UNITED
STATES SECURITIES AND EXCHANGE COMMISSION




Washington,
D.C. 20549





Form
10-K





R
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGEACT OF 1934For
      the fiscal year ended December 31, 2008or£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





Commission
file number 001-15751





eMAGIN
CORPORATION


(Exact
name of registrant as specified in its charter)





Delaware
            56-1764501(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      No.)





10500
NE 8th Street,
Suite 1400, Bellevue, Washington 98004


(Address
of principal executive offices)





(425)
749-3600


(Registrant’s
telephone number, including area code)





Securities
registered pursuant to Section 12(b) of the Act:  None





Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value
Per Share





Indicate
by check mark whether the registrant is a well-known seasoned issuer as defined
in Rule 405 of the Securities Act.  Yes £     No
R





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes £     No
R





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 R     No
£





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  £





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  £            Smaller
Reporting Company R




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





As of
June 30, 2008, the aggregate market value of the issued and outstanding common
stock held by non-affiliates of the registrant, based upon the closing price of
the common stock as quoted on the National Association of Securities Dealers
Inc. OTC Bulletin Board of $0.84 was approximately $8.6
million.   For purposes of the above statement only, all
directors, executive officers and 10% shareholders are assumed to be
affiliates.  This determination of affiliate status is not necessarily
a conclusive determination for any other purpose.





Number of
shares of common stock outstanding as of February 28, 2009 was
15,921,113.




DOCUMENTS INCORPORATED BY
REFERENCE














eMAGIN
CORPORATION





FORM
10-K





FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008





INDEX





PagePART
      IItem
      1
              Business
              4Item
      1A
              Risk
      Factors
              12Item
      1B
              Unresolved
      Staff
      Comments
              19Item
      2
              Properties
              19Item
      3
              Legal
      Proceedings
              19Item
      4
              Submission
      of Matters to a Vote of Security
      Holders
              19PART
      IIItem
      5
              Market
      for Registrant’s Common Equity, Related Shareholder Matters and Issuer
      Purchases of Equity Securities
              20Item
      6
              Selected
      Financial
      Data
              22Item
      7
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              23Item
      7A
              Quantitative
      and Qualitative Disclosures About Market
      Risk
              29Item
      8
              Financial
      Statements and Supplementary
      Data
              30Item
      9
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              56Item
      9A
              Controls
      and
      Procedures
              56Item
      9B
              Other
      Information
              57PART
      IIIItem
      10
              Directors,
      Executive Officers, and Corporate
      Governance
              58Item
      11
              Executive
      Compensation
              61Item
      12
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              69Item
      13
              Certain
      Relationships and Related Transactions and Director
      Independence
              71Item
      14
              Principal
      Accounting Fees and
      Services
              72PART
      IVItem
      15
              Exhibits
      and Financial Statement
      Schedules
              72Signatures
              73


2





STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS





In this
annual report, references to "eMagin Corporation," "eMagin," "Virtual Vision,"
"the Company," "we," "us," and "our" refer to eMagin Corporation and its wholly
owned subsidiary, Virtual Vision, Inc.





Except
for the historical information contained herein, some of the statements in this
Report contain forward-looking statements that involve risks and uncertainties.
These statements are found in the sections entitled "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operation,"
and "Risk Factors." They include statements concerning: our business strategy;
expectations of market and customer response; liquidity and capital
expenditures; future sources of revenues; expansion of our proposed product
line; and trends in industry activity generally. In some cases, you can identify
forward-looking statements by words such as "may," "will," "should," "expect,"
"plan," "could," "anticipate," "intend," "believe," "estimate," "predict,"
"potential," "goal," or "continue" or similar terminology. These statements are
only predictions and involve known and unknown risks, uncertainties and other
factors, including, but not limited to, the risks outlined under "Risk Factors,"
that may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. For example, assumptions that could cause actual
results to vary materially from future results include, but are not limited to:
our ability to successfully develop and market our products to customers; our
ability to generate customer demand for our products in our target markets; the
development of our target markets and market opportunities; our ability to
manufacture suitable products at competitive cost; market pricing for our
products and for competing products; the extent of increasing competition;
technological developments in our target markets and the development of
alternate, competing technologies in them; and sales of shares by existing
shareholders. Although we believe that the expectations reflected in the forward
looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Unless we are required to do so under
federal securities laws or other applicable laws, we do not intend to update or
revise any forward-looking statements.








3


PART
I





ITEM 1.
BUSINESS





Introduction





eMagin
Corporation (“eMagin, “we,” “our,” or “us,”) is a leader in OLED (organic light
emitting diode) technology. We design, develop, manufacture, and market OLED on
silicon microdisplays, virtual imaging products which utilize OLED
microdisplays, and related products. We also perform research in the OLED field.
Our virtual imaging products integrate OLED, technology with silicon chips to
produce high-resolution microdisplays smaller than one-inch diagonally which,
when viewed through a magnifier, create virtual images that appear comparable in
size to that of a computer monitor or a large-screen television. Our products
enable our original equipment manufacturer (“OEM”) customers to develop and
market improved or new electronic products. We believe that virtual imaging will
become an important way for increasingly mobile people to have quick access to
high resolution data, work, and experience new more immersive forms of
communications and entertainment.





We
believe our OLED microdisplays offer a number of significant advantages over the
more widely used liquid crystal displays, including greatly increased power
efficiency, less weight, and wider viewing angles. Using our active matrix OLED
technology, many computer and electronic system functions can be built directly
into the OLED microdisplay, resulting in compact, high resolution, power
efficient systems. We have developed our own intellectual property and
accumulated over 6 years of manufacturing know-how to create high performance
OLED microdisplays.





As the
first to exploit OLED technology for microdisplays, and with the support of our
partners and the development of our intellectual property, we believe that we
enjoy a significant advantage in the commercialization of microdisplays for
virtual imaging. We believe we are currently the only company to sell active
matrix small molecule OLED-on-silicon microdisplays.





eMagin
Corporation was created through the merger of Fashion Dynamics Corporation
("FDC"), which was organized on January 23, 1996 under the laws of the State of
Nevada and FED Corporation ("FED"), a developer and manufacturer of optical
systems and microdisplays for use in the electronics industry. Simultaneous with
this merger, we changed our name to eMagin Corporation. eMagin is incorporated
in the state of Delaware.





We derive
the majority of our revenue from sales of our OLED microdisplay products. We
also generate revenue from sales of optics, microdisplays combined with optics
(“microviewers”), and virtual imaging systems (primarily our Z800 3DVisor TM). In
addition we earn revenue from non-recurring engineering (“NRE”) projects and
under government contracts that support some of our research and development
programs.





Using our
active matrix OLED technology, many computer and video electronic system
functions can be built directly into the OLED microdisplay, resulting in compact
systems with expected lower overall system costs relative to alternative
microdisplay technologies. Already proven in commercialized military and
commercial systems, our portfolio of OLED microdisplays deliver high-resolution,
flicker-free virtual images, working effectively even in extreme temperatures
and high-vibration conditions with greatly increased system level power
efficiency, less weight and wider viewing angles.





Our
Technology Platforms





Small
Molecule, Top-Emitting Active Matrix OLED Technology





There are
two basic classes of OLED technology, dubbed single molecule or small molecule
(monomer) and polymer. Our microdisplays are currently based upon active matrix
small molecule OLED technology, which we refer to as active matrix OLED
(“AMOLED”) because we build the displays directly on silicon chips. Our AMOLED
technology uniquely permits millions of individual low-voltage light sources to
be built on low-cost, silicon computer chips to produce single color, white
or full-color display arrays. AMOLED microdisplays offer a number of advantages
over current liquid crystal microdisplays, including lower power requirements,
less weight and wider viewing angles. Using our OLED technology, many computer
and video electronic system functions can be built directly into the silicon
chip, under the OLED film, resulting in very compact, integrated systems with
lowered overall system costs relative to alternative technologies.





OLEDs are
thin films of stable organic materials that emit light of various colors when a
voltage is impressed across them. OLEDs are emissive devices, which mean they
create their own light, as opposed to liquid crystal displays, which require a
separate light source. As a result, OLED devices use less power and can be
capable of higher brightness and fuller color than liquid crystal microdisplays.
Because the light they emit is Lambertian, which means that it appears equally
bright from most forward directions, a moderate movement in the eye does not
change the image brightness or color as it does in other
technologies.




4




We have
developed numerous and significant enhancements to OLED technology as well as
key silicon circuit designs to effectively incorporate the OLED film on a
silicon integrated circuit. For example, we have developed a unique,
top-emitting structure for our OLED devices that enables OLED displays to be
built on opaque silicon integrated circuits rather than only on glass. Our OLED
devices emit full visible spectrum light that is isolated with color filters to
create full color images. Our microdisplays have a brightness that can be
greater than that of a typical notebook computer and can have a potential useful
life of over 50,000 operating hours, in certain applications. New materials and
device improvements, such as our recently developed OLED-XL technology, offer
potential for even better performance for brightness, efficiency, and lifespan.
In addition to our active matrix OLED technology, we have developed compact
optic and lens enhancements which, when coupled with the microdisplay, provide
the high quality large screen appearance that we believe a large proportion of
the marketplace demands.





We
believe that our AMOLED technology provides significant advantages over other
microdisplay technologies in our targeted microdisplay markets. We believe these
key advantages include:





·
            Low
      power consumption for improved battery life and longer system
      life;


·
            High-speed
      performance resulting in clear video
images;


·
            Wide
      angle light emission resulting in large apparent screen
    size;


·
            Wide
      operating temperature range;


·
            Good
      environmental stability (vibration and
  humidity).


·
            Low
      manufacturing cost; and


·
            Low
      cost system solutions.





Prism
Optics





High
quality, large view lenses with a wide range for eye positioning are essential
for using our displays in near-eye systems. We have developed advanced molded
plastic prism lenses which permit our AMOLED microdisplays to provide large
field of view images that can be viewed for extended periods with reduced
eye-fatigue. We have engaged a firm to manufacture our lenses in order to
provide them in larger quantities to our customers and are using them in our own
Z800 3DVisor personal display systems.





Our
Market Opportunities





The
growth potential of our selected target market segments have been investigated
using information gathered from key industry market research firms, including
DisplaySearch, Frost and Sullivan, Fuji-Chimera, McLaughlin Group, Nikkei, and
others. Such data was obtained using published reports and data obtained at
industry symposia. We have also relied substantially on market projections
obtained privately from industry leaders, industry analysts, and current and
potential customers.





Most
markets involve near-eye imaging applications for products such as viewfinders,
such as for digital cameras, or for head-wearable displays. These near-to-eye
viewing products have been recently characterized by the McLaughlin Consulting
Group as the Personal Viewer Market. The McLaughlin Group forecasts the total
Personal Viewer Market to reach as much as16.0 million units and $5.7 billion in
revenue by 2012.





Head-wearable
display products incorporate microdisplays mounted in or on eyeglasses, goggles,
simple headbands, helmets, or hardhats, and are often referred to as
head-mounted displays (HMDs) or headsets. Head-wearable displays may block out
surroundings for a fully immersive experience, or be designed as "see-through"
or "see-around" to the user's surroundings. They may contain one (monocular) or
two (binocular) displays. Some of the increased current interest is due to
accelerating the timetable to adapt such systems to military applications such
as night vision and fire and rescue applications. The virtual-imaging markets we
are targeting broadly fall into the categories of military, industrial/medical,
and consumer though many products serve multiple markets (“dual use”). Within
each of these market sectors, we believe that our OLED microdisplays, when
combined with compact optic lenses, will become a key component for a number of
mobile electronic products.





Military/First
Responder





Properly
implemented, we believe that head-mounted systems incorporating our
microdisplays  increases effectiveness by allowing hands-free
operation and increasing situational awareness with enough brightness to be used
in daylight, yet controllable for nighttime light security. As a COTS
(commercial off the shelf) component, OLED microdisplays intrinsically
demonstrate performance characteristics important to military and other
demanding commercial and industrial applications, including high contrast, wide
dimming range, shock and vibration resistance and insensitivity to high
G-forces. The image does not suffer from flicker or color breakup in vibrating
environments, and the microdisplay's wide viewing angle allows ease of viewing
for long periods of time. Most importantly, our OLED's very low power
consumption reduces battery weight and increases allowed mission length. The
OLED's inherent wide temperature range is especially of interest for military
applications because the display can turn on instantly at temperatures far below
freezing and can operate at very high temperatures in desert conditions. Our
recently announced SXGA OLED-XLTM microdisplay provides power advantages over
other microdisplay technologies, particularly liquid crystal displays which
require backlights and heaters and cannot provide instant-on capabilities at low
temperatures.




5




Our
products’ military applications primarily fall into three broad areas: (1)
helmet-mounted displays for situational awareness and data, (2) night
vision/thermal imaging goggles and viewers, and (3) training and simulation
devices. Similar systems are of interest for other military applications as well
as for demanding operations such as urban security, homeland defense, fire and
rescue.





Situational
Awareness.Situational awareness products include head mounted displays
which are used to display mapping, logistics and status and handheld imagers for
border patrol and training. In certain situations these products are combined
with a weapon system in order to give the user the capability of selecting
targets without direct exposure. Our OLED microdisplays have already been
commercially implemented into a number of military situational awareness
programs including: US Army Land Warrior Program, U.S. Army Mounted Warrior
Program, US Army Remote Viewer Program, Felin Fantassin à Equipements et
Liaisons Intégrés Program (French Infantryman with Networked Equipment), and
Israeli Advanced Integrated Soldier System, among others.





Night
Vision/Thermal Imaging. Night Vision Goggles allow the user to see in low
light conditions. The most modern versions usually include two different
technologies: infrared/thermal, and image intensification. Third and fourth
generation military devices usually use some combination of the two modes.
Thermal imagers detect infrared energy (heat) and convert it into an electronic
signal. The resulting signal needs to be presented on a display. Heat sensed by
an infrared camera can be very precisely quantified, or measured, allowing the
user to not only monitor thermal performance, but also identify and evaluate the
relative severity of heat-related problems. Thermal imaging systems can be
stand-alone handheld systems or integrated as part of the aiming mechanism for a
larger system.  Our OLED microdisplays are typically targeted to
uncooled systems, as opposed to systems that require external cooling in order
to increase their sensitivity.  Advances in sensor technology, both in
sensitivity and resolution as well as economic efficiency, have been driving
factors in the adoption of thermal technologies for military applications. The
power efficiency and environmental ruggedness of our products are strong
competitive advantages, particularly in these small hand-held non-cooled
systems.





Training and
Simulation.Our OLED microdisplays and our Z800 3DVisor have been
acquired by OEMs for use with their simulation and training
products.  The Z800’s capability to integrate 360 degree head tracking
and stereo vision, as well as its wide field of view are attractive attributes
for any simulation or virtual reality system. Examples of commercialized
training and simulation products include: Quantum 3D Expedition System, NVIS
Virtual Binocular SSV, and Virtually Better’s Virtual Iraq.





Military Market
Size. The McLaughlin Group reports that in 2012 sales of thermal weapons
sights are forecast to reach $525M and sales of enhanced night vision systems
are projected to reach $1.75B, propelled by both higher volumes and higher
prices for added capabilities of color, higher resolution, and digital
connectivity. Sales of helmet-mounted personal viewers for situational awareness
are forecast to reach $330M in 2012, with growth resulting from higher
definition and color displays,Our
displays have already been commercialized for situational awareness and night
vision/thermal imaging applications by military systems integrators including
Elbit, Insight Technologies, Intevac Vision Systems, Nivisys, Oasys Technology,
Qioptiq, Rockwell Collins, Saab, Sagem, and Thales, among many others. Night
Vision Equipment Corporation's HelmetIR-50TM, a lightweight, military helmet
mounted thermal imager, which provides hands-free operation and allows viewers
to see through total darkness, battlefield obscurants, and even foliage, is the
first OLED-equipped product to be listed on the US Government's GSA
schedule. Similar systems are of interest for other military applications as
well as for related operations such as urban security, fire and
rescue.





Commercial,
Industrial, and Medical





We
believe that a wide variety of commercial and industrial markets offer
significant opportunities due to increasing demand for instant data
accessibility in mobile workplaces. Some examples of potential microdisplay
applications include: immediate access to inventory such as parts, tools and
equipment availability; instant accessibility to maintenance or construction
manuals; routine quality assurance inspection; endoscopic surgery; and real-time
viewing of images and data for a variety of applications. As one potential
example, a user wearing a HMD while using test equipment, such as oscilloscopes,
can view technical data while simultaneously probing printed circuit boards.
Current commercial products equipped with our OLED microdisplays in these
sectors include those produced by Liteye, FLIR Systems, NordicNeuroLab, VRmagic
GmbH, Sensics, and Total Fire Group, among others.





6





Consumer





We
believe that the most significant driver of the longer term near-eye virtual
imaging microdisplay market is growing consumer demand for mobile access to
larger volumes of information and entertainment in smaller packages. This desire
for mobility has resulted in the development of mobile video Personal Viewer
products in two general categories: (i) an established market for electronic
viewers incorporated in products such as viewfinders for digital cameras and
video cameras which may potentially also be developed as personal viewers for
cell phones and (ii) an emerging market for headset-application platforms which
include accessories for mobile devices, portable DVD systems, electronic games,
and other entertainment, and wearable computers.





As our
OLED displays are manufactured in increasingly higher volumes at reduced costs,
we believe that our OLED microdisplay products will be increasingly well
positioned to compete with and displace liquid crystal displays in the rapidly
growing consumer market as demand for higher-resolution, and better image
quality evolves to meet the wish for more sophisticated Personal Viewers.
Examples of potential applications for mobile Personal Viewers include handheld
personal computers and mobile devices (such as smartphones, iPodsTM), whose
small, direct view screens are often limitations, but which are now capable of
running software applications that would benefit from a larger display accessory
and  entertainment and gaming video headset systems, which permit
individuals to privately view television, including HDTV, video CDs, DVDs and
video games on virtual large screens or stereovision.





Our
Products





Our
commercial microdisplay products based on our SVGA series OLED microdisplays,
first introduced in 2001, have received award recognition including: SID Display
of the Year andElectronic Products Magazine
Product of the Year. In 2008 we introduced engineering samples of our SXGA OLED
microdisplays. We are in the process of completing development of the SVGA 3DS
(SVGA 3D shrink, a smaller format SVGA display with a new cell architecture with
embedded features). In 2006 we introduced our OLED-XL technology, which provides
longer luminance half life and enhanced efficiency for all of our microdisplay
product lines. These OLED and OLED-XL products are being applied or considered
for near-eye and headset applications in products to be manufactured by OEM
customers for a wide variety of military, medical, industrial, and consumer
applications. We offer our products to OEMs and other buyers as both separate
components, integrated bundles coupled with our own optics, or full systems. We
also offer engineering support to enable customers to quickly integrate our
products into their own product development programs and offer design of
customized displays with resolutions or features to meet special customer
requirements.





SVGA+ OLED
Microdisplay Series (Super Video Graphics Array of 800x600 plus 52 added columns
of data).  Our 0.62 inch diagonal SVGA+ OLED microdisplays have
a resolution of 852x600 triad pixels (1.53 million picture elements). The
product was dubbed "SVGA+" because it has 52 more display columns than a
standard SVGA display, permitting users to run either (1) standard SVGA (800 x
600 pixels) to interface to the analog output of many portable computers or (2)
852 x 480, using all the data available from a DVD player in a 16:9 wide screen
entertainment format. The display also has an internal NTSC monochrome video
decoder for low power night vision systems. SVGA+ Rev3 OLED-XL microdisplay, the
most power efficient OLED solution for near-eye personal viewer applications,
uses less than 115 mW power in monochrome, such as for thermal imaging
applications, and lower than 175 mW at 400 cd/m2 for full color video. This new
microdisplay has simpler calibration over temperature and is ideal for demanding
binocular luminance and color matching. It also shares all the functional and
design characteristics of eMagin's original SVGA OLEDs, responding instantly at
temperatures as low as -40 degrees C.





SVGA-3D OLED
Microdisplay (Super Video Graphics Array plus built-in stereovision
capability).  Our 0.59 inch diagonal SVGA-3D OLED microdisplays
have a resolution of 800x600 triad pixels (1.44 million picture elements). A
built-in circuit provides compatibility with single channel frame sequential
stereoscopic vision without additional external components. The SVGA-3D OLED-XL
is primarily used as components of our Z800 3DVisor.





SXGA OLED-XL
(SupereXtended
Graphics Array,1280x1024). Our
SXGA OLED microdisplay with 0.77 inch diagonal active area provides 3,932,160
sub-pixels in an active area that is only 26% larger than our SVGA+
microdisplay. The 1280 x 1024 triad pixel array comprises triads of vertical
sub-pixels stacked side by side to make up each 12 x 12mm color pixel. The SXGA
OLED-XL microdisplay offers both analog and digital signal processing, requiring
less than 200mW under typical operation. The new SXGA microdisplays provide
versatility and flexibility for OEM developers though a FPGA driver design
available on a separate, lower power driver board, or as source code for
integration into end product electronics for maximum power efficiency. The
supported video formats are SXGA, 720p, DVGA (through 1280 x 960 pixel doubling,
and both frame sequential and field sequential stereovision. Additional
enhancements include increased pixel uniformity, improved color gamut, on-chip
temperature sensor and compensation, and compatibility with both analog RGB and
digital video signals. On-board circuitry ensures consistent color and
brightness over a wide range of operating temperatures.




7




Lens and Design
Reference Kits.
We offer a WF05 prism optic, with mounting brackets or combined with OLED
microdisplays to form an optic-display module. We provide Design Reference Kits,
which include a microdisplay and associated electronics to help OEMs evaluate
our microdisplay products and to assist their efforts to build and test new
products incorporating our microdisplays.





Integrated
Modules. We provide near-eye virtual imaging modules that incorporate our
OLED-on-silicon microdisplays with our lenses and electronic interfaces for
integration into OEM products. We have shipped customized modules to several
customers, some of which have incorporated our products into their own
commercial products.





Z800
3DVisorTM   Our Z800 3DVisorsTMgive
users the ability to work with their hands while simultaneously viewing
information or video on the display. The Z800 3DVisor enables more versatile
portable computing, using a 0.59-inch diagonal microdisplay (SVGA-3D capable of
delivering an image that appears comparable to that of a 19-inch monitor at 22
to 24 inches from the eye, or a 105 inch movie screen at 12 foot distance.) Our
systems are currently being used for personal entertainment, electronic gaming,
and military training and simulation, among other applications. This product has
received industry recognition including: Digital Living Class 2005 Innovators,
Consumer Electronics Association’s Consumer Electronics Show (CES) 2006 Best of
Innovation Awards for the entire display category as well as a Design and
Innovations Award for the electronic gaming category, and, was recognized as one
of Advanced Imaging's Solutions of the Year, as integrated in Chatten
Associates’ head-aimed remote viewer. We sell the Z800 3DVisor to individual
buyers, OEM systems and equipment customers, through distributors, and
through our e-commerce website, www.3dvisor.com. The
contents of our e-commerce website are not part of this Report.




Government
Contract Funding





We derive
a portion of our revenue from funding that we receive pursuant to research
contracts or subcontracts funded by various agencies of the U.S. Government. The
revenue that we recognize from these contracts represents reimbursement by
various U.S. Government entities. Our recent contracts have been awarded for
development of power efficient microdisplay for US Army Night Vision,
development of ultra-high resolution display for US Army telemedicine, and
development of display technology for US Navy aircraft. Our government contracts
require us to conduct the research effort described in the statement of work
section of the contract. These contracts may be modified or terminated at the
discretion of the government and typically are subject to appropriation and
allocation of the required funding on an annual basis. On contracts for which we
are the prime contractor, we subcontract portions of the work to various
entities and institutions.





Our
Strategy





Our
strategy is to strengthen our leadership position as a worldwide supplier of
microdisplays and virtual imaging technology solutions for applications in high
growth segments of the electronics industry by capitalizing on our experience
and expertise in active matrix OLED technology.  We aim to provide
microdisplay and complementary accessories to enable OEM customers to develop
and manufacture new and enhanced electronic products. Some key elements of our
strategy to achieve these objectives include the following:





·
            Strengthen our technology
      leadership. As the first to exploit AMOLED microdisplays, we
      believe that we enjoy a significant advantage in bringing this technology
      to market. By continuing to invest in research and development, and
      protecting our intellectual property, we expect to further develop
      performance improvements and provide a competitive edge for our customers
      who integrate our displays into their end
  products.





·
            Optimize microdisplay
      manufacturing efficiencies while protecting proprietary processes.
      We intend to reduce our production costs primarily through increasing
      manufacturing yield and lowering fixed costs through reduced cycle time
      and increased automation, as well as equipment upgrades. Weoutsource certain
      portions of microdisplay production, such as chip fabrication, to minimize
      both our costs and time to market. We intend to retain the OLED-related
      processes in-house, where we have a core competency and manufacturing
      expertise. We also believe that by keeping these processes under tight
      control we can better protect our proprietary technology and process
      know-how. This strategy will also enhance our ability to continue to
      optimize and customize processes and devices to meet customer
      needs.





·
            Build and maintain strong
      design capabilities. We employ in-house design capabilities
      supplemented by outsourced design services. Building and maintaining this
      capability will allow us to reduce engineering costs, accelerate the
      design process and enhance design accuracy to respond to our customers'
      needs as new markets develop. In addition, we intend to maintain a product
      design staff capable of rapidly developing prototype products for our
      customers and strategic partners. Contracting third party design support
      to meet demand and for specialized design skills will also remain a part
      of our overall long term strategy.





·
            Leverage strategic
      relationships. External relationships play an important role in our
      research and development efforts. Suppliers, equipment vendors, government
      organizations, contract research groups, external design companies,
      customer and corporate partners, consortia, and university relationships
      all enhance the overall research and development effort and bring us new
      ideas and solutions. In addition, we participate in industry associations
      such as Society Information Display, FlexTech Alliance (formerly known as
      United States Display Consortium), OLED Association, Consumer Electronics
      Association, and the Association of the United States Army, among others.
      Furthermore, we have established a CRADA (Cooperative Research and
      Development Agreement) with the US Army/RDECOM/NVESD for the purpose of
      evaluating and characterizing new and existing AMOLED microdisplay
      configurations. We believe that strategic relationships allow us to better
      determine the demands of the marketplace and, as a result, allow
      us to focus our future research and development activities to satisfy
      our customers’ evolving
requirements.




8




Sales
and Marketing





We
primarily provide our OLED display and optics components for OEMs to incorporate
into their branded products and sell through their own well-established
distribution channels. We have traditionally marketed and sold our products to
customers through targeted selling, promotions, select advertising and
attendance at trade shows. We identify companies with end products and
applications for which we believe our products will provide a key
differentiator. Marketing efforts focus on identifying prospects and
communicating the product performance attributes foremost in the minds of
purchasing decision-makers. This approach is intended to ensure the highest
possible return on investment for our marketing expense.





We market
our products in North America, Asia, and Europe directly from our sales office
located in our Bellevue, Washington facility. We also have a local sales
representative in Japan. We market our Z800 3DVisor through select value-added
resellers and on-line through Amazon and our e-commerce site, www.3dvisor.com. We
intend to continue to expand our global sales, marketing and distribution
capabilities.





An OEM
design cycle typically requires between 6 and 36 months, depending on the
uniqueness of the market, the complexity of the end product, or in the case of
military OEM customers, government procurement schedules.  Because our
microdisplays are the main functional component that defines many of our
customers' end products, we work closely with customers to provide technical
assistance throughout the product evaluation and integration
process.





Customers




Customers
for our products include both large multinational and smaller OEMs. We maintain
relationships with OEMs in a diverse range of industries encompassing the
military, industrial, medical, and consumer market sectors. During 2008, 61% of
our net revenue was to firms based in the United States and 39% was to
international firms as compared to 51% domestic revenue and 49% international
revenue during 2007.  In 2008, we had 10 customers that accounted for
more than 63% of our total revenue as compared to 10 customers that accounted
for more than 54% of our total revenue in 2007.  In 2008, we had 2
customers that accounted for more than 10% of our total revenue as compared to
2007 when we did not have any customers that accounted for more than 10% of our
total revenue.




Backlog




As of
February 28, 2009, we had a backlog of approximately $7.4 million for purchases
through December 2009. This backlog primarily consists of non-binding purchase
orders and purchase agreements but does not include expected revenue from
R&D contracts or expected NRE (non-recurring engineering) programs under
development.





The
majority of our backlog consists of non-binding purchase orders or purchase
agreements for delivery over the next six months. Most purchase orders are
subject to rescheduling or cancellation by the customer with no or limited
penalties.  We believe that the backlog metric is of limited utility
in predicting future sales because many of our OEM customers operate on a
ship-to-order basis. Variations in the magnitude and duration of purchase orders
and customer delivery requirements may result in substantial fluctuations in
backlog from period to period.





Manufacturing
Facilities





We are
located at IBM's Microelectronics Division facility, known as the Hudson Valley
Research Park, located about 70 miles north of New York City in Hopewell
Junction, New York. We lease approximately 33,000 square feet of space which
houses our own equipment for OLED microdisplay fabrication and research and
development, includes a 16,300 square foot class 10 clean room space, additional
lower level clean room space, assembly space and administrative
offices.




9




Facilities
services provided by IBM include our clean room, pure gases, high purity
de-ionized water, compressed air, chilled water systems, and waste disposal
support. This infrastructure provided by our lease with IBM provides us with
many of the resources of a larger corporation without the added overhead costs.
It further allows us to focus our resources more efficiently on our product
development and manufacturing goals.




We also
lease a facility in Bellevue, Washington where we operate our Z800 3DVisor
operations, finance function and business development activities. The facilities
are well suited for designing and building limited volume prototypes and small
quantity industrial or government products.





We
believe manufacturing efficiency is an important factor for success, especially
in the consumer markets. We currently have the equipment needed for profitable
production in place. We plan to add equipment to increase capacity and yield
over the next two years to meet expected demand for our
microdisplays.





Competition





The
industry in which we operate is highly competitive. We face competition from
legacy technologies such as cathode ray tubes (CRTs), liquid crystal on silicon
microdisplays (LCOS), and transmissive liquid crystal displays
(LCDs) as well as from alternative flat panel display
technologies such as field emission and virtual scanning retinal displays.
There are many large and small companies that manufacture or have in development
products based on these technologies.





Currently,
in the high resolution microdisplay market, we face competition from liquid
crystal microdisplay manufacturers, such as those sold by Kopin. We are not
aware of any current manufacturers of high resolution OLED microdisplays that
compete with our microdisplay products.





In the
future, we believe that our key competition will come from LCOS and small
transmissive LCDs. While we believe that OLED technology has the capability to
provide higher quality images, greater environmental ruggedness,
reduced electronics cost and complexity, and improved power efficiency
advantages over either type of liquid crystal based microdisplays, there is no
assurance that these benefits will be fully realized or that liquid crystal
manufacturers will not suitably improve these parameters to reduce these
potential advantages of OLEDs.





To our
knowledge, the only other companies that have publicly stated plans to
commercially develop OLED microdisplays for near-eye applications are
MicroEmissive Displays (MED) in Britain and MicroOLED in France. Though MED
had raised substantial funds and created a new production facility, the company
ceased business operations in 2008. We may also compete with potential licensees
of Universal Display Corporation, Eastman Kodak, or Cambridge Display
Technology, among others, each of which potentially can license OLED technology
portfolios. If other new OLED-based companies enter our markets
with directly relevant display designs and without manufacturing and
reliability issues, we will face competition, though we believe that our
progress to date in this area gives us a substantial head start.





Intellectual
Property





We
believe we have developed a substantial intellectual property portfolio of
patents, trade secrets and manufacturing know-how. It is important to protect
our investment in technology by obtaining and enforcing intellectual property
rights, including rights under patent, trademark, trade secret and copyright
laws. We seek to protect inventions we consider significant by applying for
patents in the United States and other countries when appropriate.





Our
intellectual property covers a wide range of materials, device structures,
processes, and fabrication techniques, primarily concentrated in the following
areas:





·
            OLED
      Materials, Structures, and
Processes;


·
            Display
      Color Processing and Sealing;


·
            Active
      Matrix Circuit Methodologies and
Designs;


·
            Lenses
      and Tracking (Eye and Head);


·
            Ergonomics
      and Industrial Design;


·
            Wearable
      Computer Interface Methodology; and


·
            Legacy
      Field Emission and General Display
Technologies.





We
believe that, in addition to patent protection, our success is dependent upon
non-patentable trade secrets and technical expertise.  To protect this
information and know-how from unauthorized use or disclosure, we use
nondisclosure agreements and other measures to protect our proprietary rights,
and we require all employees, and where appropriate, contractors, consultants,
advisors and collaborators to enter into confidentiality and non-competition
agreements. We believe that our intellectual property portfolio, coupled with
our strategic relationships and accumulated manufacturing know-how in OLED,
gives us a significant advantage over potential competitors.




10




Employees





As of
February 28, 2009, we had a total of 59 full time and part time staff. None of
our employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.





Available
Information




Our
website address is www.emagin.com. We make available free of charge through our
website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, our Proxy Statements and all amendments to such
reports filed under the Securities and Exchange Act after we electronically file
such material with, or furnish such material to, the Securities and Exchange
Commission (SEC). These reports may be accessed from our website by following
the links under “Investors,” then “SEC Filings.” The information found on our
website is not part of this or any other report we file with or furnish to the
SEC. We assume no obligation to update or revise any forward-looking statements
in this Annual Report or in other reports filed with the SEC, whether as a
result of new information, future events or otherwise, unless we are required to
do so by law. A copy of this Annual Report and our other reports is available
without charge upon written request to Investor Relations, eMagin Corporation,
10500 NE 8th St, Bellevue, WA 98004.





We also
post on our website the charters of our Audit, Compensation, Governance and
Nominating committees, our Codes of Ethics and any amendments of or waiver to
those codes of ethics, and other corporate governance materials recommended by
the SEC as they occur, as well as earnings press releases and other
business-related press releases. Our e-commerce site for sales of our Z800
3DVisor is www.3dvisor.com. The
contents of this website are not part of this Report.


11




ITEM
1A.  RISK FACTORS





You
should carefully consider the following risk factors and the other information
included herein as well as the information included in other reports and filings
made with the SEC before investing in our common stock. The
following factors, as well as other factors affecting our operating results and
financial condition, could cause our actual future results and financial
condition to differ materially from those projected. The trading price of our
common stock could decline due to any of these risks, and you may lose part or
all of your investment.





RISKS
RELATED TO OUR FINANCIAL RESULTS





We have a history of losses since
our inception and may incur losses in the future.





Our
accumulated losses are $201 million as of December 31, 2008.  We have
not yet achieved profitability on a full year basis. We have had two profitable
quarters in 2008. We can give no assurances that we will continue to be
profitable in the future. We cannot assure investors that we will sustain
profitability or that we will not incur operating losses in the
future.





We
may not be able to execute our business plan due to a lack of cash from
operations.





Historically,
we have not produced positive cash flows from operations. However, we have
generated positive cash flows the past 3 quarters. We anticipate that our cash
from operations will be sufficient to meet our requirements over the next twelve
months.  In the event that cash flow from operations is less than
anticipated and we are unable to secure additional funding to cover our
expenses, in order to preserve cash, we may have to reduce expenditures and
effect reductions in our corporate infrastructure, either of which could have a
material adverse effect on our ability to continue our current level of
operations. No assurance can be given that if additional financing is necessary,
that it will be available, or if available, will be on acceptable
terms.





We
may be subject to fines, sanctions, and/or penalties of an indeterminable nature
as a result of potential violations of federal securities laws.





In July
2006, we entered into a Note Purchase Agreement with Stillwater LLC, which
provided for the purchase and sale of a 6% senior secured convertible note in
principal amount of up to $500,000 (the “Stillwater Note”) and a warrant to
purchase 70% of the number of shares issuable upon conversion of the Stillwater
Note, at our sole discretion by delivery of a notice to Stillwater on December
14, 2006.  We then filed a registration statement on Form S-3 to
register the resale by Stillwater of up to 41,088,445 shares of our common
stock.  In July 2007, we amended the agreements with
Stillwater.  Amending the Stillwater agreements without first
withdrawing the Registration Statement on Form S-3 may be inconsistent with
Section 5 of the Securities Act of 1933, as amended, and we may be subject to
fines, sanctions and/or penalties of an indeterminable nature as a result of
potential violations of federal securities laws.  If we are assessed
fines and penalties our business will be materially affected.





The
issuance of shares of common stock in connection with the conversion of the
Notes may have not have been in compliance with certain state and federal
securities laws and any damages that we may have to pay as a result of such
issuance could have a material adverse effect on our revenues, profits, results
of operations, financial condition and future prospects.




Our
operating results have significant fluctuations.




In
addition to the variability resulting from the short-term nature of commitments
from our customers, other factors contribute to significant periodic quarterly
fluctuations in results of operations. These factors include, but are not
limited to, the following:


·
            the
      receipt and timing of orders and the timing of delivery of
      orders;


·
            the
      inability to adjust expense levels or delays in adjusting expense levels,
      in either case in response to lower than expected revenues or gross
      margins;


·
            the
      volume of orders relative to our manufacturing
  capacity;


·
            product
      introductions and market acceptance of new products or new generations of
      products;


·
            changes
      in cost and availability of labor and
  components;


·
            product
      mix;


·
            variation
      in operating expenses; regulatory requirements, foreign currency
      fluctuations and changes in duties and
tariffs;


·
            pricing
      and availability of competitive products and services;
  and


·
            changes,
      whether or not anticipated, in economic
  conditions.




Accordingly,
the results of any past periods should not be relied upon as an indication of
our future performance.




12




RISKS
RELATED TO MANUFACTURING




The manufacture ofactive matrix OLED microdisplays is
new and could result in manufacturing issues or delays.





Ours is
an evolving technology and we are pioneers in this active matrix OLED
microdisplay manufacturing technique. We cannot assure you that we will be able
to produce our products in sufficient quantity and quality to maintain existing
customers and attract new customers. In addition, we cannot assure you that we
will not experience manufacturing problems which could result in delays in
delivery of orders or product introductions.





We
are dependent on a single manufacturing line.





We
currently manufacture our products on a single manufacturing line. If we
experience any significant disruption in the operation of our manufacturing
facility or a serious failure of a critical piece of equipment, we may be unable
to supply microdisplays to our customers. For this reason, some OEMs may also be
reluctant to commit a broad line of products to our microdisplays without a
second production facility in place. However, we try to maintain product
inventory to fill the requirements under such circumstances. Interruptions in
our manufacturing could be caused by manufacturing equipment problems, the
introduction of new equipment into the manufacturing process or delays in the
delivery of new manufacturing equipment. Lead-time for delivery of manufacturing
equipment can be extensive. No assurance can be given that we will not lose
potential sales or be unable to meet production orders due to production
interruptions in our manufacturing line. In order to meet the requirements of
certain OEMs for multiple manufacturing sites, we will have to expend capital to
secure additional sites and may not be able to manage multiple sites
successfully.





We
rely on key sole source and limited source suppliers.




We depend
on a number of sole source or limited source suppliers for certain raw
materials, components, and services. These include circuit boards, graphic
integrated circuits, passive components, materials and chemicals, and equipment
support.  We maintain several single-source supplier relationships,
either because alternative sources are not available or because the relationship
is advantageous due to performance, quality, support, delivery, capacity, or
price considerations. Even where alternative sources of supply are available,
qualification of the alternative suppliers and establishment of reliable
supplies could result in delays and a possible loss of sales, which could be
detrimental to operating results.We do not manufacture the
silicon integrated circuits on which we incorporate our OLED technology.
Instead, we provide the design layouts to a sole semiconductor contract
manufacturer who manufactures the integrated circuits on silicon wafers. Our
inability to obtain sufficient quantities of components and other materials or
services on a timely basis could result in manufacturing delays, increased costs
and ultimately in reduced or delayed sales or lost orders which could materially
and adversely affect our operating results.




Our
results of operations, financial condition, and business would be harmed if we
were unable to balance customer demand and capacity.




As
customer demand for our products, particularly new products, changes we must be
able to ramp up or adjust our production capacity to meet demand. We are
continually taking steps to address our manufacturing capacity needs for our
products. If we are not able to increase our capacity or if we increase our
capacity too quickly, our business and results of operations could be adversely
impacted. If we experience delays or unforeseen costs associated with adjusting
our capacity levels, we may not be able to achieve our financial targets. For
some of our products, vendor lead times exceed our customers’ required delivery
time causing us to order to forecast rather than order based on actual demand.
Ordering raw material and building finished goods based on forecasts exposes us
to numerous risks including potential inability to service customer demand in an
acceptable timeframe, holding excess inventory or having unabsorbed
manufacturing overhead.





Variations
in our production yields impact our ability to reduce costs and could cause our
margins to decline and our operating results to suffer.





All of
our products are manufactured using technologies that are highly complex. The
number of usable items, or yield, from our production processes may fluctuate as
a result of many factors, including but not limited to the
following:


·
            variability
      in our process repeatability and
control;


·
            contamination
      of the manufacturing environment or
equipment;


·
            equipment
      failure, power outages, or variations in the manufacturing
      process;


·
            lack
      of consistency and adequate quality and quantity of piece parts and other
      raw materials;


·
            defects
      in packaging either within or without our
      control;  and


·
            any
      transitions or changes in our production process, planned or
      unplanned.




13




We
could experience manufacturing interruptions, delays, or inefficiencies if we
are unable to timely and reliably procure components from single-sourced
suppliers.





We
maintain several single-source supplier relationships, either because
alternative sources are not available or because the relationship is
advantageous due to performance, quality, support, delivery, capacity, or price
considerations.  If the supply of a critical single-source material or
component is delayed or curtailed, we may not be able to ship the related
product in desired quantities and in a timely manner.  Even where
alternative sources of supply are available, qualification of the alternative
suppliers and establishment of reliable supplies could result in delays and a
possible loss of sales, which could harm operating results.





RISKS
RELATED TO OUR INTELLECTUAL PROPERTY





We have
a license agreement with Eastman Kodak regarding the manufacture of
OLED microdisplays.





We rely
upon Eastman Kodak to protect and enforce key patents held by Eastman Kodak,
relating to OLED display technology that we have licensed. Some of Eastman
Kodak's key patents have expired and other expire at various times in the
future. Our license with Eastman Kodak could terminate if we fail to perform any
material term or covenant under the license agreement. Since our license from
Eastman Kodak is non-exclusive, Eastman Kodak could also elect to become a
competitor itself or to license OLED technology for microdisplay applications to
others who have the potential to compete with us. The occurrence of any of these
events could have a material adverse impact on our business.





We may not be
successful in protecting our intellectual property and proprietary
rights.





We rely
on a combination of patents, trade secret protection, licensing agreements and
other arrangements to establish and protect our proprietary technologies. If we
fail to successfully enforce our intellectual property rights, our competitive
position could suffer, which could harm our operating results. Patents may not
be issued for our current patent applications, third parties may challenge,
invalidate or circumvent any patent issued to us, unauthorized parties could
obtain and use information that we regard as proprietary despite our efforts to
protect our proprietary rights, rights granted under patents issued to us may
not afford us any competitive advantage, others may independently develop
similar technology or design around our patents, our technology may be available
to licensees of Eastman Kodak, and protection of our intellectual property
rights may be limited in certain foreign countries. On April 30, 2007, the
U.S. Supreme Court, in KSR
International Co. vs. Teleflex, Inc., mandated a more expansive and
flexible approach towards a determination as to whether a patent is obvious and
invalid, which may make it more difficult for patent holders to secure or
maintain existing patents. Any future infringement or other claims or
prosecutions related to our intellectual property could have a material adverse
effect on our business. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, or require us to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to us, if at all. Protection of intellectual property has
historically been a large yearly expense for eMagin. We have not been in a
financial position to properly protect all of our intellectual property, and may
not be in a position to properly protect our position or stay ahead of
competition in new research and the protecting of the resulting intellectual
property.





In
addition to patent protection, we also rely on trade secrets and other
non-patented proprietary information relating to our product development and
manufacturing activities. We try to protect this information through appropriate
efforts to maintain its secrecy, including requiring employees and third parties
to sign confidentiality agreements. We cannot be sure that these efforts will be
successful or that the confidentiality agreements will not be breached. We also
cannot be sure that we would have adequate remedies for any breach of such
agreements or other misappropriation of our trade secrets or that our trade
secrets and proprietary know-how will not otherwise become known or be
independently discovered by others.





RISKS
RELATED TO THE MICRODISPLAY INDUSTRY




The
commercial success of the microdisplay industry depends on the widespread market
acceptance of microdisplay systems products.





The
market for microdisplays is emerging. Our success will depend on consumer
acceptance of microdisplays as well as the success of the commercialization of
the microdisplay market. As an OEM supplier, our customer's products must also
be well accepted. At present, it is difficult to assess or predict with any
assurance the potential size, timing and viability of market opportunities for
our technology in this market.


14


The
microdisplay systems business is intensely competitive.





We do
business in intensely competitive markets that are characterized by rapid
technological change, changes in market requirements and competition from both
other suppliers and our potential OEM customers. Such markets are typically
characterized by price erosion. This intense competition could result in pricing
pressures, lower sales, reduced margins, and lower market share. Our ability to
compete successfully will depend on a number of factors, both within and outside
our control. We expect these factors to include the following:


·
            our
      success in designing, manufacturing and delivering expected new products,
      including those implementing new technologies on a timely
      basis;·
            our
      ability to address the needs of our customers and the quality of our
      customer services;


·
            the
      quality, performance, reliability, features, ease of use and pricing of
      our products;·
            successful
      expansion of our manufacturing
capabilities;


·
            our
      efficiency of production, and ability to manufacture and ship products on
      time;·
            the
      rate at which original equipment manufacturing customers incorporate our
      product solutions into their own
products;


·
            the
      market acceptance of our customers' products; and·
            product
      or technology introductions by our
competitors.





Our
competitive position could be damaged if one or more potential OEM customers
decide to manufacture their own microdisplays, using OLED or alternate
technologies. In addition, our customers may be reluctant to rely on a
relatively small company such as eMagin for a critical component. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial
condition.





The display industry may be
cyclical.





Our
business strategy is dependent on OEM manufacturers building and selling
products that incorporate our OLED displays as components into those products.
Industry-wide fluctuations could cause significant harm to our business. The
OLED microdisplay sector may experience overcapacity, if and when all of the
facilities presently in the planning stage come on line, leading to a difficult
market in which to sell our products.




Our
competitors have many advantages over us.





As the
microdisplay market develops, we expect to experience intense competition from
numerous domestic and foreign companies including well-established corporations
possessing worldwide manufacturing and production facilities, greater name
recognition, larger retail bases and significantly greater financial, technical,
and marketing resources than us, as well as from emerging companies attempting
to obtain a share of the various markets in which our microdisplay products have
the potential to compete. We cannot assure you that we will be able to compete
successfully against current and future competition, and the failure to do so
would have a materially adverse effect upon our business, operating results and
financial condition.





Our
products are subject to lengthy OEM development periods.





We sell
most of our microdisplays to OEMs who will incorporate them into products they
sell. OEMs determine during their product development phase whether they will
incorporate our products. The time elapsed between initial sampling of our
products by OEMs, the custom design of our products to meet specific OEM product
requirements, and the ultimate incorporation of our products into OEM consumer
products is significant often with a duration of between one and three years. If
our products fail to meet our OEM customers' cost, performance or technical
requirements or if unexpected technical challenges arise in the integration of
our products into OEM consumer products, our operating results could be
significantly and adversely affected. Long delays in achieving customer
qualification and incorporation of our products could adversely affect our
business.





Our
products will likely experience rapidly declining unit prices.





In the
markets in which we expect to compete, prices of established products tend to
decline significantly over time. In order to maintain our profit margins over
the long term, we believe that we will need to continuously develop product
enhancements and new technologies that will either slow price declines of our
products or reduce the cost of producing and delivering our products. While we
anticipate many opportunities to reduce production costs over time, there can be
no assurance that these cost reduction plans will be successful, that we will
have the resources to fund the expenditures necessary to implement certain
cost-saving measures, or that our costs can be reduced as quickly as any
reduction in unit prices. We may also attempt to offset the anticipated decrease
in our average selling price by introducing new products, increasing our sales
volumes or adjusting our product mix. If we fail to do so, our results of
operations would be materially and adversely affected.




15




RISKS
RELATED TO OUR BUSINESS





Our
success depends on attracting and retaining highly skilled and qualified
technical and consulting personnel.





We must
hire highly skilled technical personnel as employees and as independent
contractors in order to develop our products. The competition for skilled
technical employees is intense and we may not be able to retain or recruit such
personnel. We must compete with companies that possess greater financial and
other resources than we do, and that may be more attractive to potential
employees and contractors. To be competitive, we may have to increase the
compensation, bonuses, stock options and other fringe benefits offered to
employees in order to attract and retain such personnel. The costs of attracting
and retaining new personnel may have a materially adverse affect on our business
and our operating results.





Our
success depends in a large part on the continuing service of key
personnel.





Changes
in management could have an adverse effect on our business. We are dependent
upon the active participation of several key management personnel and will also
need to recruit additional management in order to expand according to our
business plan. The failure to attract and retain additional management or
personnel could have a material adverse effect on our operating results and
financial performance.





The
ineffectiveness of our internal control over financial reporting could result in
a loss of investor confidence in our financial reports and have an adverse
effect on our stock price.





Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), and the rules
and regulations promulgated by the SEC to implement Section 404, we included in
our Form 10-K an annual report by our management regarding the effectiveness of
our internal control over financial reporting.  The report includes,
among other things, an assessment of the effectiveness of our internal control
over financial reporting as of the end of our fiscal year.  Our
assessment is that although we have made substantial improvements in our
internal control over financial management, we continue to have material
weaknesses.  Management will continue to make improvements in this
regard.





As of
December 31, 2008, even though we made substantial improvement, our internal
control over financial reporting was ineffective due to the presence of material
weaknesses, as more fully described in Item 9A of this Form
10-K.  This could result in a loss of investor confidence in the
accuracy and completeness of our financial reports, which may have an adverse
effect on our stock price.





Our
operating results are substantially dependent on the development and acceptance
of new products and technology innovations.





Our
future success may depend on our ability to develop new and lower cost solutions
for existing and new markets and for customers to accept those solutions. We
must introduce new products in a timely and cost-efficient manner, and we must
secure production orders for those products from our customers. The development
of new products is a highly complex process, and we historically have
experienced delays in completing the development and introduction of new
products. Some or all of those technologies or products may not successfully
make the transition from the research and development lab. Even when we
successfully complete a research and development effort with respect to a
particular product or technology, it may fail to gain market
acceptance.  The successful development and introduction of these
products depends on a number of factors, including the
following


·
            achievement
      of technology breakthroughs required to make commercially viable
      devices;


·
            the
      accuracy of our predictions of market
  requirements;


·
            acceptance
      of our new product designs;


·
            acceptance
      of new technology in certain
markets;


·
            the
      availability of qualified research and development and product development
      personnel;


·
            our
      timely completion of product designs and
  development;


·
            our
      ability and available resources to expand
sales;


·
            our
      ability to develop repeatable processes to manufacture new products in
      sufficient quantities and at low enough costs for commercial
      sales;


·
            our
      customers’ ability to develop competitive products incorporating our
      products; and


·
            acceptance
      of our customers’ products by the
market.





If any of
these or other factors become problematic, we may not be able to develop and
introduce these new products in a timely or cost-effective manner.




16




If
government agencies discontinue or curtail their funding for our research and
development programs our business may suffer.





Changes
in federal budget priorities could adversely affect our contract revenue.
Historically, government agencies have funded a significant part of our research
and development activities. When the government changes budget priorities, such
as in time of war or for other reasons, our funding has the risk of being
redirected to other programs. Government contracts are also subject to the risk
that the government agency may not appropriate and allocate all funding
contemplated by the contract. In addition our government contracts generally
permit the contracting authority to terminate the contract for the convenience
of the government. The full value of the contracts would not be realized if they
were prematurely terminated. We may be unable to incur sufficient allowable
costs to generate the full estimated contract values. Furthermore, the research
and development and product procurement contracts of the customers we supply may
be similarly impacted. If the government funding is discontinued or reduced, our
ability to develop or enhance products could be limited and our business results
or operations and financial conditions could be adversely affected.





Our
business depends on new products and technologies.





The
market for our products is characterized by rapid changes in product, design and
manufacturing process technologies. Our success depends to a large extent on our
ability to develop and manufacture new products and technologies to match the
varying requirements of different customers in order to establish a competitive
position and become profitable. Furthermore, we must adopt our products and
processes to technological changes and emerging industry standards and practices
on a cost-effective and timely basis. Our failure to accomplish any of the above
could harm our business and operating results.





We
generally do not have long-term contracts with our customers.





Our
business has primarily operated on the basis of short-term purchase
orders.  We receive some longer term purchase agreements, and
procurement contracts, but we cannot guarantee that we will continue to do so.
Our current purchase agreements can be cancelled or revised without penalty,
depending on the circumstances. We plan production primarily on the basis of
internally generated forecasts of demand based on communications with customers,
and available industry data which makes it difficult to accurately forecast
revenues. If we fail to accurately forecast operating results, our business may
suffer and the value of your investment in eMagin may decline.





Our
business strategy may fail if we cannot continue to form strategic relationships
with companies that manufacture and use products that could incorporate our
active matrix OLED technology.





Our
prospects could be significantly affected by our ability to develop strategic
alliances with OEMs for incorporation of our active matrix OLED microdisplay
technology into their products. While we intend to continue to establish
strategic relationships with manufacturers of electronic consumer products,
personal computers, chipmakers, lens makers, equipment makers, material
suppliers and/or systems assemblers, there is no assurance that we will be able
to continue to establish and maintain strategic relationships on commercially
acceptable terms, or that the alliances we do enter in to will realize their
objectives. Failure to do so could have a material adverse effect on our
business.





Our
business depends to some extent on international transactions.





We
purchase needed materials from companies located abroad and may be adversely
affected by political and currency risk, as well as the additional costs of
doing business with foreign entities. Some customers in other countries have
longer receivable periods or warranty periods. In addition, many of the foreign
OEMs that are the most likely long-term purchasers of our microdisplays expose
us to additional political and currency risk. We may find it necessary to locate
manufacturing facilities abroad to be closer to our customers which could expose
us to various risks, including management of a multi-national organization, the
complexities of complying with foreign laws and customs, political instability
and the complexities of taxation in multiple jurisdictions.





Our
business may expose us to product liability claims.





Our
business may expose us to potential product liability claims. Although no such
claims have been brought against us to date, and to our knowledge no such claim
is threatened or likely, we may face liability to product users for damages
resulting from the faulty design or manufacture of our products. While we plan
to maintain product liability insurance coverage, there can be no assurance that
product liability claims will not exceed coverage limits, fall outside the scope
of such coverage, or that such insurance will continue to be available at
commercially reasonable rates, if at all.




17




Our
business is subject to environmental regulations and possible liability arising
from potential employee claims of exposure to harmful substances used in the
development and manufacture of our products.





We are
subject to various governmental regulations related to toxic, volatile,
experimental and other hazardous chemicals used in our design and manufacturing
process. Our failure to comply with these regulations could result in the
imposition of fines or in the suspension or cessation of our operations.
Compliance with these regulations could require us to acquire costly equipment
or to incur other significant expenses. We develop, evaluate and utilize new
chemical compounds in the manufacture of our products. While we attempt to
ensure that our employees are protected from exposure to hazardous materials, we
cannot assure you that potentially harmful exposure will not occur or that we
will not be liable to employees as a result.





Current
adverse economic conditions may adversely impact our business, operating results
and financial condition.





The
current economic conditions and market instability may affect our customers and
suppliers.  Any adverse financial or economic impact to our customers
may impact their ability to pay timely, or result in their inability to
pay.  It may also impact their ability to fund future purchases, or
increase the sales cycles which could lead to a reduction in revenue and
accounts receivable.  Our suppliers may increase their prices or may
be unable to supply needed raw materials on a timely basis which could result in
our inability to meet customers’ demand or affect our gross
margins.  Our suppliers may, also, impose more stringent payment terms
on us.  The timing and nature of any recovery in the credit and
financial markets remains uncertain, and there can be no assurance that market
conditions will improve in the near future or that our results will not be
materially and adversely affected.





Leases
for our manufacturing plant and our headquarters will terminate in
2009.





As
of the filing date of this Report, we have not yet renewed these leases. Our
manufacturing plant’s lease expires May 31, 2009 and we are in negotiations to
extend our lease.   Our headquarters’ lease expires August 31,
2009 and we are presently reviewing suitable space. If we are unable to renew
these leases or find suitable alternatives under acceptable terms, it could
adversely impact our ability to execute our business.





RISKS
RELATED TO OUR STOCK




The
substantial number of shares that are or will be eligible for sale could cause
our common stock price to decline even if eMagin is successful.





Sales of
significant amounts of common stock in the public market, or the perception that
such sales may occur, could materially affect the market price of our common
stock. These sales might also make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. As of February 28, 2009, we have outstanding common shares of
15,921,113 plus (i) options to purchase 1,615,673 shares, (ii) warrants to
purchase 12,279,239 shares and (iii) convertible preferred stock to purchase
7,652,000 shares of common stock.





We
have a staggered board of directors and other anti-takeover provisions, which
could inhibit potential investors or delay or prevent a change of control that
may favor you.





Our Board
of Directors is divided into three classes and our Board members are elected for
terms that are staggered. This could discourage the efforts by others to obtain
control of eMagin. Some of the provisions of our certificate of incorporation,
our bylaws and Delaware law could, together or separately, discourage potential
acquisition proposals or delay or prevent a change in control. In particular,
our board of directors is authorized to issue up to 10,000,000 shares of
preferred stock (less any outstanding shares of preferred stock) with rights and
privileges that might be senior to our common stock, without the consent of the
holders of the common stock.





Changes
in internal controls or accounting guidance could cause volatility in our stock
price.





Guidance
regarding implementation and interpretation of the provisions of
Section 404 continues to be issued by the standards-setting community. As a
result of the ongoing interpretation of new guidance and the audit testing to be
completed in the future, our internal controls over financial reporting may
include an unidentified material weakness which would result in receiving an
adverse opinion on our internal controls over financial reporting from our
independent registered public accounting firm. This could result in significant
additional expenditures responding to the Section 404 internal control
audit, heightened regulatory scrutiny and potentially an adverse effect to the
price of our stock.





In
addition, due to increased regulatory scrutiny surrounding publicly traded
companies, the possibility exists that a restatement of past financial results
could be necessitated by an alternative interpretation of present accounting
guidance and practice. Although management does not currently anticipate that
this will occur, a potential result of such interpretation could be an adverse
effect on our stock price.




18




The
market price of our common stock may be volatile.





The
market price of our common stock has been subject to wide fluctuations. During
our four most recently completed fiscal quarters, the closing price of our stock
ranged from $0.34 to $1.35 and decreased to a low of $0.34 on December 1, 2008.
The market price of our common stock in the future is likely to continue to be
subject to wide fluctuations in response to various factors, including, but not
limited to, the following:


·
            variations
      in our operating results and financial
  conditions;


·
            actual
      or anticipated announcements of technical innovations, new product
      developments, or design wins by us or our
  competitors;


·
            general
      conditions in the semiconductor and flat panel display industries;
      and


·
            worldwide
      economic and financial conditions.





In
addition, the public stock markets have experienced extreme price and volume
fluctuations that have particularly affected the market price for many
technology companies and that have often been unrelated to the operating
performance of these companies. The broad market fluctuations and other factors
may continue to adversely affect the market price of our common
stock.





ITEM
1B. UNRESOLVED STAFF COMMENTS





Not
applicable.





ITEM
2. PROPERTIES





Our
corporate offices are located in Bellevue, Washington.  Our Washington
location includes administrative, finance, operations, research and development
and sales and marketing functions and consists of leased space of approximately
19,000 square feet.  The lease expires in 2009.  Our
manufacturing facility is located in Hopewell Junction, New York, where we lease
approximately 33,000 square feet from IBM.  The NY facility houses our
equipment for OLED microdisplay fabrication, assembly operations, research and
development, and administrative functions. The lease expires in
2009.  We believe our facilities are adequate for our current and
near-term needs. We believe we will be able to renew these leases or obtain
alternative spaces under acceptable terms. See Note 12 to our Consolidated
Financial Statement for more information about our lease
commitments.





ITEM
3. LEGAL PROCEEDINGS





A former
employee (“plaintiff”) of the Company commenced legal action in the United
States District Court for the Southern District of New York, on or about October
12, 2007, alleging that the plaintiff was subject to gender based discrimination
and retaliation in violation of Title VII of the Civil Rights Act of 1964 (Case No. 07-CV-8827
(KMK).  The plaintiff seeks unspecified compensatory damages,
punitive damages and attorneys’ fees.  On November 26, 2007, the
Company served and filed its Answer, in which it denied the material allegations
of the Complaint and asserted numerous affirmative defenses.  This
action is presently in the discovery stage.  The Company disputes the
allegations of the Complaint and intends on vigorously defending this
action.




On
December 6, 2005, New York State Urban Development Corporation commenced action
against eMagin in the Supreme Court of the State of New York, County of New York
against eMagin, asserting breach of contract and seeking to recover a $150,000
grant which was made to eMagin based on goals set forth in the agreement for
recruitment of employees.  On July 13, 2006, eMagin agreed to a
settlement with the New York State Urban Development Corporation to repay
$112,200 of the $150,000 grant. The settlement requires that repayments be made
on a monthly basis in the amount of $3,116.67 per month commencing August 1,
2006 and ending on July 1, 2009.




ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS





None.


19




PART
II





ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES





Our
common stock is traded on the OTC Bulletin Board under the symbol
"EMAN".  The following table sets forth the range of high and low
prices per share of our common stock for each period indicated.





2007
                
                
                2008High
                
                
                Low
                
                
                High
                
                
                LowFirst
      quarter
                
                $
                1.08
                
                
                $
                0.26
                
                
                $
                1.47
                
                
                $
                0.88Second
      quarter
                
                $
                0.85
                
                
                $
                0.42
                
                
                $
                1.05
                
                
                $
                0.63Third
      quarter
                
                $
                1.64
                
                
                $
                0.65
                
                
                $
                0.83
                
                
                $
                0.52Fourth
      quarter
                
                $
                1.75
                
                
                $
                0.85
                
                
                $
                0.75
                
                
                $
                0.21





As of
February 28, 2009, there were 510 holders of record of our common stock. Because
brokers and other institutions hold many of the shares on behalf of
shareholders, we are unable to determine the actual number of shareholders
represented by these record holders.





Dividends





We have
never declared or paid cash dividends on our common stock. We currently
anticipate that we will retain all future earnings to fund the operation of our
business and do not anticipate paying dividends on our common stock in the
foreseeable future.





Recent
Issuances of Unregistered Stock





As
previously reported on a Form 8-K that was filed with the Securities and
Exchange Commission on December 23, 2008, pursuant to a Securities Purchase
Agreement (the “Securities Purchase Agreement”) entered into on December 18,
2008 between the Company and  an accredited
Investor ("Investor") on December 22, 2008 (the “Closing”), the
Company sold the Investor for an aggregate purchase price of $4,033,000 an
aggregate of 4,033 shares of its Series B Convertible Preferred Stock (the
“Preferred Stock – Series B”), which have a stated value of $1,000 per share, a
conversion price of $0.75 per share and have the rights and preferences set
forth in the Certificate of Designations of Series B Convertible Preferred Stock
filed with the Secretary of State for the State of Delaware on December 19, 2008
(the “Certificate of Designations”), and warrants to purchase 1,875,467 shares
of common stock at $1.03 per share. The warrants terminate on December 22,
2013.





On
December 22, 2008, the Company entered into an Exchange Agreement (the “Exchange
Agreement”) with three holders (“Exchange Holders”) of its outstanding Amended
Notes (as defined below).  Pursuant to the Exchange Agreement, on
December 22, 2008, the Exchange Holders exchanged $1,700,000 of their
outstanding Amended Notes and accrued and unpaid interest thereon and
received 1,706 shares of the Preferred Stock (the amount of the outstanding
principal and accrued and unpaid interest due on the Amended Notes
exchanged divided by $1,000).




On August
26, 2008, the Company and Moriah Capital, L.P. (“Moriah”) entered into Amendment
No. 3 to the Loan and Security Agreement dated as of August 20, 2008 (the
“Amendment No. 3”). Pursuant to Amendment No. 3, the Company issued Moriah
a warrant, which terminates on August 7, 2013, to purchase up to 370,000 shares
of the Company’s common stock at an exercise price of $1.30 per
share.





Pursuant
to Amendment No. 3, the Company and Moriah entered into an Amended and
Restated Securities Issuance agreement (the “Amended and Restated Securities
Issuance Agreement”). In connection with a Securities Issuance Agreement, dated
as of August 7, 2007 (the “Original Securities Issuance Agreement”), the Company
issued Moriah 162,500 shares of the Company’s common stock (the “2007
Shares”).  Pursuant to the Amended and Restated Securities Issuance
Agreement, Moriah agreed to waive the Company’s obligation to buy back the
2007 Shares with respect to 125,000 of such shares and to defer the Company’s
obligation to buy back 37,500 of such 2007 Shares  (collectively, the
“Put Waiver”). Pursuant to the Amended and Restated Securities Agreement, the
Company issued Moriah 485,000 shares of its Common Stock (of which 125,000
shares were issued in consideration for the Put Waiver from Moriah and 360,000
shares were issued in lieu of the issuance to Moriah of the Contingent
Issued Shares (as described in the Original Securities Issuance Agreement)).
Additionally, pursuant to the Amended and Restated Securities Issuance
Agreement, the Company has also granted Moriah a put option pursuant to which
Moriah can sell 162,500 shares of its common stock issued under the Amended and
Restated Securities Agreement for $195,000, pro-rated for any
portion thereof (the “2007 Put Price”). The 2007 Put Option shall
automatically be deemed exercised by Moriah unless Moriah delivers written
notice to the Company at any time between July 1, 2009 and August 1, 2009 that
it does not wish to exercise the 2007 Put Option. The Company also granted
Moriah a second put option pursuant to which Moriah can sell 360,000 of the
shares issued to Moriah pursuant to the Amended and Restated Securities Purchase
Agreement to the Company for $234,000 (the “2008 Put
Option”).  The 2008 Put Option shall automatically be deemed
exercised by Moriah unless Moriah delivers written notice to the Company at any
time between July 1, 2009 and August 1, 2009 that Moriah does not wish to
exercise the 2008 Put option in whole or in part.




20




On August
19, 2008, the Holders (as defined below) of the Amended Notes and the
Investors in the Purchase Agreement (as defined below) consented to the
Company’s execution of the Amendment No. 3, Amended and Restated Securities
Issuance Agreement, and the Amended Registration Rights Agreement.  On
September 4, 2008, in consideration for the consent, a total of 144,000 shares
of common stock were issued to the Holders and Investors based on individual
participation in the Amended Notes and Securities Purchase
Agreement.





On April
2, 2008, eMagin Corporation (the “Company”) entered into a Securities Purchase
Agreement, pursuant to which it sold to certain qualified institutional buyers
and accredited investors an aggregate of 1,586,539 shares of the Company’s
common stock, par value $0.001 per share, and warrants to purchase an additional
793,273 shares of common stock, for an aggregate purchase price of $1,650,000.
The purchase price of the common stock was $1.04 per share and the strike price
of the corresponding warrant was $1.30 per share. The warrants expire April 2,
2013.





The
Company and Moriah Capital, L.P. (“Moriah”) entered into Amendment No. 2 to the
Loan and Security Agreement dated as of March 25, 2008 (the “Second
Amendment”).  Pursuant to the Second Amendment, Moriah waived the
Company’s noncompliance with Sections 7.2, 7.3, 8.11, 9.1, 9.3, 9.5(c) and 11.5
of the Loan and Security Agreement to the extent such noncompliance resulted
solely from the Company’s inadvertently misstating the amount of its inventory
that contained defective parts (the “Defective Inventory Count”), provided that
on or before April 8, 2008 the Company repays Moriah all prior Advances (as
defined in the Loan and Security Agreement), which exceed the Maximum Credit (as
defined in the Loan and Security Agreement) if any, as a result of the Defective
Inventory Count.




Pursuant
to the Second Amendment, the Company has advised Moriah of certain delays
in implementing the Lockbox Agreement, as required under the Loan and
Security Agreement, which, if unwaived, would result in the Company’s
noncompliance with section 2.1(f) of the Loan and Security Agreement and with
Section 3 of the Post-Closing Agreement between the Company and Moriah, dated
August 7, 2007.  Moriah agreed to waive noncompliance with Sections
2.1(f) of the Loan and Security Agreement and Section 3 of the Post-Closing
Agreement in reliance on the Company’s representation and warranty that all
lockbox arrangements required to be implemented under Section 2.1(f) of the Loan
and Security Agreement and under Section 3 of the Post-Closing Agreement have
been consummated and are in full force and effect as of March 12,
2008.





On
January 30, 2008, the Company and Moriah entered into a Warrant Issuance
Agreement (the “Warrant Issuance Agreement”).  The Company and Moriah
entered into Amendment No. 1 to the Warrant Issuance Agreement. Pursuant to the
Amendment No. 1 to Warrant Issuance Agreement, the Company issued Moriah a
Warrant to purchase 250,000 shares of the Company’s common stock at an exercise
price of $1.50 per share until March 25, 2013 (the “March 2008 Warrant”).
Pursuant to the Amendment No. 1 to the Warrant Issuance Agreement, Section 3.2
of the Warrant Issuance Agreement was amended to provide that the Company has to
file by April 29, 2008 a registration statement with the Securities and Exchange
Commission to register 1,000,000 shares of the Company’s common stock issuable
upon exercise of warrants issued to Moriah (including the March 2008 Warrant and
a warrant to purchase 750,000 shares of the Common Stock which was previously
issued to Moriah).





Pursuant to the Securities Purchase Agreement, the Company claims
an exemption from the registration requirements of the Securities Act of 1933
(the “Act”), as amended for the private placement of the above-referenced
securities pursuant to Section 4(2) of the Act and/or Regulation D promulgated
thereunder since, among other things, the transaction did not involve a public
offering, the investors were accredited investors and/or qualified institutional
buyers, the investors had access to information about the Company and their
investment, the investors took the securities for investment and not resale, and
the Company took appropriate measures to restrict the transfer of the
securities.




Equity
Compensation Plan Information
 
 The
following table sets forth the aggregate information of our equity compensation
plans in effect as of December 31, 2008:
  Plan
                  
                  Number of
                    securities to be
                    issued upon exercise
                    of outstanding options,
                    warrants and rights
                  
                  
                  Weighted-average
                    exercise price of
                    outstanding options,
                    warrants and rights
                  
                  
                  Number of securities
                    remaining available for
                    future issuance under
                    equity compensation plans
                    (excluding securities reflected
                    in first columnEquity
      compensation plans approved by security holders
                  
                  
                  1,323,480
                  
                  
                  $
                  1.23
                  
                  
                  
                  2,055,595Equity
      compensation plans not approved by security holders
                  
                  
                  292,193
                  
                  
                  $
                  3.41


21




ITEM 6.  SELECTED FINANCIAL
DATA





The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”. The
statements of operations data for the years ended December 31, 2008, 2007, and
2006 and the balance sheet data at December 31, 2008 and 2007 are derived from
our audited financial statements which are included elsewhere in this Form
10-K.  The statements of operations data for the years ended December
31, 2005 and 2004 and the balance sheet data at December 31, 2006, 2005 and 2004
are derived from our audited financial statements which are not included in this
Form 10-K.   The historical results are not necessarily
indicative of results to be expected for future periods. The following
information is presented in thousands, except per share data.





Consolidated
Statements of Operations Data:





For
      the Year Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(In
      thousands, except per share data)Revenue
                  
                  $
                  18,739
                  
                  
                  $
                  17,554
                  
                  
                  $
                  8,169
                  
                  
                  $
                  3,745
                  
                  
                  $
                  3,593Cost
      of goods sold
                  
                  
                  10,673
                  
                  
                  
                  12,628
                  
                  
                  
                  11,359
                  
                  
                  
                  10,219
                  
                  
                  
                  5,966Gross
      profit (loss)
                  
                  
                  8,066
                  
                  
                  
                  4,926
                  
                  
                  
                  (3,190
                  )
                  
                  
                  (6,474
                  )
                  
                  
                  (2,373
                  )Operating
      expenses:Research
      and development
                  
                  
                  2,081
                  
                  
                  
                  2,949
                  
                  
                  
                  4,406
                  
                  
                  
                  4,020
                  
                  
                  
                  898Selling,
      general and administrative
                  
                  
                  6,254
                  
                  
                  
                  6,591
                  
                  
                  
                  8,860
                  
                  
                  
                  6,316
                  
                  
                  
                  4,428Total
      operating expenses
                  
                  
                  8,335
                  
                  
                  
                  9,540
                  
                  
                  
                  13,266
                  
                  
                  
                  10,336
                  
                  
                  
                  5,326Loss
      from operations
                  
                  
                  (269
                  )
                  
                  
                  (4,614
                  )
                  
                  
                  (16,456
                  )
                  
                  
                  (16,810
                  )
                  
                  
                  (7,699
                  )Other
      (expense) income, net
                  
                  
                  (1,590
                  )
                  
                  
                  (13,874
                  )
                  
                  
                  1,190
                  
                  
                  
                  282
                  
                  
                  
                  (5,012
                  )Net
      loss
                  
                  $
                  (1,859
                  )
                  
                  $
                  (18,488
                  )
                  
                  $
                  (15,266
                  )
                  
                  $
                  (16,528
                  )
                  
                  $
                  (12,711
                  )Basic
      and diluted loss per share
                  
                  $
                  (0.13
                  )
                  
                  $
                  (1.59
                  )
                  
                  $
                  (1.52
                  )
                  
                  $
                  (1.94
                  )
                  
                  $
                  (1.98
                  )Shares
      used in calculation of loss per share:Basic
      and diluted
                  
                  
                  14,175
                  
                  
                  
                  11,633
                  
                  
                  
                  10,058
                  
                  
                  
                  8,541
                  
                  
                  
                  6,428





Consolidated
Balance Sheet Data:





December
      31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Cash
      and cash equivalents
                
                $
                2,404
                
                
                $
                713
                
                
                $
                1,415
                
                
                $
                6,727
                
                
                $
                13,457Working
      capital (deficit)
                
                $
                3,300
                
                
                $
                (4,708
                )
                
                $
                (305
                )
                
                $
                8,868
                
                
                $
                14,925Total
      assets
                
                $
                10,104
                
                
                $
                6,648
                
                
                $
                7,005
                
                
                $
                14,142
                
                
                $
                18,436Long-term
      obligations
                
                $
                --
                
                
                $
                60
                
                
                $
                2,229
                
                
                $
                56
                
                
                $
                22Total
      shareholders’ equity (capital deficit)
                
                $
                3,661
                
                
                $
                (4,170
                )
                
                $
                (1,164
                )
                
                $
                10,401
                
                
                $
                16,447





22


ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





Introduction





The
following discussion should be read in conjunction with the Financial Statements
and Notes thereto. Our fiscal year ends December 31. This document contains
certain forward-looking statements including, among others, anticipated trends
in our financial condition and results of operations and our business strategy.
(See Part I, Item 1A, "Risk Factors "). These forward-looking statements are
based largely on our current expectations and are subject to a number of risks
and uncertainties. Actual results could differ materially from these
forward-looking statements. Important factors to consider in evaluating such
forward-looking statements include (i) changes in external factors or in our
internal budgeting process which might impact trends in our results of
operations; (ii) unanticipated working capital or other cash requirements; (iii)
changes in our business strategy or an inability to execute our strategy due to
unanticipated changes in the industries in which we operate; and (iv) various
competitive market factors that may prevent us from competing successfully in
the marketplace.





Overview





We design
and manufacture miniature displays, which we refer to as
OLED-on-silicon-microdisplays, and microdisplay modules for virtual imaging,
primarily for incorporation into the products of other manufacturers.
Microdisplays are typically smaller than many postage stamps, but when viewed
through a magnifier they can contain all of the information appearing on a
high-resolution personal computer screen. Our microdisplays use organic light
emitting diodes, or OLEDs, which emit light themselves when a current is passed
through the device. Our technology permits OLEDs to be coated onto silicon chips
to produce high resolution OLED-on-silicon microdisplays.





We
believe that our OLED-on-silicon microdisplays offer a number of advantages in
near to the eye applications over other current microdisplay technologies,
including lower power requirements, less weight, fast video speed without
flicker, and wider viewing angles. In addition, many computer and video
electronic system functions can be built directly into the OLED-on-silicon
microdisplay, resulting in compact systems with lower expected overall system
costs relative to alternate microdisplay technologies.





Since our
inception in 1996 through 2004, we derived the majority of our revenues from
fees paid to us under research and development contracts, primarily with the
U.S. federal government. We have devoted significant resources to the
development and commercial launch of our products. We commenced limited initial
sales of our SVGA+ microdisplay in May 2001 and commenced shipping samples of
our SVGA-3D microdisplay in February 2002. From inception to December 31, 2008,
we have recognized an aggregate of approximately $54.4 million from sales of our
products. As of February 28, 2009, we have a backlog of approximately $7.4
million in products ordered for delivery through December 31, 2009 compared to a
backlog of $7.1 million in products ordered for delivery through December 31,
2008. This backlog consists of non-binding purchase orders and purchase
agreements. These products are being applied or considered for near-eye and
headset applications in products such as thermal imagers, night vision goggles,
entertainment headsets, handheld Internet and telecommunication appliances,
viewfinders, and wearable computers to be manufactured by original equipment
manufacturer (OEM) customers. We have also shipped a limited number of our Z800
3DVisor personal display systems. In addition to marketing OLED-on-silicon
microdisplays as components, we also offer microdisplays as an integrated
package, which we call Microviewer that includes a compact lens for viewing the
microdisplay and electronic interfaces to convert the signal from our customer's
product into a viewable image on the microdisplay.





We hold a
license from Eastman Kodak for use of their OLED related technology and we have
developed a strong portfolio of our own patents, manufacturing know-how and
technology to create high performance OLED-on-silicon microdisplays and related
optical systems. We believe our technology and intellectual property portfolio,
gives us a leadership position in OLED and OLED-on-silicon microdisplay
technology. We believe that we are the only company to demonstrate publicly and
market full-color small molecule OLED-on-silicon microdisplays.





Company
History





We began
as a developmental stage company. As of January 1, 2003, we were no longer
classified as a development stage company. We have transitioned to manufacturing
our product and intend to significantly increase our marketing, sales, and
research and development efforts, and expand our operating infrastructure.
Currently, most of our operating expenses are labor related and therefore
semi-fixed. If we are unable to generate significant revenues, our net losses in
any given period could be greater than expected.





23




Critical
Accounting Policies





The
Securities and Exchange Commission ("SEC") defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods. Not all of the accounting policies require management to
make difficult, subjective or complex judgments or estimates. However, the
following policies could be deemed to be critical within the SEC
definition.





Revenue
and Cost Recognition





Revenue
on product sales is recognized when persuasive evidence of an arrangement
exists, such as when a purchase order or contract is received from the customer,
the price is fixed, title and risk of loss to the goods has changed and there is
a reasonable assurance of collection of the sales proceeds. We obtain written
purchase authorizations from our customers for a specified amount of product at
a specified price and consider delivery to have occurred at the time of
shipment. We record a reserve for estimated sales returns, which is reflected as
a reduction of revenue at the time of revenue
recognition.   Products sold directly to consumers have a thirty
day right of return.  Revenue on consumer products is deferred until
the right of return has expired.





Revenues
from research and development activities relating to firm fixed-price contracts
are generally recognized on the percentage-of-completion method of accounting as
costs are incurred (cost-to-cost basis). Revenues from research and development
activities relating to cost-plus-fee contracts include costs incurred plus a
portion of estimated fees or profits based on the relationship of costs incurred
to total estimated costs. Contract costs include all direct material and labor
costs and an allocation of allowable indirect costs as defined by each contract,
as periodically adjusted to reflect revised agreed upon rates. These rates are
subject to audit by the other party.





Use
of Estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. These
estimates and assumptions relate to recording net revenue, collectibility of
accounts receivable, useful lives and impairment of tangible and intangible
assets, accruals, income taxes, inventory realization and other factors.
Management has exercised reasonable judgment in deriving these estimates.
Consequently, a change in conditions could affect these estimates.





Fair
Value of Financial Instruments





eMagin’s
cash, cash equivalents, accounts receivable, short-term investments, accounts
payable and debt are stated at cost which approximates fair value due to the
short-term nature of these instruments.





Stock-based
Compensation





eMagin
maintains several stock equity incentive plans.  The 2005 Employee
Stock Purchase Plan (the “ESPP”) provides our employees with the opportunity to
purchase common stock through payroll deductions.  Employees purchase
stock semi-annually at a price that is 85% of the fair market value at certain
plan-defined dates.  As of December 31, 2008, the number of shares of
common stock available for issuance was 300,000.  As of December 31,
2008, the plan had not been implemented.





The 2003
Stock Option Plan (the”2003 Plan”) provides for grants of shares of common stock
and options to purchase shares of common stock to employees, officers, directors
and consultants.   Under the 2003 plan, an ISO grant is granted
at the market value of our common stock at the date of the grant and a non-ISO
is granted at a price not to be less than 85% of the market value of the common
stock.  These options have a term of up to 10 years and vest over a
schedule determined by the Board of Directors, generally over a five year
period.  The amended 2003 Plan provides for an annual increase in
common stock available for issuance by 3% of the diluted shares outstanding on
January 1 of each year for a period of 9 years which commenced January 1,
2005.





The 2008
Incentive Stock Plan (“the 2008 Plan”) adopted and approved by the Board of
Directors on November 5, 2008 provides for shares of common stock and options to
purchase shares of common stock to employees, officers, directors and
consultants.   As of December 31, 2008, no options or shares of
common stock were granted from this plan.





The
Company accounts for the measurement and recognition of compensation expense for
all share-based payment awards made to employees and directors under Statement
of Financial Accounting Standards No. 123 (revised 2004),Share-Based
Payment , (SFAS 123(R)). Under SFAS 123(R), the fair value of stock
awards is estimated at the date of grant using the Black-Scholes option
valuation model.  Stock-based compensation expense is reduced for
estimated forfeitures and is amortized over the vesting period using the
straight-line method. See Note 11 to the financial statements – Stock
Compensation for a further discussion on stock-based compensation.




24




Results
of Operations





The
following table presents certain financial data as a percentage of total revenue
for the periods indicated. Our historical operating results are not necessarily
indicative of the results for any future period.





As
      a Percentage of Total
                    Revenue
                    Year
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Consolidated
      Statements of Operations Data:Revenue
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %Cost
      of goods
      sold
                  
                  
                  57
                  
                  
                  
                  72
                  
                  
                  
                  139Gross
      profit (loss)
                  
                  
                  43
                  
                  
                  
                  28
                  
                  
                  
                  (39
                  )Operating
      expenses:Research
      and development
                  
                  
                  11
                  
                  
                  
                  17
                  
                  
                  
                  54Selling,
      general and administrative
                  
                  
                  33
                  
                  
                  
                  38
                  
                  
                  
                  109Total
      operating expenses
                  
                  
                  44
                  
                  
                  
                  55
                  
                  
                  
                  163Loss
      from operations
                  
                  
                  (1
                  )
                  
                  
                  (27
                  )
                  
                  
                  (202
                  )Other
      (expense) income
                  
                  
                  (9
                  )
                  
                  
                  (78
                  )
                  
                  
                  15Net
      loss
                  
                  
                  (10
                  )
      %
                  
                  
                  (105
                  )
      %
                  
                  
                  (187
                  )
      %





Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007





Revenues





Revenues
increased by approximately $1.1 million to a total of approximately $18.7
million for the year ended December 31, 2008 from approximately $17.6 million
for the year ended December 31, 2007, representing an increase of 7%. This
increase was primarily due to increased contract revenue from research and
development projects. Our contract revenue increased approximately $1.6 million
while our product revenue decreased approximately $0.5 million. Our current
expectation is that total revenue will continue to grow in 2009 if we
successfully execute our business plan.





Cost
of Goods Sold





Cost of
goods sold includes direct and indirect costs associated with production of our
products. Cost of goods sold for the years ended December 31, 2008 and 2007 was
approximately $10.7 million and $12.6, respectively, a decrease of $1.9
million.  The decrease included an inventory write-off of
approximately $0.4 million in 2007 related to a non-recurring production issue
that occurred during the fourth quarter of 2007. An increase in yield in 2008
accounted for the remaining difference.





Cost of
goods sold as a percentage of revenues improved from 72% in 2007 to 57% in 2008.
Cost of goods is comprised primarily of material and labor cost. The labor
portion of cost of goods is mostly fixed. Increased display production output
volume and improved manufacturing yield results in a lower cost of goods sold
percentage.





The
gross profit was approximately $8.1 million for the year ended December 31, 2008
and the gross profit was approximately $4.9 million for the year ended December
31, 2007.  The gross margin was 43% for the year ended December 31,
2008 as compared to the gross margin of 28% for the year ended December 31,
2007.  The gross margin improvement was attributed primarily to
improved manufacturing yield.





Research
and Development Expenses





Research
and development expenses include salaries, development materials and other costs
specifically allocated to the development of new microdisplay products, OLED
materials and subsystems.  Research and development expenses for the
year ended December 31, 2008 were approximately $2.1 million as compared to
approximately $2.9 million for the year ended December 31, 2007, a decrease of
$0.8 million.  The 29% decrease was due to the re-deployment of
research and development personnel to production contract services which are
included in cost of goods sold and to a streamlining of the research and
development effort in the subsystems area which resulted in expense
reductions.




25




Selling,
General and Administrative Expenses





Selling,
general and administrative expenses consist primarily of salaries and related
expenses for employees in the functional areas of business development, finance,
information technology, quality assurance and other corporate expenses. This
includes fees for professional services, such as audit and legal fees associated
with audit, SEC filings, and other public company related matters, as well as
other marketing and administrative expenses.  General and
administrative expenses decreased by approximately $0.3 million to a total of
approximately $6.3 million for the year ended December 31, 2008 from $6.6
million for the year ended December 31, 2007. The 5% decrease was primarily
related to a reduction of marketing expenses, personnel costs and other cost
reductions.





Other
(Expense) Income





Other
(expense) income, net consists primarily of interest income earned on
investments, interest expense related to the secured debt, loss from the change
in the derivative liability, loss on the extinguishment of debt and other income
from the licensing of intangible assets.





For the
year ended December 31, 2008, interest expense was approximately $2.0 million as
compared to $3.1 million for the year ended December 31,
2007.   Interest expense for the year ended December 31, 2008 was
comprised of interest associated with debt of approximately $0.7 million; the
amortization of the deferred costs associated with debt of approximately $1.3
million; the amortization of the debt discount associated with debt of $25
thousand; and other expenses of approximately $2 thousand.  Interest
expense for 2007 consisted of interest expense associated with debt of
approximately $744 thousand; the amortization of the deferred costs associated
with debt of approximately $418 thousand; and the amortization of the debt
discount associated with the debt of approximately $1.9 million.  The
majority of the decrease in interest expense in 2008 as compared to 2007 was a
reduction in the amortization of debt discount associated with debt of $1.9
million offset by an increase in the amortization of deferred costs associated
with debt of $0.9 million.





For
the year ended December 31, 2008, the change in the derivative liability was $0
compared to a loss of approximately $853 thousand for the year ended December
31, 2007. The loss on extinguishment of debt was $0 for the year ended December
31, 2008 as compared to a loss of $10.7 million for the year ended December 31,
2007.





Other
income for the year ended December 31, 2008 was approximately $400 thousand
which consisted of interest income of approximately $11
thousand;  approximately $18 thousand of income from equipment
salvage; gain on the license of intangibles of $557 thousand; and offset by
approximately $186 thousand of liquidated damages expense related to
registration payment arrangements as compared to approximately $815 thousand for
the year ended December 31, 2007 which consisted of interest income of
approximately $43 thousand, a gain on the license of intangible assets of $869
thousand, offset by a write-off of a miscellaneous receivable of $103 thousand,
and other income of $7 thousand.  See Note 12 to the financial
statements:  Commitments and Contingencies – Royalties for additional
information.





Off-Balance
Sheet Arrangements





We have
no off balance sheet arrangements that are reasonably likely to have a current
or future effect on our financial condition, revenues, results of operations,
liquidity or capital expenditures.





Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006





Revenues





Revenues
increased by approximately $9.4 million to a total of approximately $17.6
million for the year ended December 31, 2007 from approximately $8.2 million for
the year ended December 31, 2006, representing an increase of 115%. This
increase was due to increased microdisplay demand and increased production
capabilities. Contract revenue increased approximately $1.2 million while our
product revenue increased approximately $8.2 million. Average price per unit for
microdisplays was $371 in 2007 and $386 in 2006.




26




Cost
of Goods Sold





Cost of
goods sold includes direct and indirect costs associated with production of our
products. Cost of goods sold for the years ended December 31, 2007 and 2006 was
approximately $12.6 million and $11.4, respectively, an increase of $1.3
million. The increase included an inventory write-off of approximately $0.4
million and an increase in our warranty return reserve of approximately $0.6
million, both related to a non-recurring production issue that occurred during
the fourth quarter of 2007. The non-recurring production issue involved changing
a production procedure without adequate testing prior to implementation. The
Company has taken steps to ensure any procedural changes in the production
process will be thoroughly tested prior to implementation.





Cost of
goods sold as a percentage of revenues improved from 139% in 2006 to 72% in
2007. Cost of goods is comprised primarily of material and labor cost. The labor
portion of cost of goods is mostly fixed. Increased volume results in a lower
cost of goods sold percentage. The improvement in cost of goods sold in 2007 was
due primarily to both a streamlining of the Company’s workforce in mid-2006 that
had a significant full year effect on the fixed portion of cost of goods sold in
2007 and the effect of the revenue increase.





The gross
profit was approximately $4.9 million for the year ended December 31, 2007 and
the gross loss was approximately ($3.2) million for the year ended December 31,
2006. The gross margin was 28% for the year ended December 31, 2007 as compared
to the gross loss of (39%) for the year ended December 31, 2006. The gross
margin improvement was attributed to fuller utilization of our fixed production
overhead due to higher unit production volume.





Research and Development
Expenses





Research
and development expenses included salaries, development materials and other
costs specifically allocated to the development of new microdisplay products,
OLED materials and subsystems.  Research and development expenses for
the year ended December 31, 2007 were approximately $2.9 million as compared to
approximately $4.4 million for the year ended December 31, 2006.  The
decrease was primarily due to a decrease in research and development personnel
and related expenses.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses consist primarily of salaries and related
expenses for employees in the functional areas of business development, finance,
information technology, quality assurance and other corporate expenses. This
includes fees for professional services, such as audit and legal fees associated
with audit, SEC filings, and other public company related matters, as well as
other marketing and administrative expenses.  General and
administrative expenses decreased by approximately $2.3 million to a total of
approximately $6.6 million for the year ended December 31, 2007 from $8.9
million for the year ended December 31, 2006. The decrease in selling, general
and administrative expenses was due primarily to a reduction of personnel and
related expenses and a decrease in marketing expenses.





Other
(Expense) Income





Other
(expense) income, net consists primarily of interest income earned on
investments, interest expense related to the secured debt, loss from the change
in the derivative liability, loss on the extinguishment of debt and other income
from the licensing of intangible assets.





For the
year ended December 31, 2007, interest expense was approximately $3.1 million as
compared to $1.3 million for the year ended December 31,
2006.   Interest expense for 2007 consisted of interest expense
associated with debt of approximately $744 thousand; the amortization of the
deferred costs associated with debt of approximately $418 thousand; and the
amortization of the debt discount associated with the debt of approximately $1.9
million.  Interest expense for the year ended December 31, 2006 was
comprised of interest associated with debt of approximately $124 thousand; the
amortization of the deferred costs associated with the notes payable of
approximately $221 thousand; and the amortization of the debt discount
associated with the debt of approximately $956 thousand.  The increase
of $1.8 million of interest expense in 2007 as compared to 2006 was comprised of
an increase in the interest expense associated with debt of $0.6 million, an
increase in the amortization of deferred costs associated with debt of $0.2
million and an increase in the amortization of the debt discount associated with
debt of $0.9 million and was a result of higher debt balances in
2007.





For the
year ended December 31, 2007, the change in the derivative liability was a loss
of approximately $853 thousand as compared to a gain of approximately $2.4
million ended December 31, 2006.





The loss
on extinguishment of debt was $10.7 million for the year ended December 31, 2007
as compared to $0 for the year ended December 31, 2006.


Other
income for the year ended December 31, 2007 was approximately $815 thousand
which consisted of interest income of approximately $43 thousand, a gain on the
license of intangible assets of $869 thousand, offset by a write-off of a
miscellaneous receivable of $103 thousand, and other income of $7 thousand as
compared to $91 thousand for the year ended December 31, 2006.  See
Note 12 to the financial statements:  Commitments and Contingencies –
Royalties for additional information.




27




Liquidity and Capital Resources





As of
December 31, 2008, we had approximately $2.5 million of cash and investments as
compared to approximately $.8 million as of December 31, 2007.  The
increase of approximately $1.7 million was due primarily to cash provided by
financing activities.





For the
year ended December 31, 2008, net cash provided by operating activities was
approximately $138 thousand, attributable to improved net loss of approximately
$1.9 million offset by non cash expenses of approximately $3.0 million and
approximately $1.1 million from the change in operating assets and
liabilities.     Net cash used in operating activities
for the year ended December 31, 2007 was approximately $1.9 million, primarily
attributable to our net loss of approximately $18.5 million offset primarily by
the non-cash expense components of loss on extinguishment of debt of
approximately $10.7 million, stock based compensation of approximately $1.7
million, amortization of discount on notes payable of approximately $1.9
million, and issuance of common stock for services of approximately $1.3
million.





For the
year ended December 31, 2008, net cash used in investing activities was
approximately $311 thousand primarily related to the purchase of
equipment.  Net cash provided by investing activities for the year
ended December 31, 2007 was approximately $61 thousand primarily related to the
maturing of investments.





Net cash
provided by financing activities for the year ended December 31, 2008 was
approximately $1.9 million and was comprised of approximately $5.5 million from
proceeds of sale of common and preferred stock, net of issuance costs
and  approximately $1.9 million from proceeds from the line of credit
offset by the payments of long-term debt of approximately $5.5
million.   Net cash provided by financing activities during the
year ended December 31, 2007 was approximately $1.2 million and was comprised
primarily of approximately $1.6 million in proceeds from debt issuance and
offset by payments on long-term debt and capitalized lease obligations of
approximately $63 thousand and deferred financing costs of approximately $368
thousand.





As we
have reported our business experienced significant revenue growth during the
years ended December 31, 2008 and 2007. This trend, if it continues, may result
in higher accounts receivable levels and may require increased production and/or
higher inventory levels.  In addition, in August 2009, we will be obligated
to repay any outstanding amounts on our line of credit if we are unable to renew
or find a suitable alternative line of credit.  As of February 28,
2009, we have drawn approximately $632 thousand of the $3 million available on
the line.  We anticipate that our cash requirements to fund these
requirements as well as other operating or investing cash requirements over the
next twelve months will be less than our current cash on hand and the cash we
anticipate generating from operations.  We anticipate that we will not
require additional funds over the next twelve months.  If unanticipated
events arise during the next twelve months and we require additional funding and
we are unable to obtain sufficient funds we will further reduce the size of our
organization and may be forced to reduce and/or curtail our production and
operations, all of which could have a material adverse impact on our business
prospects.





Contractual Obligations





The
following chart describes the outstanding contractual obligations of eMagin as
of December 31, 2008 (in thousands):





Payments
      due by periodTotal
                
                
                1
      Year
                
                
                2-3
      Years
                
                
                4-5
      YearsOperating
      lease obligations
                
                $
                619
                
                
                $
                619
                
                
                $
                —
                
                
                $
                —Line
      of credit
                
                
                1,632
                
                
                
                1,632
                
                
                
                —
                
                
                
                —Purchase
      obligations (a)
                
                
                1,339
                
                
                
                1,339
                
                
                
                —
                
                
                
                —Other
      long-term liabilities (b)
                
                
                681
                
                
                
                181
                
                
                
                250
                
                
                
                250Total
                
                $
                4,271
                
                
                $
                3,771
                
                
                $
                250
                
                
                $
                250





(a)
      The majority of purchase orders outstanding contain no cancellation fees
      except for minor re-stocking fees.


(b)
      This amount represents minimum royalty payments and the New York Urban
      Development settlement.





Effect
of Recently Issued Accounting Pronouncements





See Note
3 of the Consolidated Financial Statements in Item 8 for a full description of
recent accounting pronouncements, including the expected dates of adoption and
estimated effects on results of operations and financial condition.





28





ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Market
rate risk





We are
exposed to market risk related to changes in interest rates and foreign currency
exchanges rates.





Interest
rate risk





We hold
our assets in cash and cash equivalents.  We do not hold derivative
financial instruments or equity securities.





Foreign
currency exchange rate risk





Our
revenue and expenses are denominated in U.S. dollars.  We have
conducted some transactions in foreign currencies and expect to continue to do
so; we do not anticipate that foreign exchange gains or losses will be
significant.  We have not engaged in foreign currency hedging to
date.





Our
international business is subject to risks typical of international activity,
including, but not limited to, differing economic conditions; change in
political climates; differing tax structures; and other regulations and
restrictions.  Accordingly, our future results could be impacted by
changes in these or other factors.





29


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA





Financial
Statement Index








PageReport
      of Independent Registered Public Accounting Firm
              31Consolidated
      Balance Sheets as of December 31, 2008 and 2007
              32Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007, and
      2006
              33Consolidated
      Statements of Changes in Shareholders’ Equity (Capital Deficit) for the
      years endedDecember
      31, 2008, 2007, and 2006
              34Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007, and
      2006
              35Notes
      to the Consolidated Financial Statements
              36








30







REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 Board of
Directors and Stockholders
 eMagin
Corporation
 
 
 We have
audited the accompanying consolidated balance sheets of eMagin Corporation (the
"Company") as of December 31, 2008 and 2007, and the related consolidated
statements of operations, changes in shareholders' equity (capital deficit) and
cash flows for each of the years in the three-year period ended
December 31, 2008.  Our audits also included the financial statement
schedule - Valuation and Qualifying Accounts - listed in
the index at item 15.  These financial statements and schedule
are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  We were
not engaged to perform an audit of the Company's internal control over financial
reporting.  Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of eMagin Corporation as
of December 31, 2008 and 2007, and the consolidated results of its
operations and its consolidated cash flows for each of the years in the
three-year period ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.  Also in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
 
 /s/ Eisner
LLP
 New
York, New York
 March 27,
2009


31


eMAGIN
CORPORATION


CONSOLIDATED
BALANCE SHEETS





December 31,2008
                                                                    
                                                                    
                                                                    2007(In
      thousands, exceptshare
      and per share amounts)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                                                    
                                                                    $
                                                                    2,404
                                                                    
                                                                    
                                                                    $
                                                                    713Investments
      – held to maturity
                                                                    
                                                                    
                                                                    97
                                                                    
                                                                    
                                                                    
                                                                    94Accounts
      receivable, net
                                                                    
                                                                    
                                                                    3,643
                                                                    
                                                                    
                                                                    
                                                                    2,383Inventory
                                                                    
                                                                    
                                                                    2,374
                                                                    
                                                                    
                                                                    
                                                                    1,815Prepaid
      expenses and other current assets
                                                                    
                                                                    
                                                                    796
                                                                    
                                                                    
                                                                    
                                                                    850Total
      current assets
                                                                    
                                                                    
                                                                    9,314
                                                                    
                                                                    
                                                                    
                                                                    5,855Equipment,
      furniture and leasehold improvements, net
                                                                    
                                                                    
                                                                    381
                                                                    
                                                                    
                                                                    
                                                                    292Intangible
      assets, net
                                                                    
                                                                    
                                                                    47
                                                                    
                                                                    
                                                                    
                                                                    51Other
      assets
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    232Deferred
      financing costs, net
                                                                    
                                                                    
                                                                    362
                                                                    
                                                                    
                                                                    
                                                                    218Total
      assets
                                                                    
                                                                    $
                                                                    10,104
                                                                    
                                                                    
                                                                    $
                                                                    6,648LIABILITIES
      AND SHAREHOLDERS’ EQUITY (CAPITAL DEFICIT)Current
      liabilities:Accounts
      payable
                                                                    
                                                                    $
                                                                    1,026
                                                                    
                                                                    
                                                                    $
                                                                    620Accrued
      compensation
                                                                    
                                                                    
                                                                    837
                                                                    
                                                                    
                                                                    
                                                                    891Other
      accrued expenses
                                                                    
                                                                    
                                                                    804
                                                                    
                                                                    
                                                                    
                                                                    729Advance
      payments
                                                                    
                                                                    
                                                                    694
                                                                    
                                                                    
                                                                    
                                                                    35Deferred
      revenue
                                                                    
                                                                    
                                                                    164
                                                                    
                                                                    
                                                                    
                                                                    179Current
      portion of debt
                                                                    
                                                                    
                                                                    1,691
                                                                    
                                                                    
                                                                    
                                                                    7,089Other
      current liabilities
                                                                    
                                                                    
                                                                    798
                                                                    
                                                                    
                                                                    
                                                                    1,020Total
      current liabilities
                                                                    
                                                                    
                                                                    6,014
                                                                    
                                                                    
                                                                    
                                                                    10,563Long-term
      debt
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    60Total
      liabilities
                                                                    
                                                                    
                                                                    6,014
                                                                    
                                                                    
                                                                    
                                                                    10,623Commitments
      and contingenciesRedeemable
      common stock,:  522,500 shares redeemable as of December 31,
      2008 and 162,500 shares redeemable as of December 31, 2007
                                                                    
                                                                    
                                                                    429
                                                                    
                                                                    
                                                                    
                                                                    195Shareholders’
      equity (capital deficit):Preferred
      stock, $.001 par value: authorized 10,000,000 shares:Series
      B Convertible Preferred stock, (liquidation preference of $5,739,000)
      stated value $1,000 per share, $.001 par value:  10,000 shares
      designated and 5,739 issued as of December 31, 2008
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —Common
      stock, $.001 par value: authorized 200,000,000 shares, issued and
      outstanding, 15,213,959 shares in 2008 and 12,458,400 shares in 2007, net
      of redeemable common stock
                                                                    
                                                                    
                                                                    15
                                                                    
                                                                    
                                                                    
                                                                    12Additional
      paid in capital
                                                                    
                                                                    
                                                                    204,818
                                                                    
                                                                    
                                                                    
                                                                    195,131Accumulated
      deficit
                                                                    
                                                                    
                                                                    (201,172
                                                                    )
                                                                    
                                                                    
                                                                    (199,313
                                                                    )Total
      shareholders’ equity (capital deficit)
                                                                    
                                                                    
                                                                    3,661
                                                                    
                                                                    
                                                                    
                                                                    ( 4,170
                                                                    )Total
      liabilities and shareholders’ equity (capital deficit)
                                                                    
                                                                    $
                                                                    10,104
                                                                    
                                                                    
                                                                    $
                                                                    6,648


See notes to Consolidated Financial
Statements.


32


eMAGIN
CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS




For the Year Ended December
    31,2008
                      
                      
                      2007
                      
                      
                      2006(In
      thousands, except per share data)Revenue:Product
      revenue
                      
                      $
                      15,730
                      
                      
                      $
                      16,169
                      
                      
                      $
                      7,983Contract
      revenue
                      
                      
                      3,009
                      
                      
                      
                      1,385
                      
                      
                      
                      186Total
      revenue, net
                      
                      
                      18,739
                      
                      
                      
                      17,554
                      
                      
                      
                      8,169Cost
      of goods sold:


Product
      revenue
                                                                                          
                                                                                          
                                                                                          9,086
                                                                                          
                                                                                          
                                                                                          
                                                                                          11,889
                                                                                          
                                                                                          
                                                                                          
                                                                                          11,226


Contract
      revenue
                  
                  
                  1,587
                  
                  
                  
                  739
                  
                  
                  
                  93Cost
      of goods sold
                  
                  
                  10,673
                  
                  
                  
                  12,628
                  
                  
                  
                  11,359Gross
      profit (loss)
                  
                  
                  8,066
                  
                  
                  
                  4,926
                  
                  
                  
                  (3,190
                  )Operating
      expenses:Research
      and development
                  
                  
                  2,081
                  
                  
                  
                  2,949
                  
                  
                  
                  4,406Selling,
      general and administrative
                  
                  
                  6,254
                  
                  
                  
                  6,591
                  
                  
                  
                  8,860Total
      operating expenses
                  
                  
                  8,335
                  
                  
                  
                  9,540
                  
                  
                  
                  13,266Loss
      from operations
                  
                  
                  (269
                  )
                  
                  
                  (4,614
                  )
                  
                  
                  (16,456
                  )Other
      income (expense):Interest
      expense
                  
                  
                  (1,990
                  )
                  
                  
                  (3,087
                  )
                  
                  
                  (1,306
                  )Loss
      on extinguishment of debt
                  
                  
                  —
                  
                  
                  
                  (10,749
                  )
                  
                  
                  —(Loss)
      gain on warrant derivative liability
                  
                  
                  —
                  
                  
                  
                  (853
                  )
                  
                  
                  2,405Other
      income, net
                  
                  
                  400
                  
                  
                  
                  815
                  
                  
                  
                  91Total
      other (expense) income, net
                  
                  
                  (1,590
                  )
                  
                  
                  (13,874
                  )
                  
                  
                  1,190Net
      loss
                  
                  $
                  (1,859
                  )
                  
                  $
                  (18,488
                  )
                  
                  $
                  (15,266
                  )Loss
      per share, basic and diluted
                  
                  $
                  (0.13
                  )
                  
                  $
                  (1.59
                  )
                  
                  $
                  (1.52
                  )Weighted
      average number of shares outstanding:Basic
      and diluted
                  
                  
                  14,175
                  
                  
                  
                  11,633
                  
                  
                  
                  10,058




See notes to Consolidated Financial
Statements.


33


eMAGIN
CORPORATION


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CAPITAL DEFICIT)


(In
thousands)





Preferred
      Stock
                
                
                Common
      Stock
                
                
                Additional
                  Paid-in
                
                
                Accumulated
                
                
                Total Shareholders’ Equity
      (CapitalShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Deficit
                
                
                Deficit)Balance,
      December 31, 2005
                
                
                —
                
                
                $
                —
                
                
                
                9,997
                
                
                $
                10
                
                
                $
                175,950
                
                
                $
                (165,559
                )
                
                $
                10,401Debt
      conversion
                
                
                —
                
                
                
                —
                
                
                
                85
                
                
                
                —
                
                
                
                220
                
                
                
                —
                
                
                
                220Issuance
      of common stock for services
                
                
                —
                
                
                
                —
                
                
                
                254
                
                
                
                —
                
                
                
                580
                
                
                
                —
                
                
                
                580Stock-based
      compensation
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,891
                
                
                
                —
                
                
                
                2,891Stock
      options exercised
                
                
                —
                
                
                
                —
                
                
                
                5
                
                
                
                —
                
                
                
                10
                
                
                
                —
                
                
                
                10Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (15,266
                )
                
                
                (15,266
                )Balance,
      December 31, 2006
                
                
                —
                
                
                $
                —
                
                
                
                10,341
                
                
                $
                10
                
                
                
                179,651
                
                
                $
                (180,825
                )
                
                $
                (1,164
                )Debt
      conversion
                
                
                —
                
                
                
                —
                
                
                
                797
                
                
                
                1
                
                
                
                310
                
                
                
                —
                
                
                
                311Issuance
      of common stock for services
                
                
                —
                
                
                
                —
                
                
                
                1,310
                
                
                
                1
                
                
                
                1,129
                
                
                
                —
                
                
                
                1,130Exercise
      of common stock warrants
                
                
                —
                
                
                
                —
                
                
                
                10
                
                
                
                —
                
                
                
                3
                
                
                
                —
                
                
                
                3Stock-based
      compensation
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,652
                
                
                
                —
                
                
                
                1,652Expiration
      of derivative liability- warrants
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,653
                
                
                
                —
                
                
                
                2,653Beneficial
      conversion premium
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                5,078
                
                
                
                —
                
                
                
                5,078Fair
      value of warrants issued
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                4,655
                
                
                
                —
                
                
                
                4,655Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                
                
                
                
                (18,488
                )
                
                
                (18,488
                )Balance,
      December 31, 2007
                
                
                —
                
                
                $
                —
                
                
                
                12,458
                
                
                $
                12
                
                
                $
                195,131
                
                
                $
                (199,313
                )
                
                $
                (4,170
                )Sale
      of preferred stock, net of issuance costs
                
                
                4
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                3,933
                
                
                
                —
                
                
                
                3,933Sale
      of common stock, net of issuance costs
                
                
                —
                
                
                
                —
                
                
                
                1,587
                
                
                
                2
                
                
                
                1,578
                
                
                
                —
                
                
                
                1,580Debt
      conversion
                
                
                2
                
                
                
                —
                
                
                
                718
                
                
                
                1
                
                
                
                1,956
                
                
                
                —
                
                
                
                1,957Issuance
      of common stock for services
                
                
                —
                
                
                
                —
                
                
                
                326
                
                
                
                —
                
                
                
                303
                
                
                
                —
                
                
                
                303Stock-based
      compensation
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                928
                
                
                
                —
                
                
                
                928Put
      option waiver
                
                
                —
                
                
                
                —
                
                
                
                125
                
                
                
                
                
                
                
                150
                
                
                
                —
                
                
                
                150Fair
      value of warrants issued
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                883
                
                
                
                —
                
                
                
                883Deemed
      dividend, put option
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (44
                )
                
                
                —
                
                
                
                (44
                )Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (1,859
                )
                
                
                (1,859
                )Balance,
      December 31, 2008
                
                
                6
                
                
                $
                —
                
                
                
                15,214
                
                
                $
                15
                
                
                $
                204,818
                
                
                $
                (201,172
                )
                
                $
                3,661




See notes
to Consolidated Financial Statements.


34


eMAGIN
CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006(In
      thousands)Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (1,859
                    )
                    
                    $
                    (18,488
                    )
                    
                    $
                    (15,266
                    )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                    
                    
                    223
                    
                    
                    
                    392
                    
                    
                    
                    841Amortization
      of deferred financing and waiver fees
                    
                    
                    1,295
                    
                    
                    
                    418
                    
                    
                    
                    221Increase
      (reduction) of provision for sales returns and doubtful
      accounts
                    
                    
                    499
                    
                    
                    
                    (79
                    )
                    
                    
                    (39
                    )Stock
      based compensation
                    
                    
                    928
                    
                    
                    
                    1,652
                    
                    
                    
                    2,891Issuance
      of common stock for services, net
                    
                    
                    95
                    
                    
                    
                    1,130
                    
                    
                    
                    553Amortization
      of discount on notes payable
                    
                    
                    25
                    
                    
                    
                    1,925
                    
                    
                    
                    956Loss
      (gain) on warrant derivative liability
                    
                    
                    —
                    
                    
                    
                    853
                    
                    
                    
                    (2,405
                    )Loss
      on extinguishment of debt
                    
                    
                    —
                    
                    
                    
                    10,749
                    
                    
                    
                    —Loss
      on other asset
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    157Write-off
      of miscellaneous receivable
                    
                    
                    —
                    
                    
                    
                    103
                    
                    
                    
                    —Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    (1,759
                    )
                    
                    
                    (1,390
                    )
                    
                    
                    (42
                    )Inventory
                    
                    
                    (559
                    )
                    
                    
                    670
                    
                    
                    
                    1,354Prepaid
      expenses and other current assets
                    
                    
                    399
                    
                    
                    
                    1
                    
                    
                    
                    389Advance
      payments
                    
                    
                    659
                    
                    
                    
                    (409
                    )
                    
                    
                    384Deferred
      revenue
                    
                    
                    (15
                    )
                    
                    
                    53
                    
                    
                    
                    30Accounts
      payable, accrued compensation, and accrued expenses
                    
                    
                    429
                    
                    
                    
                    (381
                    )
                    
                    
                    (566
                    )Other
      current liabilities
                    
                    
                    (222
                    )
                    
                    
                    858
                    
                    
                    
                    153Net
      cash provided by (used in) operating activities
                    
                    
                    138
                    
                    
                    
                    (1,943
                    )
                    
                    
                    (10,389
                    )Cash
      flows from investing activities:Purchase
      of equipment
                    
                    
                    (308
                    )
                    
                    
                    (16
                    )
                    
                    
                    (204
                    )Proceeds
      from maturity of (purchase of) investments – held to
    maturity
                    
                    
                    (3
                    )
                    
                    
                    77
                    
                    
                    
                    (51
                    )Purchase
      of intangibles and other assets
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (2
                    )Net
      cash (used in) provided by investing activities
                    
                    
                    (311
                    )
                    
                    
                    61
                    
                    
                    
                    (257
                    )Cash
      flows from financing activities:Proceeds
      from sale of preferred stock, net of issuance costs
                    
                    
                    3,933
                    
                    
                    
                    —
                    
                    
                    
                    —Proceeds
      from sale of common stock, net of issuance costs
                    
                    
                    1,580Proceeds
      from exercise of stock options and warrants
                    
                    
                    —
                    
                    
                    
                    3
                    
                    
                    
                    10Borrowings
      from line of credit
                    
                    
                    1,934
                    
                    
                    
                    1,108
                    
                    
                    
                    —Proceeds
      from long-term debt
                    
                    
                    —
                    
                    
                    
                    500
                    
                    
                    
                    5,970Payments
      related to deferred financing costs
                    
                    
                    (117
                    )
                    
                    
                    (368
                    )
                    
                    
                    (591
                    )Payments
      of long-term debt and capitalized lease obligations
                    
                    
                    (5,466
                    )
                    
                    
                    (63
                    )
                    
                    
                    (55
                    )Net
      cash provided by financing activities
                    
                    
                    1,864
                    
                    
                    
                    1,180
                    
                    
                    
                    5,334Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    1,691
                    
                    
                    
                    (702
                    )
                    
                    
                    (5,312
                    )Cash
      and cash equivalents, beginning of year
                    
                    
                    713
                    
                    
                    
                    1,415
                    
                    
                    
                    6,727Cash
      and cash equivalents, end of year
                    
                    $
                    2,404
                    
                    
                    $
                    713
                    
                    
                    $
                    1,415Cash
      paid for interest
                    
                    $
                    702
                    
                    
                    $
                    426
                    
                    
                    $
                    128Cash
      paid for taxes
                    
                    $
                    44
                    
                    
                    $
                    78
                    
                    
                    $
                    40Supplemental
      non-cash transactions:Conversion
      of debt to common stock
                    
                    $
                    251
                    
                    
                    $
                    311
                    
                    
                    $
                    220Conversion
      of debt to convertible preferred stock – series B
                    
                    $
                    1,706
                    
                    
                    $
                    —
                    
                    
                    $
                    —Issuance
      of 485,000 and 162,500 shares of common stock for deferred financing costs
      in 2008 and 2007, respectively.
                    
                    $
                    340
                    
                    
                    $
                    195
                    
                    
                    $
                    —Issuance
      of 1,120,000 shares of common stock underlying warrants for deferred
      financing costs in 2008.
                    
                    $
                    715
                    
                    
                    $
                    —
                    
                    
                    $
                    —




See notes
to Consolidated Financial Statements.





35





eMAGIN
CORPORATION


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





Note
1 - NATURE OF BUSINESS





eMagin
Corporation and its wholly owned subsidiary (the “Company”)
designs,  develops, manufactures, and markets OLED on silicon
microdisplays, virtual imaging products which utilize OLED microdisplays. The
Company’s products are sold mainly in North America, Asia, and
Europe.





Note 2 - SIGNIFICANT ACCOUNTING
POLICIES





Principles
of consolidation





The
accompanying audited consolidated financial statements include the accounts of
eMagin Corporation and its wholly owned subsidiary.  All intercompany
transactions have been eliminated in consolidation.





Reclassifications





Certain
items in the prior years’ consolidated financial statements have been
reclassified to conform to the current period presentation.





Use
of estimates





In
accordance with accounting principles generally accepted in the United States of
America, management utilizes certain estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and
judgments. Management bases its estimates and judgments on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from those estimates.





Revenue and cost
recognition





Revenue
is recognized when products are shipped to customers, net of allowances for
anticipated returns.  The Company’s revenue-earning
activities generally involve delivering products and revenues
are considered to be earned when the Company has completed the process
by which it is entitled to such revenues.
Revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred, selling price is
fixed or determinable and collection is reasonably assured.  We record
a reserve for estimated sales returns, which is reflected as a reduction of
revenue at the time of revenue recognition.  The Company defers
revenue recognition on products sold directly to the consumer with a maximum
thirty day right of return.  Revenue is recognized upon the expiration
of the right of return.





The
Company also earns revenues from certain R&D activities under
both firm fixed-price contracts and cost-type
contracts, including some cost-plus-fee contracts. 
Revenues relating to firm fixed-price contracts are
generally recognized on the percentage-of-completion method
of accounting as costs are incurred (cost-to-cost basis). 
Revenues on cost-plus-fee contracts include costs incurred plus a
portion of estimated fees or profits based on the relationship of costs incurred
to total estimated costs. Contract costs include all direct material and
labor costs and an allocation of allowable indirect costs as
defined by each contract, as periodically adjusted to reflect revised
agreed upon rates. These rates are subject to audit by the other
party.





Shipping
and Handling Fees and Costs





Shipping
and handling fees billed to customers are netted against the shipping and
handling costs which are recorded as cost of sales.





Research and
development expenses





Research
and development costs are expensed as incurred.





Cash
and cash equivalents





All
highly liquid instruments with an original maturity of three months or less at
the date of purchase are considered to be cash equivalents.





Investments-held
to maturity





Securities
that the Company has the positive intent and ability to hold to maturity are
classified as held-to-maturity and are carried at amortized cost on the
accompanying balance sheet.




36




Accounts
receivable





The
majority of the Company’s commercial accounts receivable is due from Original
Equipment Manufacturers ("OEM’s”). Credit is extended based on evaluation of a
customer’s financial condition and, generally, collateral is not required.
Accounts receivable are payable in U.S. dollars, are due within 30-90 days and
are stated at amounts due from customers net of an allowance for doubtful
accounts. Any account outstanding longer than the contractual payment terms is
considered past due.





Allowance for doubtful
accounts





The
allowance for doubtful accounts reflects an estimate of probable losses inherent
in the accounts receivable balance. The allowance is determined based on a
variety of factors, including the length of time receivables are past due,
historical experience, the customer's current ability to pay its obligation, and
the condition of the general economy and the industry as a whole.  The
Company will record a specific reserve for individual accounts when the Company
becomes aware of a customer's inability to meet its financial obligations, such
as in the case of bankruptcy filings or deterioration in the customer's
operating results or financial position. If circumstances related to customers
change, the Company would further adjust estimates of the recoverability of
receivables.





Inventory





Inventory
is stated at the lower of cost or market. Cost is determined using the first-in
first-out method. Cost includes materials, labor, and manufacturing overhead
related to the purchase and production of inventories. The Company regularly
reviews inventory quantities on hand, future purchase commitments with the
Company’s suppliers, and the estimated utility of the inventory. If the Company
review indicates a reduction in utility below carrying value, the inventory is
reduced to a new cost basis.





Equipment,
furniture and leasehold improvements





Equipment,
furniture and leasehold improvements are stated at cost. Depreciation on
equipment is calculated using the straight-line method of depreciation over its
estimated useful life. Amortization of leasehold improvements is calculated by
using the straight-line method over the shorter of their estimated useful lives
or lease terms. Expenditures for maintenance and repairs are charged to expense
as incurred.





In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company performs impairment tests on its long-lived
assets when circumstances indicate that their carrying amounts may not be
recoverable. If required, recoverability is tested by comparing the estimated
future undiscounted cash flows of the asset or asset group to its carrying
value. Impairment losses, if any, are recognized based on the excess of the
assets' carrying amounts over their estimated fair values.





Intangible
Assets





The
Company’s intangible assets consist of patents that are amortized over their
estimated useful lives of fifteen years using the straight line
method.  Total intangible amortization expense was approximately $4
thousand for each of the years ended December 31, 2008, 2007, and 2006,
respectively.  The accumulated amortization as of December 31, 2008
was $18 thousand.





Advertising





Costs
related to advertising and promotion of products is charged to sales and
marketing expense as incurred.  Advertising expense for the years
ended December 31, 2008, 2007, and 2006 was $0, $10 thousand, and $296 thousand,
respectively.





Income
taxes





The
Company accounts for income taxes in accordance with the provisions of Statement
of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS
No. 109”).  SFAS No. 109 requires that the Company recognize deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax
returns.  Under this method, deferred tax liabilities and assets are
determined on the basis of the difference between the tax basis of assets and
liabilities and their respective financial reporting amounts (“temporary
differences”) at enacted tax rates in effect for the years in which the
temporary differences are expected to reverse.  The Company records an
estimated valuation allowance on its deferred income tax assets if it is more
likely than not that these deferred income tax assets will not be
realized.





Loss
per common share





In
accordance with SFAS No. 128, "Earnings Per Share", net loss per common share
amounts ("basic EPS") is computed by dividing net loss by the weighted average
number of common shares outstanding and excluding any potential dilution. Net
loss per common share amounts assuming dilution ("diluted EPS") reflects the
potential dilution from the exercise of stock options and warrants. These common
equivalent shares have been excluded from the computation of diluted EPS for all
periods presented as their effect is antidilutive. The years ended December 31,
2008, 2007, and 2006 do not include options, warrants, convertible notes,
redeemable stock, and convertible preferred stock to purchase common equivalent
shares of 22,069,412, 17,728,020, and 6,832,620, respectively, as their effect
would be antidilutive.




37




Comprehensive
income (loss)





SFAS No.
130, "Reporting Comprehensive Income", requires companies to report all changes
in equity during a period, except those resulting from investment by owners and
distributions to owners, for the period in which they are recognized.
Comprehensive income (loss) is the total of net income (loss) and other
comprehensive income (loss) items, such as unrealized gains or losses on foreign
currency translation adjustments. Comprehensive income (loss) must be reported
on the face of the annual financial statements. The Company's operations did not
give rise to any material items includable in comprehensive income (loss), which
were not already in net loss for the years ended December 31, 2008, 2007, and
2006. Accordingly, the Company's comprehensive loss is the same as its net
income (loss) for the periods presented.





Stock-based
compensation





The
Company accounts for stock-based compensation under the provisions of SFAS No.
123R, “Share-Based Payment”, which requires the Company to recognize expense
related to the fair value of the Company’s share-based compensation issued to
employees and directors.  We adopted SFAS No. 123R using the modified
prospective transition method.  Compensation cost recognized for the
years ended December 31, 2008, 2007, and 2006 includes a) compensation cost for
all share-based compensation granted prior to, but not vested as of January 1,
2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No.123 and b) compensation cost for all share-based
compensation granted beginning January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS
No.123R.  The compensation cost was recognized using the straight-line
attribution method.    See Note 11 for a further discussion
on stock-based compensation.





Fair value of financial
instruments





At
December 31, 2008, the Company's cash, cash equivalents, accounts receivable,
short-term investments, accounts payable and debt are shown at cost which
approximates fair value due to the short-term nature of these
instruments.





Concentration
of Credit Risk





Financial
instruments which potentially subject the Company to concentrations of credit
risk consist of cash and cash equivalents.  The Company’s cash and
cash equivalents are deposited with financial institutions which, at times, may
exceed federally insured limits.  To date, the Company has not
experienced any loss associated with this risk.





Note 3- RECENTLY ISSUED ACCOUNTING
STANDARDS





In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements,” (“SFAS 157”), which defines fair value,
establishes a framework for measuring fair value under generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 does not require any new fair value measurements, but provides guidance
on how to measure fair value by providing a fair value hierarchy used to
classify the source of the information. In February 2008, the FASB issued
FASB Staff Position No. FSP 157-2, “Effective Date of FASB Statement
No. 157”, which provides a one year deferral of the effective date of SFAS
157 for non-financial assets and non-financial liabilities, except those that
are recognized or disclosed in the financial statements at fair value on a
recurring basis. The Company adopted SFAS 157 as of January 1, 2008, with
the exception of the application of the statement to non-recurring non-financial
assets and non-financial liabilities for which it will defer the adoption until
January 1, 2009. In October 2008, the FASB issued FASP FAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active” (“FSP 157-3”). FSP 157-3 clarified the application of
FAS 157 in situations where the market for that financial asset is not
active.  FSP 157-3 was effective upon issuance, including prior
periods for which financial statements had not been issued. The adoption of SFAS
157 did not have a material impact on the Company’s consolidated results of
operations, financial condition or cash flows.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — including an amendment of FASB
Statement No. 115,” (“SFAS 159”) which is effective for fiscal years
beginning after November 15, 2007. This statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. This statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and liabilities. Unrealized
gains and losses on items for which the fair value option is elected would be
reported in earnings. The Company has adopted SFAS 159 and has elected not to
measure any additional financial instruments and other items at fair value and
therefore the adoption of SFAS 159 did not have a material impact on the
Company’s consolidated results of operations, financial condition or cash
flows.




38




In
March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161, Disclosures about Derivative Instruments and Hedging Activities,
an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires
entities to provide greater transparency about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations and (c) how derivative instruments and related hedged items
affect an entity’s financial position, results of operations, and cash flows.
SFAS 161 is effective prospectively for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application permitted. The Company is currently evaluating the disclosure
implications of this statement.




In May
2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted
Accounting Principles, (“SFAS 162”), which identifies the sources of
accounting principles and the framework for selecting principles to be used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. This statement became effective November 15, 2008.  The
adoption of this pronouncement did not have a material on the Company's
consolidated financial statements.





In June
2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF
07-5"). EITF 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years, and must be applied to all
instruments outstanding on the date of adoption. The Company is currently
assessing the potential impact of this EITF 07-5 on its consolidated financial
condition and results of operations.





Note
4- RECEIVABLES





Receivables
consisted of the following (in thousands):





December
      31,2008
                
                
                2007Trade
      receivables
                
                $
                4,500
                
                
                $
                2,741Less
      allowance for doubtful accounts
                
                
                (857
                )
                
                
                (358
                )Net
      receivables
                
                $
                3,643
                
                
                $
                2,383





Note
5 - INVENTORY





The
components of inventory were as follows (in thousands):





December
      31,2008
                    
                    
                    2007Raw
      materials
                    
                    $
                    1,109
                    
                    
                    $
                    1,069Work
      in process
                    
                    
                    280
                    
                    
                    
                    370Finished
      goods
                    
                    
                    985
                    
                    
                    
                    376Total
      inventory
                    
                    $
                    2,374
                    
                    
                    $
                    1,815





Note 6 – PREPAID EXPENSES AND OTHER CURRENT
ASSETS





Prepaid
expenses and other current assets consist of the following (in
thousands):





December
      31,2008
                    
                    
                    2007Vendor
      prepayments
                    
                    $
                    180
                    
                    
                    $
                    537Other
      prepaid expenses*
                    
                    
                    383
                    
                    
                    
                    310Other
      current assets*
                    
                    
                    233
                    
                    
                    
                    3Total
      prepaid expenses and other current assets
                    
                    $
                    796
                    
                    
                    $
                    850


*No
individual amounts greater than 5% of current assets.





39


Note
7 – EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS





Equipment,
furniture and leasehold improvements consist of the following (in
thousands):





December
      31,2008
                      
                      
                      2007Computer
      hardware and software
                      
                      $
                      1,039
                      
                      
                      $
                      1,025Lab
      and factory equipment
                      
                      
                      3,612
                      
                      
                      
                      3,318Furniture,
      fixtures, and office equipment
                      
                      
                      306
                      
                      
                      
                      306Assets
      under capital leases
                      
                      
                      66
                      
                      
                      
                      66Leasehold
      improvements
                      
                      
                      473
                      
                      
                      
                      473Total
      equipment, furniture and leasehold improvements
                      
                      
                      5,496
                      
                      
                      
                      5,188Less:  accumulated
      depreciation
                      
                      
                      (5,115
                      )
                      
                      
                      (4,896
                      )Equipment,
      furniture and leasehold improvements, net
                      
                      $
                      381
                      
                      
                      $
                      292





Depreciation
expense was $219 thousand, $388 thousand, and $837 thousand for the years ended
December 31, 2008, 2007, and 2006, respectively.  Assets under capital
leases are fully amortized.





Note 8 - DEBT





Debt is
as follows (in thousands):


December
      31,2008
                        
                        
                        2007Current
      portion of debt:Other
      debt
                        
                        $
                        60
                        
                        
                        $
                        44Line
      of credit
                        
                        
                        1,631
                        
                        
                        
                        1,1088%
      Amended Senior Secured Convertible Notes
                        
                        
                        —
                        
                        
                        
                        5,962Less:  Unamortized
      discount on notes payable
                        
                        
                        —
                        
                        
                        
                        (25
                        )Current
      portion of debt, net
                        
                        
                        1,691
                        
                        
                        
                        7,089Long-term
      debt:Other
      debt
                        
                        
                        —
                        
                        
                        
                        60Long-term
      debt, net
                        
                        
                        —
                        
                        
                        
                        60Total
      debt, net
                        
                        $
                        1,691
                        
                        
                        $
                        7,149




The total
debt will mature as of December 31, 2009. For the years ended December 31, 2008
and 2007, approximately $1.3 million and $0.4 million, respectively, of deferred
debt issuance costs and waiver fees were amortized to interest expense. For
the years ended December 31, 2008 and 2007, interest expense includes interest
paid or accrued of approximately $667 thousand and $836 thousand,
respectively, on outstanding debt.





8% Amended Senior Secured
Convertible Notes





On July
23, 2007, an investor elected to convert approximately $252 thousand of the 6%
Senior Secured Convertible Note (“Original Note”) representing $250 thousand of
the principal amount of the Note due on July 23, 2007 and approximately $2
thousand of accrued and unpaid interest. The investor received 720,476 shares of
Common Stock at the conversion price of $0.35.





On July
23, 2007, the Company entered into Amended Agreements with the note holders of
the Original Notes issued July 21, 2006 and March 28, 2007 and agreed to issue
each holder an 8% Amended Senior Secured Convertible Note (“Amended Note”) in
the principal amount equal to the principal amount outstanding as of July 23,
2007 which was in total approximately $6.0 million.  The significant
changes to the Amended Notes include the following:


·
            the
      due dates have been changed from July 23, 2007 and January 21, 2008 to
      December 21, 2008;


·
            the
      annual interest rate has been changed from 6% to
  8%;


·
            the
      Amended Notes are convertible into 8,407,612 shares of the Company’s
      common stock.  The conversion price for $5.8 million of
      principal is at a conversion price of $0.75, originally $2.60 and the
      conversion price for $250,000 of principal remains the same at
      $0.35;


·
            the
      Agreement adjusts the exercise price of the amended Warrants from $3.60 to
      $1.03 per share for 1,553,468 shares of common stock and requires the
      issuance of warrants for an additional 3,831,859 shares of common stock at
      $1.03 per share with an expiration date of July 21,
      2011.   The warrants are subject to anti-dilution
      adjustment rights;


·
            50%
      of the Amended Notes can be converted into the Company’s newly designated
      Series A Senior Secured Convertible Preferred Stock which is convertible
      into common stock at the same rate as the Amended
  Notes;


·
            the
      liquidated damages of 1% per month will no longer accrue and the deferred
      balance at July 23, 2007 is forgiven;
and


·
            there
      is no minimum cash or cash equivalents balance
  requirement.




40




Under the
guidance of EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of
Debt Instruments”, the Company determined the change in the present value of the
expected cash flows between the Amended Notes and the Original Notes issued July
21, 2006 was greater than 10%; therefore (a) for financial reporting purposes,
the modifications to the Original Notes issued July 21, 2006 were treated as an
extinguishment of debt and (b) on July 23, 2007, the Company recorded a loss on
extinguishment of debt of approximately $10.7 million reflecting the difference
between (i) the recorded amount of debt, net of related discounts, of
approximately $4.8 million and (ii) the fair value of the new debt instrument of
approximately $10.7 , which was determined by multiplying the number of
convertible shares underlying the note by the closing market price of the common
stock on July 23, 2007 plus the change in the fair value of the
warrants  on July 23, 2007, the date of the modification, of
approximately $4.7 million, which was considered a fee paid by the debtor to the
creditor under EITF 96-19 .  The Company has also recorded a
beneficial conversion charge of approximately $5.1 million on the Amended Notes,
which was calculated by multiplying the intrinsic value of the common stock by
the underlying convertible shares, adjusting the Amended Notes to their face
value of approximately $5.8 million.  The Original Note issued on
March 28, 2007 and amended on July 23, 2007 was not treated as an extinguishment
but a modification.





On August
16, 2007, an investor elected to convert approximately $58 thousand of the
Amended Note. The investor received 76,923 shares of Common Stock at the
conversion price of $0.75.





On
December 22, 2008, the Company paid approximately $4.03 million to its 8%
Amended Senior Secured Convertible Note Holders (“the Amended Note Holders”)
which was comprised of approximately $4.01 million of principal and
approximately $0.02 million of accrued interest. The remaining Note Holders
elected to convert approximately $1.95 million to equity.  See Note 10
– Shareholders’ Equity for additional information.





Line of
Credit





On August
7, 2007, the Company enteredinto a loan agreement
with Moriah Capital, L.P. (“Moriah”)and established a
revolving line of credit (the “Loan”) of $2.5 million.  The Company
was permitted to borrow an amount not to exceed 90% of its domestic eligible
accounts receivable and 50% of its eligible inventory capped at $600
thousand.  As part of the transaction, the Company issued 162,500
shares of unregistered common stock valued at $195 thousand and paid a servicing
fee of $82.5 thousand to Moriah which were amortized to interest expense over
the life of the agreement. In conjunction with entering into this loan and
issuing unregistered common stock, the Company granted Moriah registration
rights.  In addition, the Company granted Moriah a put option pursuant
to which Moriah can sell to the Company the 162,500 shares of its common stock
for $195,000, or prorated for any portion thereof for one year from the issue
date (“the 2007 Put Option”).  The Loan was convertible into shares of
the Company’s common stock pursuant to the terms of the Loan Conversion
Agreement.  The Loan was to mature on August 7, 2008, however Moriah
extended the maturity date to August 20, 2008 when the loan agreement was
further amended as explained below.





On
January 30, 2008, the Company amended and restated its Loan agreement (“Amended
Loan Agreement”) with Moriah.  The Amended Loan Agreement’s borrowing
base calculation was modified to include 70% of eligible foreign accounts
receivable.  The Amended Loan Agreement eliminated the optional
conversion of principal up to $2.0 million into common stock.  In
connection with the Amended Loan Agreement, the Company entered into a Warrant
Issuance Agreement and issued a Warrant to purchase 750,000 shares of its common
stock at a price of $1.50 per share with an expiration date of January 29,
2013.





The
Amended Loan Agreement has specific terms to which the Company must comply
including (a) maintaining a lockbox account into which payments from related
accounts receivable must be deposited, (b) periodic certifications as to
borrowing base amounts equaling or exceeding net balances outstanding under the
Line of Credit, and (c) a requirement that a registration statement with respect
to shares held or to be issued to the lender be filed within thirty days of
January 30, 2008.  A delay in establishing the required lockbox
account created a technical default under the Line of Credit
agreement.  Similarly, the production and subsequent discovery of
defective displays resulted in an inadvertent overstatement of inventory during
December 2007, January 2008 and early February 2008 that created a technical
default under the agreement.  Finally, the Company was not able to
complete the registration of shares within the thirty day timeframe mandated in
the amended agreement.  On March 25, 2008 the Company received a
waiver from the lender (a) waiving compliance with the lockbox account
requirement through March 14, 2008, (b) waiving compliance with the borrowing
base requirement in so far as it related exclusively to the defective displays
inadvertently included in inventory, and (c) extending the period for filing a
registration statement for certain shares held or to be issued to the lender
until April 29, 2008.  The Company established a lockbox account by
March 14, 2008 and filed a registration statement with the SEC on April 29,
2008.





Effective
March 25, 2008, the Company amended the Warrant Issuance Agreement (“Amended
Warrant Agreement”) with Moriah. In connection with such amendment, the Company
issued a waiver fee in the form of a Warrant to purchase an additional 250,000
shares of its common stock at a price of $1.50 expiring March 25,
2013.





The
Company determined the fair value of the 1,000,000 warrants to be $729 thousand
of which $168 thousand was expensed immediately and $561 thousand was amortized
to interest expense over the life of the loan.  The following
assumptions were used to determine the fair value of the
warrants:  dividend yield of 0%; risk free interest rates of 2.61 %
and 2.96%; expected volatility of 90.9% and 92.3%; and expected contractual term
of 5 years.




41




The
Company and Moriah entered into Amendment No. 3 to the Loan and Security
Agreement dated August 20, 2008 (the “Amendment No. 3”).  Pursuant to
Amendment No. 3, the Company issued Moriah an Amended and Restated Revolving
Loan Note (the “Amended Note”) and the maturity date has been extended to August
7, 2009. The Company paid Moriah $85 thousand in servicing fees.  The
servicing fees are amortized to interest expense over the life of the
agreement.





Pursuant
to Amendment No. 3, the following changes were made to the Loan:  the
maximum amount the Company can borrow has been increased to $3 million; the
borrowing base calculation was modified to increase eligible foreign accounts
receivable to 80% and increased the eligible inventory to the lesser of 70% or
$800 thousand; and financial covenants have been added.  The Company
was in compliance with the financial covenants at December 31,
2008.





The
Company issued Moriah a warrant, which terminates on August 7, 2013, to purchase
up to 370,000 shares of the Company’s common stock at an exercise price of $1.30
per share.  The Company determined the fair value of the warrants to
be approximately $154 thousand which was recorded as a deferred debt issuance
cost. The following assumptions were used to determine the fair value of the
warrants:  dividend yield of 0%; risk free interest rates of 3.16 %;
expected volatility of 87.7%; and expected contractual term of 5
years.  The deferred debt issuance costs are being amortized to
interest expense over the life of the loan.





Pursuant
to Amendment No. 3, the Company and Moriah, also, entered into an Amended and
Restated Securities Issuance Agreement.  The Company issued 485,000
shares of unregistered common stock valued at approximately $340 thousand which
was recorded as a deferred debt issuance cost.  It will be amortized
to interest expense over the life of the agreement. In addition, the holders of
the Amended 8% Notes and the investors in the Purchase Agreement (See Note 10)
consented to the Amended Note and received a total of 144,000 shares of
unregistered common stock valued at approximately $101 thousand which was
recorded as waiver fees and expensed to interest expense.





Pursuant
to Amendment No. 3, the Company and Moriah entered into an Amendment to
Registration Rights Agreement (the “Amended Registration Rights
Agreement”).   Pursuant to the Amended Registration Rights
Agreement, the Company agreed to use its best efforts to file a registration
statement to register the 485,000 shares of the company’s common stock
issued pursuant to the Amended and Restated Securities Issuance Agreement and
the shares of common stock issuable upon exercise of the Warrant, provided that
the Company is permitted to under applicable securities rules and regulations
and after the certain other registration statements that the Company was
obligated to file on behalf of selling shareholders have
been  declared effective.





Note 9 - INCOME TAXES





Loss
before income taxes consists of the following (in thousands):





For
      the years ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Domestic
                    
                    $
                    (1,859
                    )
                    
                    $
                    (18,488
                    )
                    
                    $
                    (15,266
                    )Total
                    
                    $
                    (1,859
                    )
                    
                    $
                    (18,488
                    )
                    
                    $
                    (15,266
                    )





Deferred
income taxes reflect the net tax effects of (a) temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes, and (b) operating losses and tax
credit carryforwards.





The tax
effects of significant items comprising the Company’s deferred taxes as of
December 31 are as follows (numbers are in thousands):


For
      the years ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Federal
      and state net operating loss carryforwards
                  
                  $
                  40,964
                  
                  
                  $
                  42,266
                  
                  
                  $
                  41,554Research
      and development tax credit carryforwards
                  
                  
                  1,454
                  
                  
                  
                  1,397
                  
                  
                  
                  —Stock
      based compensation
                  
                  
                  879
                  
                  
                  
                  609
                  
                  
                  
                  279Depreciation
      and amortization
                  
                  
                  466
                  
                  
                  
                  552
                  
                  
                  
                  (63
                  )Other
      provisions and expenses not currently deductible
                  
                  
                  851
                  
                  
                  
                  585
                  
                  
                  
                  304Total
      deferred tax assets
                  
                  
                  44,614
                  
                  
                  
                  45,409
                  
                  
                  
                  42,074Less
      valuation allowance
                  
                  
                  (44,614
                  )
                  
                  
                  (45,409
                  )
                  
                  
                  (42,074
                  )Net
      deferred tax asset
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  0





42




SFAS No.
109 requires that the tax benefit of net operating losses, temporary differences
and credit carryforwards be recorded as an asset to the extent that management
assesses that realization is “more likely than not.”  Realization of
the future tax benefits is dependent on the Company’s ability to generate
sufficient taxable income within the carryforward period.  Because of
the Company’s history of operating losses, management believes that realization
of the deferred tax assets arising from the above-mentioned future tax benefits
is currently not likely and, accordingly, has provided a valuation
allowance.





As of
December 31, 2008, 2007 and 2006, the Company has net deferred tax assets of
approximately of $44.6, $45.4, and $42.0 million,respectively, primarily
resulting from the future tax benefit of net operating loss carryforwards. The
valuation allowance decreased by $795 thousand during 2008 and increased by $3.3
million and $4.7 million during 2007 and 2006, respectively.





As of
December 31, 2008, eMagin has federal and state net operating loss
carryforwards of approximately $120.3 million. The federal research and
development tax credit carryforwards are approximately $1.5 million.
The net operating losses and tax credit carryforwards will be available to
offset future taxable income, if any, through December 2028. The
utilization of net operating losses is subject to a limitation due to the change
of ownership provisions under Section 382 of the Internal Revenue Code and
similar state provisions. Such limitation may result in the expiration of the
net operating losses before their utilization. The Company has done analysis
regarding prior year ownership changes, and it has been determined that the
Section 382 limitation on the utilization of net operating losses will not
materially affect the Company's ability to utilize its net operating
losses.





The
difference between the statutory federal income tax rate on the Company's
pre-tax income and the Company's effective income tax rate is summarized as
follows:




For
      the years ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006U.S.
      Federal income tax benefit at federal statutory rate
                    
                    
                    34
                    %
                    
                    
                    34
                    %
                    
                    
                    34
                    %Change
      in valuation allowance
                    
                    
                    43
                    %
                    
                    
                    (18
                    )%
                    
                    
                    (32
                    )
      %Change
      in effective state tax rate
                    
                    
                    (75
                    )%
                    
                    
                    —
                    
                    
                    
                    —Loss
      on extinguishment of debt
                    
                    
                    —
                    
                    
                    
                    (20
                    )%
                    
                    
                    —Other,
      net
                    
                    
                    (
      2
                    )
      %
                    
                    
                    4
                    %
                    
                    
                    (
      2
                    )
      %0
                    %
                    
                    
                    0
                    %
                    
                    
                    0
                    %




The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007.  The Company did not
have unrecognized tax benefits which would require an adjustment to the January
1, 2007 beginning balance of retained earnings.  The Company did not
have any unrecognized tax benefits at December 31, 2007 or at December 31, 2008.
The Company recognizes interest accrued and penalties related to unrecognized
tax benefits in tax expense.  During the years ended December 31, 2008
and 2007 the Company recognized no interest and penalties.





The
Company files income tax returns in the U.S. federal jurisdiction and New
York.  The tax years 2005-2007 remain open to examination by major
taxing jurisdictions to which the Company is subject.




43




Note
10 - SHAREHOLDERS' EQUITY





Preferred
Stock





Preferred Stock – Series B
Convertible Preferred Stock (“the Preferred Stock – Series
B”)





The
Company has designated 10,000 shares of the Company’s preferred stock as
Preferred Stock – Series B at a stated value of $1,000 per share.  The
Preferred Stock – Series B is convertible into common stock at a conversion
price of $0.75 per share.  The Preferred Stock – Series B does not pay
interest.  The holders of the Preferred Stock – Series B are not
entitled to receive dividends unless the Company’s Board of Directors declare a
dividend for holders of the Company’s common stock and then the dividend shall
be equal to the amount that such holder would have been entitled to receive if
the holder converted its Preferred Stock – Series B into shares of the Company’s
common stock. Each share of Preferred Stock – Series B has voting rights
equal to (i) the number of shares of Common Stock issuable upon conversion of
such shares of Preferred Stock – Series B at such time (determined without
regard to the shares of Common Stock so issuable upon such conversion in respect
of accrued and unpaid dividends on such share of Preferred Stock) when the
Preferred Stock – Series B votes together with the Company’s Common Stock or any
other class or series of stock of the Company and (ii) one vote per share of
Preferred Stock when such vote is not covered by the immediately preceding
clause.  In the event of a liquidation, dissolution, or winding up of the
Company, the Preferred Stock – Series B is entitled to receive liquidation
preference before the Common Stock.  The Company may at its option
redeem the Preferred Stock – Series B by providing the required notice to the
holders of the Preferred Stock – Series B and paying an amount equal to $1,000
multiplied by the number of shares for all of such holder’s shares of
outstanding Preferred Stock – Series B to be redeemed.





On
December 22, 2008, the Company entered into a Securities Purchase Agreement
pursuant to which the Company sold and issued an aggregate of 4,033 shares of
its Preferred Stock – Series B for an aggregate price of approximately $4.03
million and warrants to purchase 1,875,467 shares of common stock at $1.03 per
share. The net proceeds received after expenses were approximately $3.93
million.   The fair value of the warrants was recorded as equity
and there was no impact on the consolidated financial position of the results of
operations.   In addition, the Company entered into an Exchange
Agreement (the “Exchange Agreement”) with three holders (“Holders”) of its
outstanding Amended Notes.  Pursuant to the Exchange Agreement, the
Holders exchanged $1.7 million of their outstanding Amended Notes and unpaid
interest of $6 thousand, and received 1,706 shares of the Preferred Stock –
Series B.   There was no gain or loss on the extinguishment of
debt.





As of
December 31, 2008, there were 5,739 shares of Preferred Stock – Series B issued
and outstanding.





Preferred Stock – SeriesA Senior
Secured Convertible Preferred Stock(“the Preferred Stock –
Series A”)





The
Company designated but did not issue 3,198 shares of the Company’s preferred
stock as Series A Senior Secured Convertible Preferred Stock (“the Preferred
Stock - Series A”) at a stated value of $1,000 per share.  The
Preferred Stock - Series A was entitled to cumulative dividends which accrued at
a rate of 8% per annum, payable on December 21, 2008.  Each share of
the Preferred Stock -  Series A had voting rights equal to
(1)  in any case in which the Preferred Stock -  Series A
voted together with the Company's Common Stock or any other class or series of
stock of the Company, the number of shares of Common Stock issuable upon
conversion of such shares of Preferred Stock -  Series A at such time
(determined without regard to the shares of Common Stock so issuable upon such
conversion in respect of accrued and unpaid dividends on such share of Preferred
Stock -  Series A) and (2) in any case not covered by the immediately
preceding clause one vote per share of Preferred Stock -  Series
A.  Preferred Stock - Series A had a mandatory redemption at December
21, 2008.  As of December 21, 2008, there were no shares issued or
outstanding.





Common
Stock





2008





On
December 22, 2008, an investor converted $250 thousand of the principal amount
of the Amended Note and approximately $1 thousand of accrued and unpaid interest
totaling $251 thousand and received 717,620 shares of Common Stock at the
conversion price of $0.35.





On
December 22, 2008, the Company entered into a Securities Purchase Agreement
pursuant to which the Company sold and issued 5,739 shares of Preferred Stock –
Series B at a stated value of $1,000 per share (see Preferred Stock above for
additional information).  The Preferred Stock – Series B is
convertible into Common Stock at a conversion price of $0.75.  The
Company may at its option redeem the Preferred Stock – Series B by providing the
required notice to the holders of the Preferred Stock – Series B and paying an
amount equal to $1,000 multiplied by the number of shares for all of such
holder’s shares of outstanding Preferred Stock – Series B to be
redeemed.  The total shares of Common Stock underlying the Preferred
Stock – Series B is 7,652,000.  As mentioned above in Preferred Stock
– Series B, warrants were issued to purchase 1,875,467 shares of common stock at
$1.03 per share.  The warrants terminate on December 22,
2013.





The
Company entered into a Registration Rights Agreement to register for resale of
the shares of the Company’s common stock issuable upon conversion of the
Preferred Stock sold in the offering and the shares of Common Stock issuable
upon exercise of the warrants.  Subject to the terms of the
Registration Rights Agreement, the Company is required to file a registration
statement on Form S-1 with the Securities and Exchange Commission (the “SEC”)
within 30 days following the date that the Company is permitted to file a
registration statement by (i) the rules and regulations of the SEC and (ii) the
agreements set forth on Schedule B to the Registration Rights Agreement, which
as of December 18, 2008 prohibit the Company from filing the initial
Registration Statement until certain other registration statements are filed.
After filing the Registration Statement, the Company is to cause such
Registration Statement to be declared effective under the Securities Act of 1933
(the “Act”) as promptly as possible but in no event later than 90 days after the
filing date (or no later than 120 days after the filing date in the event of SEC
“full review” of the Registration Statement). The Holders that exchanged their
Notes pursuant to the Exchange Agreement received the same registration
rights.




44




As a
result of the December 22, 2008 Securities Purchase Agreement, the outstanding
650,000 Series F Common Stock Purchase Warrants that were issued to participants
of the Securities Purchase Agreement dated October 25, 2004, were repriced from
$3.31 to $2.50 and the April 2, 2008 Common Stock Purchase Warrants were
repriced from $1.28 to $1.13.  The repricing of the warrants had no
effect on the consolidated financial statements.





On August
20, 2008, the Company and Moriah Capital entered into Amendment No. 3 to the
Loan and Security Agreement (“Amendment No. 3”) effective August 7, 2008. The
Company issued Moriah a warrant, which terminates on August 7, 2013, to purchase
up to 370,000 shares of the Company’s common stock at an exercise price of $1.30
per share.





In
addition, the Company and Moriah entered into an Amended and Restated
Securities Issuance agreement (the “Amended and Restated Securities Issuance
Agreement”) on August 20, 2008. On August 7, 2007, in connection with the
Securities Issuance Agreement, (the “Original Securities Issuance Agreement”),
the Company issued Moriah 162,500 shares of the Company’s common stock (the
“2007 Shares”). With respect to the Amended and Restated Securities
Issuance Agreement, Moriah agreed to waive the Company’s obligation to buy
back the 2007 Shares with respect to 125,000 of such shares with a redemption
amount of $150,000 and to extend the Company’s obligation to buy back 37,500 of
such 2007 Shares for an additional 12 month period. The Company issued Moriah
485,000 shares of its Common Stock of which 125,000 shares were issued as
additional consideration for the extension of the loan and security agreement
and 360,000 shares were issued in lieu of the issuance to Moriah of the
Contingent Issued Shares (as described in the Original Securities Issuance
Agreement). Additionally, Moriah has a put option pursuant to which Moriah can
sell to the Company 162,500 shares of its common stock for $195,000,
pro-rated for any portion thereof, relating to the remaining 37,500 shares
subject to the 2007 Put Option and the 125,000 shares issued to extend the loan
and security agreement, the Put Waiver shares.  In conjunction with
the issuance of the 360,000 shares, the Company granted Moriah a put option
pursuant to which such shares can be put to the Company for $234,000 (the “2008
Put Option”).  The 2007 and 2008 Put Option shall automatically be
deemed exercised by Moriah unless Moriah delivers written notice to the Company
at any time between July 1, 2009 and August 1, 2009 that Moriah does not wish to
exercise the 2007 and 2008 Put options in whole or in part.




The
shares underlying the put options are presented as redeemable common stock
and presented separately from permanent equity. As of December 31,
2008, an aggregate of 522,500 shares related to the 2007 and 2008 put
options are presented on the balance sheet as redeemable common stock in
the amount of $429,000, representing the amount for which the shares may be
redeemed at the option of the holders at such date.




The
Company and Moriah entered into an Amendment to Registration Rights Agreement
(the “Amended Registration Rights Agreement”) and the Company agreed to use its
best efforts to file a registration statement to register the 485,000
shares of the Company’s common stock issued and the shares of common stock
issuable upon exercise of the Warrant.




On August
19, 2008, the Holders of the Amended Notes and the Investors in
the Purchase Agreement consented to the Company’s execution of the Amended
Note, Amendment No. 3, Amended and Restated Securities Issuance Agreement, and
the Amended Registration Rights Agreement.  In consideration for the
consent, a total of 144,000 shares of common stock valued at $101,000 were
issued to the Holders and Investors based on individual participation in the
Amended Notes and Purchase Agreement on September 4, 2008.





As a
result of the Amended and Restated Securities Issuance Agreement, the
outstanding 650,000 Series F Common Stock Purchase Warrants that were issued to
participants of the Securities Purchase Agreement dated October 25, 2004, were
repriced from $3.45 to $3.31 and the April 2, 2008 Common Stock Purchase
Warrants were repriced from $1.30 to $1.28.  The repricing of the
warrants had no effect on the consolidated financial statements.





On April
2, 2008, the Company entered into a Securities Purchase Agreement (“Purchase
Agreement”), pursuant to which the Company sold and issued 1,586,539 shares of
common stock, par value of $0.001 per share, at a price of $1.04 per share and
warrants to purchase an additional 793,273 shares of common stock for an
aggregate purchase price of approximately $1.65 million.  The net
proceeds received after expenses were approximately $1.58
million.  The warrants are exercisable at a price of $1.30 per share
and expire on April 2, 2013.





As a
result of the Purchase Agreement, the outstanding 650,000 Series F Common Stock
Purchase Warrants that were issued to participants of the Securities Purchase
Agreement dated October 25, 2004, were repriced from $4.09 to $3.45. The
repricing of the warrants had no effect on the consolidated financial
statements.





A
registration rights agreement was entered into on April 2, 2008 in connection
with the private placement which required the Company to file a registration
statement for the resale of the common stock and the shares underlying the
warrants within 45 days of the signing of the agreement.  The Company
must use its best efforts to have the registration statement declared effective
within 90 days of the signing of the agreement or if a SEC review occurs, 120
days.  In addition, the Company must use its best efforts to maintain
the effectiveness of the registration statement until all common stock has been
sold or may be sold without volume restrictions pursuant to Rule 144(k) of the
Securities Act.




45




If the
registration statement is not effective within the grace periods (“Event Date”)
or the Company cannot maintain its effectiveness (“Event Date”), the Company
must pay partial liquidated damages (“damages”) in cash to each investor equal
to 2% of the aggregate purchase price paid by each investor under the Purchase
Agreement on the Event Date and each monthly anniversary of the Event Date (or
on a pro-rata basis for any portion of a month) until the registration statement
is effective.  The Company is not liable for any damages with respect
to the warrants or warrant shares.  The maximum damages payable to
each investor is 36% of the aggregate purchase price.  If the Company
fails to pay the damages to the investors within 7 days after the date payable,
the Company must pay interest at a rate of 15% per annum to each investor which
accrues daily from the date payable until damages are paid in full.





The
Company filed the registration statement within the 45 day period however the
Company was notified that the registration statement was under review by the
SEC.  The amended registration statement was not filed by August 2,
2008 which was the 120th day from the signing of the purchase agreement and
therefore the registration statement is not effective. As of December 31, 2008,
the registration statement is not effective.





The
Company accounted for the registration payment arrangement under the guidance of
EITF 00-19-2, “Accounting for Registration Payment Arrangements”, (“EITF
00-19-2”) which requires the contingent obligation to make future payments be
recognized and measured in accordance with FASB Statement No. 5, “Accounting for
Contingencies”, (“Statement 5”) and FASB Interpretation No. 14, “Reasonable
Estimation of the Amount of a Loss”, (“Interpretation 14”). The Company
estimated $399 thousand to be the maximum potential damages that the Company may
be required to pay the investors if the registration statement is not effective
within three years of the signing of the agreement. The Company estimated $186
thousand to be a reasonable estimate of the potential damages that may be due to
the investors.  As a result, the Company recorded a liability of $186
thousand in the consolidated balance sheets and the associated expense in other
income (expense) in the consolidated statements of
operations.  Effective March 25, 2008, the Company amended the Warrant
Issuance Agreement (“Amended Warrant Agreement”) with Moriah. In connection with
such amendment, the Company issued a Warrant to purchase an additional 250,000
shares of its common stock at a price of $1.50 expiring March 25,
2013.





On
January 30, 2008, the Company amended and restated its Loan and Security
Agreement (“Amended Loan Agreement”) with Moriah.   As part of the
amended agreement, the Loan Conversion agreement was terminated which eliminated
the optional conversion of principal up to $2.0 million into common stock at
$1.50.  In connection with the Amended Loan agreement, the Company
issued a Warrant to purchase 750,000 shares of its common stock at a price of
$1.50 per share with an expiration date of January 29, 2013. Effective March 25,
2008, the Company amended the Warrant Issuance Agreement with Moriah. In
connection with such amendment, the Company issued a Warrant to purchase an
additional 250,000 shares of its common stock at a price of $1.50 expiring March
25, 2013.





The
Company determined the fair value of the 1,000,000 warrants issued to Moriah to
be $729 thousand. The Company valued the warrants using a Black-Scholes
option pricing model. The Company recorded $168 thousand as interest
expense and the remaining $561 thousand was recorded as deferred debt
issuance costs and amortized over the life of the loan.   The
following assumptions were used to determine the fair value of the
warrants:  dividend yield of 0%; risk free interest rates of 2.61 %
and 2.96%; expected volatility of 90.9% and 92.3%; and expected contractual term
of 5 years.





For the
year ended December 31, 2008, there were no stock options and warrants
exercised.  For the year ended December 31, 2008, the Company also
issued approximately 326,000 shares of common stock for payment of approximately
$303 thousand for services rendered and to be rendered in the
future.  As such, the Company recorded the fair value
of the services rendered in prepaid expenses and
selling, general and administrative expenses in the accompanying
consolidated statement of operations for the year ended December 31,
2008.





2007





On August
16, 2007, an investor elected to convert approximately $58 thousand of the
Amended Note. The investor received 76,923 shares of Common Stock at the
conversion price of $0.75.





On August
7, 2007, the Company enteredinto a loan agreement
with Moriah Capital, L.P. (“Moriah)and established a
revolving line of credit (the “Loan”) of $2.5 million.  As part of the
transaction, the Company issued 162,500 shares of unregistered common stock
valued at $195 thousand, recognized as deferred financing costs, and paid a
servicing fee of $82,500 to Moriah which was amortized to interest expense over
the life of the agreement.  For the year ended December 31, 2007
approximately $116 thousand was amortized to interest expense.  In
conjunction with entering into this loan and issuing unregistered common stock,
the Company granted Moriah registration rights.  The Loan was
convertible into shares of the Company’s common stock pursuant to the terms of
the Loan Conversion agreement.  The Loan matured on August 8, 2008
however the Company had the option of extending it an additional
year.  On January 30, and March 25, 2008, the loan agreement was
amended.





A
registration rights agreement was entered into in connection with the Loan which
requires the Company to file a registration statement for the resale of the
common stock issued.  The Company must use its best efforts to have
the registration statement declared effective by the end of a specified grace
period and also maintain the effectiveness of the registration statement until
all shares of common stock have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) of the Securities Act.





Additionally,
the Company granted Moriah a put option pursuant to which Moriah can sell to the
Company the 162,500 shares of its common stock for $195 thousand, or prorated
for any portion thereof ("the Put Option"). The Put Option expires if the Put
Option is not exercised during the Put Period which is the earlier of a) ten
business days commencing on the anniversary date of the loan agreement or b) ten
business days commencing on the date which is nine months after the registration
statement for the registration of the issued 162,500 shares of common stock is
declared effective. The shares underlying the put option are presented as
redeemable common stock on the accompanying consolidated balance sheet and
presented separately from permanent equity.




46




On July
23, 2007, the Company entered into Agreements with the note holders and agreed
to issue each holder an Amended Note in the principal amount equal to the
principal amount outstanding as of July 23, 2007 which was in total
approximately $6.0 million. The Amended Notes were convertible into 8,407,612
shares of the Company’s common stock.  The conversion price for $5.8
million of principal was at a conversion price of $0.75 and the conversion price
for $250 thousand of principal remains the same at $0.35.   The
Agreement adjusted the exercise price of the amended Warrants from $3.60 to
$1.03 per share for 1,553,468 shares of common stock and required the issuance
of warrants for an additional 3,831,859 shares of common stock at $1.03 per
share with an expiration date of July 21, 2011.   The warrants
are subject to anti-dilution adjustment rights.  50% of the Amended
Notes were convertible into the Company’s newly designated Series A Senior
Secured Convertible Preferred Stock which was convertible into common stock at
the same rate as the Amended Notes.





The
Company had recorded the fair value of the warrants associated with the Note as
a liability as the warrant agreement required a potential net-cash settlement in
the first year of the warrant agreement if the registration statement is not
effective as required by EITF 00-19 “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF
00-19”).  The liability was adjusted to fair value at each reporting
period.  As of July 23, 2007, the potential net-cash settlement had
expired.  As a result, the fair value of the warrant liability on July
23, 2007, approximately $2.7 million, was reversed.  For the year
ended December 31, 2007, the Company recorded losses of approximately $0.8
million from the change in the fair value of the warrant derivative liability.
The change in the fair value of the warrant liability was recorded in the
Consolidated Statement of Operations as other income (expense).





On July
23, 2007, an investor converted $250 thousand of the principal amount of the
Original Note due on July 23, 2007 and approximately $2 thousand of accrued and
unpaid interest totaling $252 thousand and received 720,476 shares of Common
Stock at the conversion price of $0.35.  On August 16, 2007, an
investor elected to convert approximately $58 thousand of the Amended Note. The
investor received 76,923 shares of Common Stock at the conversion price of
$0.75.





On March
28, 2007, the Company entered into a Note Purchase Agreement for the sale of
$500 thousand of 6% senior secured convertible debentures (the “Note”) and
warrants to purchase approximately 1,000,000 shares of common stock, par value
$.001 per share.  The investor purchased the Note with a conversion
price of $0.35 per share that may convert into approximately 1,400,000 shares of
common stock and issued warrants exercisable at $0.48 per share for
approximately 1,000,000 shares of common stock expiring in July
2011.  On April 9, 2007, the Company closed the transaction and
received approximately $460 thousand, net of offering costs of approximately $40
thousand, which are amortized over the life of the Note.   The
Note was amended on July 23, 2007 as described in Footnote
8:  Debt.





As a
result of the issuance of the Note, the outstanding 116,573 Series A Common
Stock Purchase Warrants, that were issued to certain accredited and/or
institutional investors pursuant to the Securities Purchase Agreement dated
January 9, 2004, were re-priced from $2.60 to $0.35 and the outstanding 650,000
Series F Common Stock Purchase Warrants, that were issued to certain accredited
and/or institutional investors pursuant to the Securities Purchase Agreement
dated October 25, 2004, were re-priced from $8.60 to $7.12. As a result of the
issuance of the Amended Notes the outstanding 650,000 Series F Common Stock
Purchase Warrants that were issued to certain accredited and/or institutional
investors pursuant to the Securities Purchase Agreement dated October 25, 2004,
were re-priced from $7.12 to $4.39 in accordance with the anti-dilution
provision of the original agreement.  These warrants were further
re-priced in connection with the loan agreement with Moriah from $4.39 to
$4.09.  The repricing of the warrants had no effect on the
consolidated financial statements.





For the
year ended December 31, 2007, there were no stock options exercised and the
Company received approximately $3 thousand in proceeds for warrants exercised.
For the year ended December 31, 2007, the Company also issued approximately 1.3
million shares of common stock for payment of approximately $1.1 million for
services rendered and to be rendered in the future. In addition, the
Company issued 162,500 shares of common stock subject to a put option for
payment of approximately $0.2 million for services rendered.  As
such, the Company recorded the fair value of the services
rendered in prepaid expenses and selling, general and
administrative expenses in the accompanying consolidated statement of
operations for the year ended December 31, 2007.





2006




At the
Company’s 2006 Annual Meeting of Shareholders held on October 20, 2006, the
Company’s shareholders approved an amendment to the Company’s certificate of
incorporation to effect a reverse stock split of the issued and outstanding
common stock on a ratio of 1-for-10.  On November 3, 2006, the reverse
stock split became effective. The Company has adjusted its shareholders’ equity
accounts by reducing its stated capital and increasing its additional paid-in
capital by approximately $91 thousand as of December 31, 2006 and 2005 to
reflect the reduction in outstanding shares as a result of the reverse stock
split.




47




On July
21, 2006, the Company entered into several Note Purchase Agreements for the sale
of approximately $5.99 million of senior secured debentures (the “Notes”) and
warrants to purchase approximately 1.8 million shares of common stock, par value
$.001 per share.  The investors purchased $5.99 million principal
amount of Notes with conversion prices of $2.60 per share that may convert into
approximately 2.3 million shares of common stock and 5 year warrants exercisable
at $3.60 per share into approximately 1.6 million shares of common
stock.  If the Notes are not converted, 50% of the principal amount
will be due on July 23, 2007 and the remaining 50% will be due on January 21,
2008.  Commencing September 1, 2006, 6% interest is payable in
quarterly installments on outstanding notes.  For the year ended
December 31, 2006, the Company paid approximately $124 thousand of interest to
investors. The Company received approximately $5.4 million, net of deferred
financing costs of approximately $0.6 million which are amortized over the life
of the Notes.   The Company amortized approximately $221 thousand
of deferred financing costs in 2006. For the year ended December 31, 2006, two
note holders converted their promissory notes valued at approximately $220
thousand and were issued an aggregate of approximately 85,000
shares.





Under
EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in, a Company’s Own Stock”, the fair value of the warrants,
$3.6 million, have been recorded as a liability since the warrant agreement
requires a potential net-cash settlement in the first year of the warrant
agreement if the registration statement is not effective.  As of
December 31, 2006, the registration statement is effective.  The
liability will be adjusted to fair value at each reporting
period.  The change in the fair value of the warrants will be recorded
in the Consolidated Statement of Operations as other income
(expense).  For the twelve months ended December 31, 2006, the Company
recorded approximately $2.4 million of gain from the change in the fair value of
the derivative liability.





An
additional $0.5 million was to be invested through the exercise of a warrant to
purchase approximately 192,000 shares of common stock at $2.60 per share on or
prior to December 14, 2006, or at the election of the Company, by the purchase
of additional Notes and warrants.  The Company determined the relative
fair value of the warrants to be approximately $157,000 which was recorded as an
other asset.  The following assumptions were used to determine the
fair value of the warrant:





Dividend
      yield
                      
                      
                      0
                      %Risk
      free interest rates
                      
                      
                      5.25
                      %Expected  volatility
                      
                      
                      122
                      %Expected
      term (in years)
                      
                      0.4
      years


The
investor elected not to exercise its warrants prior to December 14,
2006.  The fair value of the warrants which was recorded as an other
asset was written off as a sales, general and administrative
expense.





In
connection with the Notes, a registration rights agreement was entered into
which requires the Company to file a registration statement for the resale of
the common stock underlying the Notes and the warrants.  The Company
must use its best efforts to have the registration statement declared effective
by the end of a specified grace period and also maintain the effectiveness of
the registration statement until all shares of common stock underlying the Notes
and the warrants have been sold or may be sold without volume restrictions
pursuant to Rule 144(k) of the Securities Act.  If the Company fails
to have the registration statement declared effective within the grace period or
fails to maintain the effectiveness as set forth in the preceding sentence, the
Company is required to pay each investor cash payments equal to 1.0% of the
aggregate purchase price monthly until the failure is cured.  If the
Company fails to pay the liquidated damages, interest at 16.0% will accrue until
the liquidated damages are paid in full.  The registration statement
was filed and declared effective by the Securities and Exchange Commission
within the specified grace period.





The
Company accounts for the registration rights agreement as a separate
freestanding instrument and accounts for the liquidated damages provision as a
derivative liability subject to SFAS 133.  The estimated fair value of
the derivative liability is based on an estimate of the probability and costs of
cash penalties being incurred.  The Company determined that the fair
value of the liability was immaterial and it is not recorded in accrued
liabilities.  The Company will revalue the potential liability at each
balance sheet date.





As a
result of the issuance of the Notes, the outstanding 116,576 Series A Common
Stock Purchase Warrants, that were issued to certain accredited and/or
institutional investors pursuant to the Securities Purchase Agreement dated
January 9, 2004, were re-priced from $5.50 to $2.60 and the outstanding 650,001
Series F Common Stock Purchase Warrants, that were issued to certain accredited
and/or institutional investors pursuant to the Securities Purchase Agreement
dated October 25, 2004, were re-priced from $10.90 to $8.60.





For the
year ended December 31, 2006, the Company received approximately $10 thousand
for the exercise of 5,000 options and there were no warrants
exercised.  For year ended December 31, 2006, the Company issued
approximately 254,000 shares of common stock in lieu of cash payments in the
amount of approximately $580 thousand as compensation for services rendered
and to be rendered in the future.  The fair value of the services was
measured at market value of the common stock at the time of
payment.  As such, the Company recorded the fair value of the services
rendered in selling, general and administrative expenses in the accompanying
consolidated statement of operations for the year ended December 31,
2006.





The 2004
Non-Employee Compensation Plan (the “2004 Plan”) was established to help the
Company retain consultants, professionals and service providers.  The
Board of Directors will select the recipient of the awards, the nature of the
awards and the amount. At the 2006 Annual Shareholder meeting, the shareholders
approved an increase in the number of authorized shares of common stock usable
from 200,000 to 950,000.  This number is subject to adjustment in the
event of a recapitalization, reorganization or similar event.


48




Note
11 - STOCK COMPENSATION





Employee
stock purchase plan





In 2005,
the stockholders approved the 2005 Employee Stock Purchase Plan
(“ESPP”).  The ESPP provides the Company’s employees with the
opportunity to purchase common stock through payroll deductions. Employees
purchase stock semi-annually at a price that is 85% of the fair market value at
certain plan-defined dates. At December 31, 2008, the number of shares of common
stock available for issuance was 300,000.  As of December 31, 2008,
the plan had not been implemented.





Incentive
compensation plans





In 2000,
the Company established the 2000 Stock Option Plan (the "2000 Plan"). The Plan
permits the granting of options and stock purchase rights to employees and
consultants of the Company. The 2000 Plan allows for the grant of incentive
stock options meeting the requirements of Section 422 of the Internal Revenue
Code of 1986 (the "Code") or non-qualified stock options which are not intended
to meet such requirements.





In 2003,
the Company established the 2003 Stock Option Plan (the "2003 Plan"). The 2003
Plan provided for the granting of options to purchase an aggregate of 920,000
shares of the common stock to employees and consultants. On July 2, 2003, the
shareholders approved the plan and the 2003 Plan was subsequently amended by the
Board of Directors on July 2, 2003 to reduce the number of additional shares
that may be provided for issuance under the "evergreen" provisions of the 2003
Plan. The amended 2003 Plan provides for an increase of 200,000 shares in
January 2004 and an annual increase on January 1 of each year for a period of
nine (9) years commencing on January 1, 2005 of 3% of the diluted shares
outstanding.  The shareholders approved an amendment to the 2003 Plan
to provide grants of shares of common stock in addition to options to purchase
shares of common stock.





The 2008
Incentive Stock Plan (“the 2008 Plan”) adopted and approved by the Board of
Directors on November 5, 2008 provides for  shares of common stock and
options to purchase shares of common stock to employees, officers, directors and
consultants.  The 2008 Plan has an aggregate of 2,000,000 shares.
 As of December 31, 2008, no options or shares of common stock were granted
from this plan.





Vesting
terms of the options range from immediate vesting to a ratable vesting period of
5 years. Option activity for the years ended December 31, 2008, 2007 and 2006 is
summarized as follows:




Number
      of Shares
                                
                                
                                Weighted
      Average Exercise Price
                                
                                
                                Weighted
      Average Remaining Contractual Life (In Years)
                                
                                
                                Aggregate
      Intrinsic ValueBalances
      at December 31, 2005
                                
                                
                                1,805,264
                                
                                
                                $
                                10.90Options
      granted
                                
                                
                                185,744
                                
                                
                                
                                4.30Options
      exercised
                                
                                
                                (5,000
                                )
                                
                                
                                2.10Options
      forfeited
                                
                                
                                (453,115
                                )
                                
                                
                                7.47Options
      cancelled
                                
                                
                                (467,148
                                )
                                
                                
                                11.97Balances
      at December 31, 2006
                                
                                
                                1,065,745
                                
                                
                                $
                                2.94Options
      granted
                                
                                
                                228,577
                                
                                
                                
                                1.41Options
      exercised
                                
                                
                                —
                                
                                
                                
                                —Options
      forfeited
                                
                                
                                (203,943
                                )
                                
                                
                                2.90Options
      cancelled
                                
                                
                                (196,056
                                )
                                
                                
                                2.67Balances
      at December 31, 2007
                                
                                
                                894,323
                                
                                
                                $
                                2.62Options
      granted
                                
                                
                                927,253
                                
                                
                                
                                0.89Options
      exercised
                                
                                
                                —
                                
                                
                                
                                —Options
      forfeited
                                
                                
                                (205,903
                                )
                                
                                
                                2.29Options
      cancelled
                                
                                
                                —
                                
                                
                                
                                —Balances
      at December 31, 2008
                                
                                
                                1,615,673
                                
                                
                                $
                                1.63
                                
                                
                                6.43
                                
                                $
                                1,440Vested
      or expected to vest at
                                  December
      31, 2008(1)
                                
                                
                                1,568,953
                                
                                
                                $
                                1.51
                                
                                
                                6.43
                                
                                $
                                —Exercisable
      at December 31, 2008
                                
                                
                                1,148,476
                                
                                
                                $
                                1.79
                                
                                
                                6.61
                                
                                $
                                —





(1)  The
expected to vest options are the result of applying the pre-vesting forfeiture
rate assumptions to total unvested options.





At December 31, 2008, there were 2,055,595 shares
available for grant under the 2008 Plan, 2003 Plan and 2000
Plan.





The
aggregate intrinsic value in the table above represents the difference between
the exercise price of the underlying options and the quoted price of the
Company’s common stock for the options that were in-the-money.  As of
December 31, 2008 there were 8,000 options that were
in-the-money.   The Company’s closing stock price was $0.54 as of
December 31, 2008. The Company issues new shares of common stock upon exercise
of stock options.




49




The
following table summarizes information about stock options outstanding at
December 31, 2008:





Options
      Outstanding
                    
                    
                    Options
      ExercisableNumber
      Outstanding
                    
                    
                    Weighted
      Average Remaining Contractual Life (In Years)
                    
                    
                    Weighted
      Average Exercise Price
                    
                    
                    Number
      Exercisable
                    
                    
                    Weighted
      Average Exercisable Price$
                    0.34
      - $0.97
                    
                    
                    
                    759,553
                    
                    
                    
                    7.39
                    
                    
                    $
                    0.80
                    
                    
                    
                    404,620
                    
                    
                    $
                    0.79$
                    1.00
      - $1.44
                    
                    
                    
                    388,577
                    
                    
                    
                    8.71
                    
                    
                    
                    1.38
                    
                    
                    
                    358,397
                    
                    
                    
                    1.41$
                    2.60
      - $2.70
                    
                    
                    
                    430,343
                    
                    
                    
                    2.98
                    
                    
                    
                    2.61
                    
                    
                    
                    352,959
                    
                    
                    
                    2.61$
                    3.50
      - $5.80
                    
                    
                    
                    8,000
                    
                    
                    
                    3.55
                    
                    
                    
                    5.51
                    
                    
                    
                    8,000
                    
                    
                    
                    5.51$
                    6.60
      - $22.50
                    
                    
                    
                    29,200
                    
                    
                    
                    2.57
                    
                    
                    
                    10.91
                    
                    
                    
                    24,500
                    
                    
                    
                    10.901,615,673
                    
                    
                    
                    6.43
                    
                    
                    $
                    1.63
                    
                    
                    
                    1,148,476
                    
                    
                    $
                    1.79





On July 21, 2006, certain employees and Directors
of the Company agreed to cancel approximately 467,000 shares underlying existing
stock options in return for the re-pricing of approximately 869,000 existing
options at $2.60 per share having a weighted average original exercise price of
$11.97.  Option grants that have not been re-priced remain
unchanged.  The unvested options which were re-priced continue to vest
on original vesting schedules, but in no event vest prior to January 19,
2007.  Previously vested options which were re-priced were fully
vested on January 19, 2007.  Re-priced grants will be forfeited if the
individual leaves voluntarily.  The Company has accounted for the
re-pricing and cancellation transactions as a modification under SFAS No.
123R.





Stock based
compensation





The
Company accounts for the measurement and recognition of compensation expense for
all share-based payment awards made to employees and directors under Statement
of Financial Accounting Standards No. 123 (revised 2004),Share-Based
Payment , (SFAS 123(R)). Under SFAS 123(R), the fair value of stock
awards is estimated at the date of grant using the Black-Scholes option
valuation model.  Stock-based compensation expense is reduced for
estimated forfeitures and is amortized over the vesting period using the
straight-line method.





The
following table summarizes the allocation of stock-based compensation to expense
categories for the years ended December 31, 2008, 2007 and 2006 (in
thousands):





For
      the years ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Cost
      of revenue
                  
                  $
                  134
                  
                  
                  $
                  215
                  
                  
                  $
                  343Research
      and development
                  
                  
                  237
                  
                  
                  
                  357
                  
                  
                  
                  435Selling,
      general, and administrative
                  
                  
                  557
                  
                  
                  
                  1,080
                  
                  
                  
                  2,113Total
      stock compensation expense
                  
                  $
                  928
                  
                  
                  $
                  1,652
                  
                  
                  $
                  2,891





At
December 31, 2008, total unrecognized compensation costs related to stock
options was approximately $0.6 million, net of estimated
forfeitures.  Total unrecognized compensation cost will be adjusted
for future changes in estimated forfeitures and is expected to be recognized
over a weighted average period of approximately 1.5 years.  The total
fair value of the shares that vested in 2008 was $0.6 million.





The
Company recognizes compensation expense for options granted to non-employees in
accordance with the provision of Emerging Issues Task Force (“EITF”) consensus
Issue 96-18, “Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services,”
which requires using a fair value options pricing model and re- measuring
such stock options to the current fair market value at each reporting period as
the underlying options vest and services are rendered.


50





In
determining the fair value of stock options granted during the years ended
December 31, 2008, 2007, and 2006, the following key assumptions were used in
the Black-Scholes option pricing model:





For
      the years ended December 31,2008
                
                
                2007
                
                
                2006Dividend
      yield
                
                
                0
                %
                
                
                0
                %
                
                
                0
                %Risk
      free interest rates
                
                
                1.71%
      - 3.37
                %
                
                
                3.28%
      - 4.23
                %
                
                
                4.59%
      - 4.82
                %Expected  volatility
                
                
                87%
      -92
                %
                
                
                105%
      -106
                %
                
                
                123%
      - 126
                %Expected
      term ( in
      years)
                
                5
      years
                
                
                5
      years
                
                
                5
      years





We have
not declared or paid any dividends and do not currently expect to do so in the
near future.  The risk-free interest rate used in the Black-Scholes
option pricing model is based on the implied yield currently available on U.S.
Treasury securities with an equivalent term.   Expected
volatility is based on the weighted average historical volatility of the
Company’s common stock for the most recent five year period.  The
expected term of options represents the period that eMagin’s stock-based awards
are expected to be outstanding and was determined based on historical experience
and vesting schedules of similar awards.





Warrants





At
December 31, 2008, 12,279,239 warrants to purchase shares of common stock are
outstanding and exercisable at exercise prices ranging from $0.35 to $24.10 and
expiration dates ranging from January 8, 2009 to December 22, 2013.





Outstanding
      WarrantsShares
                                    
                                    
                                    Weighted
      Average Exercise PriceBalances
      at December 31, 2005
                                    
                                    
                                    2,619,725
                                    
                                    
                                    $
                                    10.20Warrants
      granted
                                    
                                    
                                    1,805,037
                                    
                                    
                                    
                                    3.49Warrants
      exercised
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Warrants
      expired
                                    
                                    
                                    (876,588
                                    )
                                    
                                    
                                    6.90Balances
      at December 31, 2006
                                    
                                    
                                    3,548,174
                                    
                                    
                                    $
                                    7.05Warrants
      granted
                                    
                                    
                                    4,831,859
                                    
                                    
                                    
                                    0.88Warrants
      exercised
                                    
                                    
                                    (9,524
                                    )
                                    
                                    
                                    0.35Warrants
      expired
                                    
                                    
                                    (30,000
                                    )
                                    
                                    
                                    4.26Balances
      at December 31, 2007
                                    
                                    
                                    8,340,509
                                    
                                    
                                    $
                                    2.65Warrants
      granted
                                    
                                    
                                    4,038,740
                                    
                                    
                                    
                                    1.22Warrants
      exercised
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Warrants
      expired
                                    
                                    
                                    (100,009
                                    )
                                    
                                    
                                    27.60Balances
      at December 31, 2008
                                    
                                    
                                    12,279,239
                                    
                                    
                                    $
                                    1.88





Note 12 - COMMITMENTS AND
CONTINGENCIES





Royalties





The Company, in accordance with
a royalty agreement with Eastman Kodak, is obligated to make
minimum annual royalty payments of $125 thousand which commenced on January
1, 2001. Under this agreement, the Company must pay to Eastman Kodak a certain
percentage of net sales with respect to certain products, which
percentages are defined in the agreement. The percentages are on a sliding scale
depending on the amount of sales generated. Any minimum royalties
paid will be credited against the amounts due based on the percentage of
sales. The royalty agreement terminates upon the expiration of the issued
patent which is the last to expire.





Effective
May 30, 2007, Kodak and eMagin entered into an intellectual property agreement
where eMagin assigned Kodak the rights, title, and interest to a Company owned
patent currently not being used by the Company and in consideration, Kodak
waived the royalties due under existing licensing agreements for the first six
months of 2007, and reduced the royalty payments by 50% for the second half of
2007 and for the entire calendar year of 2008. In addition, the minimum royalty
payment was delayed until December 1st for the
years 2007 and 2008.  The Company recorded approximately $556 thousand
and $868 thousand for the years ended December 31, 2008 and 2007, respectively,
as income from the license of intangible assets and included this amount in
other income on the Consolidated Statement of Operations.





For the
years ended December 31, 2008, 2007, and 2006, royalty expense of approximately
$1.1 million,  $1.2 million, and $515 thousand, respectively, is
included in cost of goods sold.




51




Operating
leases





The
Company leases office facilities and office, lab and factory equipment under
operating leases expiring in 2009.   The Company currently has
lease commitments for space in Hopewell Junction, New York and Bellevue,
Washington.





The
Company’s manufacturing facilities are leased from IBM in Hopewell Junction, New
York.  eMagin leases approximately 40,000 square feet to house its
equipment for OLED microdisplay fabrication and for research and development, an
assembly area and administrative offices. The lease expires May 31,
2009.  The Company is currently in negotiations to extend the
lease.





In July
2005, eMagin signed a sub-lease agreement for approximately 19,000 square feet
in Bellevue Washington. The leased space is used as the Company’s corporate
headquarters.  This lease will expire August 31, 2009.  The
Company is currently reviewing potential office spaces for lease.





The
future minimum lease payments through 2009 are $619 thousand. Rent expense for
the years ended December 31, 2008, 2007, and 2006 was approximately $1.3
million, $1.3 million, and $1.3 million, respectively.





Employee
benefit plans





eMagin
has a defined contribution plan (the 401(k) Plan) under Section 401(k) of the
Internal Revenue Code, which is available to all employees who meet established
eligibility requirements. Employee contributions are generally limited to 15% of
the employee's compensation. Under the provisions of the 401(k) Plan, eMagin may
match a portion of the participating employees' contributions. There was no
matching contribution to the 401(k) Plan for the years ended December 31, 2008,
2007 and 2006.





Legal
proceedings





A former
employee (“plaintiff”) of the Company commenced legal action in the United
States District Court for the Southern District of New York, on or about October
12, 2007, alleging that the plaintiff was subject to gender based discrimination
and retaliation in violation of Title VII of the Civil Rights Act of 1964 (Case No. 07-CV-8827
(KMK).  The plaintiff seeks unspecified compensatory damages,
punitive damages and attorneys’ fees.  On November 26, 2007, the
Company served and filed its Answer, in which it denied the material allegations
of the Complaint and asserted numerous affirmative defenses.  This
action is presently in the discovery stage.  The Company disputes the
allegations of the Complaint and intends on vigorously defending this
action.





On
December 6, 2005, New York State Urban Development Corporation commenced action
against eMagin in the Supreme Court of the State of New York, County of New York
asserting breach of contract and seeking to recover a $150,000 grant which was
made to eMagin based on goals set forth in the agreement for recruitment of
employees.  On July 13, 2006, eMagin agreed to a settlement with the
New York State Urban Development Corporation to repay $112,200 of the $150,000
grant. The settlement requires that repayments be made on a monthly basis in the
amount of $3,116.67 per month commencing August 1, 2006 and ending on July 1,
2009.  As of December 31, 2008, approximately $59,617 remains
outstanding to the New York Urban Development Corporation, of which $37,800 will
be forgiven if payments are timely.





Note
13 – RELATED PARTY TRANSACTIONS





2008





On
December 22, 2008, the Company entered into a Securities Purchase Agreement with
Stillwater LLC, a beneficial owner of more than 5%, pursuant to which the
Company sold and issued an aggregate of 4,033 shares of its Preferred Stock –
Series B for an aggregate price of approximately $4.03 million and warrants to
purchase 1,875,467 shares of common stock at $1.03 per share. The proceeds from
the Securities Purchase Agreement were used to pay approximately $4.01 million
of the outstanding principal of its Amended Notes and approximately $0.02
million of accrued interest.  One employee had an Amended Note of $10
thousand which was repaid. Alexandra Global Master Fund Ltd (“Alexandra”), a
beneficial owner of more than 5% of the Company’s common stock, had its Amended
Note of $3 million repaid.





In
addition, the Company entered into an Exchange Agreement (the “Exchange
Agreement”) with three holders (“Holders”) of its outstanding Amended
Notes.  Pursuant to the Exchange Agreement, the Holders exchanged $1.7
million of their outstanding Amended Notes and unpaid interest, $6 thousand, and
received 1,706 shares of the Preferred Stock.   Paul Cronson,
Board member, through Navacorp III, LLC - a Note Holder, exchanged an Amended
Note of $200 thousand for 200 shares of Preferred Stock – Series
B.  Rainbow Gate Corporation, a corporation whose investment manager
is the sole member of Stillwater LLC and whose controlling shareholder is the
same as Ginola Limited’s, exchanged an Amended Note of $700 thousand and accrued
interest of $3 thousand for 703 shares of Preferred Stock – Series
B.  Ginola Limited, a beneficial owner of more than 5%, exchanged an
Amended Note of $800 thousand and accrued interest of $3 thousand for 803 shares
of Preferred stock – Series B.   Stillwater LLC disclaims
beneficial ownership of shares owned by Rainbow Gate Corporation.  On
December 22, 2008, Stillwater LLC converted its $250 thousand Amended Note and
accrued interest of approximately $1.2 thousand to 717,620 shares of Common
Stock.




52





On April
2, 2008, the Company entered into a Securities Purchase Agreement (“Purchase
Agreement”), pursuant to which the Company sold and issued 1,586,539 shares of
common stock, par value of $0.001 per share, at a price of $1.04 per share and
warrants to purchase an additional 793,273 shares of common stock for an
aggregate purchase price of approximately $1.65 million.  The net
proceeds received after expenses were approximately $1.58
million.  The warrants are exercisable at a price of $1.30 per share
and expire on April 2, 2013.





Stillwater
LLC, as a beneficial owner of more than 5%, invested $500 thousand and received
480,769 shares of common stock and warrants to purchase additional 240,385
shares of common stock.  Ginola Limited, as a beneficial owner of more
than 5%, invested $250 thousand and received 240,385 shares of common stock and
warrants to purchase an additional 120,193 shares of common stock. Crestflower
Corporation invested $250 thousand and received 240,385 shares of common stock
and warrants to purchase additional 120,193 shares of common
stock.  Ginola Limited and Crestflower share the same directors;
however, Ginola Limited disclaims beneficial ownership of shares owned by
Crestflower Corporation.





2007





On July
23, 2007, the Company entered into Agreements with the note holders and issued
8% Amended Senior Secured Convertible Notes (“Amended Notes”) to the note
holders in the principal amount equal to the principal amount outstanding as of
July 23, 2007. The due date for the principal payment was extended to December
21, 2008 and the interest rate increased to 8%. The Amended Notes were
convertible into 8,407,612 shares of the Company’s common stock. The conversion
price for approximately $5,770,000 of principal was revised from $2.60 to $.75
per share and the conversion price of $.35 per share for $250,000 of principal
was unchanged. $3,010,000 of the Notes were convertible into 3,010 shares of the
Company’s newly formed Series A Convertible Preferred Stock (the “Preferred”) at
a conversion price of $1,000 per share. The Preferred was convertible into
common stock at the same price allowable by the Amended Notes, subject to
adjustment as provided for in the Certificate of Designations. The Amended Notes
adjusted the exercise price from $3.60 to $1.03 per share for 1,553,468 warrants
and required the issuance of 3,831,859 warrants exercisable at $1.03 per share
pursuant to which the note holders may acquire common stock until July 21,
2011.





Stillwater
LLC was a beneficial owner of more than 5% of the Company’s common
stock.  Rainbow Gate Corporation, a corporation whose investment
manager is the sole member of Stillwater LLC and whose controlling shareholder
is the same as Ginola Limited’s, had an Amended Note of $700 thousand which was
convertible into 933,333 shares and received 653,333 warrants exercisable at
$1.03 per share.  Ginola Limited had an Amended Note of $800 thousand
which was convertible into 1,066,333 shares and received 746,666 warrants
exercisable at $1.03 per share.  Stillwater LLC disclaimed beneficial
ownership of shares owned by Rainbow Gate Corporation.





Two
employees and one board member participated in the Agreements. Olivier Prache,
Senior VP of Display Operations, had an Amended Note of $10 thousand which was
convertible into 13,333 shares, received 9,333 warrants which are exercisable at
$1.03 per share, and has 5,385 warrants which are exercisable at $3.60 per
share.  John Atherly, former CFO as of January 2, 2008, had an Amended
Note of $40 thousand which was convertible into 53,333 shares and received
37,333 warrants which are exercisable at $1.03 per share.   Paul
Cronson, Board member, through Navacorp III, LLC, had an Amended Note of $200
thousand which was convertible into 266,666 shares and received 186,666 warrants
which are exercisable at $1.03 per share.





Alexandra
Global Master Fund Ltd (“Alexandra”) was a beneficial owner of more than 5% of
the Company’s common stock.  Alexandra had an Amended Note of $3
million which was convertible into 4 million shares and received 2.8 million
warrants exercisable at $1.03 per share.





On March
28, 2007, the Company entered into an amendment to the Stillwater Agreement,
originally dated July 21, 2006. On April 9, 2007, the sale of the Stillwater
Note and Warrant was complete and the Company issued a 6% Senior Secured
Convertible Note in the principal amount of $500,000 and warrants to purchase
1,000,000 shares of the Company’s common stock at an exercise price of $0.48. On
July 23, 2007, Stillwater elected to convert $250,000 of the principal amount of
the Note and approximately $2,167 of accrued and unpaid interest. Stillwater
received 720,476 shares of Common Stock at the conversion price of
$0.35.  The remaining 50% was amended to an 8% Amended Senior Secured
Convertible Note on July 23, 2007.





A family
member of an outside director of eMagin was the holder of a Series A warrant to
purchase an aggregate of 4,286 shares of common stock. As a result of the
Stillwater transaction, the exercise price of all Series A warrants was reduced
from $5.50 to $0.35 per share.





2006





On July
21, 2006, the Company entered into several Note Purchase Agreements for the sale
of approximately $5.99 million of senior secured debentures (the “Notes”) and
warrants to purchase approximately 1,800,000 shares of common stock, par value
$.001 per share.  The investors purchased $5.99 million principal
amount of Notes with conversion prices of $2.60 per share that may convert into
approximately 2.3 million shares of common stock and 5 year warrants exercisable
at $3.60 per share into approximately 1,600,000 million shares of common
stock.  If the Notes are not converted, 50% of the principal amount
will be due on July 23, 2007 and the remaining 50% will be due on January 21,
2008.  Commencing September 1, 2006, 6% interest was payable in
quarterly installments on outstanding notes.  The Notes were amended
on July 23, 2007.




53




In the
Note Purchase transaction, two employees and a board member
participated.  Olivier Prache, Senior VP of Display Operations,
purchased a $30 thousand promissory note which may be converted into 11,539
shares and received 8,077 warrants which are exercisable at $3.60 per
share.  Mr. Prache converted $20 thousand of his promissory note and
received 7,693 shares.   John Atherly, CFO, purchased a $40
thousand promissory note which may be converted into 15,385 shares and received
10,770 warrants exercisable at $3.60 per share.  Paul Cronson, Board
member, through Navacorp III, LLC purchased a $200 thousand promissory note
which may be converted into 76,923 shares and received 53,847 warrants
exercisable at $3.60 per share.  The Notes were amended on July 23,
2007.





Stillwater
LLC is a beneficial owner of more than 5% of the Company’s common
stock.  Rainbow Gate Corporation, a corporation whose investment
manager is the sole member of Stillwater LLC and whose controlling shareholder
is the same as Ginola Limited’s, purchased a $700 thousand promissory note which
may be converted into 269,231 shares and received 188,462 warrants exercisable
at $3.60 per share.  Ginola Limited purchased an $800 thousand
promissory note which may be converted into 307,693 shares and received 215,385
warrants exercisable at $3.60 per share.  Stillwater LLC disclaims
beneficial ownership of shares owned by Rainbow Gate Corporation.  The
Notes were amended on July 23, 2007.





A family
member of an outside director of eMagin is the holder of a Series A warrant to
purchase an aggregate of 4,286 shares of common stock. As a result of the Note
Purchase transaction, the exercise price of all Series A warrants was reduced
from $5.50 to $2.60 per share.   Family members of an outside
director of eMagin are holders of Series F warrants to purchase an aggregate of
10,000 shares of common stock.   As a result of the Note Purchase
transaction, the exercise price of all Series F warrants was reduced from $10.90
to $8.60 per share.





eMagin
has entered into a financial advisory agreement with Larkspur Capital
Corporation. Paul Cronson, a director of eMagin, is a founder and shareholder of
Larkspur Capital Corporation. The Company has agreed to pay a minimum fee of
$500 thousand to Larkspur Capital Corporation in the event certain transactions
occur, i.e. sale of the Company’s assets or change of control.





Note
14 – SEPARATION AND EMPLOYMENT AGREEMENTS





Effective
January 1, 2006, the Company entered into a revised executive employment
agreement with Susan K. Jones, Chief Marketing and Strategy Officer. The
agreement is effective for an initial term of three years. The agreement
provides for an annual salary, benefits made available by the Company to its
employees and eligibility for an incentive bonus pursuant to one or more
incentive compensation plans established by the Company from time to time. The
Company may terminate the employment of Ms. Jones at any time with or without
notice and with or without cause (as such term is defined in the
agreements). If Ms. Jones’ employment is terminated without cause, or if
Ms. Jones resigns with good reason (as such term is defined in the agreements),
or Ms. Jones’ position is terminated or significantly changed as result of
change of control (as such term is defined in the agreements), Ms. Jones shall
be entitled to receive salary until the end of the agreement’s full term or
twelve months, whichever is greater, payment for accrued vacation, and bonuses
which would have been accrued during the term of the agreement. If Ms. Jones
voluntarily terminates employment with the Company, other than for good reason
or is terminated with cause (as such term is defined in the agreement), she
shall cease to accrue salary, vacation, benefits, and other compensation on the
date of the voluntary or with cause termination. The Executive Employment
Agreement includes other conventional terms and also contains invention
assignment, non-competition, non-solicitation and non-disclosure
provisions.  On April 17, 2006, the parties entered into amendments to
the employment agreements pursuant to which the parties clarified that the
Company has agreed to pay for health benefits equivalent to medical and dental
benefits provided during Ms. Jones’ full time employment until the end of the
agreement’s full term or twenty-four (24) months, whichever is
greater.





Effective
January 30, 2008, the Company entered into an amended employment agreement with
Susan K. Jones, Chief Business Officer.  The amended agreement
provides for an annual base salary of $315 thousand, an extension of the term of
the agreement to January 31, 2010, modification and clarification of the basis
for the incentive component of her salary, and extension of the
change-of-control/material change/termination-without-cause compensation payout
periods to the greater of 18 months or the remaining term of the amended
employment agreement.





Effective
January 31, 2008, K.C. Park resigned as Interim Chief Executive Officer,
President and Director.  Dr. Park and the Company entered into a
Separation Agreement and General Release (“Separation
Agreement”).  The Company recorded severance expense of
$60,000.  Dr. Park and the Company also entered into a Consulting
Agreement (“Agreement”) for the term, February 1 through August 1,
2008.  Dr. Park was paid a sum of $75,000.  In addition
to the compensation, Dr. Park received non-qualified stock options to acquire
56,250 shares of common stock which are fully vested and exercisable on the
dates of the grant.   On May 1, 2008, Dr. Park received
non-qualified stock options to acquire 51,703 shares of common stock at the fair
market value and are fully vested.





Effective
January 2, 2008, John Atherly resigned as Chief Financial
Officer.  There was no separation agreement executed between Mr.
Atherly and the Company.




54




Effective
December 27, 2007, Michael D. Fowler became the Company’s Interim Chief
Financial Officer. Effective April 14, 2008, Michael D. Fowler, the
Company’s Interim Chief Financial Officer, resigned his position with the
Company. There was no separation agreement executed between Mr. Fowler and the
Company.





Effective
April 15, 2008, Mr. Paul Campbell began serving as the Company’s Interim Chief
Financial Officer pursuant to an agreement between the Company and Tatum, LLC,
dated April 2, 2008 (the “Tatum Agreement”).  Pursuant to the Tatum
Agreement, for a minimum term of three months, Mr. Campbell will be paid a
salary of $24,500 per month and the Company will also pay Tatum a fee of $10,500
per month plus $300 per business day.  The Tatum Agreement was
modified in January 2009 to exclude the $300 per business day. Either party may
terminate the Tatum Agreement by providing the other with at least 30 days
notice.





Effective
June 1, 2008, Andrew G. Sculley became the Company’s Chief Executive Officer,
President and Director pursuant to an employment agreement dated May 13, 2008.
Pursuant to the agreement, Mr. Sculley will be paid a salary of $300,000,
per annum, increasing to $310,000, per annum, after six months and to $320,000,
per annum, at the end of the first year.  Mr. Sculley was granted 500,000
qualified stock options.  The options vest as
follows:  166,667 shares vest immediately, 166,667 vests on the first
anniversary date, and 166,666 vests on the second anniversary
date.   If Mr. Sculley voluntarily terminates his employment with
the Company, other than for good reason as defined in the employment agreement,
he shall cease to accrue salary, personal time off, benefits and other
compensation on the date of voluntary termination.  The Company may
terminate Mr. Sculley’s employment with or without cause.  If the Company
terminates without cause, Mr. Sculley will be entitled to one year of
salary.





Note
15 - CONCENTRATIONS





The
Company had two customers that each accounted for 11% of its total revenue in
2008.  There were no customers that accounted for more than 10% of its
total revenue in 2007.  In 2006, the Company had one customer that
accounted for 13% of its total revenue.





For the
year ended December 31, 2008, approximately 61% of the company’s net revenues
were derived from customers in the United States and approximately 39% of the
Company’s net revenues were derived from international customers.  For
the year ended December 31, 2007, approximately 51% of the Company’s net
revenues were derived from customers in the United States and approximately 49%
of the Company’s net revenues were derived from international
customers.  For the year ended December 31, 2006, approximately 59% of
the Company's net revenues were derived from customers in the United States and
approximately 41% of the Company's net revenues were derived from international
customers.





At
December 31, 2008 and 2007, there were five customers which comprised 60% and
54%, respectively, of the outstanding accounts receivable.   The
Company had two customers that each accounted for 19% and one customer accounted
for 12% of its outstanding accounts receivable in 2008. There were two customers
that accounted for 11% and 20% of its outstanding accounts receivable in
2007.





The
Company purchases principally all of its silicon wafers from a single supplier
located in Taiwan.





Note
16 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)





Summarized
quarterly financial information for 2008 and 2007 are as follows (in thousands
except per share data):





Quarters
      EndedMarch
      31, 2008
                                        
                                        
                                        June
      30, 2008
                                        
                                        
                                        September
      30, 2008
                                        
                                        
                                        December
      31, 2008Revenues
                                        
                                        $
                                        2,665
                                        
                                        
                                        $
                                        5,619
                                        
                                        
                                        $
                                        5,185
                                        
                                        
                                        $
                                        5,270Gross
      margin
                                        
                                        $
                                        352
                                        
                                        
                                        $
                                        2,623
                                        
                                        
                                        $
                                        2,384
                                        
                                        
                                        $
                                        2,707Net
      (loss) income
                                        
                                        $
                                        (2,674
                                        )
                                        
                                        $
                                        (122
                                        )
                                        
                                        $
                                        361
                                        
                                        
                                        $
                                        576Net
      (loss) income per share – basic
                                        
                                        $
                                        (0.21
                                        )
                                        
                                        $
                                        (0.01
                                        )
                                        
                                        $
                                        0.02
                                        
                                        
                                        $
                                        0.04Net
      (loss) income per share – diluted
                                        
                                        $
                                        (0.21
                                        )
                                        
                                        $
                                        (0.01
                                        )
                                        
                                        $
                                        0.02
                                        
                                        
                                        $
                                        0.03Weighted
      average number of shares outstanding – basic
                                        
                                        
                                        12,621
                                        
                                        
                                        
                                        14,321
                                        
                                        
                                        
                                        14,617
                                        
                                        
                                        
                                        15,113Weighted
      average number of shares outstanding –diluted
                                        
                                        
                                        12,621
                                        
                                        
                                        
                                        14,321
                                        
                                        
                                        
                                        23,430
                                        
                                        
                                        
                                        23,907Quarters
      EndedMarch
      31, 2007
                                        
                                        
                                        June
      30, 2007
                                        
                                        
                                        September
      30, 2007
                                        
                                        
                                        December
      31, 2007Revenues
                                        
                                        $
                                        3,609
                                        
                                        
                                        $
                                        4,232
                                        
                                        
                                        $
                                        5,071
                                        
                                        
                                        $
                                        4,642Gross
      margin
                                        
                                        $
                                        494
                                        
                                        
                                        $
                                        1,286
                                        
                                        
                                        $
                                        2,012
                                        
                                        
                                        $
                                        1,134Net
      loss
                                        
                                        $
                                        (2,937
                                        )
                                        
                                        $
                                        (1,728
                                        )
                                        
                                        $
                                        (12,651
                                        )
                                        
                                        $
                                        (1,172
                                        )Net
      loss per share – basic and diluted
                                        
                                        $
                                        (0.27
                                        )
                                        
                                        $
                                        (0.15
                                        )
                                        
                                        $
                                        (1.06
                                        )
                                        
                                        $
                                        (0.10
                                        )Weighted
      average number of shares outstanding – basic and diluted
                                        
                                        
                                        10,792
                                        
                                        
                                        
                                        11,176
                                        
                                        
                                        
                                        11,935
                                        
                                        
                                        
                                        12,249


55




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





None.





ITEM
9A. CONTROLS AND PROCEDURES





(a)
Disclosure Controls and Procedures





Our
principal executive and principal financial officers have evaluated the
effectiveness of our disclosure controls and procedures, as defined in Rules 13a
– 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), as of the end of the period covered by this annual
report.  They  have concluded that, based on such
evaluation, our disclosure controls and procedures were not effective due to the
material weaknesses in our internal control over financial reporting as of
December 31, 2008, as further described below.





(b)
Management’s Annual Report on Internal Control Over Financial
Reporting





Overview





Internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
refers to the process designed by, or under the supervision of, our principal
executive officer and principal financial officer, and effected by our board of
directors, management and other personnel, 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.  Management is responsible for establishing and
maintaining adequate internal control over financial reporting for
eMagin.





Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations.  Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures.  Internal
control over financial reporting also can be circumvented by collusion or
improper management override.  Because of such limitations, there is a
risk that material misstatements may not be prevented or detected on a timely
basis by internal control over financial reporting.  However, these
inherent limitations are known features of the financial reporting
process.  Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.





Management
has used the framework set forth in the report entitled “Internal Control --
Integrated Framework” published by the Committee of Sponsoring Organizations
(“COSO”) of the Treadway Commission to evaluate the effectiveness of eMagin’s
internal control over financial reporting.  As a result of the
material weaknesses described below, management has concluded that the Company’s
internal control over financial reporting was not effective as of December 31,
2008.





Management’s
Assessment





Management
has determined that, as of the December 31, 2008 measurement date, there were
material weaknesses in both the design and effectiveness of our internal control
over financial reporting.  Management has assessed these deficiencies
and has determined that there were two general categories of material weaknesses
in eMagin’s internal control over financial reporting.  As a result of
our assessment that material weaknesses in our internal control over financial
reporting existed as of December 31, 2008, management has concluded that our
internal control over financial reporting was not effective as of December 31,
2008.  A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of our annual or interim
financial statements will not be prevented or detected on a timely
basis.





In
management’s opinion, our assessment as of December 31, 2008 regarding the
existence of material weaknesses in our internal control over financial
reporting relates to (1) the lack of controls or ineffectively designed controls
and (2) the failure in design and operating effectiveness of information
technology controls over financial reporting.  Management and our
audit committee have assigned a high priority to the short-term and long-term
improvement of our internal control over financial reporting.





The
material weaknesses we have identified include:





Deficiencies
pertaining to the lack of controls or ineffectively designed
controls.
Our control design analysis and process walk-throughs disclosed a number of
instances where review approvals were undocumented, where established policies
and procedures were not defined, and controls were not in place.





Deficiencies
related to information technology control design and operating effectiveness
weaknesses.This material weakness
resulted from the absence of key formalized information technology policies and
procedures and could result in (1) unauthorized system access, (2) application
changes being implemented without adequate reliability testing, (3) inconsistent
investigation of system errors and the absence of timely or properly considered
remedial actions, and  (4) over reliance on spreadsheet applications
without quality control assurances.  These factors could lead to
material errors and misstatements to financial statements occurring without
timely detection.




56




This
annual report does not include an attestation report of the Company’s registered
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission





(c)
Changes in Internal Control over Financial Reporting





There has
been substantial improvement in our internal control over financial reporting,
as defined in Rules 13a-15(f) of the Exchange Act, during our most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





The
substantial improvement is a result of the following measures that are now in
place:





·
            Hired
      more qualified and experienced accounting personnel to perform month-end
      reviews and closing processes as well as to allow additional oversight and
      supervision.


·
            Restored
      our executive management team with qualified and experienced business
      leaders to provide day-to-day management oversight and strategic
      direction.


·
            Implemented
      control procedures within the month and quarter end close processes
      including documentation of procedures and processes completed and approved
      by management.





In
addition, we have initiated or intend to initiate a number of remediation
measures to address the control deficiencies and material weaknesses identified
above.  The remediation measures include or are expected to include
the following





·
            Reassigning
      and altering functional responsibilities among new and existing employees
      to provide appropriate segregation of duties among functional groups
      within the Company.





·
            Updating
      of our policies and procedures along with control matrices and
      implementing testing procedures to ensure ongoing
    compliance.





·
            Establishing
      programs to provide ongoing training and professional education and
      development plans for accounting department
  personnel.





·
            Adding
      additional information technology staffing and implementing information
      technology policies and procedures to ensure adequate system controls are
      in place and compliance testing occurs on a regular
  basis.





We intend
to adopt additional remediation measures related to the identified control
deficiencies as necessary as well as to continue to evaluate our internal
controls on an ongoing basis in order to upgrade and enhance when
appropriate.  Our audit committee has taken an active role in
reviewing and discussing the internal control deficiencies with our auditors and
financial management.  Our management and the audit committee will
actively monitor the implementation and effectiveness of the remediation efforts
undertaken by our financial management.





ITEM 9B. OTHER
INFORMATION





None.


57


PART III





ITEM
10.  DIRECTORS, OFFICERS AND CORPORATE GOVERNANCE





The
following table sets forth the names of our directors and executive officers as
of February 28, 2008:





Name
              Age
              PositionAndrew
      G. Sculley (5)
              57
              Chief
      Executive Officer and PresidentPaul
      Campbell (4)
              53
              Interim
      Chief Financial OfficerSusan
      K. Jones
              57
              Chief
      Business Officer, Secretary.
      Thomas Paulsen  (2)(3*)
              72
              Chairman
      of the Board, DirectorClaude
      Charles (1)
              72
              DirectorPaul
      Cronson
              52
              DirectorIrwin
      Engelman (1*)
              74
              DirectorJacob
      Goldman (2*)(3)
              87
              DirectorStephen
      Seay (1)(3)
              62
              Director(1)
              Audit
      Committee(2)
              Governance
      & Nominating Committee(3)
              Compensation
      Committee(4)
              On
      April 14, 2008, Michael D. Fowler resigned from his position as Interim
      Chief Financial Officer of the Company(5)
              As
      of June 1, 2008, Andrew G. Sculley is Chief Executive Officer and
      President.  Admiral Paulsen resigned from his position as
      interim Chief Executive Officer and continues to serve as Chairman of the
      Board.


*
Committee Chair





Andrew G.
Sculley became the Company’s Chief Executive Officer and President on June 1,
2008.  Mr. Sculley served as the General Manager of Kodak’s OLED
systems Business Unit and Vice President of Kodak’s Display Business from 2004
to 2008. From 2003 to 2006, he served on the Board of Directors of SK Display, a
joint venture between Sanyo and Kodak. From 1996 to 2001 Mr. Sculley served as
the Manager of Operations, CFO and member of the Board of Directors of Kodak
Japan Ltd., where he managed Distribution, Information Technologies, Legal,
Purchasing and Finance. Previously, he held positions in strategic planning and
finance in Eastman Kodak Company.  Mr. Sculley holds an MBA from
Carnegie-Mellon University and an MS in physics from Cornell University. He
attended Harvard University’s International Senior Management Program while an
executive at Kodak.





Paul
Campbell became the Company’s Interim Chief Financial Officer on April 15, 2008.
Mr. Campbell has been a partner with Tatum, LLC (“Tatum”), an executive services
firm, since November 2007. Mr. Campbell served as the Chief Financial
Officer of four public companies, including Checkers Drive-In Restaurants, Inc,
which until 2006 was traded on the Nasdaq and as Chief Financial Officer of
Famous Dave’s of America, Inc., a publicly held company currently trading on the
Nasdaq.  Mr. Campbell also served as Chief Financial Officer of Sonus
Corporation, a medical device retailer, and of Organic To Go, Inc., an emerging
publicly-held food company, from May 2007 through October 2007.  From
2001 through April 2007, Mr. Campbell owned and operated Campbell Capital, LLC,
a consulting and investment firm in Seattle, Washington providing strategic
planning and financing services to small businesses. Mr. Campbell received
his Masters of Business Administration from Pepperdine University and his
Bachelor of Arts degree in Business Economics from the University of California
at Santa Barbara.





Susan K.
Jones has served as Executive Vice President and Secretary since 1992, Chief
Marketing and Strategy Officer since 2001, and assumed responsibility of Chief
Business Officer in 2008. Ms. Jones has more than 30 years of industrial
experience, including senior research, management, and marketing assignments at
Texas Instruments and Merck, Sharp, & Dohme Pharmaceuticals. Ms. Jones
serves on the boards or chairs committees for industry organizations including
IEEE, SPIE, and SID. Ms. Jones served as a director of eMagin Corporation from
1993 to 2000 and was a director of Virtual Vision, Inc. Ms. Jones graduated from
Lamar University with a B.S. in chemistry and biology, holds more than a
dozen patents, and has authored more than 100 papers and talks.





Rear
Admiral Thomas Paulsen (ret.) has served as a director since July 2003 and
Non-Executive Chairman of the Board since 2007. He served as Interim CEO and
President from  January 2008 to May 2008. Admiral Paulsen served for
over 34 years in the US Navy in Command Control, Communications and Intelligence
(C3I), Telecommunications, Network Systems Operations, Computers and Computer
Systems Operations until his retirement in 1994 as a Rear Admiral. He then
served as Chief Information Officer for Williams Telecommunications. Admiral
Paulsen has served as a director of Umbanet, Inc. since 2002. Since 2000,
Admiral Paulsen has served on the Board of Governors of the Institute of
Knowledge Management, George Washington University. Since 1994, he has served as
the Chairman of the Advisory Board and President Emeritus of the Center for
Advanced Technologies (CAT) and a Managing Partner on the National Knowledge and
Intellectual Property Management Taskforce, a not-for-profit company
headquartered in Dallas, Texas, and is a member of the Board of Governors for
the Japanese American National Museum, Los Angeles, California.





Claude
Charles has served as a director since April of 2000. Mr. Charles has served as
President of Azur Capital Limited since 1999. From 1996 to 1998 Mr. Charles was
Chairman of Equinox Group Holdings. Prior to 1996, Mr. Charles has also served
as a director and in senior executive positions at SG Warburg and Co. Ltd.,
Peregrine Investment Holdings, Trident International Finance Ltd., and Dow
Banking Corporation. Mr. Charles holds a B.S. in economics from the Wharton
School at the University of Pennsylvania and a M.S. in international finance
from Columbia University.




58




Paul
Cronson has served as a director since July of 2003. Mr. Cronson is Managing
Director of Larkspur Capital Corporation, which he co-founded in 1992. Larkspur
is a broker dealer that is a member of FINRA and advises companies seeking
private equity or debt. Mr. Cronson's career in finance began in 1979 at
Laidlaw, Adams Peck where he worked in asset management and corporate finance.
From 1983 to 1985, Mr. Cronson worked with Samuel Montagu Co., Inc. in London,
where he marketed eurobond issuers and structured transactions. Subsequently
from 1985 to 1987, he was employed by Chase Investment Bank Ltd., where he
structured international debt securities and he developed "synthetic asset"
products using derivatives. Returning to the U.S., he joined Peter Sharp Co.,
where he managed a real estate portfolio, structured financings and assisted
with capital market investments until 1992. Mr. Cronson received his BA from
Columbia College in 1979, and his MBA from Columbia College in 1982. He is on
the Board of the Evelyn Sharp Foundation in New York, a private foundation
supporting various not for profit endeavors.





Irwin
Engelman has served as a director since May of 2005. He is currently a
consultant to various industrial companies and is a director of Sanford C.
Bernstein Mutual Funds, a publicly-traded company, and chairman of its audit
committee. From November 1999 until April 2002, he served as Executive
Vice President and Chief Financial Officer of YouthStream Media
Networks, Inc., a media and retailing company serving high school and
college markets. From 1992 until April 1999, he served as Executive Vice
President and Chief Financial Officer of MacAndrews and Forbes
Holdings, Inc., a privately-held financial holding company. From
November 1998 until April 1999, he also served as Vice Chairman, Chief
Administrative Officer and a director of Revlon, Inc., a publicly-traded
consumer products company. From 1978 until 1992, he served as an executive
officer of various public companies including International Specialty
Products, Inc. (a subsidiary of GAF Holdings Inc.), CitiTrust
Bancorporation, General Foods Corporation and The Singer Company. Mr. Engelman
received a BBA in Accounting from Baruch College in 1955 and a Juris Doctorate
from Brooklyn Law School in 1961. He was admitted practice law in the State of
New York in 1962. In addition, he was licensed as a CPA in the State of New
Jersey in 1966.





Dr. Jack
Goldman joined our board of directors in February of 2003. Dr. Goldman is the
retired senior vice-president for R&D and chief technical officer of the
Xerox Corporation. While at Xerox, he founded and directed the celebrated Xerox
PARC laboratory. Prior to joining Xerox, Dr. Goldman was Director of Ford Motor
Company's Scientific Research Laboratory. He also served as Visiting Edwin
Webster Professor at MIT. Dr. Goldman presently serves on the Boards of
Directors of Umbanet Inc. and Medis Technologies Inc., and he has served on the
Boards of Xerox, General Instrument Corp., United Brands, Intermagnetics
General, GAF and Bank Leumi USA. He has also been active in government and
professional advisory roles including service on the US Dept. of Commerce
Technical Advisory Board, chairman of Statutory Visiting Committee of The
National Bureau of Standards (National Institute of Standards and Technology),
vice-president of the American Association for the Advancement of Science and
president of the Connecticut Academy of Science and Engineering.





General
Stephen M. Seay was elected to the Board of Directors in January 2006. In his
33-year Army career, General Seay held a wide variety of command and staff
positions, most importantly as a soldier's soldier volunteering for deployment
on Operation Iraqi Freedom, 2004-2005.  Simultaneously, he was Commanding
General, Joint Contracting Command-Iraq, Head of Contracting Authority,
Operation Iraqi Freedom and Program Executive Officer for Simulation, Training
and Instrumentation.  He previously served as Program Manager for a joint
automation system, headed the Joint Target Oversight Council and was Commanding
General, Simulation, Training and Instrumentation Command (STRICOM), Army
Materiel Command.  Earlier, as a Field Artillery officer, he commanded at
all levels, rising to corps artillery commander. He served as Chief of Staff ,
United States Army, Europe (Forward) and National Security Element, Taszar ,
Hungary, during Operation Joint Endeavor.  He held resource management,
operations research, and acquisition positions during three tours on Department
of the Army staff.  General Seay holds a Bachelor of Science degree from
the University of New Hampshire and a Master of Science degree from North
Carolina State University .





CORPORATE
GOVERNANCE





Code
of Ethics





We have
adopted a Code of Business Conduct and Ethics that applies to all of our
directors, officers and employees, including our principal executive officer,
principal financial officer and principal accounting officer. The Code of
Business Conduct and Ethics is posted on our website at
http://www.emagin.com/investors.





We intend
to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an
amendment to, or waiver from, a provision of this Code of Business Conduct and
Ethics by filing a Current Report on Form 8-K with the SEC, disclosing such
information.





Section
16(a) Beneficial Ownership Reporting Compliance





Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires our directors and
executive officers and persons who own more than 10% of the issued and
outstanding shares of eMagin common stock to file reports of initial ownership
of common stock and other equity securities and subsequent changes in that
ownership with the SEC. Officers, directors and greater than ten percent
stockholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file. To our knowledge, based solely on a review
of the copies of such reports furnished to us and written representations that
no other reports were required, during the fiscal year ended December 31, 2008
all Section 16(a) filing requirements applicable to our officers, directors and
greater than 10% beneficial owners were complied with.




59




General Information Concerning the
Board of Directors





The Board
of Directors of eMagin is classified into three classes: Class A, Class B and
Class C. As of December 31, 2008, Irwin Engelman is the only Class A
Director, and will hold office until the next Annual Meeting of our
stockholders. Paul Cronson, Admiral Thomas Paulsen, and General Stephen Seay are
Class B directors who will hold office until the next Annual Meeting. Claude
Charles and Dr. Jacob Goldman are Class C directors who will hold office
until the next Annual Meeting.  There was no Annual Meeting held
during 2008.   In each case, each director will hold office until
his successor is duly elected or appointed and qualified in the manner provided
in our Amended and Restated Certificate of Incorporation and our Amended and
Restated Bylaws, or as otherwise provided by applicable law.





Our Board
of Directors held 19 meetings during 2008. Our independent directors met in
executive session on a periodic basis in connection with regular meetings, as
well as in their capacity as members of our Audit Committee and Compensation
Committee.





Compensation
of Directors





Non-management
directors receive options under the 2003 and 2008 Stock Option Plans. Under
these Plans, a grant of options to purchase 15,000 shares of common stock will
automatically be granted on the date a director is first elected or re-elected,
or otherwise validly appointed to the Board with an exercise price per share
equal to 100% of the market value of one share on the date of grant. Such
options granted will expire ten years after the date of grant and will become
exercisable in four equal installments commencing on the date of grant and
annually thereafter. For calendar years 2007 and 2008, Directors received an
annual cash retainer of $10,000 and an annual stock retainer of 25,000 options,
fully vested, at market price on the date of issuance Directors are also granted
options based on committee assignments consisting of options to purchase 5,000
shares per year for members of the Compensation committee, 10,000 shares for the
governance committee and 15,000 shares for the audit committee. Each committee
chair will receive 5,000 additional shares. In 2008 and 2009 the chairs of the
Audit and the Governance and Nominating committees receive additional 10,000
options.  In addition, each non-management director receives $1,000
for each in-person Board meeting, and $500 for each teleconference meeting or
Committee meeting. Directors are eligible for reimbursement for ordinary
expenses incurred in connection with attendance at such meetings.





Admiral
Thomas Paulsen was not an independent director during the period January through
May 2008 when he was acting Interim CEO and President.  As of June 1,
2008, Admiral Paulsen was an independent director.  No change occurred
in Admiral Paulsen’s compensation as a director of the Company as a result of
his accepting this temporary position.





The Audit
Committee is responsible for determining the adequacy of our internal accounting
and financial controls, supervising matters relating to audit functions,
reviewing and setting internal policies and procedures regarding audits,
accounting and other financial controls, reviewing the results of our audit
performed by the independent public accountants, and recommending the selection
of independent public accountants. The Audit Committee has adopted an Audit
Charter, which is posted on our website at
http://www.emagin.com/investors.  The Audit Committee is composed of
three Directors, Claude Charles, Irwin Engelman, and General Stephen Seay. The
Board has determined that each of the members of the Audit Committee is
unrelated, an outside member with no other affiliation with us and is
independent. The Board has determined that Mr. Engelman is an “audit committee
financial expert” as defined by the SEC. During 2008, the Audit Committee held 4
meetings via teleconference.





Compensation
Committee.The
Compensation Committee determines matters pertaining to the compensation and
expense reporting of certain of our executive officers, and administers our
stock option, incentive compensation, and employee stock purchase plans. The
Compensation Committee is presently composed of three Directors, Jack Goldman,
Thomas Paulsen, and Stephen Seay, each of whom the Board has determined to be
independent and none of whom has been an employee of the Company, except as
noted above. During 2008, the Compensation Committee held 5 meetings in person
or through a conference call.





Governance
and Nominating Committee.
The Governance and Nominating Committee is responsible for considering potential
Board members, nominating Directors for election to the Board, implementing the
Company’s corporate governance and ethics policies, and for all other purposes
outlined in the Governance and Nominating Committee Charter, which is posted on
our website athttp://www.emagin.com/investors.   The Governance and
Nominating Committee is composed of Jack Goldman and Thomas Paulsen, each of
whom the Board has determined to be independent, except as noted above. During
2008, the Governance and Nominating Committee held 2 meetingsin person or through a conference
call.


Nomination
of Directors
 
 As
provided in its charter and our company’s corporate governance principles, the
Governance and Nominating Committee is responsible for identifying individuals
qualified to become directors. The Governance and Nominating Committee seeks to
identify director candidates based on input provided by a number of sources,
including (1) the Governance and Nominating Committee members, (2) our other
directors, (3) our stockholders, (4) our Chief Executive Officer or Chairman,
and (5) third parties such as professional search firms. In evaluating potential
candidates for director, the Nominating and Corporate Governance Committee
considers the entirety of each candidate’s credentials.
 Qualifications
for consideration as a director nominee may vary according to the particular
areas of expertise being sought as a complement to the existing composition of
the Board of Directors. However, at a minimum, candidates for director must
possess:
 
 •
                  high
      personal and professional ethics and integrity;•
                  the
      ability to exercise sound judgment;•
                  the
      ability to make independent analytical inquiries;•
                  a
      willingness and ability to devote adequate time and resources to
      diligently perform Board and committee duties; and•
                  the
      appropriate and relevant business experience and
  acumen


60




In
addition to these minimum qualifications, the Governance and Nominating
Committee also takes into account when considering whether to nominate a
potential director candidate the following factors:





•
              whether
      the person possesses specific industry expertise and familiarity with
      general issues affecting our business;•
              whether
      the person’s nomination and election would enable the Board to have a
      member that qualifies as an “audit committee financial expert” as such
      term is defined by the Securities and Exchange Commission (the “SEC”) in
      Item 401 of Regulation S-K;


•
            whether
      the person would qualify as an “independent” director under the listing
      standards of the OTC Bulletin
Board;


•
            the
      importance of continuity of the existing composition of the Board of
      Directors to provide long term stability and experienced oversight;
      and


•
            the
      importance of diversified Board membership, in terms of both the
      individuals involved and their various experiences and areas of
      expertise.




Shareholder
Communications
 
 Shareholders requesting communication
with Directors can do so by writing to eMagin Corporation, c/o Corporate
Secretary, 10500 NE 8th St., Bellevue, WA 98004, or emailing tosjones@emagin.comAt this time we do
not screen communications received and would forward any requests directly to
the named Director. If no Director was named in a general inquiry, the Secretary
would contact either the Chairman or the Chairman of a particular committee, as
appropriate. We do not provide the physical address, email address, or phone
numbers of Directors to outside parties without a Director's
permission.
 
 ITEM
11. EXECUTIVE COMPENSATION





COMPENSATION
DISCUSSION AND ANALYSIS





This
section describes the compensation program for our executive officers. In
particular, this section focuses on our 2008 compensation program and related
decisions.





Compensation
Discussion and Analysis




The
objectives of our compensation program are as follows:




•
              Reward performance that drives substantial increases in
      shareholder value, as evidenced through both future operating profits and
      increased market price of our common shares;
and
 •
              Attract, hire and retain well-qualified
    executives.






The
compensation level of our executives generally reflects their unique position
and incentive to positively affect our future operating performance and
shareholder value. Part of the compensation of our executives is from equity
compensation, primarily through stock option grants or restricted stock awards.
The stock option exercise price is generally the fair market value of the stock
on the date of grant. Therefore, a gain is only recognized if the value of the
stock increases, which promotes a long term alignment between the interests of
the Company’s executives and its shareholders. For that reason, stock options
are a component of 100% of our employees’ salary package.





Specific
salary and bonus levels, as well as the amount and timing of equity incentive
grants, are determined informally and judgmentally, on an individual-case basis,
taking into consideration each executive's unique talents and experience as they
relate to our needs. Executive compensation is paid or granted pursuant to each
executive's compensation agreement. Compensation adjustments are made
occasionally based on changes in an executive's level of responsibility or on
changed local and specific executive employment market conditions.





The Board
of Directors has established a Compensation Committee, comprised exclusively of
independent outside directors which approves all compensation and awards to
executive management. The members of the Compensation Committee have extensive
executive level experience in other companies and bring a perspective of
reasonableness to compensation matters with our Company. In addition, the
Compensation Committee compares executive compensation practices of similar
companies at similar stages of development.




Generally
on its own initiative, at least annually, the Compensation Committee reviews the
performance of executives and establishes compensation levels based on the
performance evaluation, historical compensation levels of the executives, levels
of responsibility and contributions to the Company, and comparable position
studies provided by independent sources.  With respect to equity
compensation, the Compensation Committee approves all option grants, generally
based on the recommendation of the president and chief executive officer and has
delegated granting authority to the president and chief executive officer or, on
occasion, his designee. Executives are eligible to receive bonus compensation at
the discretion of the Compensation Committee, which is primarily based on the
achievement of certain goals and objectives and the executive’s contributions to
the Company. Executives also are entitled to participate in the same benefit
plans that are available to other Company employees.




Compensation
for the Chairman





From
January through May 2008, Admiral Paulsen served as Interim Chief Executive
Officer. Admiral Paulsen receives an annual stipend of $60,000 for serving as
Non-Executive Chairman of the Board, an annual cash retainer of $10,000 for
serving as a director, and meetings fees. No change occurred in Admiral
Paulsen’s compensation as a result of his accepting the temporary position of
Interim Chief Executive Officer and President.




Summary
Compensation Table
 
 The following table sets forth information regarding
compensation paid to our principal executive officer, principal financial
officer, and our highest paid executive officer, all of whose total annual
salary and bonus for the years ended December 31, 2008, 2007 and 2006 exceeded
$100,000.




61











SUMMARY
      COMPENSATION TABLESalary
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              Bonus
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              Stock
      Awards
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              Option
      awards
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              Non-equity
      incentive plan compen-sation
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              Change
      in pension value and non qualified deferred compensation
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              All
      Other Compensation
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              TotalName
      and principal position
                                                                                                                                                                                                                                                                                                                                                                              Year
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              ($)
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              ($)
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              ($)
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              ($),
      (a)
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              ($)
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              ($)
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              ($)
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              ($)Andrew
      G. Sculley,
                                                                                                                                                                                                                                                                                                                                                                              2008
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              161,923
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              287,150
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              449,073President
      and Chief
                                                                                                                                                                                                                                                                                                                                                                              2007
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -Executive
      Officer (1)
                                                                                                                                                                                                                                                                                                                                                                              2006
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -K.C.
      Park, Interim
                                                                                                                                                                                                                                                                                                                                                                              2008
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              105,817
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              60,000
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              (7
                                                                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              42,371
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              75,000
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              (8
                                                                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              283,188President
      and Chief
                                                                                                                                                                                                                                                                                                                                                                              2007
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              313,462
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              40,000
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              (9
                                                                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              353,462Executive
      Officer (2)
                                                                                                                                                                                                                                                                                                                                                                              2006
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              200,000
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              200,000Gary
      Jones, President
                                                                                                                                                                                                                                                                                                                                                                              2008
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -and
      Chief Executive
                                                                                                                                                                                                                                                                                                                                                                              2007
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              102,060
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              430,000
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              (10
                                                                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              51,638
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              (11
                                                                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              583,698Officer
      (3)
                                                                                                                                                                                                                                                                                                                                                                              2006
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              368,170
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              127,928
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              (12
                                                                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              496,098Paul
      Campbell, Interim
                                                                                                                                                                                                                                                                                                                                                                              2008
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              203,539
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              203,539Chief
      Financial Officer
                                                                                                                                                                                                                                                                                                                                                                              2007
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -(4)
                                                                                                                                                                                                                                                                                                                                                                              2006
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -Michael
      D. Fowler,
                                                                                                                                                                                                                                                                                                                                                                              2008
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              84,808
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              84,808Interim
      Chief Financial
                                                                                                                                                                                                                                                                                                                                                                              2007
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -Officer
      (5)
                                                                                                                                                                                                                                                                                                                                                                              2006
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -John
      D. Atherly, Chief
                                                                                                                                                                                                                                                                                                                                                                              2008
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              44,628
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              44,628Financial
      Officer (6)
                                                                                                                                                                                                                                                                                                                                                                              2007
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              243,000
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              243,0002006
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              242,308
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              242,308Susan
      Jones, Executive Vice President, Chief
                                                                                                                                                                                                                                                                                                                                                                              2008
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              329,916
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              189,325
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              (13
                                                                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              519,241Business
      Officer, and
                                                                                                                                                                                                                                                                                                                                                                              2007
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              278,888
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              175,184
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              (13
                                                                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              454,072Secretary
                                                                                                                                                                                                                                                                                                                                                                              2006
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              289,163
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              81,379
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              (13
                                                                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                                                                              370,542








62




(1)
      Mr. Sculley has been serving as our President and Chief Executive Officer
      as of June 1, 2008.(2)
      Dr. Park was appointed Interim President and Chief Executive Officer in
      January 2007 and resigned his post in January 2008.  Prior to
      January 2007, Dr. Park served as Executive Vice President of International
      Operations.  Dr. Park provided consulting services from February
      1, 2008 through August 1, 2008.(3)
      Mr. Jones resigned as President and Chief Executive Officer in January
      2007.(4)
      Mr. Campbell has been serving as our Interim Chief Financial Officer as of
      April 15, 2008.(5)
      Mr. Fowler resigned as Interim Chief Financial Officer as of April 14,
      2008.(6)
      Mr. Atherly resigned as Chief Financial Officer in January
      2008.(7)  This
      amount represents options issued pursuant to Mr. Park’s consulting
      agreement.(8)  This
      amount represent consulting fees paid pursuant to Mr. Park’s consulting
      agreement.(9)
      This amount represents a retention bonus in the form of a stock grant that
      was issued to the named executive officer.(10)
      This amount represents a payment in the form of a stock grant pursuant to
      Mr. Jones' severance agreement.  Previously granted options that
      remained unexercised were also forfeited pursuant to the severance
      agreement.(11)
      This amount represents legal and accounting fee reimbursement for the
      benefit of the named executive officer.(12)
      This amount represents relocation expense reimbursement for the benefit of
      the named executive officer.(13)
      This amount represents deferred dollar amount earned in sales incentive
      compensation by the named executive officer.Column
      note:(a)  The
      amounts in this column represent the fair value of option awards to the
      named executive officer as computed on the date of the option grants using
      the Black-Scholes option-pricing model.


Grants
of Plan-Based Awards





The
following table sets forth information regarding stock option awards to our
named executive officers under our stock option plans for the year ended
December 31, 2008 as follows:





Name
                    Grant
      Date
                    
                    All
      Other Option Awards: Number of Securities Underlying Options
      (#)
                    
                    
                    Exercise
      or Base Price of Options Awards ($/Sh)
                    
                    
                    Total
      Grant Date Fair Value ($)Andrew
      G. Sculley
                    June
      2, 2008 (1)
                    
                    
                    500,000
                    
                    
                    
                    0.81
                    
                    
                    
                    287,150K.C. Park
                    May
      1, 2008 (2)
                    
                    
                    70,453
                    
                    
                    
                    0.97
                    
                    
                    
                    24,461K.C. Park
                    August
      1, 2008 (2)
                    
                    
                    37,500
                    
                    
                    
                    0.68
                    
                    
                    
                    17,910





(1)  1/3
of the grant is exercisable immediately; 1/3 of the grant is exercisable on the
first anniversary and the remaining 1/3 is exercisable on the second
anniversary.


(2)  The
grant is exercisable immediately.









Outstanding
Equity Awards at Fiscal Year-End





The
following table sets forth information with respect to the outstanding equity
awards of our principal executive officers and principal financial officer
during 2008, and each person who served as an executive officer of eMagin
Corporation as of December 31, 2008:









OUTSTANDING
      EQUITY AWARDS AT YEAR-ENDOption
      awards
                                                                                                                                                                                                    
                                                                                                                                                                                                    Stock
      awardsNumber
      of securities underlying unexercised options (#)
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    Number
      of securities underlying unexercised options (#)
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    Equity
      incentive plan awards: Number of securities underlying unexercised
      options
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    Options
      exercise price
                                                                                                                                                                                                    
                                                                                                                                                                                                    Option
      expiration
                                                                                                                                                                                                    
                                                                                                                                                                                                    Number
      of shares or units of stock that have not vested
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    Market
      value of shares or units of stock that have not vested
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    Equity
      incentive plan awards:
                                                                                                                                                                                                      Number
      of unearned shares other rights that have not vested
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    Equity
      incentive plan awards:
                                                                                                                                                                                                      Market
      or payout value of unearned shares, units or other rights that have not
      vestedName
      and principal position
                                                                                                                                                                                                    
                                                                                                                                                                                                    Exercisable
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    Unexercis-
      able
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (#
                                                                                                                                                                                                    ),
      (a)
                                                                                                                                                                                                    
                                                                                                                                                                                                    ($)
                                                                                                                                                                                                    
                                                                                                                                                                                                    Date
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (#
                                                                                                                                                                                                    )
                                                                                                                                                                                                    
                                                                                                                                                                                                    ($)
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (#
                                                                                                                                                                                                    )
                                                                                                                                                                                                    
                                                                                                                                                                                                    ($)Andrew
      G. Sculley, President and Chief Executive Officer (1)
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    166,667
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    333,333
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    500,000
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    0.81
                                                                                                                                                                                                    
                                                                                                                                                                                                    June
      2, 2015
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -K.C.
      Park, Interim President and Chief Executive Officer (2)
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    70,453
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    70,453
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    0.97
                                                                                                                                                                                                    
                                                                                                                                                                                                    May
      1, 2018
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -37,500
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    37,500
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    0.68
                                                                                                                                                                                                    
                                                                                                                                                                                                    August
      1, 2018
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -Susan
      Jones, Executive Vice President, Chief Business Officer, and
      Secretary
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    48,750
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    48,750
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    2.60
                                                                                                                                                                                                    
                                                                                                                                                                                                    May
      17, 2009
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -16,770
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    16,770
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    2.60
                                                                                                                                                                                                    
                                                                                                                                                                                                    January
      11, 20109,685
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    9,685
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    2.60
                                                                                                                                                                                                    
                                                                                                                                                                                                    January
      11, 201016,250
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    16,250
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    2.60
                                                                                                                                                                                                    
                                                                                                                                                                                                    March
      17, 201011,700
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    11,700
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    2.60
                                                                                                                                                                                                    
                                                                                                                                                                                                    November
      30, 201211,932
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    11,932
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    2.60
                                                                                                                                                                                                    
                                                                                                                                                                                                    April
      24, 20137,159
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    7,159
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    2.60
                                                                                                                                                                                                    
                                                                                                                                                                                                    August
      30, 20137,159
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    -
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    7,159
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    2.60
                                                                                                                                                                                                    
                                                                                                                                                                                                    December
      1, 2013





(1)
      Mr. Sculley is the President and Chief Executive Officer as of June 1,
      2008.(2)
      Dr. Park was appointed Interim President and Chief Executive Officer in
      January 2007 and resigned his post in January 2008.  The options
      were granted pursuant to his consulting agreement.Column
      note:On
      November 3, 2006, a reverse stock split, ratio of 1-for-10, became
      effective.  All stock options presented reflect the stock
      split.(a)
      The options in this column were repriced.   On July 21,
      2006, certain employees agreed to cancel a portion of their existing stock
      options in return for repricing the remaining stock options at $2.60 per
      share.  The repriced unvested options continued to vest on the
      original schedule.




64




Option
Exercises and Stock Vested





No
executive officer identified in the Summary Compensation Table above exercised
an option in fiscal year 2008.




The
following table sets forth information regarding stock option awards to our
named executive officers under our stock option plans for the year ended
December 31, 2008 as follows:





Name
                Grant
      Date
                
                All
      Other Option Awards: Number of Securities Underlying Options
      (#)
                
                
                Exercise
      or Base Price of Options Awards ($/Sh)
                
                
                Total
      Grant Date Fair Value ($)Andrew
      G. Sculley
                June
      2, 2008 (1)
                
                
                500,000
                
                
                
                0.81
                
                
                
                287,150K.C. Park
                May
      1, 2008 (2)
                
                
                70,453
                
                
                
                0.97
                
                
                
                24,461K.C. Park
                August
      1, 2008 (2)
                
                
                37,500
                
                
                
                0.68
                
                
                
                17,910





(1)  1/3
of the grant vests immediately; 1/3 of the grant vests on the first anniversary
and the remaining 1/3 vests on the second anniversary.


(2)  The
grant vests immediately.





Pension
Benefits





eMagin
does not have any plan which provides for payments or other benefits at,
following, or in connection with retirement.





Non-qualified
Deferred Compensation





eMagin
does not have any defined contribution or other plan which provides for the
deferral of compensation on a basis that is not tax-qualified.





Employment
Agreements





Effective
January 1, 2006, the Company entered into a revised executive employment
agreement with Susan K. Jones, Chief Marketing and Strategy Officer. The
agreement was effective for an initial term of three years. The agreement
provides for an annual salary, benefits made available by the Company to its
employees and eligibility for an incentive bonus pursuant to one or more
incentive compensation plans established by the Company from time to time. The
Company may terminate the employment of Ms. Jones at any time with or without
notice and with or without cause (as such term is defined in the
agreements). If Ms. Jones’ employment is terminated without cause, or if
Ms. Jones resigns with good reason (as such term is defined in the agreements),
or Ms. Jones’ position is terminated or significantly changed as result of
change of control (as such term is defined in the agreements), Ms. Jones shall
be entitled to receive salary until the end of the agreement’s full term or
twelve months, whichever is greater, payment for accrued vacation, and bonuses
which would have been accrued during the term of the agreement. If Ms. Jones
voluntarily terminates employment with the Company, other than for good reason
or is terminated with cause (as such term is defined in the agreement), she
shall cease to accrue salary, vacation, benefits, and other compensation on the
date of the voluntary or with cause termination. The Executive Employment
Agreement includes other conventional terms and also contains invention
assignment, non-competition, non-solicitation and non-disclosure
provisions.  On April 17, 2006, the parties entered into amendments to
the employment agreements pursuant to which the parties clarified that the
Company has agreed to pay for health benefits equivalent to medical and dental
benefits provided during Ms. Jones’ full time employment until the end of the
agreement’s full term or twenty-four (24) months, whichever is
greater.





Effective
January 30, 2008, the Company entered into an amended employment agreement with
Susan K. Jones, Chief Business Officer.  The amended agreement
provides for an annual base salary of $315 thousand, an extension of the term of
the agreement to January 31, 2010, modification and clarification of the basis
for the incentive component of her salary, provision for payment in the event
Ms. Jones voluntarily terminates her employment, and extension of the
change-of-control/material change/termination-without-cause compensation payout
periods to the greater of 18 months or the remaining term of the amended
employment agreement.





Effective
January 31, 2008, K.C. Park resigned as Interim Chief Executive Officer,
President and Director.  Dr. Park and the Company entered into a
Separation Agreement and General Release (“Separation
Agreement”).  The Company recorded severance expense of
$60,000.  Dr. Park and the Company also entered into a Consulting
Agreement (“Agreement”) for the term, February 1 through August 1,
2008.  Dr. Park was paid a sum of $75.000.  In addition
to the compensation, Dr. Park received non-qualified stock options to acquire
56,250 shares of common stock which are fully vested and exercisable on the
dates of the grant.   On May 1, 2008, Dr. Park received
non-qualified stock options to acquire 51,703 shares of common stock at the fair
market value and are fully vested.




65




Effective
January 2, 2008, John Atherly resigned as Chief Financial
Officer.  There was no separation agreement executed between Mr.
Atherly and the Company.





Effective
December 27, 2007, Michael D. Fowler became the Company’s Interim Chief
Financial Officer. Effective April 14, 2008, Michael D. Fowler, the
Company’s Interim Chief Financial Officer, resigned his position with the
Company. There was no separation agreement executed between Mr. Fowler and the
Company.





Effective
April 15, 2008, Mr. Paul Campbell is serving as the Company’s Interim Chief
Financial Officer pursuant to an agreement between the Company and Tatum, LLC,
dated April 2, 2008 (the “Tatum Agreement”).  Pursuant to the Tatum
Agreement, for a minimum term of three months, Mr. Campbell will be paid a
salary of $24,500 per month and the Company will also pay Tatum, LLC a fee of
$10,500 per month plus $300 per business day.  Either party may
terminate the Tatum Agreement by providing the other with at least 30 days
notice.





Effective
June 1, 2008, Andrew G. Sculley became the Company’s Chief Executive Officer,
President and Director pursuant to an employment agreement dated May 13, 2008.
Pursuant to the agreement, Mr. Sculley will be paid a salary of $300,000,
per annum, increasing to $310,000, per annum, after six months and to $320,000,
per annum, at the end of the first year.  Mr. Sculley was granted 500,000
qualified stock options.  The options vest as
follows:  166,667 shares vest immediately, 166,667 vests on the first
anniversary date, and 166,666 vests on the second anniversary
date.   If Mr. Sculley voluntarily terminates his employment with
the Company, other than for good reason as defined in the employment agreement,
he shall cease to accrue salary, personal time off, benefits and other
compensation on the date of voluntary termination.  The Company may
terminate Mr. Sculley’s employment with or without cause.  If the Company
terminates without cause, Mr. Sculley will be entitled to one year of
salary.





Potential
Payments Upon Termination or Change-in-Control





The
following table sets forth information regarding potential payments and benefits
our principal executive officers would receive upon termination of employment
under specified circumstances, assuming that the triggering event in question
occurred on December 31, 2008, the last business day of the fiscal
year:





Name
                                                                                          
                                                                                          Voluntary
      Resignation w/o Good Reason
                                                                                          
                                                                                          
                                                                                          Voluntary
      Resignation for Good Reason
                                                                                          
                                                                                          
                                                                                          Involuntary
      Termination without Cause
                                                                                          
                                                                                          
                                                                                          Involuntary
      Termination with Cause
                                                                                          
                                                                                          
                                                                                          Involuntary
      Termination with a Change in ControlAndrew
      SculleyCash
      severance
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          
                                                                                          
                                                                                          $
                                                                                          310,000
                                                                                          (1)
                                                                                          
                                                                                          $
                                                                                          310,000
                                                                                          (1)
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          
                                                                                          
                                                                                          $
                                                                                          310,000
                                                                                          (1)Vesting
      of stock options
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          (2)
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          (2)
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          (2)Susan
      JonesCash
      severance
                                                                                          
                                                                                          $
                                                                                          157,500
                                                                                          (1)
                                                                                          
                                                                                          $
                                                                                          472,500
                                                                                          (1)
                                                                                          
                                                                                          $
                                                                                          472,500
                                                                                          (1)
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          
                                                                                          
                                                                                          $
                                                                                          472,500
                                                                                          (1)Post-termination
      health and welfare
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          
                                                                                          
                                                                                          $
                                                                                          10,820
                                                                                          (3)
                                                                                          
                                                                                          $
                                                                                          10,820
                                                                                          (3)
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          
                                                                                          
                                                                                          $
                                                                                          10,820
                                                                                          (3)Vesting
      of stock options
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          (4)
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          (4)
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          
                                                                                          
                                                                                          $
                                                                                          —
                                                                                          (4)





(1) This
amount reflects the lump sum that is payable within thirty days of the
triggering event to the named executive.  All calculations were made
as of December 31, 2008 using then current salary figures for the named
executive.


(2) This
amount reflects the value of the stock options awards that were unvested as of
December 31, 2008 which would accelerate and vest under the terms of eMagin’s
option plans following a triggering event.


(3) This
amount reflects the COBRA payments for health and dental benefits that eMagin
would make on behalf of the named executive.


(4)  This
amount would reflect the value of the stock option awards that were unvested as
of December 31, 2008 which would accelerate and vest under the terms of eMagin’s
option plans following a triggering event.  As of December 31, 2008,
all stock options were fully vested.




Director
Compensation Arrangements
 
 The
following table sets forth with respect to the named director, compensation
information inclusive of equity awards and payments made in the year ended
December 31, 2008.  The table includes only directors that were not
employees of eMagin Corporation.  Any director who was also an
executive officer is included in the Summary Compensation
Table.




DIRECTOR
      COMPENSATIONName
                                              
                                              Fees
      earned or paid in cash($)
                                              
                                              
                                              Stock
      awards
                                                ($)
                                              
                                              
                                              Option
      awards($)
                                              
                                              
                                              Non-equity
      incentive plan compensation($)
                                              
                                              
                                              Change
      in pension value and nonqualified deferred compensation
      earnings($)
                                              
                                              
                                              All
      other compensation
                                                ($)
                                              
                                              
                                              Total($)Claude
      Charles
                                              
                                              
                                              20,500
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              39,035
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              59,535Paul
      Cronson
                                              
                                              
                                              18,500
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              24,263
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              42,763Irwin
      Engelman
                                              
                                              
                                              21,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              39,035
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              60,035Jack
      Goldman
                                              
                                              
                                              22,500
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              39,035
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              61,535Thomas
      Paulsen
                                              
                                              
                                              84,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              34,111
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              118,111Stephen
      Seay
                                              
                                              
                                              19,500
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              34,111
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              53,611




66




The
following table sets forth information with respect to the outstanding equity
awards of our directors as of December 31, 2008:





OUTSTANDING
      EQUITY AWARDS AT YEAR-ENDOption
      awards
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          Stock
      awardsNumber
      of securities underlying unexercised options (#)
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          Number
      of securities underlying unexercised options (#)
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          Equity
      incentive plan awards: Number of securities underlying unexercised
      options
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          Options
      exercise price
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          Option
      expiration
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          Number
      of shares or units of stock that have not vested
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          Market
      value of shares or units of stock that have not vested
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          Equity
      incentive plan awards:
                                                                                                                                                                                                                            Number
      of unearned shares other rights that have not vested
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          Equity
      incentive plan awards:
                                                                                                                                                                                                                            Market
      or payout value of unearned shares, units or other rights that have not
      vestedName
      and principal position
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          Exercisable
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          Unexercisable
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          (#
                                                                                                                                                                                                                          ),
      (a)
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          ($)
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          Date
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          (#
                                                                                                                                                                                                                          )
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          ($)
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          (#
                                                                                                                                                                                                                          )
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          ($)Claude
      Charles
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3.50
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          January
      2, 2010
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -975
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          975
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          July
      2, 2010
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -650
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          650
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          September
      2, 2010
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -3,250
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3,250
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          April
      5, 2011
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -1,950
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1,950
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          June
      15, 2014
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -975
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          975
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          September
      30, 2015
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          December
      31, 2015
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -12,700
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          12,700
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.51
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          November
      23, 2017
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.44
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          December
      3, 2017
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.35
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          January
      2, 2018
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -30,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          30,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          0.70
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          July
      24, 2018
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -Paul
      Cronson
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          4,875
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          4,875
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          July
      2, 2010
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -1,625
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1,625
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          June
      15, 2014
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          December
      31, 2015
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -10,400
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          10,400
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.51
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          November
      23, 2017
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.44
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          December
      3, 2017
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.35
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          January
      2, 2018
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -Irwin
      Engelman
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          October
      3, 2012
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -975
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          975
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          September
      30, 2015
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -163
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          163
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          October
      3, 2015
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -5,038
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          5,038
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.51
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          November
      23, 2017
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.44
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          December
      3, 2017
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.35
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          January
      2, 2018
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -30,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          30,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          0.70
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          July
      24, 2018
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -Jacob
      Goldman
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          650
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          650
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          July
      2, 2010
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          September
      2, 2010
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -2,113
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2,113
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          June
      15, 2014
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -650
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          650
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          September
      30, 2015
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -488
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          488
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          October
      3, 2015
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          December
      31, 2015
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -12,026
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          12,026
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.51
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          November
      23, 2017
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.44
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          December
      3, 2017
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.35
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          January
      2, 2018
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -30,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          30,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          0.70
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          July
      24, 2018
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -Thomas
      Paulsen
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          July
      30, 2010
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -1,300
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1,300
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          June
      15, 2014
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -1,625
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1,625
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          September
      30, 2015
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -3,250
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3,250
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          October
      3, 2015
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -813
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          813
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          December
      31, 2015
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -11,213
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          11,213
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.51
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          November
      23, 2017
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.44
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          December
      3, 2017
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.35
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          January
      2, 2018
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -20,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          20,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          0.70
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          July
      24, 2018
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -Stephen
      Seay
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          2.60
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          February
      14, 2016
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          3,900
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.51
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          November
      23, 2017
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.44
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          December
      3, 2017
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          25,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          1.35
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          January
      2, 2018
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -20,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          20,000
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          0.70
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          July
      24, 2018
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          
                                                                                                                                                                                                                          -




67


Compensation
Committee Interlocks and Insider Participation





None of
the members of our Compensation Committee has been an officer or employee of
eMagin during years ending December 31, 2006, 2007 and 2008, except as noted
below.  In addition, during the most recent fiscal year, no eMagin
executive officer served on the Compensation Committee (or equivalent), or the
Board, of another entity whose executive officer(s) served on our Compensation
Committee or Board.   On January 31, 2008, Dr. K.C. Park resigned
as our Interim Chief Executive Officer and President and Thomas Paulsen, a
director and Chairman of both the Board of Directors and the Compensation
Committee, assumed that role on an interim basis until June 1,2008 when Andrew G. Sculley,
Jr. joined the Company as Chief Executive Officer and President.  No
change in Admiral Paulsen’s compensation occurred as a result of his accepting
the temporary position of Interim Chief Executive Officer and
President.





Compensation
Committee Report




The
Committee has reviewed the Compensation Discussion and Analysis and discussed
that analysis with management.  Based on its review and discussions with
management, the Committee recommended to the Board that the Compensation
Discussion and Analysis be included in eMagin’s 10-K.  This report is
provided by the following independent directors, who comprise the
Committee:




Thomas
Paulsen (Chairman)


Jacob
Goldman


Stephen
Seay


68


ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS





Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters





The  following
table sets forth the number of shares known to be owned by all persons who own
at least 5% of eMagin's outstanding common stock, the Company's directors, the
executive officers, and the directors and executive officers as a group as of
February 28, 2009, unless otherwise noted. Unless otherwise indicated, the
stockholders listed in the table have sole voting and investment power with
respect to the shares indicated.




Name
      of Beneficial Owner
              
              Common
      Stock Beneficially Owned
              
              Percentage
      of Common StockMoriah
      Capital L.P.  (1)
              
              2,017,500
              
              5.4%Stillwater
      LLC (2)
              
              13,137,958
              
              35.1%Alexandra
      Global Master Fund Ltd (3)
              
              3,074,932
              
              8.2%Ginola
      Limited (4)
              
              5,079,856
              
              13.6%Susan
      K Jones (5)
              
              683,465
              
              1.8%Rainbow
      Gate Corporation (6)
              
              1,951,037
              
              5.2%Kettle
      Hill (7)
              
              731,318
              
              2.0%Paul
      Cronson (8)
              
              568,682
              
              1.5%Claude
      Charles (9)
              
              105,400
              
              *Jack
      Goldman (10)
              
              103,727
              
              *Thomas
      Paulsen (11)
              
              92,101
              
              *Irwin
      Engelman(12)
              
              90,076
              
              *Stephen
      Seay( 13)
              
              77,800
              
              *Andrew
      G. Sculley (14)
              
              166,667
              
              *All
      executive officers and directors as a group (consisting of 8 individuals)
      (15)
              
              1,887,918
              
              4.3%





*Less
than 1*% of the outstanding common stock





**
Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options,
warrants, or preferred shares exercisable or convertible within 60
days of February 28, 2009 are deemed outstanding for computing the
percentage of the person holding such option or warrant.  Percentages
are based on a total of 37,468,025 shares: 15,921,113 shares of common
stock outstanding on February 28, 2009 and 21,546,912 shares issuable upon the
exercise of options, warrants exercisable, and preferred shares convertible
on or within 60 days of February 28, 2009, as described below.


(1) This
figure represents (i) 647,500 shares owned by Moriah Capital, L.P and (ii)
warrants held by Moriah Capital L.P. to purchase 1,370,000
shares.  Alexandre Speaker and Greg Zilberstein exercise the shared
voting power with respect to the shares.




69




(2) This
figure represents: (i) 2,969,819 shares owned by Stillwater LLC, which
includes 276,084 shares owned by Rainbow Gate Corporation, in which the
sole member of Stillwater LLC is the investment manager of Rainbow Gate
Corporation; (ii) warrants held by Stillwater LLC to purchase 3,853,472 shares,
which includes warrants to purchase 737,620 shares held by Rainbow Gate
Corporation, in which the sole member of Stillwater LLC is the investment
manager of Rainbow Gate Corporation; and (iii) 6,314,667 shares of common
stock underlying convertible preferred shares which includes 937,333 shares
of common stock underlying convertible preferred shares held by Rainbow
Gate Corporation, which the sole member of Stillwater LLC is the investment
manager of Rainbow Gate Corporation. Mortimer D.A. Sackler exercises the sole
voting power with respect to the shares held in the name of Stillwater LLC as
sole member, and Mortimer D.A. Sackler exercises the sole voting power with
respect to the shares held in the name of Rainbow Gate Corporation as investment
manager; therefore Stillwater LLC is deemed to beneficially own the shares held
by Rainbow Gate as “beneficially owned” but Stillwater LLC disclaims beneficial
ownership of such shares.


(3) This
figure represents:  (1) 56,750 shares owned by Alexandra Global Master
Fund; (ii) and warrants held to purchase 3,018,182 shares. Alexandra
Investment Management, LLC, a Delaware limited liability company (“AIM”), serves
as investment adviser to Alexandra Global Master Fund Ltd., a British Virgin
Islands company (“Alexandra”).  By reason of such relationship, AIM
may be deemed to share dispositive power over the shares of common stock stated
as beneficially owned by Alexandra. AIM disclaims beneficial ownership of such
shares of common stock. Mr. Mikhail A. Filimonov (“Filimonov”) is the Chairman,
Chief Executive Officer, Chief Investment Officer and a managing member of
AIM.  By reason of such relationships, Filimonov may be deemed to
share dispositive power over the shares of common stock stated as beneficially
owned by Alexandra.  Filimonov disclaims beneficial ownership of such
shares of common stock.


(4) This
figure represents: (i) 1,257,629 shares owned by Ginola Limited, which include
276,084 shares held indirectly by Rainbow Gate Corporation; 65,080 shares owned
by Mount Union Corp.; 57,372 shares owned by Chelsea Trust Company Limited, as
trustee; and 284,736 shares owned by Crestflower Corporation (Ginola Limited
disclaims beneficial ownership of the shares owned by Crestflower Corporation;
Mount Union Corp.; and Chelsea Trust Company Limited, as trustee); and (ii)
warrants held by Ginola Limited to purchase 1,814,227 common shares, which
includes warrants to purchase 737,620 shares held by Rainbow Gate Corporation,
in which the sole shareholder of Ginola Limited is also the sole shareholder of
Rainbow Gate Corporation, warrants to purchase 32,540 shares owned by Mount
Union Corp., 27,273 shares of common stock issuable upon exercise of a common
stock purchase warrant held indirectly by Chelsea Trust Company Limited, as
trustee, and 120,193 shares of common stock issuable upon exercise of common
stock purchase warrant held by Crestflower Corporation (Ginola Limited disclaims
beneficial ownership of the shares owned by Crestflower Corporation, Mount Union
Corp. and Chelsea Trust Company Limited, as trustee); and (iii) 2,008,000
shares of common stock underlying convertible preferred shares, which includes
937,333 shares of common stock underlying convertible preferred shares held by
Rainbow Gate Corporation, in which the sole shareholder of Ginola Limited is
also the sole shareholder of Rainbow Gate Corporation. Stillwater LLC and Ginola
Limited are beneficially owned by separate individuals and therefore do not
exert voting control over one another. However, Stillwater LLC does include the
shares held by Rainbow Gate as “beneficially owned” since the sole member of
Stillwater LLC is investment manager and sole director of Rainbow Gate
Corporation and exerts voting control over such shares but Stillwater LLC
disclaims beneficial ownership of such shares. Jonathan White, Steven
Meiklejohn, and Joerg Fischer exercise the shared voting power with respect to
the shares held in the name of Mount Union Corp.. Stuart Baker, Joerg Fischer,
Charles Lubar, Christopher Mitchell, Leslie Schreyer and Jonathan White exercise
the shared voting power with respect to the shares held in the name of Chelsea
Trust Company Limited.  Jonathan White, Joerg Fischer and Steven
Meiklejohn exercise the shared voting power with respect to the shares held in
the name of Crestflower Corporation.  Jonathan White, Joerg Fischer
and Steven Meiklejohn are the directors of Ginola Limited and exercise the
shared voting power with respect to the shares held in the name of Ginola
Limited.


(5) This
figure represents shares owned by Gary Jones and Susan Jones who are married to
each other, including (i) 395,268 shares owned by Gary Jones and 158,792 shares
owned by Susan Jones; and (ii) 129,405 shares of common stock issuable upon
exercise of stock options held by Susan Jones.


(6) This
figure represents (1) 276,084 shares owned by Rainbow Gate Corporation; (ii)
warrants held by to purchase 737,620 shares; and (iii) 937,333 shares of common
stock underlying convertible preferred shares. Mortimer D.A.
Sackler exercises the sole voting power with respect to the shares held in
the name of Rainbow Gate Corporation but disclaims beneficial ownership of such
shares.


(7) This
figure represents (i) 490,932 shares of common stock owned by Kettle Hill of
which 110,577 shares held by Kettle Hill Partners, LP, 207,278 shares held by
Kettle Hill Partners II, LP, and 173,077 shares held by Kettle Hill Offshore,
Ltd. and (ii) warrants held by Kettle Hill to purchase 240,386 common shares
which includes warrants to purchase 55,289 shares held by Kettle Hill Partners,
LP, warrants to purchase 98,558 shares held by Kettle Hill Partners II, LP, and
warrants to purchase 86,539 shares held by Kettle Hill Offshore,
Ltd.  Kettle Hill Capital Management, LLC acts as investment manager
for Kettle Hill Partners, LP, Kettle Hill Partners II LP, and Kettle Hill
Offshore, Ltd.  Andrew Kurita exercises the voting power with respect
to the shares.


(8) This
figure represents 22,198 shares owned by Mr. Cronson, 208,235 shares underlying
warrants, 70,800 shares underlying options, and 266,666 shares of common stock
underlying convertible preferred shares held directly and indirectly by
Paul Cronson. This includes (i) 12,097 common stock shares and 4,286 shares
underlying warrants held indirectly by a family member of Paul Cronson; (ii)
4,366 shares underlying warrants held indirectly by Larkspur Corporation of
which he is the Managing Director and (iii) 3,783 shares of common stock,
186,666 shares underlying warrants and 266,666 shares of common stock
underlying convertible preferred shares held indirectly by Navacorp III,
LLC. Mr. Paul Cronson exercises the sole voting power with respect to the shares
held in the name of Larkspur Corporation, and Paul Cronson exercises the sole
voting power with respect to the shares held in the name of Navacorp III,
LLC.


(9) This
figure represents shares underlying options.


(10) This
figure represents shares underlying options.


(11) This
figure represents shares underlying options.


(12) This
figure represents shares underlying options.


(13) This
figure represents shares underlying options.


(14) This
figure represents shares underlying options.


(15) This
figure represents:  (i) 577,041 shares; (ii) warrants held to purchase
208,235 shares; (iii) 266,666 shares of common stock underlying convertible
preferred shares; and (iv) 835,976 shares of common stock issuable upon exercise
of stock options.




70




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE




As
previously reported on a Form 8-K that was filed with the Securities and
Exchange Commission on December 23, 2008, pursuant to a Securities Purchase
Agreement (the “Securities Purchase Agreement”) entered into on December 18,
2008 between the Company and  Stillwater LLC ("Stillwater"), on
December 22, 2008 (the “Closing”), the Company sold Stillwater for an aggregate
purchase price of $4,033,000 an aggregate of 4,033 shares of its Series B
Convertible Preferred Stock (the “Preferred Stock”), which have a stated value
of $1,000 per share, a conversion price of $0.75 per share and have the rights
and preferences set forth in the Certificate of Designations of Series B
Convertible Preferred Stock filed with the Secretary of State for the State of
Delaware on December 19, 2008 (the “Certificate of Designations”), and warrants
to purchase 1,875,467 shares of common stock at $1.03 per share (the
“Warrants”).  The Warrants terminate on December 22, 2013. Stillwater
beneficially owns 35.1% of the Company’s common stock.





Pursuant
to the terms of the Securities Purchase Agreement, the Company used the proceeds
from the sale of the Preferred Stock exclusively to repay $4,033,000 of its
Amended and Restated 8% Senior Secured Convertible Notes (the “Notes”)
which matured on December 22, 2008.





Pursuant
to the Securities Purchase Agreement, the members of the Company’s board of
directors, and certain executive officers executed lockup agreements pursuant to
which, subject to the terms of the lockup agreement, they are restricted from
selling the Company’s stock that they beneficially own for 180 days from the
Closing.





On
December 22, 2008, the Company entered into an Exchange Agreement (the “Exchange
Agreement”) with three holders (“Holders”) of its outstanding Notes, (i)
Navacorp III LLC whose managing member, Paul Cronson, is a member of its board
of directors; (ii) Ginola Limited who beneficially owns 13.6% of the shares of
common stock; and (iii) Rainbow Gate Corporation who beneficially owns 5.2% of
common stock. Pursuant to the Exchange Agreement, on December 22, 2008, the
Holders exchanged $1,700,000 of their outstanding Notes and accrued and unpaid
interest thereon and received 1,706 shares of the Preferred Stock (the amount of
the outstanding principal and accrued and unpaid interest due on the Notes
exchanged divided by $1,000).




The
Company also entered into a Registration Rights Agreement with Stillwater
to register for resale the shares of the common stock issuable upon
conversion of the Preferred Stock sold in the offering and the shares of common
stock issuable upon exercise of the warrants.  Subject to the terms of
the Registration Rights Agreement, the Company is required to file a
registration statement (the “Registration Statement”) on Form S-1 with the
Securities and Exchange Commission (the “SEC”) within 30 days following the date
that it is permitted to file a registration statement by (i) the rules and
regulations of the Securities and Exchange Commission and (ii) the agreements
set forth on Schedule B to the Registration Rights Agreement, which as of
December 18, 2008 prohibits the Company from filing the initial Registration
Statement until certain other registration statements are filed. After filing
the Registration Statement, the Company is to cause such Registration Statement
to be declared effective under the Securities Act of 1933 (the “Act”) as
promptly as possible after the filing thereof, but in no event later than 90
days after the filing date (or no later than 120 days after the filing date in
the event of SEC “full review” of the Registration Statement). The Holders of
Notes that exchanged their Notes pursuant to the Exchange Agreement, (i.e.,
Rainbow Gate Corporation, Ginola Limited and Navacorp III LLC), received the
same registration rights as Stillwater.




On April
2, 2008, the Company completed a private placement of its common stock with
several institutional investors for gross proceeds of $1,650,000.  The
transaction involved the sale of 1,586,539 shares of common stock at $1.04 per
share, or the 5-day average closing price of the Company’s common stock on the
trading days immediately preceding the closing date.  The Company also
issued to the investors 793,273 warrants to buy our common stock at a price of
$1.30 per share.  Pursuant to the transaction, the Company filed a
registration statement for the shares issued as well as shares underlying the
warrants on April 29, 2008.  Stillwater (as defined above) and Ginola
Limited participated in the private placement.  Stillwater and Ginola
Limited are beneficial owners of more than 5% of the Company’s common
stock.  As a result of later transactions in 2008, the exercise price
of the warrants was reduced from $1.30 to $1.13 per share.





As a
result of the 2008 equity and debt transactions, the exercise price of all
Series F warrants was ultimately reduced from $8.60 to $2.50 per
share.





Director
Independence





Board of
Directors has determined that Messrs. Thomas Paulsen, Claude Charles, Jacob
Goldman, Irwin Engelman, and Stephen Seay are
each independent directors as of December 31, 2008.  Thomas
Paulsen was not an independent director during the period January through May
2008 when he was acting Interim CEO and President.  As of June 1,
2008, Thomas Paulsen is an independent director.




71




The Board
of Directors has established a compensation committee which is
currently comprised of Thomas Paulsen, Jacob Goldman, and Stephen Seay each of
whom is independent as of December 31, 2008.  Thomas Paulsen was
not an independent director during the period January through May 2008 when he
was acting Interim CEO and President.  As of June 1, 2008, Thomas
Paulsen is an independent director.





The Board of Directors has established
a corporate governance and nominating committee, which is comprised of
Thomas Paulsen and Jacob Goldman, each of whom is independent as of
December 31, 2008. Thomas Paulsen was not an independent director during the
period January through May 2008 when he was acting Interim CEO and
President.  As of June 1, 2008, Thomas Paulsen is an independent
director.





The 
Board  of  Directors  has a  separately 
designated  audit  committee established in accordance  with
Section  3(a)(58)(A) of the Securities  Exchange Act of 1934, which is
currently comprised of Claude Charles, Irwin Engelman, and Stephen Seay. The
members of the Audit Committee are independent.





ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES





Eisner
LLP has served as eMagin’s independent auditors for the years ended December 31,
2008 and 2007.  For the year ended December 31, 2008, the fees for
audit services totaled approximately $361 thousand which included approximately
$251 thousand associated with the annual audit and review of the Company’s
quarterly reports on Form 10-Q and approximately $110 thousand associated with
the Company’s statutory and regulatory filings.  For the year ended
December 31, 2007, the fees for audit services totaled approximately $342
thousand which included approximately $259 thousand associated with the annual
audit and reviews of the Company’s quarterly reports on Form 10-Q and
approximately $83 thousand associated with the Company’s statutory and
regulatory filings.





The Audit
Committee pre-approves all audit and non-audit services performed
by  the Company’s auditor and the fees to be paid in connection with
such services in order to assure that the provision of such services does not
impair the auditor’s independence.





ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES





(a)  Financial
Statements and Schedules





1.  Financial
Statements





The
following consolidated financial statements are filed as part of this report
under Item 8 of Part II “Financial Statements and Supplementary
Data.:





A. 
Consolidated Balance Sheets at December 31, 2008 and 2007.


B.  Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007, and
2006.


C. Consolidated
Statements of Changes in Shareholders’ Equity (Capital Deficit) for the Years
Ended December 31, 2008, 2007, and 2006.


D.  Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007, and
2006.





2.Financial
Statement Schedules





The
following financial statement schedule is filed as part of this
report:





A.  Schedule II – Valuation
and Qualifying Accounts





Financial
statement schedules not included herein have been omitted because they are
either not required, not applicable, or the information is otherwise included
herein.





(b)  Exhibits





The
exhibits listed in the accompanying Index to Exhibits on pages 77 to 81 are
filed or incorporated by reference as part of this Annual Report on Form
10-K.


72


SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on this 31st day of March, 2009.




eMAGIN
    CORPORATIONBy:
              /s/ Andrew
      G. SculleyAndrew
      G. SculleyChief
      Executive Officer


In
accordance with the Exchange Act, this report has been signed below by the
following persons on March 31, 2009, on behalf of the registrant and in the
capacities Indicated.








Signature
            Title/s/
      Andrew G. Sculley
            President
      and Chief Executive Officer, DirectorAndrew
      G. Sculley
            (Principal
      Executive Officer)/s/
      Paul Campbell
            Interim
      Chief Financial OfficerPaul
      Campbell
            (Principal
      Financial and Accounting Officer)/s/
      Adm. Thomas Paulsen
            Chairman
      of the Board, DirectorAdm.
      Thomas Paulsen/s/
      Claude Charles
            DirectorClaude
      CharlesDirectorPaul
      Cronson/s/
      Irwin Engelman
            DirectorIrwin
      EngelmanDirectorDr.
      Jacob E. Goldman/s/
      Brig. Gen. Stephen Seay
            DirectorBrig.
      Gen. Stephen Seay





73


eMAGIN CORPORATION


SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS











Allowance
for doubtful accounts





Year
      Ended
                
                Beginning
      Balance
                
                
                Charged
      to Expenses
                
                
                Amounts
      Written Off
                
                
                Ending
      Balance(In
      thousands)December
      31, 2008
                
                $
                (358
                )
                
                $
                509
                
                
                $
                10
                
                
                $
                (857
                )December
      31, 2007
                
                $
                (443
                )
                
                $
                —
                
                
                $
                85
                
                
                $
                (358
                )December
      31, 2006
                
                $
                (487
                )
                
                $
                —
                
                
                $
                44
                
                
                $
                (443
                )





74





eMAGIN
CORPORATION


INDEX
TO EXHIBITS




Exhibit
      Number
              
              Description2.1
              
              Agreement
      and Plan of Merger between Fashion Dynamics Corp., FED Capital Acquisition
      Corporation and FED Corporation dated March 13, 2000 (incorporated by
      reference to exhibit 2.1 to the Registrant's Current Report on Form 8-K/A
      filed on March 17, 2000).3.1
              
              Amended
      and Restated Articles of Incorporation (incorporated by reference to
      exhibit 99.2 to the Registrant's Definitive Proxy Statement filed on June
      14, 2001).3.2
              
              Amended
      Articles of Incorporation (incorporated by reference to exhibit A to the
      Registrant's Definitive Proxy Statement filed on June 13,
      2003).3.3
              
              Bylaws
      of the Registrant (incorporated by reference to exhibit 99.3 to the
      Registrant's Definitive Proxy Statement filed on June 14,
      2001).3.4
              
              Certificate
      of Designations of Series B Convertible Preferred Stock (incorporated by
      reference to exhibit 4.2 of the Registrant’s current report on Form 8-K
      filed on December 23, 2008).4.1
              
              Form
      of Warrant dated as of April 25, 2003 (incorporated by reference to
      exhibit 4.3 to the Registrant's Current Report on Form 8-K filed on April
      28, 2003).4.2
              
              Form
      of Series A Common Stock Purchase Warrant dated as of January 9, 2004
      (incorporated by reference to exhibit 4.1 to the Registrant's Current
      Report on Form 8-K filed on January 9, 2004).4.3
              
              Form
      of Series B Common Stock Purchase Warrant dated as of January 9, 2004
      (incorporated by reference to exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K filed on January 9, 2004).4.4
              
              Form
      of Series C Common Stock Purchase Warrant dated as of January 9, 2004
      (incorporated by reference to exhibit 4.3 to the Registrant's Current
      Report on Form 8-K filed on January 9, 2004).4.5
              
              Form
      of Series D Warrant (incorporated by reference to exhibit 4.1 to the
      Registrant's current report on Form 8-K filed on March 4,
      2004).4.6
              
              Form
      of Series E Warrant (incorporated by reference to exhibit 4.2 to the
      Registrant's current report on Form 8-K filed on March 4,
      2004).4.7
              
              Form
      of Series F Warrant (incorporated by reference to exhibit 4.1 to the
      Registrant's current report on Form 8-K filed on October 26,
      2004).4.8
              
              Form
      of Common Stock Purchase Warrant (incorporated by reference
      to  exhibit 10.3 to the Registrant’s current report on Form 8-K
      filed October 21, 2005).4.9
              
              Form
      of Common Stock Purchase Warrant (incorporated by reference to exhibit 4.1
      to the Registrant's current report on Form 8-K filed on August 26,
      2008).4.10
              
              Form
      of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1
      to the Registrant’s current report on Form 8-K filed on December 23,
      2008).10.1
              
              2000
      Stock Option Plan (incorporated by reference to Annex A to exhibit 99.1 to
      the Registrant's Registration Statement on Form S-8 filed on March 14,
      2000).*10.2
              
              Form
      of Agreement for Stock Option Grant pursuant to 2003 Stock Option Plan
      (incorporated by reference to exhibit 99.2 to the Registrant's
      Registration Statement on Form S-8 filed on March 14,
    2000).*10.3
              
              Nonexclusive
      Field of Use License Agreement relating to OLED Technology for miniature,
      high resolution displays between the Eastman Kodak Company and FED
      Corporation dated March 29, 1999 (incorporated by reference to exhibit
      10.6 to the Registrant's Annual Report on Form 10-K/A for the year ended
      December 31, 2000 filed on April 30, 2001).10.4
              
              Amendment
      Number 1 to the Nonexclusive Field of Use License Agreement relating to
      the LED Technology for miniature, high resolution displays between the
      Eastman Kodak Company and FED Corporation dated March 16, 2000
      (incorporated by reference to exhibit 10.7 to the Registrant's Annual
      Report on Form 10-K/A for the year ended December 31, 2000 filed on April
      30, 2001).10.5
              
              Lease
      between International Business Machines Corporation and FED Corporation
      dated May 28, 1999 (incorporated by reference to exhibit 10.9 to the
      Registrant's Annual Report on Form 10-K for the year ended December 31,
      2000 filed on March 30, 2001).  75
   10.6
              
              Amendment  Number  1  to  the  Lease  between  International  Business
      Machines Corporation and FED Corporation dated July 9, 1999 (incorporated
      by reference to exhibit 10.8 to the Registrant's Annual Report on Form
      10-K for the year ended December 31, 2000 filed on March 30,
      2001).10.7
              
              Amendment
      Number 2  to the Lease between International Business Machines
      Corporation and FED Corporation dated January 29,  001
      (incorporated by reference to exhibit 10.11 to the Registrant's Annual
      Report on Form 10-K for the year ended  December 31, 2000 filed
      on March 30, 2001).10.8
              
              Amendment
      Number 3 to Lease between International Business Machines Corporation and
      FED Corporation dated May 28, 2002 (incorporated by reference to the
      Company’s Form S-1A as filed November 12, 2008).10.9
              
              Amendment
      Number 4 to Lease between International Business Machines Corporation and
      FED Corporation dated December 14, 2004 (incorporated by reference to the
      Registrant’s Current Report on Form 8-K filed on December 20,
      2004).10.10
              
              Securities
      Purchase Agreement dated as of April 25, 2003 by and among eMagin and the
      investors identified on the signature  pages thereto, filed
      April  28,  2003,  as filed in the
      Registrant's Form  8-K incorporated herein by
      reference.10.11
              
              Registration
      Rights Agreement dated as of April 25, 2003 by and among eMagin and
      certain initial investors identified on the signature pages thereto
      (incorporated by reference to exhibit 10.3 to the Registrant's Current
      Report on Form 8-K filed on April 28, 2003).10.12
              
              Securities
      Purchase Agreement dated as of January 9, 2004 by and among eMagin and the
      investors identified on the signature pages thereto (incorporated by
      reference to exhibit 10.1 to the Registrant's Current Report on Form 8-K
      filed on January 9, 2004).10.13
              
              Registration
      Rights Agreement dated as of January 9, 2004 by and among eMagin and
      certain initial investors identified on the signature pages thereto
      (incorporated by reference to exhibit 10.2 to the Registrant's Current
      Report on Form 8-K filed on January 9, 2004).10.14
              
              Master
      Amendment Agreement dated as of February 17, 2004 by and among eMagin and
      the investors identified on the signature pages thereto (incorporated by
      reference to exhibit 10.1 to the Registrant's Current Report on Form 8-K
      filed on March 4, 2004).10.15
              
              Registration  Rights  Agreement  dated
      as of February  17, 2004 by and among eMagin and certain initial
      investors identified on the signature
      pages  thereto  (incorporated  by  reference
      to  exhibit  10.2  to the Registrant's
      Current Report on Form 8-K filed on March 4, 2004).10.16
              
              Letter
      Agreement  amending the Master Amendment  Agreement
      dated as of  March 1,  2004 by
      and  among  eMagin  and
      the  parties  to
      the  Master  Amendment
      Agreement  (incorporated by reference to exhibit 10.3 to the
      Registrant's Current Report on Form 8-K filed on March 4,
      2004).10.17
              
              Lease
      between  International  Business  Machines  Corporation  and
      FED Corporation  dated May 28,  1999,  as
      filed in the  Registrant's  Form 10-K/A for the year
      ended December 31, 2000 (incorporated by reference to the Form 10-K filed
      on March 30, 2001).10.18
              
              Amendment  Number  2  to  the  Lease  between  International  Business
      Machines  Corporation and
      FED  Corporation  dated January 29, 2001,
      as  filed in the Registrant's  Form 10-K/A for the
      year ended December 31, 2000 (incorporated by reference to the Form 10-K
      filed on March 30, 2001).10.19
              
              Secured
      Note Purchase  Agreement entered into as of November 27, 2001,
      by and among eMagin  Corporation and
      certain  investors named therein,
      as  filed  in
      the  Registrant's  Form  8-K  dated  December  18,  2001(incorporated
      by reference to Form *-K filed December 18, 2001).10.20
              
              2004
      Non-Employee Compensation Plan, filed July 7, 2004, as filed in the
      Registrant’s Form S-8, incorporated herein by
  reference.*10.21
              
              Form
      of Letter Agreement by and among eMagin and the holders of the Class A,
      Class B and Class C common stock purchase warrants, filed August 9, 2004,
      as filed in the Registrant's Form 8-K incorporated herein by
      reference.10.22
              
              Securities
      Purchase Agreement dated as of October 21, 2004 by and among eMagin and
      the purchasers listed on the signature pages thereto, filed October 26,
      2004, as filed in the Registrant's Form 8-K incorporated herein by
      reference.10.23
              
              Placement
      Agency Agreement dated as of October 21, 2004 by and among eMagin and W.R.
      Hambrecht & Co., LLC, filed October 26, 2004, as filed in the
      Registrant's Form 8-K incorporated herein by
  reference.  76
  10.24
              
              Agreement,
      dated as of June 29, 2004, by and between eMagin and Larkspur Capital
      Corporation, filed October 26, 2004, as filed in the Registrant's Form 8-K
      incorporated herein by reference.10.25
              
              Sublease
      Agreement dated as of July 14, 2005 by and between eMagin and Cap Gemini
      U.S., LLC, filed August 2, 2005, as filed in the Registrant's Form 8-K
      incorporated herein by reference.10.26
              
              Amended
      and Restated 2003 Stock Option Plan, filed September 1, 2005, as filed in
      the Registrant’s Definitive Proxy Statement, incorporated herein by
      reference.*10.27
              
              Amended
      and Restated 2004 Non-Employee Compensation Plan, filed September 1, 2005,
      as filed in the Registrant’s Definitive Proxy Statement, incorporated
      herein by reference.*10.28
              
              2005
      Employee Stock Purchase Plan, filed September 1, 2005, as filed in the
      Registrant’s Definitive Proxy Statement, incorporated herein by
      reference.*10.29
              
              Securities
      Purchase Agreement dated as of October 20, 2005, by and among eMagin and
      the purchasers listed on the signature pages thereto, filed October 31,
      2005, as filed in the Registrant's Form 8-K incorporated herein by
      reference.10.30
              
              Registration
      Rights Agreement dated as of October 20, 2005, by and among eMagin and the
      purchasers listed on the signature pages thereto, filed October 31, 2005,
      as filed in the Registrant's Form 8-K incorporated herein by
      reference.10.31
              
              Employment
      Agreement effective as of January 1, 2006 by and between eMagin and Gary
      Jones, filed January 27, 2006, as filed in the Registrant's Form 8-K
      incorporated herein by reference.10.32
              
              Employment
      Agreement effective as of January 1, 2006 by and between eMagin and Susan
      Jones, filed January 27, 2006, as filed in the Registrant's Form 8-K
      incorporated herein by reference.10.33
              
              Amendment
      to Employment Agreement as of April 17, 2006 by and between eMagin and
      Gary Jones.10.34
              
              Amendment
      to Employment Agreement as of April 17, 2006 by and between eMagin and
      Susan Jones.10.35
              
              Form
      of Note Purchase Agreement dated July 21, 2006, by and among the Company
      and the investors named on the signature pages thereto
      2006  (incorporated by reference to the
      Company’s  Form S-1A as filed November 12,
  2008).10.36
              
              Form
      of 6% Senior Secured Convertible Note Due 2007-2008 of the Company dated
      July 21, 2006, filed July 25, 2006, as filed in the Registrant's Form 8-K
      incorporated herein by reference.10.37
              
              Form
      of Common Stock Purchase Warrant of the Company dated July 21, 2006, filed
      July 25, 2006, as filed in the Registrant's Form 8-K incorporated herein
      by reference.10.38
              
              Pledge
      and Security Agreement dated as of July 21, 2006 by and between the
      Company and Alexandra Global Master Fund Ltd., as collateral agent, filed
      July 25, 2006, as filed in the Registrant's Form 8-K incorporated herein
      by reference.10.39
              
              Patent
      and Trademark Security Agreement dated as of July 21, 2006 by and between
      the Company and Alexandra Global Master Fund Ltd., as collateral agent,
      filed July 25, 2006, as filed in the Registrant's Form 8-K incorporated
      herein by reference.10.40
              
              Lockbox
      Agreement dated as of July 21, 2006 by and between the Company and
      Alexandra Global Master Fund Ltd., as collateral agent, filed July 25,
      2006, as filed in the Registrant's Form 8-K incorporated herein by
      reference.10.41
              
              2004
      Amended and Restated Non-Employee Compensation Plan, filed September 21,
      2006, as filed in the Registrant's Definitive Proxy Statement incorporated
      herein by reference. *10.42
              
              Executive
      Separation and Consulting Agreement dated as of January 11, 2007 by and
      between eMagin Corporation and Gary W. Jones, filed January 19, 2007, as
      filed in the Registrant's Form 8-K/A incorporated herein by
      reference.  77
  10.43
              
              Letter
      Agreement dated as of February 12, 2007 by and between eMagin Corporation
      and Dr. K.C. Park, filed February 16, 2007, as filed in the Registrant's
      Form 8-K incorporated herein by reference.10.44
              
              Allonge
      to the 6% Senior Secured Convertible Notes Due 2007-2008 of eMagin
      Corporation dated as of March 9, 2007, filed March 13, 2007, as filed in
      the Registrant's Form 8-K incorporated herein by
  reference.10.45
              
              First
      Amendment to Note Purchase Agreement as of March 28, 2007 by and between
      eMagin Corporation and Stillwater LLC, as filed in the Registrant's
      Form 8-K dated April 25, 2007 incorporated herein by
      reference.10.46
              
              Note
      Purchase Agreement as of April 9, 2007 by and between eMagin
      Corporation and Stillwater LLC, as filed in the Registrant's Form 8-K
      dated April 25, 2007 (incorporated by reference to the Company’s Form S-1A
      as filed November 12, 2008).10.47
              
              Amendment
      Agreement, dated as of July 23, 2007, incorporated by reference to the
      Company’s Form 8-K as filed on July 25, 2007.10.48
              
              Form
      of Amended and Restated 8% Senior Secured Convertible Note due 2008,
      incorporated by reference to the Company’s Form 8-K as filed on July 25,
      2007.10.49
              
              Form
      of Amended and Restated Common Stock Purchase Warrant, incorporated by
      reference to the Company’s Form 8-K as filed on July 25,
    2007.10.50
              
              Form
      of Amendment No. 1 to Patent and Security Agreement, , filed July 25,
      2007, incorporated by reference to the Company’s Form 8-K as filed on July
      25, 2007.10.51
              
              Form
      of Amendment No. 1 to Pledge and Security Agreement, filed July 25, 2007,
      incorporated by reference to the Company’s Form 8-K as filed on July 25,
      2007.10.52
              
              Form
      of Lockbox Agreement, filed July 25, 2007, incorporated by reference to
      the Company’s Form 8-K as filed on July 25, 2007.10.53
              
              6%
      Senior Secured Convertible Note, dated April 9, 2007, by and between the
      Company and Stillwater LLC, incorporated by reference to the Company’s
      Form 8-K as filed on April 26, 2007.10.54
              
              Common
      Stock Purchase Warrant, dated April 9, 2007, by and between the Company
      and Stillwater LLC, incorporated by reference to the Company’s Form 8-K as
      filed on April 26, 2007.10.55
              
              Employment
      Agreement between the Company and Tatum, LLC, dated December 26, 2007,
      incorporated by reference to the Company’s Form 8-K as filed on January 3,
      2008.10.56
              
              Form
      of Common Stock Purchase Warrant, incorporated by reference to the
      Company’s Form 8-K/A as filed on February 8, 2008.10.57
              
              Amendment
      No. 1 to Loan and Security Agreement, dated as of January 30, 2008, to the
      Loan and Security Agreement, dated August 7, 2007, incorporated by
      reference to the Company’s Form 8-K/A as filed February 8,
      2008.10.58
              
              Warrant
      Issuance Agreement, dated January 30, 2008, incorporated by reference to
      the Company’s Form 8-K/A as filed February 8, 2008.10.59
              
              Form
      of Note Purchase Agreement dated July 21, 2006, by and between the Company
      and Stillwater LLC, (incorporated by reference to the Company’s Form S-1A
      as filed November 12, 2008).10.60
              
              Form
      of Common Stock Purchase Warrant, incorporated by reference to the
      Company’s Form 8-K, as filed on March 31,
2008.  78
  10.61
              
              Amendment
      No. 2 to Loan and Security Agreement, dated as of March 25, 2008 to the
      Loan and Security Agreement, dated August 7, 2007, as amended on January
      30, 2008, incorporated by reference to the Company’s Form 8-K, as filed
      March 31, 2008.10.62
              
              Amendment
      No. 1 to Warrant Issuance Agreement, dated as of March 25, 2008, as
      amended on January 30, 2008, incorporated by reference to the Company’s
      Form 8-K, as filed March 31, 2008.10.63
              
              Form
      of Common Stock Purchase Warrant, incorporated by reference to the
      Company’s Form 8-K, as filed on April 4, 2008.10.64
              
              Securities
      Purchase Agreement, dated as of April 2, 2008, incorporated by reference
      to the Company’s Form 8-K, as filed April 4, 2008 (incorporated by
      reference to the Company’s Form S-1A as filed November 12,
      2008).10.65
              
              Registration
      Rights Agreement, dated as of April 2, 2008, incorporated by reference to
      the Company’s Form 8-K, as filed April 4, 2008.10.66
              
              Agreement
      between the Company and Tatum, LLC, incorporated by reference to the
      Company’s Form 8-K, filed April 18, 200810.67
              
              Employment
      Agreement effective as of June 1, 2008 by and between eMagin and Andrew
      Sculley, incorporated by reference to the Company’s Form 8-K/A as filed
      August 19, 2008.10.68
              
              Form
      of Amended and Restated Secured Revolving Loan Note (incorporated by
      reference to exhibit 4.2 to the Registrant's current report on Form 8-K
      filed on August 26, 2008).10.69
              
              Amendment
      No. 3 to Loan and Security Agreement, dated as of August 20, 2008 to the
      Loan and Security Agreement, dated August 7, 2007, incorporated by
      reference to the Company’s Form 8-K, as filed August 26,
    2008.10.70
              
              Warrant
      Issuance Agreement No. 2, dated August 20, 2008, incorporated by reference
      to the Company’s Form 8-K as filed August 26, 2008.10.71
              
              Amended
      and restated Securities Issuance Agreement, dated as of August 20, 2008,
      incorporated by reference to the Company’s Form 8-K, as filed August 26,
      2008.10.72
              
              Amendment,
      dated August 20, 2008, to Registration Rights Agreement, dated as of
      August 7, 2007, incorporated by reference to the Company’s Form 8-K, as
      filed August 26, 2008.10.73
              
              Loan
      and Security Agreement between Moriah Capital, L.P. and eMagin
      Corporation, dated as of August 7, 2007, (incorporated by reference to the
      Company’s Form S-1A as filed February 17, 2009).**10.74
              
              Securities
      Purchase Agreement, dated December 18, 2008 (incorporated by reference to
      exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on
      December 22, 2008).10.75
              
              Registration
      Rights Agreement, dated December 18, 2008 (incorporated by reference to
      exhibit 99.2 of the Registrant’s Current Report on Form 8-K filed on
      December 22, 2008).10.76
              
              Exchange
      Agreement, dated December 18, 2008 (incorporated by reference to exhibit
      99.3 of the Registrant’s Current Report on Form 8-K filed on December 22,
      2008).10.77
              
              Amendment
      No. 2 to the Employment Agreement between eMagin Corporation and Susan
      Jones (filed herewith).21.1
              
              Subsidiaries
      of the Company (filed herewith).23.1
              
              Consent
      of Independent Registered Public Accounting Firm (filed
      herewith).31.1
              
              Certification
      by Chief Executive Officer pursuant to Sarbanes Oxley Section 302 (filed
      herewith).31.2
              
              Certification
      by Chief Financial Officer pursuant to Sarbanes Oxley Section 302 (filed
      herewith).32.1
              
              Certification
      by Chief Executive Officer pursuant to 18 U.S.C.   Section
      1350 (filed herewith).32.2
              
              Certification
      by Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (filed
      herewith).*
      Each of the Exhibits noted by an asterisk is a management compensatory
      plan or arrangement.**
      The confidential portions of the exhibit has been omitted and filed
      separately with the Securities and Exchange
  Commission











79