Intrinsic Value (A)		Number of Options Outstanding at June 30, 2006	Weighted- Average Remaining Contractual Life (Years)	Weighted- Average Exercise Price		Aggregate Intrinsic Value (A)

$ 3.75-5.45	1,010,785	4.04	$	4.75	$	8,652,054	1,010,785	4.04	$	4.75	$	8,652,054
5.88-8.56	975,183	6.82		8.26		4,925,214	956,183	6.80		8.27		4,823,244
9.04-10.51	1,086,228	7.02		10.13		3,454,095	1,046,228	6.97		10.14		3,316,145
10.62-17.26	664,208	7.59		15.04		93,518	548,208	7.34		15.25		59,518
17.43-21.69	63,750	3.89		18.40		—	63,750	3.89		18.40		—
24.38	64,500	3.98		24.38		—	64,500	3.98		24.38		—

$ 3.75-24.38	3,864,654	6.19	$	9.47	$	17,124,881	3,689,654	6.07	$	9.33	$	16,850,961

(A)	The difference between the stock option’s exercise price and the closing price of the common stock at June 30, 2006.

The total intrinsic value of stock awards exercised during the six months ended June 30, 2006 and 2005 were $1,771,333 and $182,210, respectively.

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The impact related to stock-based compensation for the six months ended June 30, 2006 is shown in the table below:

Stock-based compensation expense	$	430,882
Increase in loss per share of common stock, basic and diluted	$	0.01
Cash received from stock options exercised	$	1,889,682

At June 30, 2006, there was $1,269,618 of total unrecognized compensation cost from stock-based compensation arrangements granted under the Equity Compensation Plan, which is related to non-vested options. The compensation expense is expected to be recognized over a weighted-average period of approximately 1.47 years.

8.	COMMITMENTS AND CONTINGENCIES

Under the terms of the Company’s License Agreement with Motorola, the Company agreed to make minimum royalty payments to Motorola through 2006. See Note 4 for further explanation.

In accordance with the April 2002 amendment to the 1997 Research Agreement with Princeton University, the Company is required to make annual payments to Princeton University. Under the 2006 Research Agreement with USC, the Company is obligated to make certain payments to USC. See Note 3 for further explanation.

Under the terms of the 1997 Amended License Agreement, the Company is required to make minimum royalty payments to Princeton University. See Note 3 for further explanation.

9.	CONCENTRATION OF RISK

Two customers accounted for 47% and 14% of consolidated revenue for the six months ended June 30, 2006 and 2005, respectively. Accounts receivable from these customers was $1,456,675 at June 30, 2006.

Revenues from outside of North America represented 75% and 51% of the consolidated revenue for the six months ended June 30, 2006 and 2005, respectively.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes above.

CAUTIONARY STATEMENT

CONCERNING FORWARD-LOOKING STATEMENTS

This discussion and analysis contains some “forward-looking statements.” Forward-looking statements concern our possible or assumed future results of operations, including descriptions of our business strategies and customer relationships. These statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “seek,” “will,” “may” or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate in these circumstances.

As you read and consider this discussion and analysis, you should not place undue reliance on any forward-looking statements. You should understand that these statements involve substantial risk and uncertainty and are not guarantees of future performance or results. They depend on many factors that are discussed further in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, as supplemented by any disclosures in Item 1A. of Part II below. Changes or developments in any of these areas could affect our financial results or results of operations, and could cause actual results to differ materially from those contemplated in the forward-looking statements.

All forward-looking statements speak only as of the date of this report or the documents incorporated by reference, as the case may be. We do not undertake any duty to update any of these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

OVERVIEW

We are a leader in the research, development and commercialization of organic light emitting diode, or OLED, technologies for use in a variety of flat panel display and other applications. Since 1994, we have been exclusively engaged, and expect to continue to be exclusively engaged, in funding and performing research and development activities relating to OLED technologies and materials, and in attempting to commercialize these technologies and materials. Our revenues are generated through contract research, sales of development and commercial chemicals, technology development and evaluation agreements and license fees. In the future, we anticipate that the revenues from licensing our intellectual property will become a more significant part of our revenue stream.

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While we have made significant progress over the past few years developing and commercializing our family of OLED technologies (PHOLED™, TOLED™, FOLED™, etc.) we have incurred significant losses and will continue to do so until our OLED technologies become more widely adopted by flat panel display manufacturers. We have incurred losses since our inception, resulting in an accumulated deficit of $138,004,513 as of June 30, 2006.

We anticipate fluctuations in our annual and quarterly results of operations due to uncertainty regarding:

•

the timing of our receipt of license fees and fees for future technology development and evaluation;

•

the timing and volume of sales of our OLED materials for both commercial usage and evaluation purposes;

	•	the timing of our customers’ introduction and discontinuance of OLED products;
	•	the timing and magnitude of expenditures we may incur in connection with our ongoing research and development activities;

and

•

the timing and financial consequences of our formation of new business relationships and alliances.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

We had a net loss of $4,312,651 (or $0.14 per diluted share) for the quarter ended June 30, 2006, compared to a net loss of $3,189,980 (or $0.11 per diluted share) for the same period in 2005. The increased loss was primarily due to an increase in total operating costs of $1,387,736.

Our revenues were $3,009,316 for the quarter ended June 30, 2006, compared to $3,011,995 for the same period in 2005.

Our commercial chemical and license fee revenues for the quarter ended June 30, 2006 were $336,365 and $807,185, respectively, compared to $0 and $42,000, respectively, for the corresponding period in 2005. The increases were primarily due to the purchases of our proprietary PHOLED materials by a customer for use in active matrix OLED products intended for sale in Asia and Europe. However, we cannot accurately predict the timing and frequency of such purchases due to the early stage of the OLED industry, and these purchases are likely to end when the current product lifecycle is completed.

The license fee revenue for the period ended June 30, 2006 also included fees recorded as a result of the signing of a patent license agreement with Samsung SDI Co., Ltd. in April 2005 and a cross-license agreement executed with DuPont Displays, Inc. in December 2002. In connection with each of these agreements, we received upfront payments that have been classified as deferred royalties and deferred license fees. The deferred license fees are being recognized as license fee revenue over the life of the agreement with Samsung SDI and over 10 years with DuPont Displays, Inc.

We recognized $667,613 in technology development revenue for the quarter ended June 30, 2006 in connection with four technology development and evaluation agreements entered into in 2005 and 2003, compared to $331,818 for the same period in 2005 in connection with two such agreements. The increase is due to the signing of three new technology development agreements in 2005. The amount and timing of our receipt of fees for technology development and evaluation services is difficult to predict due to the early stage of the OLED industry.

We earned $901,529 in contract research revenue from the U.S. government for the quarter ended June 30, 2006, compared to $1,514,325 for the same period in 2005. During the quarter ended June 30, 2005, we worked on 13 different contracts, six of which we continued to work on during 2006. In addition, we commenced work on three new contracts in the quarter ended June 30, 2006.

We earned $296,624 from sales of developmental chemicals in the quarter ended June 30, 2006, compared to $1,123,852 for the same period in 2005. The decrease was mainly due to a decreased volume of OLED materials purchased for evaluation by potential OLED display manufacturers, including our technology development and evaluation partners. We cannot accurately predict the timing and frequency of such purchases from customers due to the early stage of the OLED industry.

We incurred research and development expenses of $5,416,226 for the quarter ended June 30, 2006, compared to $4,552,047 for the same period in 2005. The increase was due mainly to increased costs relating to new personnel, and increased operating costs for our expanded facility offset to some extent by reductions in costs associated with our agreements with PPG Industries (see Note 5 of the Notes to Consolidated Financial Statements) and patent costs.

General and administrative expenses were $2,234,535 for the quarter ended June 30, 2006, compared to $1,760,402 for the same period in 2005. The increase was mainly due to increased personnel and operating costs for our expanded facility.

Interest income increased to $544,626 for the quarter ended June 30, 2006, compared to $320,930 for the same period in 2005. This was the result of higher rates of return on our invested cash during the quarter compared to the same period in the prior year.

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Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

We had a net loss of $7,834,691 (or $0.26 per diluted share) for the six months ended June 30, 2006, compared to a net loss of $8,180,882 (or $0.29 per diluted share) for the same period in 2005. The decreased loss was primarily due to an increase in total revenue of $1,801,660 and an increase in interest income of $435,923, offset to some extent by an increase in total operating expenses of $1,974,411.

Our revenues were $6,280,722 for the six months ended June 30, 2006, compared to $4,479,062 for the same period in 2005. The increase in revenue was primarily due to increased sales of commercial chemicals, recording of license fees associated with the sale of commercial materials and increased technology development revenue.

Our commercial chemical and license fee revenues for the six months ended June 30, 2006 were $734,844 and $1,738,031, respectively, compared to $31,395 and $115,255, respectively, for the corresponding period in 2005. The increases were primarily due to the purchases of our proprietary PHOLED materials by a customer for use in active matrix OLED products intended for sale in Asia and Europe. However, we cannot accurately predict the timing and frequency of such purchases due to the early stage of the OLED industry, and these purchases are likely to end when the current product lifecycle is completed.

We recognized $1,397,727 in technology development revenue for the six months ended June 30, 2006 in connection with four technology development and evaluation agreements entered into in 2005 and 2003, compared to $581,818 for the same period in 2005 in connection with two such agreements. The increase is due to the signing of three new technology development agreements in 2005. The amount and timing of our receipt of fees for technology development and evaluation services is difficult to predict due to the early stage of the OLED industry.

We earned $1,437,590 in contract research revenue from the U.S. government for the six months ended June 30, 2006, compared to $2,213,380 for the same period in 2005. During the quarter ended June 30, 2005, we worked on 13 different contracts, six of which we continued to work on during 2006. In addition, we commenced work on five new contracts in the six months ended June 30, 2006.

We earned $972,530 from sales of developmental chemicals in the six months ended June 30, 2006, compared to $1,537,214 for the same period in 2005. The decrease was mainly due to a decreased volume of OLED materials purchased for evaluation by potential OLED display manufacturers, including our technology development and evaluation partners. We cannot accurately predict the timing and frequency of such purchases from customers due to the early stage of the OLED industry.

We incurred research and development expenses of $10,417,298 for the six months ended June 30, 2006, compared to $9,157,372 for the same period in 2005. The increase was due mainly to increased costs relating to new personnel, increased operating costs for our expanded facility and increased costs associated with our agreements with PPG Industries (see Note 5 of the Notes to Consolidated Financial Statements), offset to some extent by a reduction in patent costs.

General and administrative expenses were $4,232,227 for the six months ended June 30, 2006, compared to $3,655,265 for the same period in 2005. The increase was mainly due to increased personnel and operating costs for our expanded facility.

Interest income increased to $1,019,016 for the six months ended June 30, 2006, compared to $583,093 for the same period in 2005. This was the result of higher rates of return on our invested cash during the six months compared to the same period in 2005.

Liquidity and Capital Resources

As of June 30, 2006, we had cash and cash equivalents of $25,194,983, short-term investments of $21,078,855 and investments in certificates of deposit and other liquid instruments with an original maturity of more than one year of $1,557,707, for a total of $47,831,545. This compares to cash and cash equivalents of $30,654,249, short-term investments of $17,190,242 and investments in certificates of deposit and other liquid instruments with an original maturity of more than one year of $1,828,708, for a total of $49,673,199, as of December 31, 2005. The overall decrease in cash and cash equivalents and short-term and long-term investments of $1,841,654 was primarily due to cash usage for operating activities and purchases of equipment, offset to some extent by cash received from the exercise of common stock options and warrants.

Cash used in operating activities was $5,615,675 for the six months ended June 30, 2006, as compared to $1,984,586 for the same period in 2005. The increase in cash used in operations was mainly due to a reduction of $816,027 in deferred revenue and deferred license fees (which represents cash received in a prior period and recorded as revenue in the current period), an increase of $589,484 in accounts receivable, an increase of $203,435 in other current assets (which represents prepaid expenses) and a reduction of $275,592 in accounts payable and accrued expenses. The overall increase in cash used in investing activities was mainly due to the purchase of equipment as a result of the expansion of our facility. Cash used in operating and investing activities was offset by cash received from the exercise of common stock options and warrants in the amount of $5,273,300.

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Working capital increased to $39,917,124 as of June 30, 2006, from working capital of $38,347,913 as of December 31, 2005. The net increase was due primarily to a reduction in current liabilities during the quarter resulting from the payment of liabilities due on the final phase of construction on our facility in Ewing, New Jersey.

We anticipate, based on our internal forecasts and assumptions relating to our operations (including, among others, assumptions regarding our working capital requirements, the progress of our research and development efforts, the availability of sources of funding for our research and development work, and the timing and costs associated with the preparation, filing, prosecution, maintenance and enforcement of our patents and patent applications), that we have sufficient cash, cash equivalents and short-term investments to meet our obligations through at least the end of 2007.

We believe that potential additional financing sources for us include long-term and short-term borrowings, public and private sales of our equity and debt securities and the receipt of cash upon the exercise of warrants and options. We have an effective shelf registration statement that would enable us to offer, from time to time, up to $44,725,524 of our common stock, preferred stock and other securities, subject to market conditions and other factors.

It should be noted, however, that additional funding may be required in the future for research, development and commercialization of our OLED technologies and materials, to obtain and maintain patents respecting these technologies and materials, and for working capital and other purposes, the timing and amount of which are difficult to ascertain. There can be no assurance that additional funds will be available to us when needed, on commercially reasonable terms or at all.

Critical Accounting Policies

Refer to our Annual Report on Form 10-K for the year ended December 31, 2005 for a discussion of our critical accounting policies. There were no changes in critical accounting policies to date in 2006, other than the adoption of SFAS No. 123R, effective January 1, 2006 (See Note 7).

Contractual Obligations

Refer to our Annual Report on Form 10-K for the year ended December 31, 2005 for a discussion of our contractual obligations. There were no significant changes in contractual obligations to date in 2006, other than the 2006 Research Agreement discussed in Note 3.

Off-Balance Sheet Arrangements

Refer to our Annual Report on Form 10-K for the year ended December 31, 2005 for a discussion of off-balance sheet arrangements. As of June 30, 2006, we had no off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not utilize financial instruments for trading purposes and hold no derivative financial instruments, other financial instruments or derivative commodity instruments that could expose us to significant market risk. Our primary market risk exposure with regard to financial instruments is to changes in interest rates, which would impact interest income earned on investments.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control Over Financial Reporting

During our most recent fiscal quarter, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended June 30, 2006, we issued an aggregate of 332,413 shares of our common stock upon the exercise of outstanding warrants. Among these shares were 121,141 shares issued to PPG Industries for services provided to us under our OLED Materials Supply and Service Agreement with PPG. The warrants had a weighted average exercise price of $8.382 per share. The shares were issued in reliance on the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

(a) We held our 2006 Annual Meeting of Shareholders on June 29, 2006.

(b) Per Instruction 3 to Item 4 of Form 10-Q, no response is required.

(c) The number of votes represented at the annual meeting, in person or by proxy, was 29,307,582. In determining this number, abstentions and shares held by brokers who have notified us that they lack voting authority with respect to any matter (referred to herein as “broker non-votes”) were deemed present. The matters voted upon at the annual meeting and the results of the vote on each such matter are set forth below:

1. Election of Directors . The result of the vote tabulated at the meeting for the election of seven directors is set forth as follows, opposite their respective names:

Name	Number of Votes FOR	Number of Votes WITHHELD	Percentage FOR of Total Votes Cast*

Steven V. Abramson	28,420,803	886,779	97.0
Leonard Becker	29,054,179	253,403	99.1
Elizabeth H. Gemmill	29,006,979	300,603	99.0
C. Keith Hartley	29,067,196	240,386	99.2
Lawrence Lacerte	29,066,763	240,819	99.2
Sidney D. Rosenblatt	28,396,017	911,565	96.9
Sherwin I. Seligsohn	28,392,142	915,440	96.9

* Broker non-votes are not considered votes “cast” with respect to the election of directors.

2. Proposal to Amend the Company’s Equity Compensation Plan . The result of the vote tabulated at the meeting for the ratification and approval of this proposal was as follows:

Number of Votes FOR	Number of Votes AGAINST	Number of ABSTENTIONS	Percentage FOR of Total Votes Cast*

11,205,931	4,160,989	204,558	72.9

* Abstentions and broker non-votes are not considered votes “cast” with respect to this proposal.

(d) Not applicable.

ITEM 5. OTHER INFORMATION

On August 7, 2006, the Compensation Committee of our Board of Directors (the “Committee”) approved the following new base salaries for our executive officers: Sherwin I. Seligsohn, Chairman of the Board and Chief Executive Officer ($270,858); Steven V. Abramson, President and Chief Operating Officer ($447,700); Sidney D. Rosenblatt, Executive Vice President and Chief Financial Officer ($447,700); and Julia J. Brown, Vice President and Chief Technical Officer ($279,812). These new base salaries represent a 5.5% increase over the prior salaries of these individuals. The new base salaries are retroactive to the annual raise dates of these individuals, which are July 1, 2006 for Messrs. Seligsohn, Abramson and Rosenblatt and June 22, 2006 for Dr. Brown. All other terms and conditions of these officers’ employment and compensation arrangements with the Company remain the same.

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ITEM 6. EXHIBITS

The following is a list of the exhibits filed as part of this report. Where so indicated by footnote, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated parenthetically, together with a reference to the filing indicated by footnote.

Exhibit Number		Description

10.1*		Amendment No. 2 to the Amended License Agreement among Princeton University, the University of Southern California, the Regents of the University of Michigan and the Registrant entered into on May 1, 2006.

10.2*		Sponsored Research Agreement between the University of Southern California and the Registrant entered into on May 1, 2006.

31.1*		Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)

31.2*		Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)

32.1**		Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C. Section 1350. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)

32.2**		Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C. Section 1350. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)

*	Filed herewith.

**	Furnished herewith.

Note: Any of the exhibits listed in the foregoing index not included with this report may be obtained, without charge, by writing to Mr. Sidney D. Rosenblatt, Corporate Secretary, Universal Display Corporation, 375 Phillips Boulevard, Ewing, New Jersey 08618.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

	UNIVERSAL DISPLAY CORPORATION
Date: August 9, 2006	By:	/s/ Sidney D. Rosenblatt

		Sidney D. Rosenblatt Executive Vice President and Chief Financial Officer

Exhibit 10.1

Amendment No. 2 to the
AMENDED LICENSE AGREEMENT

by and among

PRINCETON UNIVERSITY,
THE UNIVERSITY OF SOUTHERN CALIFORNIA,
THE REGENTS OF THE UNIVERSITY OF MICHIGAN

and

UNIVERSAL DISPLAY CORPORATION

Dated: January 1, 2006

The Trustees of Princeton University (“PRINCETON”), the University of Southern California (“USC”) and Universal Display Corporation (“Licensee”), having previously entered into an Amended License Agreement effective as of October 9, 1997, as subsequently amended by Amendment No. 1 on August 7, 2003 (the “Agreement”), together with the Regents of the University of Michigan (“MICHIGAN”), intending to be legally bound, do hereby mutually agree to amend the Agreement as follows:

	1. MICHIGAN is hereby added as a party to the Agreement. In all places in the Agreement where USC is referenced said reference shall henceforth be deemed to include both USC and Michigan, except: (1) in the existing recitals on pages 1 and 2 of the Agreement; and (2) in sections 4.6, 4.7 and 15.1 of the Agreement; and (3) in those provisions deleted or amended below.

2. The following new recitals are hereby added to the Agreement, on page 2 following the existing recitals:


		“WHEREAS, Professor Forrest became employed by the University of Michigan (“MICHIGAN”) in January 2006 and is continuing his research in the field of the Technology at that institution;


		WHEREAS, LICENSEE has entered into a new Sponsored Research Agreement with USC, under which LICENSEE is continuing to support basic research in the field of the Technology under the supervision of Professor Thompson at USC and, as a subcontractor to USC, Professor Forrest at MICHIGAN (the “New Sponsored Research Agreement”); and


		WHEREAS, PRINCETON and MICHIGAN have entered into an Interinstitutional Agreement, that provides for any inventions under the New Sponsored Research Agreement to be subject to this License Agreement, and further provides that PRINCETON shall manage such inventions on behalf of USC and MICHIGAN.”

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	3. Paragraph 1.4 is hereby deleted in its entirety and replaced with the following:

1.4 “Patent Rights” shall mean (i) the United States and foreign patents and patent applications set forth in Appendix B attached hereto and made a part hereof; (ii) any United States and foreign patents and patent applications arising out of the Sponsored Research Agreement and/or the New Sponsored Research Agreement (including, without limitation, work performed at MICHIGAN under the subcontract with USC and/or under the Sponsored Research Agreement prior to execution of the subcontract), including inventions conceived or discovered thereunder; (iii) the United States patents and foreign patents, including utility models and patents of importation and addition, issuing from said United States and foreign patent applications, or later-filed foreign applications based upon any of said United States patents and applications; and (iv) any continuations, continuations-in-part divisions, reissues, or extensions of any of the foregoing.


	4. Paragraph 1.5 is hereby deleted in its entirety and replaced with the following:


		1.5 “Licensed Product(s)” shall mean any product which:


		(a) is covered in whole or in part by (i) a pending claim contained in the Patent Rights in the country in which the product is made, used or sold, or (ii) a valid and unexpired claim contained in the Patent Rights in the country in which the product is made, used or sold;


		(b) is manufactured by using a process which is covered in whole or in part by (i) a pending claim contained in the Patent Rights in the country in which the Licensed Process is used, or (ii) a valid and unexpired claim contained in the Patent Rights in the country in which the Licensed Process is used; or


		(c) is used according to a method which is covered in whole or in part by a valid and unexpired claim contained in the Patent Rights in the country in which the method is used.


		All unexpired claims of issued patents shall be considered valid unless and until a court of competent jurisdiction issues an unappealed or unappealable final order to the contrary.


	5. Paragraph 1.6 is hereby deleted in its entirety and replaced with the following:


		1.6 “Licensed Process(es)” shall mean a process or method which is covered in whole or in part by (i) a pending claim contained in the Patent Rights , or (ii) a valid and unexpired claim contained in the Patent Rights in the country in which the process or method is used.


	6. A new paragraph 2.5 is hereby added to Article II as follows:

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		2.5 MICHIGAN, USC and PRINCETON reserve the right to practice the Patent Rights arising from inventions first conceived prior to January 1, 2006, for educational purposes and for internal research (including clinical) directed by the Principal Investigators (as defined in the New Sponsored Research Agreement), including any such internal research conducted by or in collaboration with other researchers or students at these institutions, provided that such research is not funded by another commercial entity. In addition, MICHIGAN, USC and PRINCETON reserve the right to practice the Patent Rights arising from inventions first conceived after January 1, 2006, for educational purposes and for internal research (including clinical) directed by researchers or students at these institutions, provided that such research is not funded by another commercial entity, and provided further that this reservation shall not imply any expansion of the reserved right to practice the Patent Rights described in the preceding sentence.


	7. Paragraphs 4.2 (b) and 4.2(c) shall not entitle MICHIGAN to any stock or warrants therefor, in LICENSEE.

8. Paragraphs 6.1 through 6.4 are hereby deleted in their entirety and replaced with the following:


		6.1 LICENSEE may designate by notice to PRINCETON, or to the patent attorneys after consultation with PRINCETON, countries where applications within Patent Rights shall be filed and prosecuted, and/or issued patents within the Patent Rights shall be maintained, which may include the United States or any other country. PRINCETON shall communicate with USC and MICHIGAN pursuant to their Interinstitutional Agreement. LICENSEE agrees to pay for all reasonable and necessary out-of-pocket expenses incurred in the preparation, filing, prosecution, maintenance, renewal and continuation of Patent Rights in said designated countries, including all taxes, official fees and attorneys’ fees. The patent law firm shall be reasonably acceptable to LICENSEE, PRINCETON, USC, and MICHIGAN. PRINCETON and, as to Patent Rights arising out of the New Sponsored Research Agreement, MICHIGAN shall be clients in the relationship with such law firm and may provide instructions to such law firm regarding the scope and content of the Patent Rights, subject to the right of LICENSEE to request PRINCETON or MICHIGAN to instruct such law firm, or instruct the law firm directly after consultation with PRINCETON or MICHIGAN, to cover any additional matters as LICENSEE may reasonably desire to assure that such Patent Right covers all reasonable items of commercial interest and importance. PRINCETON and MICHIGAN will not unreasonably refuse requests of LICENSEE. PRINCETON and LICENSEE each shall receive copies of all correspondence with respect to such preparation, filing, renewal and continuation of Patent Rights, and shall consult with each other regarding all such matters and the costs associated herewith. The rights of PRINCETON, USC and MICHIGAN are subject to the Interinstitutional Agreement.

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		6.2 LICENSEE may elect in writing to be released from its obligations under this Agreement for any Patent Rights in a particular country after initial patent filing costs have been paid, upon thirty days’ notice of election being given to PRINCETON, in which event it shall thereafter have no obligation to reimburse PRINCETON, USC or MICHIGAN for any subsequent expenses relating to said Patent Right in such country, nor shall LICENSEE thereafter have any further right in said Patent Right in such country.


		6.3 All inventions conceived or discovered under the Sponsored Research Agreement or the New Sponsored Research Agreement, by PRINCETON, USC or MICHIGAN, or jointly by any of them, shall automatically become subject to this License Agreement. PRINCETON, USC and MICHIGAN shall use reasonable efforts to ensure that applications within the Patent Rights are promptly filed and prosecuted.


		6.4 LICENSEE has the right to make of record in the Patent Office for each patent or application in the Patent Rights that it is the exclusive licensee of such rights.


	9. LICENSEE hereby expressly acknowledges that Michigan is entitled to be indemnified by LICENSEE to the full extent that each of PRINCETON and USC is entitled to be so indemnified under Article 10.2 of the Agreement.

	10. Paragraph 9.5 is hereby amended by adding “reasonably” prior to “possible.”

	11. Paragraph 10.3 is hereby amended by substituting “LICENSEE” for “PRINCETON” where it appears in quotation marks in the seventh line of said paragraph.

12. For purposes of the Agreement, MICHIGAN’s business address and address for notices under Paragraph 14.1 shall be as follows:


			Office of Technology Transfer

University of Michigan

3003 S. State Street, Suite 2071

Ann Arbor, MI 48109-1280

Attn: Director


	13. The following new Section 15.2 is hereby added to the Agreement:


		15.2 PRINCETON, USC, and MICHIGAN have entered into an Interinstitutional Agreement, incorporated herein by reference, whereby, inter-alia, PRINCETON shall be the manager of this License Agreement and USC shall be the manager of the New Sponsored Research Agreement, and LICENSEE shall interact with PRINCETON and USC respectively, on behalf of themselves as well as MICHIGAN, on all matters respecting those agreements.

	14. Except as specifically modified by this Amendment No. 2, all of the provisions of the Agreement are hereby ratified and confirmed to be in full force and effect, and shall remain in full force and effect.

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IN WITNESS WHEREOF, the parties, by their duly authorized representatives, have entered into this Amendment No. 2 effective as of the date first set forth above.

The Trustees of Princeton University		The University of Southern California


By:	/s/ John Ritter	By:	/s/ Todd Dickey


Name:	John Ritter	Name:	Todd R. Dickey


Title:	Director, OTL	Title:	Sr. V.P. Administration &

			General Counsel


Date:	May 1, 2006	Date:	May 2, 2006

The Regents of the University of Michigan		Universal Display Corporation


By:	/s/ Kenneth J. Nisbet	By:	/s/ Steven V. Abramson


Name:	Kenneth J. Nisbet	Name:	Steven V. Abramson


Title:	Executive Director	Title:	President

	UM Technology Transfer


Date:	April 28, 2006	Date:	May 2, 2006

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Exhibit 10.2

SPONSORED RESEARCH AGREEMENT
between
Universal Display Corporation
and
The University of Southern California

This Sponsored Research Agreement (this “ Agreement ”) is entered into effective as of May 1, 2006 (the “ Effective Date ”), by and between Universal Display Corporation (“ UDC ”) and the University of Southern California (“ USC ”).

RECITALS

WHEREAS, UDC desires to fund USC’s performance of, and USC desires to perform, certain research activities on the terms and conditions set forth herein; and

WHEREAS, it is understood and agreed that certain of the research activities will be performed by the University of Michigan (“ Michigan ”) under a subcontract agreement to be entered into between USC and Michigan.

NOW THEREFORE, each of the parties hereto, intend to be legally bound, hereby agrees as follows:

Article 1 Nature of the Research

USC shall conduct and facilitate Michigan’s conduct of the research program described in the Work Plan and Appendix attached hereto as Exhibit A (the “ Research ”). No other commercial entity shall fund the Principal Investigators’ conduct of the same or substantially similar research activities without UDC’s prior written consent. In addition, the Principal Investigators will not collaborate with personnel outside of USC and Michigan in performing the Research without UDC’s prior written consent, which shall not be unreasonably withheld. Nothing in this Agreement shall be construed to limit the freedom of USC or Michigan personnel who are not involved in performance of the Research from engaging in similar research activities independently under other grants, contracts or agreements with parties other than UDC.

Article 2 Principal Investigators

Performance of the Research by USC shall be directed by Professor Mark E. Thompson (the “ USC Principal Investigator ”), and through a subcontract with Michigan by Professor Stephen R. Forrest (the “ Michigan Principal Investigator ”) collectively with the USC Principal Investigator, (the “ Principal Investigators ”). The Principal Investigators shall coordinate their performance of the Research with Dr. Julia J. Brown or her designated replacement (the “ UDC Program Manager ”), who is responsible for overseeing the Research under this Agreement. The Principal Investigators shall devote appropriate proportions of their time and effort to performance of the Research and shall make themselves reasonably available for meetings and conferences with the UDC Program Manager in order to discuss the progress and results of the Research and any issues or concerns in relation thereto. Any replacement or temporary substitution for the Principal Investigators shall be subject to the prior approval of UDC, such approval not to be unreasonably withheld.

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Article 3 Period of Performance

The period for performance of the Research shall commence on the Effective Date, and shall continue for a period of three (3) years thereafter. At the end of such period, this Agreement shall expire unless extended upon the mutual written agreement of the parties.

Article 4 Reports and Other Deliverables

The Principal Investigators shall provide UDC with such written progress and other reports as are specified in the Work Plan and Appendix, or as may otherwise be reasonably requested by the UDC Program Manager in order to administer this Agreement. In addition, the Principal Investigators shall provide UDC with such other deliverables as are identified in the Work Plan and Appendix, if any, promptly upon their completion and in accordance with the schedule set forth therein.

Article 5 Reimbursement of Costs

In full consideration of USC’s performance of the Research, UDC shall pay for actual work performed according to the Work Plan and Appendix, up to the amounts specified in the Budget attached hereto as Exhibit B . Unless otherwise agreed in writing, the total annual amounts due from UDC hereunder for performance of the Research shall not exceed the maximum annual budgeted amounts in Exhibit B . USC or Michigan shall be solely responsible for any costs and expenses in excess thereof, including any salary and travel costs for the Principal Investigators or any other USC or Michigan personnel performing the Research at their respective institutions.

Article 6 Payments

USC shall invoice UDC for the actual costs incurred in conducting the Research at the end of each quarter during the period for performance. All invoices shall be directed to the UDC point of contact for financial matters, as specified below. UDC shall pay USC all properly invoiced amounts within thirty (30) days following the later of (a) the end of the quarter to which USC’s invoice applies, or (b) receipt of USC’s invoice, in each case subject to UDC’s receipt of any required reports or supporting documentation or data. Payments shall be made by wire transfer or check using USC account information as provided to UDC in writing. Any funds paid to USC in advance for performance of the Research which funds are not expended upon expiraton or termination of this Agreement, including all extensions thereof, shall be promptly repaid to UDC.

Article 7 Records and Audit Rights

USC and Michigan shall maintain reasonable records relevant to the administration and performance of this Agreement, which shall include records to account for all funding provided hereunder. Such records shall be retained for a period of at least three (3) years following the expiration or sooner termination of this Agreement. All such records shall be subject to review and audit by UDC at reasonable times and on reasonable prior notice.

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Article 8 Visiting Personnel

From time to time, certain UDC personnel may visit the USC or Michigan campuses and work in the Principal Investigators’ laboratories to facilitate performance of the Research in accordance with the Work Plan and Appendix. Principal Investigators will reasonably support and assist such UDC personnel in performing said activities, it being understood that a significant goal of both parties is for the results of the Research to be transferred to UDC for use in its business.

Article 9 Equipment

Unless otherwise specifically agreed by the parties, title to any equipment purchased or manufactured by USC or Michigan in the performance of the Research shall vest in USC or Michigan, as applicable. Title to any equipment supplied by UDC to USC or Michigan for conduct of the Research shall remain solely in UDC, and upon conclusion of the Research such equipment shall be returned to or purchased from UDC.

Article 10 UDC Materials

UDC may provide the Principal Investigators or their researchers with certain devices, chemicals or other materials (collectively, “ UDC Materials ”) in order to assist them in their performance of the Research. Such persons shall use all UDC Materials solely to perform the Research, and shall not provide third parties with access to such materials, or use such materials on behalf of third parties, without UDC’s prior written consent.

Article 11 Proprietary/Confidential Information

During the course of this Agreement, the parties may provide each other with certain information, drawings, data, documents or material in writing which the disclosing party has clearly marked or identified in writing as confidential or proprietary in nature (“ Confidential Information ”). The receiving party shall receive and hold Confidential Information of the disclosing party in confidence, use such Confidential Information only to perform its obligations or exercise its rights under this Agreement, and agrees to use its reasonable efforts to prevent unintentional disclosure to third parties of such Confidential Information. Said efforts shall be the same as those the receiving party uses to protect its own similar confidential information, but in no case less than reasonable care. In addition, upon the disclosing party’s request, the receiving party shall return or destroy all of the disclosing party’s Confidential Information.

The receiving party shall not consider information disclosed to it by the disclosing party Confidential Information which: (a) is now public knowledge or subsequently becomes such through no breach of this Agreement; (b) is rightfully in the receiving party’s possession prior to the disclosing party’s disclosure as shown by written records; (c) is disclosed to the receiving party by an independent third party who, to the best of the receiving party’s knowledge, is not under an obligation of confidentiality for such information to the disclosing party; or (d) is independently developed by or for the receiving party without benefit of Confidential Information received from the disclosing party as shown by written records.

Each party acknowledges that the Confidential Information of the other party is owned solely by such party, and that the unauthorized disclosure of such information may cause irreparable harm and significant injury, the degree of which may be difficult to ascertain. Accordingly, each party agrees that the other party will have the right to seek an immediate injunction enjoining any breach of this Article 11, as well as, subject to Article 21 below, the right to pursue any and all other rights and remedies available at law or in equity for such breach.

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Article 12 Technical Data

UDC shall have the right to reference and use in its business all technical data generated through performance of the Research.. The Principal Investigators may share such technical data with third parties outside of USC and Michigan only with UDC’s prior consent, which shall not be unreasonably withheld. Public disclosure and publication of any technical data shall be in accordance with the provisions of Article 14 below.

Article 13 Intellectual Property Rights

The Principal Investigators shall promptly provide UDC with a complete written disclosure for each invention conceived, developed or first reduced to practice by them or their researchers in their performance of the Research (“ Developed IP ”). Title to all Developed IP, including patent rights, shall vest solely in USC and/or Michigan if the Developed IP is conceived, developed and reduced to practice solely by USC and/or Michigan researchers, and shall vest jointly in USC and/or Michigan and UDC if the Developed IP is conceived, developed or reduced to practice jointly by USC and/or Michigan researchers and UDC researchers. The Principal Investigators and their researchers shall assign all of their rights, title and interest in and to Developed IP to USC and/or Michigan in accordance with the foregoing sentence. All USC and/or Michigan Developed IP (or, in the case of jointly-owned Developed IP, USC’s and/or Michigan’s interest therein), including patent rights, shall be deemed exclusively licensed to UDC under and in accordance with the terms of the Amended License Agreement between USC, Michigan and Princeton University dated as of October 9, 1997, as amended. Otherwise, no implied rights or licenses are granted by either party to the other hereunder.

Article 14 Public Disclosure and Publications

All publications and other public disclosure concerning the Research shall be subject to the prior review of UDC, and shall not include any UDC confidential or proprietary information without UDC’s prior written consent. Copies of all publications and presentation materials (including, without limitation, manuscripts submitted for review) shall be delivered to UDC sufficiently in advance of their publication or other public disclosure so as to afford UDC reasonable time to review such materials prior to their release. Upon UDC’s request, the Principal Investigators will delay publication or other public disclosure of any such material for a reasonable period of time, not to exceed sixty (60) days, in order for the parties to file appropriate patent or other applications. Following publication, copies of all published papers and articles shall be submitted to the UDC Program Manager. All publications and other public presentations containing data or results derived from the Research will contain an appropriate acknowledgement of support by UDC.

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Article 15 Publicity and Use of Names

Neither party will use the name of the other in connection with any products, advertisements, promotional literature or press releases without the prior written permission of the other party, which permission shall not be unreasonably withheld. Notwithstanding the foregoing, each party shall be free to publicize the existence of this Agreement and the basic nature of the relationship of the parties and the Research being performed hereunder. In addition, UDC shall be permitted to disclose such terms of and information pertaining to this Agreement as may be required in its public filings with the U.S. Securities and Exchange Commission.

Article 16 Disclaimer of Warranties; Limitation of Liability

USC and Michigan make no warranties to UDC, express or implied, as to any matter concerning this Agreement, including, without limitation, the condition of the Research or any inventions(s) or product(s), whether tangible or intangible, conceived, discovered, or developed under this Agreement; or the ownership, merchantability, or fitness for a particular purpose of the research or any such invention or product. USC and Michigan shall not be liable to UDC for any direct, consequential, or other damages suffered by any licensee or any others resulting from the use of the Research results or any invention or product derived therefrom. UDC shall not be liable for any bodily injury or property damage to USC or Michigan, or any of their researchers, based on their performance of the Research.

Except as specified elsewhere in this agreement, USC and Michigan make no warranties for any purpose whatsoever, express or implied, as to the project or the results of the project, including the merchantability or fitness for a particular purpose of the project or the results of the project under this agreement.

To the maximum extent permitted by law, in no event will either party be responsible for any incidental damages, consequential damages, exemplary damages of any kind, lost goodwill, lost profits, lost business and/or any indirect economic damages whatsoever regardless of whether such damages arise from claims based upon contract, negligence, tort (including strict liability or other legal theory), a breach of any warranty or term of this agreement, and regardless of whether a party was advised or had reason to know of the possibility of incurring such damages in advance.

Additionally, USC and Michigan’s total liability under this agreement shall not be in excess of the total amount of commitment paid by UDC to USC and Michigan respectively under this Agreement.

UDC agrees that it will not rely solely upon technical information provided by USC and Michigan or the Principal Investigators in developing any invention or product, but will independently test, analyze and evaluate all inventions and products prior to manufacture and distribution of such inventions and products.

Neither the Principal Investigators, UDC, nor any other person is authorized to give any such warranty in the name of or on behalf of USC of Michigan.

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Article 17 Indemnification

UDC agrees to indemnify and hold harmless USC, Michigan and their respective employees, trustees, officers and agents from and against any losses, claims, damages, or liabilities of any kind arising from the negligent or willful acts or omissions of UDC personnel in conducting any activities under this Agreement, including, without limitation, the negligent or willful acts or omissions of any UDC personnel visiting and/or working in the Principal Investigators’ laboratories, except to the extent that such losses, claims, damages, or liabilities arise, in whole or in part, from the gross negligence or willful misconduct of USC, Michigan or their researchers.

UDC warrants that at its sole cost and expense it maintains in effect a policy or program of comprehensive general liability insurance or self-insurance on an occurrence made basis in single limit coverage of not less than Two Million Dollars ($2,000,000) per incident and Two Million Dollars ($2,000,000) annual aggregate for death, bodily injury, illness or property damage to support the indemnification obligations assumed herein. Such policy shall name USC as an additional insured and shall provide for not less than thirty (30) days prior written notice before any cancellation or material change in coverage shall be effective. A Certificate evidencing the comprehensive general liability policy shall be delivered to USC upon request.

Article 18 Termination and Survival


(a) If the USC Principal Investigator is unable or unwilling to continue to serve in such capacity and the parties, despite their reasonable efforts, are unable to agree upon a mutually acceptable successor within a reasonable period of time (not to exceed thirty (30) days), either party may terminate this Agreement immediately upon written notice to the other.

(b) If the Michigan Principal Investigator is unable or unwilling to continue to serve in such capacity and the parties, despite their reasonable efforts, are unable to agree upon a mutually acceptable successor within a reasonable period of time (not to exceed thirty (30) days), USC will terminate the subcontract with Michigan for performance of the Research immediately upon UDC’s written request. In such event, any future Research that was to be performed by the Michigal Principal Investigator shall henceforth be deleted from the Work Plan and Appendix and the Budget and maximum annual amount payable by UDC hereunder shall be reduced accordingly.

(c) Either party may terminate this Agreement on written notice to the other party if the other party materially breaches any of its obligations under this Agreement and fails to cure such breach within thirty (30) days following written notice thereof by the terminating party. However, both parties agree to consult in good faith with each other prior to issuing any such notice of termination in order to determine whether there is a course of action beyond termination that is acceptable to both parties.

(d) Upon any termination of this Agreement, UDC will reimburse USC for all actual costs incurred prior to the effective date of termination, including any costs not yet incurred but which cannot reasonably be avoided) in accordance with the provisions of this Agreement. Notwithstanding the foregoing, the aggregate amounts payable to USC under this Agreement shall not exceed the maximum annual amount that would otherwise have been payable for full performance of the Research.

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(e) Except as may otherwise be expressly agreed in writing, the Principal Investigators and their researchers shall cease all further use of the UDC Materials and UDC Confidential Items upon the expiration or sooner termination of this Agreement.


(f) The provisions of Articles 7, 9-17 and 20-24, together with any other provisions of this Agreement that expressly or by implication should survive its expiration or sooner termination, shall survive such expiration or termination of this Agreement.

Article 19 Subcontracting and Assignment

(a) USC shall enter into a subcontract agreement with Michigan for the performance of such of the Research activities as are to be performed by and under the direction of the Michigan Principal Investigator. Such subcontract agreement shall be consistent with and shall obligate Michigan and the Michigan Principal Investigator to the terms of this Agreement applicable thereto. USC shall provide a copy of the subcontract agreement to UDC upon request. Except as set forth herein, USC may not assign, transfer or subcontract this Agreement, or any portion of the Research, to a third party without the prior written consent of UDC.


(b) UDC may assign this Agreement to an affiliate or to an entity acquiring all or substantially all of UDC’s assets relating to the subject matter of this Agreement, whether by merger, acquisition or otherwise. Such assignee shall be required to expressly assume in writing all obligations of UDC under this Agreement.

(c) Any purported assignment of this Agreement other than as permitted hereunder shall be of no force and effect. Nothing in this Agreement shall confer or be construed as conferring any rights upon any person or entity other than the parties hereto and their respective successors and permitted assigns.

Article 20 Governing Law

This Agreement and the relationship of the parties hereunder shall be interpreted and governed in accordance with the federal laws of the United States of America and the laws of the State of California, without regard to any principles respecting conflicts of law.

Article 21 Dispute Resolution

In the event of a dispute between the parties, the aggrieved party shall notify the other party and provide a detailed description of the alleged problem. The parties agree to use reasonable efforts to resolve such dispute by good faith negotiations and mutual agreement. In the event such informal resolution is not successful within a reasonable period of time, the parties hereby agree to submit any claim or dispute arising out of or relating to the terms of this Agreement to private and confidential arbitration by a single neutral arbitrator in Los Angeles, California. Subject to the terms of this paragraph, the Commercial Arbitration Rules of the American Arbitration Association shall govern the arbitration proceedings. The arbitrator shall be appointed by agreement of the Parties hereto or, if no agreement can be reached, by the American Arbitration Association pursuant to its Rules. The decision of the arbitrator shall be final and binding on all Parties to this Agreement, and judgment thereon may be entered in any court of competent jurisdiction. The costs of the arbitration proceeding, including all attorneys’ fees, shall be paid by the Party against whom the arbitrator rules and the arbitrator shall have the right to award injunctive relief in lieu of or in addition to monetary compensation. This arbitration procedure is intended to be the sole and exclusive method of resolving any claim arising out of or relating to this Agreement; provided, however, that nothing herein shall prevent either party from seeking or obtaining injunctive relief in any court of competent jurisdiction at any time.

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Article 22 Notices

All notices and other communications under this Agreement shall be in writing and shall be addressed and delivered as follows, or to such other address(es) as either party may provide in writing:

For technical and scientific matters, to:

Universal Display Corporation	University of Southern California
375 Phillips Boulevard	Department of Chemistry
Ewing, New Jersey 08618	Los Angeles, California 90089-0744
Attn: Dr. Julia J. Brown	Attn: Professor Mark E. Thompson
Fax No.: (609) 671-0995	Fax No.: (213) 740-8594
Tel No.: (609) 671-0980 x218	Tel No.: (213) 740-6402
E-mail: jjbrown@universaldisplay.com	E-mail: met@usc.edu

For financial matters:

[same as above]	[same as above]
Attn: Katerina Cozza	Attn: Sponsored Projects Accounting
Fax No.: (609) 671-0995	Fax No.: (213) 740-7798
Tel No.: (609) 671-0980 x203	Tel No.: (213)740-5381
E-mail: kcozza@universaldisplay.com	E-mail: cmlee@usc.edu
All other notices:

[same as above]	[same as above]
Attn: Steven V. Abramson	Attn: Vanessa M. Nichols
Fax No.: (609) 671-0995	Fax No.: (213)740-6070
Tel No.: (609) 671-0980 x207	Tel No.: (213)740-7762
E-mail: abramson@universaldisplay.com	E-mail: vnichols@usc.edu

Article 23 Independent Contractors

This Agreement is not intended by the parties to constitute, create, give effect to, or otherwise recognize a joint venture, partnership, or other form of business organization between the parties. Each party hereto shall act as an independent contractor, and neither shall act as an agent of the other for any purpose. Neither party has the authority to assume or create any obligation, express or implied, on behalf of the other.

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Article 24 Miscellaneous

(a) No modifications to this Agreement, including the Work Plan and Appendix, shall be valid unless contained in a writing that is signed by an authorized representative of the party claimed to be bound thereby. Moreover, the failure of either party to enforce, or any delay in enforcing, any right, power or remedy that such party may have under this Agreement shall not constitute a waiver of any such right, power or remedy, or release the other party from any obligations under this Agreement, except by a written document signed by the party against whom such waiver or release is sought to be enforced.

(b) Should any provisions of this Agreement be or become unenforceable, the parties hereto shall in good faith endeavor to substitute for such unenforceable provisions, by mutual consent, one or more enforceable provisions having a sufficiently similar economic effect such that it reasonably can be assumed that the parties would have entered into this Agreement with such enforceable provisions. In case such enforceable provisions cannot be agreed upon within a reasonable period of time, the unenforceability of one or more provisions of this Agreement shall not affect the validity of this Agreement as a whole, unless the unenforceable provisions are of such essential importance to this Agreement that it reasonably can be assumed that the parties would not have entered into this Agreement without them.

(c) This Agreement embodies the entire understanding and agreement of parties and supersedes any prior or contemporaneous understandings and agreements of the parties, whether written or oral, respecting the subject matter hereof. There are no representations, warranties, agreements or understandings between the parties, oral or written, respecting the subject matter of this Agreement that are not fully expressed herein.


(d) This Agreement may be executed in two or more counterparts, all of which shall constitute one and the same instrument. Each such counterpart shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their duly authorized representatives.

Universal Display Corporation		The University of Southern California


By:	/s/ Steven V. Abramson	By:	/s/ Barbara Lewis


Name:	Steven V. Abramson	Name:	Barbara Lewis


Title:	President	Title:	Deputy Director, Department of

			Contracts and Grants


Date:	May 2, 2006	Date:	May 1, 2006





	/s/ Mark E. Thompson		/s/ Stephen Forrest

	Professor Mark E. Thompson		Professor Stephen R. Forrest
	USC Principal Investigator		Michigan Principal Investigator

Date:	May 2, 2006	Date:	May 2, 2006

UDC Confidential

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Exhibit A

Work Plan and Appendix

[separately attached hereto]

UDC Confidential

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Exhibit B

Budget

[separately attached hereto]

UDC Confidential

Exhibit 31.1

CERTIFICATIONS REQUIRED BY

RULE 13a-14(a)/15d-14(a)

I, Sherwin I. Seligsohn, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Universal Display Corporation (the “registrant”) for the quarter ended June 30, 2006;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2006

By:

/s/ Sherwin I. Seligsohn

Sherwin I. Seligsohn

Chairman of the Board and Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS REQUIRED BY

RULE 13a-14(a)/15d-14(a)

I, Sidney D. Rosenblatt, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Universal Display Corporation (the “registrant”) for the quarter ended June 30, 2006;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2006

By:

/s/ Sidney D. Rosenblatt

Sidney D. Rosenblatt

Executive Vice President and Chief Financial Officer

Exhibit 32.1

CERTIFICATIONS REQUIRED BY

RULE 13a-14(b)/15d-14(b) AND 18 U.S.C. SECTION 1350

In connection with the quarterly report of Universal Display Corporation (the “Company”) on Form 10-Q for the quarter ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sherwin I. Seligsohn, Chairman of the Board and Chief Executive Officer of the Company, hereby certify, based on my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 9, 2006

By:

/s/ Sherwin I. Seligsohn

Sherwin I. Seligsohn

Chairman of the Board and Chief Executive Officer

Exhibit 32.2

CERTIFICATIONS REQUIRED BY

RULE 13a-14(b)/15d-14(b) AND 18 U.S.C. SECTION 1350

In connection with the quarterly report of Universal Display Corporation (the “Company”) on Form 10-Q for the quarter ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sidney D. Rosenblatt, Executive Vice President and Chief Financial Officer of the Company, hereby certify, based on my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 9, 2006

By:

/s/ Sidney D. Rosenblatt

Sidney D. Rosenblatt

Executive Vice President and Chief Financial Officer