UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB/A

                   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
                          COMMISSION FILE NO. 001-15751

                               eMagin Corporation
                 (Name of Small Business Issuer in Its Charter)

        Delaware                                           56-1764501
-------------------------------             ------------------------------------
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
 Incorporation or Organization)





10500 N.E. 8th Street, Suite 1400, Bellevue, WA              98004
-----------------------------------------------            ------------
(Address of Principal Executive Offices)                   (Zip Code)

                                 (425) 749-3600
                                  -------------
                (Issuer's Telephone Number, Including Area Code)

    SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE

      SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:

                     Common Stock, $.001 Par Value Per Share

Check  whether  the Issuer:  (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 [X] No [ ]

Check if there is no  disclosure of  delinquent  filers  pursuant to Item 405 of
Regulation S-B contained  herein,  and no disclosure  will 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-KSB or any  amendment to
this Form 10-KSB. [ ]

Our revenues for our most recent fiscal year were $3,592,867.

There are  81,872,176  shares  outstanding  as of March 28, 2005.  The aggregate
market value of the issued and outstanding  common stock held by  non-affiliates
of eMagin  based upon the  closing  price of the  common  stock as quoted on the
American  Stock   Exchange  on  March  28,  2005  of  $0.94  was   approximately
$33,808,903.

There were  79,638,817  shares of common stock  outstanding,  as of December 31,
2004.



EXPLANATORY  NOTE:  This Amended Form 10-KSB/A is being filed for the purpose of
amending the form on which the Company  previously  filed its Form  10-KSB/A for
the fiscal year ended  December  2004 filed by the Company on May 2, 2005.  This
amended Form 10-KSB/A is being filed for the sole purpose of modifying  Exhibits
31.1 and 31.2 Certification  Pursuant to Sarbanes-Oxley  Section 302 to complete
the statement under 5(a) by including the term:  material weaknesses under 5(a).
In all other material  respects this Amended Form 10-KSB/A is unchanged from the
Form 10-KSB/A filed by the Company on May 2, 2005.

In addition, we are revising Item 8A, Controls and Procedures,  to disclose that
the  Company's  management  believes that its controls and  procedures  were not
effective  as of  the  end of the  period  covered  by  this  report  due to the
restatements to the Company's financial statements as set forth above.


                                       1
<PAGE>



                                   FORM 10-KSB

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

                                      INDEX

                                     PART I

<TABLE>
<CAPTION>
                                                                                       Page

<S>                                                                                     <C>
Item 1.        Description of Business...................................................4
Item 2.        Description of Property...................................................22
Item 3.        Legal Proceedings.........................................................22
Item 4.        Submission of Matters to a Vote of Security Holders.......................22

                                     PART II

Item 5.        Market for the Registrant's Common Equity and
               Related  Stockholder  Matters and Small Business Issuer Purchases
               of Equity Securities......................................................22
Item 6.        Management's Discussion and Analysis or Plan of Operation.................24
Item 7.        Financial Statements......................................................F-1
Item 8.        Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure.......................................36
Item 8A.       Controls and Procedures...................................................36
Item 8B.       Other Information.........................................................36
                                    PART III

Item 9.        Directors, Executive Officers,  Promoters  and  Control  Persons;
               Compliance with Section 16(A) of the Exchange Act.........................37
Item 10.       Executive Compensation....................................................40
Item 11.       Security Ownership of Certain  Beneficial  Owners  and Management
               and Related Stockholder Matters...........................................42
Item 12.       Certain Relationships and Related Transactions............................43
Item 13.       Exhibits..................................................................46

                                     PART IV


Item 14.       Principal Accountant Fees and Services....................................48

SIGNATURES...............................................................................46
</TABLE>

                                       2
<PAGE>
                 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 subsidiary.

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 or Plan  Operations," 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 US federal  securities
laws or other  applicable  laws,  we do not  intend  to  update  or  revise  any
forward-looking statements.



                                       3
<PAGE>
PART I

ITEM 1. DESCRIPTION OF BUSINESS

Introduction

     eMagin Corporation  designs,  develops,  manufactures,  and markets virtual
imaging  products  which  utilize  OLEDs,  or  organic  light  emitting  diodes,
OLED-on-silicon  microdisplays and related information technology solutions.  We
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,  or 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.

     Our first commercial product, the SVGA+ (Super Video Graphics Array plus 52
added columns of data) OLED  microdisplay was initially  offered for sampling in
2001,   and  our  first  SVGA-3D  (Super  Video  Graphics  Array  plus  built-in
stereovision  capability)  OLED  microdisplay was shipped in early 2002. We have
now  accepted  purchase  agreements  for  larger  quantities  of our  commercial
microdisplay products and virtual imaging subsystems which combine displays with
lenses.  These products are being applied or considered for near-eye and headset
applications in products such as  entertainment  and gaming  headsets,  handheld
Internet and telecommunication  appliances,  viewfinders, and wearable computers
to be  manufactured  by OEM  customers for military,  medical,  industrial,  and
consumer  applications.  We market our products in North American,  Europe,  and
Asia.

     Our OLED-on-silicon microdisplays offer a number of advantages over current
liquid  crystal  microdisplays,  including  increased  brightness,  lower  power
requirements, less weight and wider viewing angles. Using our active matrix OLED
technology,  many computer and video  electronic  system  functions can be built
directly into the  OLED-on-silicon  microdisplay,  resulting in compact  systems
with expected  lower  overall  system costs  relative to alternate  microdisplay
technologies.  We have developed our own  technology to create high  performance
OLED-on-silicon  microdisplays  and related optical systems and we have licensed
certain fundamental OLED and display technology from Eastman Kodak.

     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 this
display  technology  for  virtual  imaging.  We are  the  only  company  to sell
full-color  active  matrix  small  molecule  OLED-on-silicon  microdisplays.  In
January 2005 we announced the world's first  personal  display system to combine
OLED technology with head-tracking and 3D stereovision, the Z800 3D Visor.

     Our  sub-system  group,  which  produces our  headsets,  offers value added
services to our customers by providing  custom  engineering  support for virtual
imaging  subsystem design and prototyping,  as well as by creating  standardized
optical and electronics  interfaces for our displays that accelerate the time to
market for products offered by our new potential customers.

     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.  FDC had
no active business  operations  other than to acquire an interest in a business.
On March 16, 2000,  FDC acquired  FED.  The merged  company  changed its name to
eMagin Corporation.  Following the Merger, the business conducted by the Company
is the business conducted by FED prior to the Merger.

     Our website is located at www.emagin.com. We make available on our website,
free of charge,  our  annual  report on Form  10KSB,  our proxy  statement,  our
quarterly  reports on Form 10QSB, our current reports on Form 8K,  amendments to
reports filed under the  Securities and Exchange Act,  earnings press  releases,
and other  business-related  press  releases.  We also post on our  website  the
charters of our Audit,  Compensation,  and 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  Securities and
Exchange Commission and the American Stock Exchange as they occur.

                                       4
<PAGE>
Industry Overview

     The  overall  flat  panel   display   industry  is  predicted  to  grow  to
approximately $70 billion by 2008, according to market research by DisplaySearch
(Q4, 2004 Survey);  iSuppli/Stanford  Resources is  projecting  slightly  higher
sales of $95 billion (Q1 2005 Forecast Update), with OLED sales of $2.25 billion
and a compound annual growth rate of 51.5%. Within the flat panel industry there
are various sizes and  applications  of flat panel  displays,  ranging from wall
size  signage  to  calculator  and  viewfinder  displays.  Displays  are sold as
independent  products (such as flat TVs) or as components of other systems (such
as laptop computers). Our products target one segment of the flat panel industry
which is known as  near-to-the-eye  or near-eye  microdisplays  because they are
viewed  through a lens rather than directly,  in comparison to desktop  computer
screens which are know as direct view displays.

     Near-eye  virtual imaging using  microdisplays  are used in small optically
magnified  devices such as video  headsets,  camcorders,  viewfinders  and other
portable devices.  Microdisplays are typically of such high resolution that they
are only practically  viewed with magnifying  optics.  Although the displays are
typically  physically smaller than a postage stamp, they can provide a magnified
viewing area similar to that of a full size computer screen.  For example,  when
magnified through a lens, a high-resolution 0.6-inch diagonal display can appear
comparable to a 19 to 21-inch diagonal  computer screen at about 2 feet from the
viewer or a 60-inch TV screen at about 6 feet.  One  version of our  display and
optic recreates the virtual  imaging viewing and sound  experience of sitting in
the middle seat of a typical movie theater.

     The  microdisplay  market,  according to McLaughlin  Consulting  Group in a
report issued in its Microdisplay Forecast Report 2004, is expected to grow from
$1.2  billion  in 2003 to at least $4  billion  in 2008.  Insight  Media and the
McLaughlin  Consulting  Group  predict  particularly  significant  growth in one
segment of that  market - consumer  products.  Their joint  "Personal  Displays:
Opportunity  Analysis and Forecast 2004" focuses  microdisplay-enabled  personal
electronics  for  consumers  as well as  professionals  in vertical  markets and
projects growth in this segment from $73 million in 2004 to $1 billion market by
2008.

     We believe that the most significant driver of the 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 near-eye  microdisplay  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  such as  notebook  and  sub-notebook
computers, portable DVD systems, electronic games, and other entertainment,  and
wearable computers.

     Until now,  near-eye  virtual imaging  microdisplay  technologies  have not
simultaneously met all of the requirements for high resolution,  full color, low
power consumption,  brightness,  lifetime,  size and cost which are required for
successful  commercialization in OEM consumer products.  We believe that our new
OLED-on-silicon  microdisplay  product line meets these requirements better than
alternative  products  and will help to enable  virtual  imaging to emerge as an
important display industry segment.

Our Approach: OLED-on-Silicon Microdisplays and Optics

     There are two basic  classes  of organic  light  emitting  diode,  or OLED,
technology,  dubbed single molecule or small molecule (monomer) and polymer. Our
microdisplays  are currently based upon active matrix molecular OLED technology,
which we call OLED-on-silicon  because we build the displays directly on silicon
chips. Our  OLED-on-silicon  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.  OLED-on-silicon
microdisplays   offer  a  number  of  advantages  over  current  liquid  crystal
microdisplays,  including increased brightness,  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.

                                       5
<PAGE>
     We have  developed our own  proprietary  and patented  technology to create
high performance  OLED-on-silicon  microdisplays and related optical systems and
we license  fundamental OLED technology from Eastman Kodak.  (See  "Intellectual
Property" and "Strategic Relationships").  We expect that the integration of our
OLED-on-silicon  microdisplays  into mobile  electronic  products will result in
lower overall system costs to our OEM customers.

     We  believe  that our  OLED-on-silicon  microdisplays  will  initiate a new
generation of virtual imaging products that could have a profound impact on many
industries.  Headsets providing virtual screens surrounding the user in a sphere
of data  become a  practical  reality  with  our  displays  and a low cost  head
tracker.  Because our  microdisplays  generate and emit light, they have a wider
viewing angle than competing liquid crystal microdisplays, and because they have
the same high brightness at all forward viewing angles, our microdisplays permit
a large field-of-view and superior optical image.

     The wider  viewing angle of our display  results in the following  superior
optical characteristics:

     o    the user does not need to as  accurately  position  the  head-wearable
          display to the eye;

     o    the image will  change  minimally  with eye  movement  and appear more
          natural; and

     o    the display can be placed further from the eye and not cut off part of
          the image.

     In addition, our OLED-on-silicon  microdisplays offer faster response times
and use much less power than competitive  liquid crystal  microdisplay  systems.
Our subsystem-level  power consumption is so low that two SVGA, full color, full
speed motion video computer  displays can easily be run in stereovision  off the
power from a single USB port on a portable computer. Battery life is extended or
weight is greatly reduced in systems using our products.

     Our SVGA+  OLED  microdisplay  stores  all the color  and  luminance  value
information at each of the more than 1.5 million  picture  elements,  or pixels,
between  refresh cycles in the display array,  eliminating  the flicker or color
breakup seen by most other high-resolution microdisplay technologies. Even power
efficient  frame  rates as low as 30 Hz can usually be used  effectively.  Power
consumption at the system level is expected to be the lowest of any  full-color,
full-video SVGA resolution  range,  large view  microdisplay on the market.  The
OLED's  ability to emit light at wide angles  allows  customers  to create large
field of view  (approx.  40 degrees),  wide image capture range images from very
compact, low-cost,  one-piece optical systems. The display contains the majority
of the electronics  required for connection to the RGB (red, green, blue signal)
port of a portable  computer  imbedded in its silicon  chip  backplane,  thereby
eliminating many other components required by other display technologies such as
digital-analog  converters,  application-specific  integrated  circuits (ASICs),
light sources,  multiple optical elements, and other components. We believe that
these features will enable our new class of  microdisplay  to potentially be the
most  compact,  highest  image  quality,  and  lowest  cost  solution  for  high
resolution near-eye applications, once they are in full production.

     We have commercialized two OLED microdisplay products, our SVGA+ resolution
microdisplay,   which   contains  1.53  million   picture   elements,   and  our
stereovision-capable  SVGA-3D microdisplay,  which contains 1.44 million picture
elements.  We sell our  OLED-on-silicon  microdisplays  for use as components by
customers  who prefer to design and build  their own lenses or coupled  with our
own optics.  We also plan to offer OLED processing on our customers'  integrated
circuits to some OEMs who design their own  integrated  circuits.  We provide PC
Interface Kits and Developer 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.  We are
commencing  manufacturing of a personal  display system,  Z800 3D Visor for PCs,
which  incorporates   eMagin  OLED  display   stereovision  with  head  tracking
capability.

Our Product Lines

     We offer  our  products  to OEMs and  other  large  volume  buyers  as both
separate  components  and  integrated  bundles in a  three-tiered  platform.  We

                                       6
<PAGE>
believe that our strategy of offering our products  both as separate  components
and as integrated bundles that include microdisplays and lenses will allow us to
address the needs of the largest number of potential customers.

     (1)  OLED-on-silicon  microdisplays  for integration  into near-eye virtual
imaging OEM products for consumer, industrial, and military markets;

     (2)  Microviewer(TM)  near-eye virtual imaging modules that incorporate our
OLED-on-silicon  microdisplays with compact lenses and electronic interfaces for
integration into OEM products for consumer, industrial, and military markets. We
have shipped customized microviewer modules to several customers,  some of which
have incorporated our products into their own commercially available products;

     (3)  Head-wearable  near-eye  virtual  imaging  display  systems  that will
incorporate our Microviewers(TM) for consumer and industrial markets.

     We also  offer  engineering  support  and a variety  of  support  products,
including  developer kits and PC interface kits, to enable  customers to quickly
integrate our products into their own product development programs.

Our Products

     (1) OLED Microdisplay Products

     We serve as a  component  manufacturer  by  supplying  our  OLED-on-silicon
microdisplays  for  those  customers  who have  their own  lenses or  integrated
circuits.  Our first  commercial  microdisplay  products  are based on our "SVGA
series" OLED microdisplays. We expect to offer our SXGA OLED microdisplay during
early 2006.  This is a new design effort for a smaller,  lower cost,  full-color
SXGA.  We have  experienced  several  short  delays in the design phase which is
normal,  and to be expected in a research  and  development  process.  The table
below provides a partial listing of the display products,  or in the late stages
of development.
<TABLE>
<CAPTION>
OLED Microdisplays:

Microdisplay            Description                               Resolution        Color             Size
Product Numbers                                                   (pixels)                            (diagonal)
<S>                          <C>                                    <C>             <C>                <C>
EMA-100080              SVGA+ OLED microdisplay                   852x3x600         color             0.62 inch
EMA-100100              SVGA+ OLED microdisplay                   852x3x600         white             0.62 inch
EMA-100116              SVGA+ OLED microdisplay                   852x3x600         yellow            0.62 inch
EMA-100110              SVGA+ OLED microdisplay                   852x3x600         green             0.62 inch
EMA-100052              SVGA 3D OLED microdisplay                 800x3x600         color             0.59 inch
TBD                     SVGA 3DS OLED microdisplay                800x3x600         various           0.42 inch
TBD                     SXGA  OLED microdisplay                   1280x3x1024       various           0.62 inch
TBD                     QVGA OLED microdisplay                    320x3x240         various           0.24 inch
</TABLE>

     0.62-inch  Diagonal SVGA+ (Super Video Graphics Array plus 52 added columns
of data) for  Consumer  OEMs.  This  display has a  resolution  of 852 x 3 x 600
pixels,  and was dubbed  "SVGA+"  because it has 52 more display  columns than a
standard SVGA display.  The design permits 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 SVGA+ can be made as a full-color or monochrome
microdisplay primarily for high-performance and large-view consumer OEM products
such as games, video/data head-wearable displays, digital cameras, video cameras
and other portable  electronics  applications.  The display also has an internal
NTSC monochrome  video decoder for low power night vision systems.  This product
is designed to interface with most portable personal computers.

     0.59-inch  Diagonal  SVGA-3D  (Super  Video  Graphics  Array plus  built-in
stereovision capability) for Consumer OEMs. This display has a resolution of 800
x 3 x 600  pixels.  The  SVGA-3D  can be  made  as a  full-color  or  monochrome
microdisplay primarily for high-performance and large-view consumer OEM products
such as personal computer games and video/data  head-wearable  displays,  but is
also  designed to be  applicable  for digital  cameras,  video cameras and other
portable  electronics  applications since the 3D feature is optional. A built-in
circuit provides compatibility with single channel frame sequential stereoscopic
vision without additional external  components.  In high volumes, the SVGA-3D is

                                       7
<PAGE>
priced  lower than the SVGA+,  so it is likely to be selected  whenever  the OEM
customer does not need monochrome NTSC or the extra columns of resolution.

     Under Development - 0.62-inch  Diagonal SXGA (Super eXtended Video Graphics
Array) for  consumer,  industrial,  medical and  military  applications.  We are
developing   a   full   color   SXGA   microdisplay   product   as  a   personal
computer-compatible  headset  display for a large spectrum of  applications.  We
anticipate that prototypes of this display will become available for sampling in
early 2006.  This  product will have 1280 x1024 triad color pixels and an active
diagonal similar to that of the SVGA+  microdisplay.  It will include  luminance
and dimming ranges compatible with the demands of Military  applications as well
as those of high-end consumer and industrial  markets.  Even though this SXGA is
not  expected  to be a high  volume  production  item,  we  anticipate  that its
performance  features combined with a small package will generate a considerable
interest and serve as a catalyst for the development of new applications

     Under  Development  - With our  partner  Rohm  Corporation  of Japan we are
developing a new QVGA (Quarter Video  Graphics  Array)  viewfinder  microdisplay
with 320x240 resolution for camcorders, digital cameras, web phones, and low end
games.
<TABLE>
<CAPTION>
OLED Microdisplay Kits:

Kit Product Number      Description                                        Available colors
<S>                           <C>                                           <C>
EMA-100119              SVGA+ Monocular Developer Kit                      Color, white, yellow, green
EMA-100120              SVGA+ Binocular Developer Kit                      Color, white, yellow, green
EMA 100125              SVGA 3D Monocular Developer Kit                    Color, white, yellow, green
EMA-100126              SVGA 3D Binocular Developer Kit                    Color, white, yellow, green
EMA-100121 HB           High Bright Monocular Developer Kit                Yellow
EMA-100135              SVGA Series Monocular PC Interface Kit             Color, white, yellow, green
EMA-100136              SVGA Series Binocular PC Interface Kit             Color, white, yellow, green
</TABLE>
     Developer Kit. The multi-functional Developer Kit provides a menu selection
of resolution, frequency, image flip, monochrome operation, gain, and offset. It
also provides NTSC RS-170 video composite input for SVGA+ (monochrome  only). An
optional  serial-to-I2C  adapter  provides direct loading and  interrogation  of
display registers located on the display chip.

     The PC Interface  Kit provides a simple RGB interface  with image  flipping
for SVGA+ and SVGA-3D displays,  and automatic  stereovision  signal recognition
for SVGA-3D displays.  Interface kits can be provided configured with or without
displays.

     (2) Microviewer(TM) Products Incorporating Lenses

     By providing an  integrated  solution of a complete  microdisplay  and lens
assembly to integrate into OEM customers' end product design,  OEM customers can
avoid incurring  expensive  optics design and tooling costs.  Different lens and
microdisplay  specifications  can be mixed and matched to be adapted to many end
products.

     We have developed  advanced lens  technology for several  applications  and
believe  we hold  key  patents  on  certain  low  cost,  high  performance  lens
technology  for  microdisplay  applications.  Our lens  technology  permits  our
OLED-on-silicon  microdisplays to provide large field of view images that can be
viewed for extended periods with reduced eye-fatigue.

                                       8
<PAGE>
     We intend to sell  Microviewer(TM)  modules  to OEMs for  integration  with
their branded products. Some of our potential customers have stated a preference
for  Microviewers(TM)  over  microdisplays  since  Microviewers(TM)  incorporate
lenses which save OEMs a step in their  manufacturing  process and can save them
the time required to develop,  or integrate a third party high  performance lens
system. Custom microviewer products incorporated into specially designed modules
are currently  being sold to OEMs,  including  Sage  Technologies,  Night Vision
Equipment Corporation, and Total Fire Group.

     Molded plastic prism lenses have been developed  under eMagin  direction to
help our commercial and consumer OEM customers obtain better quality, large area
virtual   images  using  our  displays  at  relatively  low  cost  to  alternate
approaches. First sample lens were shipped to select customers for evaluation in
February 2005.

     (3) Head-Wearable and Headset Systems

     Personal   Viewer(TM)  [IP  COUNSEL  SHOULD  CHECK  STATUS  OF  TRADEMARKS]
head-wearable systems, such as our Z800 3D Visor (R) and our prototype eGlass(R)
Personal  Viewer(TM)  give  users the  ability to work with  their  hands  while
simultaneously  viewing  information or video on the display.  Our head-wearable
displays  enable more  versatile  portable  computing,  capable of delivering an
image that appears  comparable  to that of a 19-inch  monitor at 22 to 24 inches
from the eye using a 0.59-inch diagonal microdisplay  (SVGA-3D). We believe that
Personal  Viewer  head-wearable  displays  will fill the  increasing  demand for
instant  data  accessibility  in  mobile  workplaces.  We  expect  to  sell  the
head-wearable  displays primarily to OEM systems and equipment customers through
distributors,   direct  sales  and  our   e-commerce   website  which  is  under
development.


Our Market Opportunity

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<PAGE>
     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,  International Data
Corporation,  Nikkei, SEMI, Stanford Resources-iSuppli 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 potential customers.

     We  believe  that  the  consumer   oriented,   virtual-imaging   market  is
characterized  by about 20 large OEMs that,  collectively,  dominate  90% of the
market.  The  non-consumer  market  consists  of niches -  industrial,  medical,
military, arcade games, 3-D CAD/Virtual Reality, and wearable computers.  Within
each of these market sectors,  we believe that our microdisplays,  when combined
with compact  optic  lenses,  will become a key component for a number of mobile
electronic products. We are targeting the following applications:

     (1) Near-Eye Viewers for Digital Cameras, Camcorders and Hand-held Internet
and Telecommunications Appliances

          We believe that our microdisplays  will enhance near-eye  applications
          in the following groups of products:

     o    Digital  cameras  and  camcorders,  which  typically  use direct  view
          displays  at low  resolution,  offer a  small  visual  image,  and are
          difficult  to see on sunny  days.  According  to  Display  Search,  41
          million digital  cameras and 13 million  camcorders are expected to be
          sold in 2005. Some of these products may incorporate  microdisplays as
          high-resolution  viewfinders  which would  permit  individuals  to see
          enlarged,  high-resolution proofs immediately upon taking the picture,
          giving them the opportunity to retake a poor shot.

     o    Mobile  phones and other  hand-held  Internet  and  telecommunications
          appliances  which will enable  users to access full web and fax pages,
          data lists and maps in a  pocket-sized  device.  According to the Fuji
          Chimera Research Institute,  an industry market research organization,
          by 2005 the cellular  phone and handheld  portable  digital  assistant
          markets  will  grow  to  655  million  units  and  20  million  units,
          respectively.  Some of these products may eventually  incorporate  our
          microdisplays.    In   order   for   the   high-resolution    wireless
          telecommunications  market to develop,  Generation  3 (G3)  high-speed
          data transmission  must become widely available.  The current cost and
          limited availability of broadband services has impeded the development
          of this market, but several telecommunication companies have prototype
          programs in progress which incorporate our microdisplay products.

     For each of  these  applications,  we  anticipate  that our  microdisplays,
combined with compact optic lenses,  will offer higher  resolution,  lower power
and system cost and achieve  larger images than are  currently  available in the
consumer market.  As a result, we believe that we can obtain a sizeable share of
the market for the display components of these mobile electronic products.

     (2) Head-wearable Display Platforms

     Head-wearable   displays  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.  These have
military, commercial, and consumer applications.

Military

     Military  demand for  head-wearable  displays is  currently  being met with
microdisplay  technologies that we believe to be inferior to our OLED-on-silicon
products.  The new generation of soldiers will be highly mobile,  and will often
need to carry highly computerized  communications and surveillance equipment. To
enable  interaction with the digital  battlespace,  rugged,  yet lightweight and
energy  efficient  technology  is  required.  Currently  available  microdisplay
technologies do not meet the  requirements  for low power,  hands-free,  day and
night-viewable   displays.  Our  OLED  microdisplays   demonstrate   performance
characteristics  important  to  military  and  other  demanding  commercial  and

                                       10
<PAGE>
industrial  applications including high brightness and resolution,  wide dimming
range, wider temperature  operating ranges,  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.  The OLED's  very low power
consumption  reduces  battery  weight  and  increases  allowed  mission  length.
Properly  implemented,  we believe that head-mounted  systems  incorporating our
microdisplays will increase  effectiveness by allowing hands-free  operation and
increasing  situational awareness with enough brightness to be used in daylight,
yet controllable for nighttime light security. The OLED's 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 OLED  microdisplays  were  selected  for several  aircraft  and soldier
applications,  including  the US Army Land  Warrior  1.0 and 2.0  programs,  and
Stryker  Interoperative,  and the US Air Force Joint Strike  Fighter and Lil Hal
Digital  Kneeboard,  among others.  Land  Warrior,  a core program in the Army's
drive  to  digitize  the  battlefield,  is an  integrated  digital  system  that
incorporates computerized  communication,  navigation,  targeting and protection
systems  for  use  by  the  twenty-first   century  infantry   soldier.   Kaiser
Electro-Optics,  a Rockwell Collins company and the principal contractor for the
US Army's  Land  Warrior HMD  system,  and eMagin  will apply  their  respective
expertise in HMD and imaging  technology to develop rugged,  yet lightweight and
energy efficient products meeting the requirements of tomorrow's soldier. The US
Army expects to initially  equip more than 40,000 soldiers with the Land Warrior
system.  The  current  overall  redesign of the Land  Warrior  system by General
Dynamics  and  Rockwell  Collins  has delayed  increased  volume use of displays
beyond small  quantities  for that program until a future date to be determined.
Our display is also used in Kaiser Electro-Optics, Inc.'s commercially available
ProView   S035   Monocular   HMD.   Night   Vision    Equipment    Corporation's
HelmetIR-50(TM),  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.  Our  displays  have  been
commercialized, or planned to be commercialized, by military systems integrators
including Insight Technologies,  Elbit, Thales, and Sagem. We cannot assure that
the Government will remain on schedule, or be fully implemented. Similar systems
are of  interest  for  other  military  applications  as  well  as  for  related
operations such as 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 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.  Commercial
products in these  sectors  include Sage  Technologies,  Ltd.'s  Helmet Vue (TM)
Thermal Imaging System and Liteye's 500,  developed as an upcoming  accessory to
Antelope  Technologies' MCC Wearable Computing system,  which incorporates IBM's
wearable PC  technology.  VRmagic GmbH, a leading  developer of virtual  reality
simulators,  is using our OLED  microdisplays in their EYESI(TM) Virtual Reality
Surgical Simulator,  which provides real-time  simulation of ophthalmic surgery,
high  performance  biomechanical  tissue  simulation,  precision  tracking,  and
realistic  stereo imaging.  Sensics has  incorporated our OLED displays in their
immersive  SkyVizor (TM) virtual  reality  headset to serve as the "eyes" of the
Robonaut,  a humanoid  robot being  developed  by NASA and DARPA.  The  Robonaut
system  can work side by side with  humans,  or alone in  high-risk  situations.
Telepresence  uses virtual  reality display  technology to visually  immerse the
operator into the robot's workspace, facilitating operation and interaction with
the  Robonaut,  and  potentially  reducing the number of  dangerous  space walks
required of real astronauts.

Consumer

          We believe that our  head-wearable  display  products will enhance the
          following consumer products:

     o    Entertainment   and  gaming  video  headset   systems,   which  permit
          individuals to view  television,  including HDTV,  video CDs, DVDs and
          video  games on  virtual  large  screens  or  stereovision  in private
          without  disturbing  others.  Even  though  entertainment  and  gaming
          headsets  represent an emerging  product  class,  we are seeing demand
          from OEMs.  Headset  game  systems for  portable  computers  with head
          tracking  and/or  stereovision  appears  to be  our  predominant  high

                                       11
<PAGE>
          quantity  near  term  market   opportunity,   with  several  customers
          indicating an interest in large production quantities of our displays.
          Our current SVGA-3D display was designed specifically for this market.
          We believe  that these new headset  game systems can provide a game or
          telepresence  experience not otherwise  practical  using  conventional
          direct view display technology. We expect low cost to be important for
          success in this field, and expect our product cost to decrease in high
          quantity  production.  At the 2004 Consumer  Electronics Show, Leadtek
          Research Inc.  (Taiwan)  announced that it was planning to introduce a
          consumer HMD using eMagin SVGA-3D  displays.  The product is currently
          under development. At the 2005 Consumer Electronics Show, we announced
          our Z800 3D Visor (R), the world's  first  personal  viewer to combine
          OLEDs, stereovision, and head tracking.

     o    Notebook  computers,  which can use  head-wearable  devices  to reduce
          power as well as expand the apparent screen size and increase privacy.
          Current notebook computers do not use microdisplays.  Our products can
          apply  not  only to new  models  of  notebook  computers,  but also as
          aftermarket  attachments to older  notebooks still in use. The display
          can be easily used as a second monitor on notebook  computers for ease
          of editing multiple  documents to provide multiple screens or for data
          privacy while traveling.  It can also be used to provide larger screen
          capability for viewing  spreadsheets or complex  computer aided design
          (CAD) files. We expect to market our head-wearable displays to be used
          as plug-in  peripherals to be compatible with most notebook computers.
          We  believe  that the  SVGA-3D  microdisplay  is well  suited for most
          portable PC headsets.  Our microdisplays can be operated using the USB
          power source of most portable  computers.  This eliminates added power
          supplies,  batteries, and rechargers and reduces system complexity and
          cost.

     o    Handheld  personal  computers,  whose  small,  direct view screens are
          often  limitations,  but which are now  capable  of  running  software
          applications  that would benefit from a larger display.  Microdisplays
          can be built  into  handheld  computers  to display  more  information
          content on virtual  screens without  forfeiting  portability or adding
          the cost a larger direct view screen.  Microdisplays are not currently
          used in this  market.  We believe  that GPS  viewers  and other  novel
          products are likely to develop as our displays become more available.

     o    Highly compact wearable computers and personal digital assistants,  or
          PDAs  using  video  headsets  as  screens  can  be  made  possible  by
          high-resolution  microdisplays. A lightweight pocketsize computer that
          is less than one  pound  can  potentially  be  created  with a foldout
          keyboard,  compact input device, or voice actuation and a headset that
          provides a near-desktop personal computer experience.

     The combination of power  efficiency,  high  resolution,  low systems cost,
brightness and compact size offered by our OLED-on-silicon microdisplays has not
been made  available to makers and  integrators  of existing  entertainment  and
gaming video headset  systems,  notebook  computers and handheld  computers.  We
believe  that our  microdisplays  will  catalyze  the growth of new products and
applications such as lightweight wearable computer systems.

<TABLE>
<CAPTION>
Selected Applications by Market Sector
------------------------------------------- ------------------------------------------------
<S>                                 <C>         <C>
Sector                                       Representative Applications
------------------------------------------- ------------------------------------------------
Portable Computer Peripheral        |X|      Notebook and SuperSubnotebook computer headsets
                                    |X|      Miniature data viewers
------------------------------------------- ------------------------------------------------
Entertainment                       |X|      Games
                                    |X|      Headset Television/DVDs
------------------------------------------- ------------------------------------------------
Industrial, Medical, &              |X|      Surgery and Dentistry
Administration                      |X|      Industrial Control and Safety
                                    |X|      Emergency Services
                                    |X|      Inventory and Retail
                                    |X|      Institutional Control
                                    |X|      Maintenance (Industry & Consumer)

                                       12
<PAGE>
                                    |X|      Communications
                                    |X|      Finance
                                    |X|      Education and Training
------------------------------------------- ------------------------------------------------
Military                            |X|      Communications
                                    |X|      Targeting and Enhanced Vision
                                    |X|      Night Vision
                                    |X|      Handheld & Headmount Equipment
                                    |X|      Body worn displays
                                    |X|      Avionics (Helmet mount)
                                    |X|      Ground and Water Vehicles
                                    |X|      Maintenance & Training
                                    |X|      Special Applications
------------------------------------------- ------------------------------------------------
Telecommunications, Handheld,       |X|      Cell Phones/Headset phones
and Small Instruments               |X|      Handheld & Portable Internet Viewers
                                    |X|      Smart Appliances & Instruments
------------------------------------------- ------------------------------------------------
Advanced Computer                   |X|      CAD/CAM
Applications                        |X|      Virtual Reality and Simulations
                                    |X|      Ultra-High Resolution
                                    |X|      Telepresence
------------------------------------------- ------------------------------------------------
</TABLE>
Our Strategy

     Our  strategy  is to  establish  and  maintain a  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  leadership in both  OLED-on-silicon  technology  and  microdisplay  lens
technology.  We aim to provide  microdisplay  and  complimentary  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:

     o    Leverage  our  superior  technology  to  establish  a  leading  market
          position. As the first to exploit  OLED-on-silicon  microdisplays,  we
          believe  that we  enjoy  a  significant  advantage  in  bringing  this
          technology to market.

     o    Develop products for large consumer markets via key relationships with
          OEMs. Our  relationships  with OEMs whose  products use  microdisplays
          have  allowed  us to  identify  initial  microdisplay  products  to be
          produced for entertainment,  industrial,  and military headsets, to be
          followed by other applications such as digital cameras, camcorders and
          hand-held  Internet  and  telecommunications   appliances.  We  target
          markets which we believe to have long-term growth potential.

     o    Optimize  manufacturing  efficiencies by outsourcing  while protecting
          proprietary  processes.  We intend to  outsource  certain  portions of
          microdisplay  production,  such as chip fabrication,  to minimize both
          our costs and time to market. We intend to retain the OLED application
          and OLED sealing processes  in-house.  We believe that these areas are
          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. By performing
          the processes  in-house we can continue to directly make  improvements
          in the  processes,  which will  improve  device  performance.  We also
          retain the ability to customize certain aspects such as color balance,
          which is known  as  chromaticity,  as well as  specialized  boards  or
          interfaces,  and to adjust other parameters at the customer's request.
          In the area of lenses and head-wearable  displays,  we intend to focus
          on design and  development,  while  working with third parties for the
          manufacture  and  distribution  of  finished  products.  We  intend to
          prototype  new  optical  systems,  provide  customization  of  optical
          systems,  and manufacture  limited volumes at our subsidiary,  Virtual

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<PAGE>
          Vision, but intend to outsource high volume manufacturing  operations.
          There are numerous companies that provide these outsource services.


     o    Build  and  maintain  strong  internal  design  capabilities.  As more
          circuitry  is added to  OLED-on-silicon  devices,  the cost of the end
          product  using the  display  can be  decreased;  therefore  integrated
          circuit design capability will become increasingly important to us. To
          meet  these  requirements,   we  intend  to  develop  in-house  design
          capabilities.  Building and maintaining this capacity 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.

Our Strategic Relationships

     Strategic  relationships  have been an  important  part of our research and
development efforts to date and are an integral part of our plans for commercial
product  launch.  We have  forged  strategic  relationships  with major OEMs and
strategic suppliers.  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  better  meet our  customer's
requirements.  Moreover, we expect to provide microdisplays and Microviewers(TM)
to some of these partners,  thereby taking advantage of established distribution
channels for our products.

     Eastman Kodak is a technology partner in OLED development,  OLED materials,
and a potential  future  customer for both specialty  market display systems and
consumer  market  microdisplays.  We  license  Eastman  Kodak's  OLED and optics
technology portfolio.  We have a nonexclusive;  perpetual,  worldwide license to
use Eastman Kodak patented OLED technology and associated  intellectual property
in the development,  use,  manufacture,  import and sale of  microdisplays.  The
license covers emissive active matrix microdisplays with a diagonal size of less
than 2 inches for all OLED display technology  previously developed by Kodak. An
annual  minimum  royalty is paid at the  beginning of each  calendar year and is
fully  creditable  against the  royalties  we are  obligated to pay based on net
sales  throughout  the year.  Eastman  Kodak and eMagin have engaged in numerous
discussions regarding potential product applications for eMagin's  microdisplays
by Eastman Kodak.

     We have an  agreement  with Rohm  Corporation  of Japan to develop  two new
products:  an enhanced  version of our SVGA-3D  microdisplay  with new  imbedded
features for consumer head-mounted displays and high resolution games, and a new
QVGA and/or VGA viewfinder  microdisplay for camcorder and digital cameras,  web
phones, and low end games.

     We are working  cooperatively  with the US Army and with  several  military
system integrators to further  characterize  operation of our displays in rugged
military environments.

     We are a member of the United  States  Display  Consortium,  a  cooperative
agency of display  and  related  technology  manufacturers  whose  charter is to
support  continued  progress of the display  industry.  We intend to continue to
establish additional strategic relationships in the future.

Our Technology Platforms

OLED-on-Silicon Technology

     Scientists  working at Eastman  Kodak  invented  OLEDs in the early  1980s.
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  existing
technologies. OLED films may be coated on computer chips, permitting millions of
individual  low-voltage light sources to be built on silicon integrated circuits
to produce single color, white or full-color  display arrays.  Many computer and
video  electronic  system  functions  can  be  built  directly  into  a  silicon
integrated  circuit as part of the OLED display,  resulting in an  ultra-compact

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<PAGE>
system. We believe these features,  together with the  well-established  silicon
integrated circuit fabrication  technology of the semiconductor  industry,  make
our OLED-on-silicon microdisplays attractive for numerous applications.

     We believe our technology  licensing agreement with Eastman Kodak,  coupled
with our own intellectual property portfolio,  gives us a leadership position in
OLED and OLED-on-silicon  microdisplay  technology.  Eastman Kodak provides OLED
technology and we provide additional  technology  advancements that have enabled
us to coat the silicon integrated circuits with OLEDs.

     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,
up-emitting structure for our OLED-on-silicon devices that enables OLED displays
to be built on opaque silicon integrated circuits rather than only on glass. Our
OLED  devices can emit full  visible  spectrum  light that can be isolated  with
color filters to create full color images.  Our  microdisplay  prototypes 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 in development offer future
potential for even better performance for brightness,  efficiency, and lifespan.
Additionally,  we have invested  considerable work over several years to develop
unique electronics control and drive designs for OLED-on-silicon microdisplays.

     In addition to our  OLED-on-silicon  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.

Advantages of OLED Technology

     We  believe  that  our  OLED-on-silicon   technology  provides  significant
advantages  over existing  solutions in our targeted  microdisplay  markets.  We
believe these key advantages will include:

     o    Low manufacturing cost;

     o    Low cost system solutions;

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

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

     o    High brightness for improved viewing;

     o    High-speed performance resulting in clear video images;

     o    Wide operating temperature range; and

     o    Good environmental stability (vibration and humidity).

     Low manufacturing cost. Many OLED-on-silicon  microdisplays can be built on
an  8-inch  silicon  wafer  using  existing  automated  OLED  and  color  filter
processing tools. The level of automation used lowers labor costs. Only a minute
amount of OLED  material is used in each  OLED-on-silicon  microdisplay  so that
material costs,  other than the integrated circuit itself, are small. The number
of  displays  per  silicon  wafer may be higher on OLEDs than on liquid  crystal
displays,  or LCDs, because OLEDs do not require a space-wasting  perimeter seal
band.

     Low cost  systems  solutions.  In  general,  an OEM  using  OLED-on-silicon
microdisplays  will not need to purchase and  incorporate  lighting  assemblies,
color converter related Applications  Specific Integrated Circuits, or ASICs, or
beam splitter lenses as is the case in liquid crystal microdisplays,  which also
require  illumination.  Many important  display-related  system functions can be
incorporated into an OLED-on-silicon microdisplay, reducing the size and cost of
the   system.   Non-polarized   light   from  OLEDs   permit   lenses  for  many
OLED-on-silicon  applications that are made of a single piece of molded plastic,
which  reduces size,  weight and assembly  cost when compared to the  multipiece
lens  systems used for liquid  crystal  microdisplays.  System cost  relative to
liquid crystal and liquid crystal on silicon,  or LCOS  competitive  products is
thus reduced.  Because our displays are power efficient,  they typically require
less  power at the  system  level than  other  display  technologies  at a given
display size and brightness.

     Wide-angle light emission simplifies optics for large apparent screen size.
OLEDs emit light at most forward  directions  from each pixel.  This permits the
display  to be placed  close to the lens in  compact  optical  systems.  It also
provides  the added  benefit of less  angular  dependence  on the image  quality
relative to pupil and eye position  when  showing a large field of view,  unlike
reflective  LCOS  microdisplays.  This  results in less eye fatigue and makes it
relatively easy to Low power  consumption  for improved  battery life and longer
system life. OLEDs emit light rather than transmitting it, so no power-consuming

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<PAGE>
backlight or front light, as required for liquid crystal displays,  is required.
OLEDs can be energy efficient because of their high efficiency light generation.
Furthermore,  OLEDs  conserve  power by powering  only those  pixels that are on
while liquid crystal on silicon  requires light at all pixels all the time. Most
optical systems used for our OLEDs are highly efficient,  permitting over 80% of
the  light to reach  the eye,  whereas  reflective  technologies  such as liquid
crystal on silicon require  multiple beam splitters to get light to the display,
and then into the optical system.  This results in typically less than 25% light
throughput efficiency in reflective  microdisplay systems. Most important, we do
not need a  power-hungry  video frame  buffer,  as  required  in liquid  crystal
frame-sequential color systems. Battery life can therefore be long.

     High brightness for improved viewing. This feature can be of great value to
military applications,  where there is a need to see the computer image overlaid
onto brightly lit real-life  backgrounds such as desert sand, water  reflections
or sunlit clouds.  The OLED can be operated over a large luminance range without
loss of gray level  control,  permitting  the  displays to be used in a range of
dark environments to very bright ambient applications. Since military simulation
and situation awareness applications,  including night vision, typically require
large fields of view, the OLED's Lambertian optical  characteristics  make it an
excellent choice.

     High-speed  performance  resulting in clear video images.  The OLEDs switch
much more rapidly than liquid  crystals or most cathode ray tubes, or CRTs. This
results in smear-free video rate imagery and provides improved image quality for
DVD  playback  applications.  This  eliminates  visible  image  smear  and makes
practicable  three-dimensional  stereo  imaging  using a split frame rate.  This
advantage of our  OLED-on-silicon is very important for 3-D stereovision  gaming
applications.

     Flicker-free  and no color  breakup.  Because  the  OLED-on-silicon  stores
brightness and color  information at each pixel,  the display can be run with no
noticeable flicker and no color sequential breakup, even at low refresh rates. A
lower refresh rate not only helps reduce power, but it also  facilitates  system
integration.  Color sequential  breakup occurs in systems such as liquid crystal
on silicon and some liquid  crystal  display  microdisplays  when red, green and
blue frames are  sequentially  imaged in time for the eye to combine.  Since the
different  color  screens occur at different  times,  movement of the eye due to
vibration or just fast pupil movement can create color bands at each  dark-light
edge, making the image unpleasant to view and making text difficult to read. For
example, the liquid crystal on silicon display needs to run at least three times
the  "normal"  frame rate or speed to produce  color  sequential  images,  which
wastes  power and makes  for a  difficult  technological  challenge  as  display
resolutions increase.

     Wide operating  temperature  range.  Our OLEDs offer much less  temperature
sensitivity at both high and low  temperatures  than LCDs.  LCDs are sluggish or
non-operative  much below  freezing  unless  heaters are added and lose contrast
above 50 degrees  Celsius,  while our OLEDs turn on  instantly  and can  operate
between  -55  degrees  Celsius  and 130  degrees  Celsius.  We specify a smaller
temperature range on most consumer products to accommodate lower cost packaging.
This is an important  characteristic for many portable products that may be used
outdoors in many varying  environmental  conditions.  It is especially important
for military customers. Insensitivity to vibration, shock, and pressure are also
important environmental control attributes.

Complementary Lens and System Technologies

     We have developed a wide range of  technologies  which  complement our core
OLED and lens  technologies  and which will enhance our competitive  position in
the microdisplay and head-wearable display markets. These include:

                                       16
<PAGE>
     Lens technology.  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 lens technology for microdisplays and head-wearable  display
systems and hold key patents in these  areas.  Our lens  technology  permits our
OLED-on-silicon  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.

          We believe that the key advantages of our lens technology include:

     o    Can be very low cost,  with  minimal  assembly.  A one  piece,  molded
          plastic  optic  attached to the microdisplay  can serve many consumer-
          end-product  markets.  Since our process is plastic  molding,  our per
          unit production costs are low;

     o    Allows a compact and lightweight  lens system that can greatly magnify
          a microdisplay to produce a large field of view;

     o    Can use single-piece  molded  microdisplay lenses to permit high light
          throughput  making the display image brighter or permitting the use of
          less power for an acceptable brightness;

     o    Can be  designed  to provide  focusing  to enable  users with  various
          eyesight qualities to view images clearly; and

     o    Can  optionally   provide  focal  plane  adjustment  for  simultaneous
          focusing of computer images and real world objects. For example,  this
          characteristic  is  beneficial  for  word  processing  or  spreadsheet
          applications where a person is typing data in from reference material.
          This  feature  can make it easier  for  people  with  moderately  poor
          accommodation   to  use  a   head-wearable   display   as  a  portable
          computer-viewing accessory.

     Head-wearable display technology.  We have developed ergonomic technologies
that  make   head-wearable   displays  easier  to  use  in  a  wide  variety  of
applications.  For  example,  the use of our patented  rotatable  Eyeblocker(TM)
provides a sharp image without  requiring  most users to squint.  The Eyeblocker
can  also be  moved  to  create  an  effective  see-through  appearance.  To our
knowledge,  we have  made the  lightest  weight,  high-resolution  head-wearable
display  with  an  over  35  degree   diagonal   field  of  view  ever  publicly
demonstrated.  We  also  have  access  to  low  cost,  small  size,  high  speed
headtrackers to further enhance game and telepresence applications.

Sales and Marketing

     We primarily provide display components and  Microviewer(TM)  display-optic
modules for OEMs to  incorporate  into their  branded  products and sell through
their  own  well-established  distribution  channels.  In  addition,  we  market
head-wearable  displays  directly to various vertical market  channels,  such as
medical, industrial, and government customers. A typical buyer is a manufacturer
of a product requiring a specific resolution of visual display or viewfinder for
insertion into a product such as a portable DVD headset, a PC-gaming headset, or
an instrument.

     We market our services primarily in North America, Asia, and Europe through
direct  technical  sales  from our  headquarters.  Regular  purchase  orders are
processed by our Customer Service Coordinator and technical questions related to
product purchases or product applications are processed by our Technical Support
Coordinator.  Additional sales are generated through our sales office located in
Japan. We are in the process of selecting worldwide distributors.


                                       17
<PAGE>
     As a market-driven  company,  we assess customer needs both  quantitatively
and qualitatively,  through market research and direct  communications.  Because
our  microdisplays  are the main  functional  component that defines many of our
customers' end products,  we work closely with potential customers to define our
products   to   optimize   the   final    design,    typically   on   a   senior
engineer-to-engineer basis.

     We identify  companies  with end  products  and  applications  for which we
believe that our products will provide a system level solution and for which our
products can be a key  differentiator.  We target both market leaders and select
early adopter companies;  their acceptance validates our technology and approach
in the market. We believe successful  marketing will require  relationships with
recognized consumer brand companies.

     We are now  shipping  monochrome  and full color  versions of our first two
commercial microdisplay products. Our SVGA+ resolution OLED microdisplay,  which
contains 1.53 million picture  elements,  was specifically  designed to meet the
needs of several military,  industrial, and medical customers based on marketing
information  obtained  prior to the design  phase of the  display  and was first
offered  for   sampling  in  April  2001.   Our   stereovision-capable   SVGA-3D
microdisplay,  which contains 1.44 million picture  elements,  was designed with
the input of  multiple  customers  to  principally  target the  mobile  personal
computer and PC games markets, and was first shipped in February 2002. We expect
to ship  first  quantities  of our Z800 3D Visor  personal  viewer in the second
quarter of 2005.

     Near term sales efforts have been focused on our military,  industrial, and
medical customers.  We have received  production orders and design wins for both
the SVGA+ and SVGA 3D displays. To date, we have shipped products and evaluation
kits to more than 100 OEM  customers.  An OEM design  cycle  typically  requires
between 6 and 24  months,  depending  on the  uniqueness  of the  market and the
complexity  of the end  product.  New product  development  may require  several
design iterations prior to commercialization. Some of our initial customers have
completed  their initial  evaluation  cycle and we are now  receiving  follow-on
orders and notification of product purchase  decisions.  Several  customers have
indicated  their  intent  to  incorporate   potentially   high  volumes  of  our
microdisplays into consumer products through 2006, pending successful completion
of their own product  development  efforts.  We have also received  notification
that our microdisplays will be used as components in versions 1.0 and 2.0 of the
US Army Land  Warrior  program  and in the US Air  Force  Joint  Strike  Fighter
program,  among  other  programs.   (See  "Our  Market  Opportunity:   Military;
Commercial, Industrial, and Medical; and Consumer")

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 2004, 78% of our net revenue were to firms based in the United States and
22% were to  international  firms,  compared  to 70%  domestic  revenue  and 30%
international   revenue  during  2003.  In  2004,  we  had  two  customers  that
individually  accounted for more than 10% of our total net revenue. One customer
accounted for 17% of total net revenue and the other accounted for 15%. In 2003,
we had one customer that  individually  accounted for more than 10% of our total
net revenue. This customer accounted for 21% of total net revenue.

Backlog

     The majority of our backlog  consists of purchase  agreements  for delivery
over the next 24 months.  Most purchase  orders are subject to  rescheduling  or
cancellation  by the  customer  with no or  limited  penalties.  Because  of the
possibility  of customer  changes in delivery  schedules  or  cancellations  and
potential delays in product  shipments,  our backlog as of a particular date may
not be  indicative  of net  sales for any  succeeding  period.  Lack of  working
capital  through  the early part of 2004  delayed  our  ability to ship the full
quantity of purchase  agreements  and purchase  orders on hand, and has required
negotiations with customers for delays in product launch  schedules.  Deliveries
of wafers and other supplies played a negative roll in our 2004 shipments due to
capacity and technical  issues at our  suppliers,  such as our wafer supplier in
Taiwan.  Some customers have experienced delays in their expected product launch
schedules due to their own product  development  delays not directly  related to
our  microdisplays,  such as optics.  Some new eMagin  products  such as plastic
prism optics, PC interfaces and cables may help customers begin their production
more quickly, but there is no guarantee that this will occur.

                                       18
<PAGE>
     As of  February  25,  2005  we had a  backlog  of  purchase  agreements  of
approximately  $28 million from 3 OEMs for purchases through 2007. We determined
that one  customer  included in the  previously  reported  backlog has  incurred
financial  difficulties which will significantly  delay or prevent completion of
their HMD program,  so we removed $10 million from our backlog  amount,  some of
which was replaced by increases from another  customer.  Our current  backlog is
comprised  of 3  customers  who are all in the process of  completing  their own
design work.


Research and Development

     Near-to-the-eye  virtual  imaging and OLED  technology  are  relatively new
technologies  that  have  considerable  room  for  substantial  improvements  in
luminance, life, power efficiency,  voltage swing, design compactness,  field of
view, optical range of visibility,  headtracking  options,  wireless control and
many  other  parameters.   We  also  anticipate  that  achieving  reductions  in
manufacturing costs will require new technology developments. We anticipate that
improving the  performance,  capability and cost of our products will provide an
important competitive advantage in our fast moving, high technology marketplace.
Past and current research  activities  include  development of improved OLED and
display device structures, developing and/or evaluating new materials (including
the  synthesis of new organic  molecules),  manufacturing  equipment and process
development,   electronics  design   methodologies  and  new  circuits  and  the
development of new lenses and related  systems.  During 2002 and 2003 we focused
primarily on near-term  product  development  projects related to our transition
from research to manufacturing.  For example we developed a glass cover plate to
ruggedize our displays to facilitate  easier  handling by our OEM customers.  We
also developed a new high luminance,  high efficiency yellow monochrome OLED and
adapted  to our SVGA+  display  for  see-through  optic  applications  and began
sampling  the yellow  monochrome  product in early  2003.  However,  in order to
improve customer  satisfaction and simultaneously  maximize our margins, as well
as  to  maintain  competitive  technology  advantages,  we  believe  that  it is
important to continue to engage in long-term  research and  development.  During
the  past  eight  years,  we  have  spent,  net  of  U.S.   government  funding,
approximately  $31  million  on  research  and  development.  In 2004  we  spent
approximately $0.9 million on research and development.  In 2004 we continued to
research more efficient  materials and processes.  We also developed fiber optic
bundling  technology to provide custom video sizes and resolutions,  and created
what we believe  the world's  highest  resolution  OLED  display and the world's
highest resolution  microdisplay,  the tiled UXGA display (1600x3x1200  pixels),
and DUXGA (1600x3x2400 pixels).

     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  (See  "Strategic
Relationships").

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. In 2004 we entered into an amended lease agreement
which  extends the term of this lease to May 31,  2009.  We lease  approximately
40,000  square feet of space  housing our own  equipment  for OLED  microdisplay
fabrication and for research and development  plus additional space for assembly
and administrative  offices. We also entered into lease agreement with IBM for a
16,300 square foot class 10 clean room space, along with additional, lower level
clean room space.

     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 believe that our facility is
capable of producing over 50,000 SVGA+ or SVGA-3D displays per month once we are
manufacturing  around the clock on a 24 hours a day, 7 days per week basis, with
ample  supplies and a fully loaded  manufacturing  line assuming good  equipment
up-time.

     We  lease  additional   non-clean  room  facilities  for  chemical  mixing,
cleaning,  chemical systems,  and glass/silicon  cutting.  OLED chemicals can be

                                       19
<PAGE>
purified  in our  facility  with our own  equipment,  permitting  the company to
evaluate  new  chemicals  in  pilot  production  that are not yet  available  in
suitable purity for OLED applications on the market.

     Our display  fabrication  process starts with the silicon  wafer,  which is
manufactured by a semiconductor foundry using conventional CMOS process. After a
device is designed by a  combination  of internal  and external  designers  with
customer participation, we outsource wafer fabrication.

     Our manufacturing process for OLED-on-silicon  microdisplays has three main
components:  organic film deposition,  organic film encapsulation (also known as
sealing),   and  color   filter   processing.   All  steps  are   performed   in
semi-automated,  hands-free environment suitable for high volume throughput.  An
automated cluster tool provides all OLED deposition steps in a highly controlled
environment  that  is the  centerpiece  of our  OLED  fabrication.  After  wafer
processing,  each part is inspected using an automated  inspection system, prior
to  shipment.  We  have  electrical  and  optical  instrumentation  required  to
characterize  the  performance of our displays  including  photometric and color
coordinate analysis. We are also equipped for integrated circuit and electronics
design and display testing.

     We also lease a facility in Redmond, Washington where we operate our system
development  effort  and  business  development  activities.  The lease for this
facility expires in May of 2005 The facilities are well suited for designing and
building limited volume  prototypes and small quantity  industrial or government
products. Cables and electronic interfaces have recently been produced to permit
our  OEM   customers  to  more  rapidly   create   products  and  shorten  their
time-to-market.  We plan to outsource medium to high volume subsystem production
to low cost plastics, lenses, and assembly manufacturers. We are currently using
domestic and  international  outside  manufacturers and we are investigating new
outsource opportunities.

     We believe that manufacturing efficiency is an important factor for success
in the consumer markets.  We believe that high yield and maximum  utilization of
our equipment set will be key for profitability. We believe that all of the main
components  for  manufacturing  success  are  in  place,  but  we  will  require
additional:  (i) staff and training of employees for round the clock  operation,
(ii)  inventory  of  integrated  circuits  and  other raw  materials,  and (iii)
maintenance  and upgrades to the equipment set from time to time.  The equipment
required for initial  profitable  production is in place. Some equipment will be
added when our production volume increases or as needed.

     We intend to outsource certain  capital-intensive  portions of microdisplay
production  to minimize  both our costs and time to market.  Joint  ventures are
being  considered for higher  quantity OLED production off shore should suitable
resources  not be available  for US  expansion.  We currently  outsource all our
integrated   circuit   fabrication   while  retaining  the  final  metal,   OLED
application,   color  filter,  OLED  sealing,  and  sample  packaging  processes
in-house.

Intellectual Property

     We have developed a significant intellectual property portfolio of patents,
trade secrets and know-how,  supported by our license from Eastman Kodak and our
current patent portfolio.

     Our  license  from  Eastman  Kodak  gives us the right to use in  miniature
displays a portfolio in organic light emitting diode and optics technology, some
of which  are  fundamental.  Our  agreement  with  Eastman  Kodak  provides  for
perpetual  access to the OLED technology for our  OLED-on-silicon  applications,
provided we remain active in the field and meet our contractual  requirements to
Eastman  Kodak.  We also  generate  intellectual  property  as a  result  of our
internal research and development activities.

     Our patents and patent applications cover a wide range of materials, device
structures,   processes,   and  fabrication  techniques,   such  as  methods  of
fabricating full color OLEDs. We believe that our patent  applications  relating

to up-emitting structures on opaque substrates such as silicon wafers, which are
critical  for OLED  microdisplays,  and  applications  relating to the  hermetic
sealing of such structures are particularly important.

          Our patents are concentrated in the following areas:

     o    OLED Materials, Structures, and Processes;

                                       20
<PAGE>
     o    Display Color Processing and Sealing;

     o    Active Matrix Circuit Methodologies and Designs;

     o    Field Emission and General Display Technologies;

     o    Lenses and Tracking (Eye and Head);

     o    Ergonomics and Industrial Design; and

     o    Wearable Computer Interface Methodology

     We also rely on proprietary technology,  trade secrets, and know-how, which
are not  patented.  To  protect  our  rights  in these  areas,  we  require  all
employees,  and  where  appropriate,   contractors,  consultants,  advisors  and
collaborators  to enter into  confidentiality  and  non-competition  agreements.
There  can  be  no  assurance,  however,  that  these  agreements  will  provide
meaningful  protection  for our trade  secrets,  know-how  or other  proprietary
information in the event of any unauthorized use, misappropriation or disclosure
of such trade secrets, know-how or other proprietary information.

     We believe  that our  intellectual  property  portfolio,  coupled  with our
strategic relationships and accumulated experience in the OLED field gives us an
advantage over potential competitors.

Competition

     We may  face  competition  in the  OLED and  microdisplay  industry  from a
variety of companies and technologies.  We believe that our key competition will
come from  liquid  crystal  on  silicon  microdisplays,  or LCOS,  also known as
reflective  liquid  crystal  displays.  While we  believe  that  OLED-on-silicon
provides  comparatively  lower optics cost, larger apparent image size,  reduced
electronics  cost and complexity,  enhanced color, and improved power efficiency
advantages over liquid crystal on silicon  microdisplays,  there is no assurance
that  these  benefits  will  be  realized  or that  liquid  crystal  on  silicon
manufacturers  will not suitably improve these  parameters.  Companies  pursuing
liquid  crystal on  silicon  technology  include  Microdisplay  Corporation  and
Brillian Corporation, among others, although most of the companies are primarily
focusing on  projection  microdisplays,  which do not compete  directly with the
company.  In certain  markets,  we may also face  competition from developers of
transmissive liquid crystal displays, such as those developed by Kopin, or laser
scanning systems, such as those developed by Microvision Corporation.

     To our knowledge,  the only other company that has publicly stated plans to
develop OLED microdisplays for near-eye  applications is MicroEmissive  Displays
in Britain.  We may also compete with potential  licensees of Universal  Display
Corporation  and  Cambridge  Display  Corporation,  each of which  license  OLED
technology portfolios.  Even though we could potentially license technology from
these developers,  potential competitors could also obtain such licenses and may
do so at more favorable royalty rates. However,  should they decide to embark on
developing  microdisplays  on silicon,  we believe  that our progress to date in
this area gives us a substantial head start.

     Our microdisplays and head-wearable display systems may face competition on
a price and performance  basis from major  manufacturers  such as Sony and Seiko
Epson.  However,   these  companies  use  first  generation  liquid  crystal  on
polysilicon  technology and therefore,  we believe that they may incorporate our
technology into their products.

Employees

     As of  February  25,  2005,  we had a total of 72 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.

                                       21
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY

     Our  principal  executive  offices are located at: 2070 Route 52,  Hopewell
Junction,  New York 12533.  We lease  approximately  40,000 square feet of space
from IBM,  all of which is located in the same  industrial  park.  Approximately
30,000  square  feet of space  houses our own  equipment  for OLED  microdisplay
fabrication, and for research and development plus additional space for assembly
operations  and storage.  Approximately  10,000 square feet of space is used for
administrative offices.

     Our lease runs  through May 31,  2009.  As of December 31, 2004 our monthly
rent was $71,729  per month not  including  utilities.  Our rent  payments  will
increase  3% per year  thereafter  through  the term of the lease.  The  average
monthly rent over the 5 years is approximately $74,000.

     Our lenses and  system  development  operation  lease  approximately  7,000
square feet of space in Redmond,  Washington.  The lease for this  facility runs
until May 2005,  and we are  currently in  negotiation  to renew the lease.  The
average monthly rent is $4,000.

     During  March 2004 we upgraded  our  telecommunication  system to a digital
system,  and our  phone  and fax  numbers  changed.  eMagin  Corporation's  main
telephone  number is (845)  838-7900 and our main fax number is (845)  838-7901.
Our website address is www.emagin.com.

ITEM 3. LEGAL PROCEEDINGS

     We are not a party to any material legal proceedings.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

         None
                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY AND RELATED  STOCKHOLDER  MATTERS
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES .

     Our common stock is traded on the American  Stock Exchange under the symbol
"EMA".

     As of February  25,  2005,  there were 463 holders of record of  81,798,903
shares of our common stock. This does not reflect those shares held beneficially
or those shares held in "street" name.

     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.

     The table below sets forth the high and low closing prices per share of our
common  stock for each full  quarterly  period in the last two  fiscal  years as
reported on the American Stock Exchange.

                                                       High           Low
    -------------------------------------------- ----------------- ----------
    2004
    -------------------------------------------- ----------------- ----------
           First Quarter                                3.15           1.40
    -------------------------------------------- ----------------- ----------
           Second Quarter                               3.80           1.57
    -------------------------------------------- ----------------- ----------
           Third Quarter                                1.73           0.75
    -------------------------------------------- ----------------- ----------
           Fourth Quarter                               1.50           0.90
    -------------------------------------------- ----------------- ----------
    2003
    -------------------------------------------- ----------------- ----------
           First Quarter                                1.00           0.33
    -------------------------------------------- ----------------- ----------
           Second Quarter                               0.85           0.50
    -------------------------------------------- ----------------- ----------
           Third Quarter                                1.99           0.51
    -------------------------------------------- ----------------- ----------
           Fourth Quarter                               1.74           1.15
    -------------------------------------------- ----------------- ----------

On March 28, 2005, the last sale price for our Common Stock was $0.94.

                                       22
<PAGE>

<TABLE>
<CAPTION>
Equity Compensation Plan Information

------------------------------------ ------------------------ ---------------------- ------------------------
           Plan category              Number of securities      Weighted average      Number of securities
                                        to be issued upon       exercise price of    remaining available for
                                           exercise of        outstanding options,       future issuance
                                      outstanding options,     warrants and rights
      As of December 31, 2004          warrants and rights
------------------------------------ ------------------------ ---------------------- ------------------------
                                               (a)                     (b)                     (c)
<S>                                        <C>                        <C>                    <C>
Equity compensation plans approved
by security holders                        10,546,162               $ 1.05                   428,849

Equity compensation plans not
approved by security holders                    -                       -                       -
                                     ------------------------ ---------------------- ------------------------
Total                                      10,546,162               $ 1.05                   428,849
                                     ======================== ====================== ========================
</TABLE>
     In  addition  to the plans  listed,  eMagin  has issued  inducement  option
compensation  awards to new  employees  in  accordance  with the  provisions  of
Section 711 of the  American  Stock  Exchange  Company  Guide.  The  outstanding
out-of-plan  options as of December 31, 2004 are to purchase an aggregate  total
of 3,013,000  shares,  vesting over five years at per share prices  ranging from
$1.01 to $2.77.

     Recent Issuances of Unregistered Securities.

None

                                       23
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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 "Factors Which May Affect Future Results"). 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,  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.  As of December 31, 2004 since our
inception,  we have recognized an aggregate of  approximately  $7.8 million from
sales of our  products,  and have a backlog of more than $28 million in products
ordered  for  delivery  through  2007.  These  products  are  being  applied  or
considered   for  near-eye  and  headset   applications   in  products  such  as
entertainment and gaming headsets, handheld Internet and


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<PAGE>
telecommunication   appliances,   viewfinders,  and  wearable  computers  to  be
manufactured by original equipment  manufacturer  (OEM) customers.  We have also
shipped a limited  number of prototypes of our eGlass II  Head-wearable  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.  Through our  operations in Washington  state we are
also developing head-wearable displays that incorporate our Microviewer.

     We  license  our  core  OLED  technology  from  Eastman  Kodak  and we have
developed  our  own  technology  to  create  high  performance   OLED-on-silicon
microdisplays and related optical systems.  We believe our technology  licensing
agreement  with  Eastman  Kodak,  coupled  with  our own  intellectual  property
portfolio,   gives  us  a  leadership   position  in  OLED  and  OLED-on-silicon
microdisplay  technology.  We are the only company to  demonstrate  publicly and
market full-color OLED-on-silicon microdisplays.

Company History

     Our history has been 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.  Most of our operating expenses are fixed in the near
term. If we are unable to generate significant  revenues,  our net losses in any
given period could be greater than expected.

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.  Revenue is recognized at shipment and we record a reserve
for estimated sales returns, which is reflected as a reduction of revenue at the
time of revenue recognition.

     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.  Amounts
can be  billed  on a  bi-monthly  basis.  Billing  is based on  subjective  cost
investment factors.

Use of estimates:

     The preparation of financial  statements in conformity with U.S.  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the reported  amounts of assets and liabilities and 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.
Consequently, a change in conditions could affect these estimates.



Fair value of financial instruments:

     At  December  31,  2004 the  Company's  cash,  cash  equivalents,  accounts
receivable and accounts payable are earned at cost which appropriates fair value
due to the short-term nature of these instruments.

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<PAGE>
Results of Operations

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Revenues
Revenues increased by $1.0 million to a total of $3.6 million for the year ended
December  31,  2004 from $2.6  million  for the year ended  December  31,  2003,
representing  an increase of 39%. This increase was due primarily to many of our
customers reaching commercial and pre-commercial  stages with their systems. Our
contract revenue decreased  approximately $0.3 million while our product revenue
increased  approximately  $1.3  million.  Average  unit sales price for displays
decreased  to $372 in 2004 as compared to $422 in 2003 as we increase our larger
order fulfillment. Our current expectation is that revenue will continue to grow
in 2005 if we successfully execute our business plan.


Cost of Goods Sold
Cost of goods sold includes direct and indirect costs associated with production
and  inventory  losses.  In  the  year  ended  December  31,  2004  we  recorded
approximately  $6.0 million in cost of goods sold which resulted in a gross loss
of $2.4 million as compared to approximately $5.1 million in costs of goods sold
resulting in a gross loss of $2.6  million in the year ended  December 31, 2003.
Although  both  revenue  and costs of goods sold  increased  approximately  $1.0
million, our gross loss decreased to (66%) in 2004 from (99%) 2003. We currently
operate two shifts, but we are currently making  modifications to the production
line and we are  utilizing  less than 10% of the line's  capacity.  Through  the
production  line  modifications  and an  increase in volume we expect to achieve
gross margin improvements.


Research and Development Expenses
Gross research and development  expenses increased by $0.9 million to a total of
$0.9 million for the year ended December 31, 2004 from $19 thousand for the year
ended December 31, 2003. The $0.9 million  increase in R&D expenses for the year
ended  December  31,  2004  reflects  our  renewed  ability to invest in product
improvement and new product lines.  We expect research and development  expenses
to increase in the coming year as we move  forward with the  development  of two
new microdisplays and develop additional versions of our visor.

Non-Cash Stock Based Compensation
Non-cash stock based compensation for the year ended December 31, 2004 decreased
$2.1 million to a total of $88 thousand as compared to $2.2 million for the year
ended December 31, 2003. The amount of compensation recorded in 2004 was related
to the  balance  of options  issued in 2000 and  re-priced  during  the  merger.
Non-cash  stock-based  compensation  costs are the result of amortization of the
intrinsic value ascribed for the issuance of stock options at the time of grant.
The amortization was done over the vesting period of such options.


Selling, General and Administrative Expenses
General and administrative expenses increased by $0.8 million to a total of $4.3
million  for the year ended  December  31,  2004 from $3.5  million for the year
ended  December 31, 2003.  The increase in selling,  general and  administrative
expenses  was due  primarily  to an increase in staff and  personnel  costs.  We
expect  marketing,  general  and  administrative  expense to  increase in future
periods  as we  add to our  staff,  make  additional  investments  in  marketing
activities and as we comply with the Sarbanes Oxley 404 requirements.

Other Income  (Expense)
Other  expenses  for 2004 were $5 million for 2004 up from other  income of $3.6
million in 2003.  The  primary  causes of the change  were other  income of $4.6
million in 2003 related to a gain on debt settlement not repeated in 2004 and an
increase in  interest  expense to $5.1  million in 2004 up from $1.3  million in
2003. The increase in interest  expense for the nine months ended  September 30,
2004 was  attributable to three factors;  (1) $3.18 million of non-cash  charges
related to the value of the warrants  issued to induce the holders of the $7.825
million in Notes to agree to an early conversion of the Notes into common stock,
(2) $1,598,325 in non-cash  charges  related to the remaining  unamortized  debt

                                       26
<PAGE>
discount and beneficial  conversion  feature  associated with the aforementioned
Notes,  and (3)  $74,637 in non-cash  charges  related to the  write-off  of the
remaining unamortized deferred financing costs.


                      Balance Sheet Data as of December 31,
                                 (In thousands)

      ------------------------------- --------------------- ------------------
                                              2004                2003
      ------------------------------- --------------------- ------------------
      Cash and cash equivalents                   $ 13,457           $  1,054
      ------------------------------- --------------------- ------------------
      Working capital                               14,925                106
      ------------------------------- --------------------- ------------------
      Total assets                                  18,436              3,749
      ------------------------------- --------------------- ------------------
      Total liabilities                              1,989              8,516
      ------------------------------- --------------------- ------------------
      Total stockholders' equity                  $ 16,447           $ (4,767)
      ------------------------------- --------------------- ------------------


Liquidity and Capital Resources

Current Financial Position
We have approximately $28 million of backlog  represented by purchase agreements
for our  microdisplays to be delivered now through 2007. These agreements can be
cancelled at any time without  penalty.  Management  believes that the prospects
for  additional  growth of  microdisplay  revenue  remain high and that revenues
derived from our new Z800 3D visor,  which contain two microdisplays per system,
should also  contribute to revenue  growth.  As a result we anticipate  that our
largest  use of cash in 2005 will be the funding of higher  accounts  receivable
and inventory levels.

To support our projected sales for 2005 we have made strategic  purchases of raw
materials  and hired  additional  production  personnel in order to increase our
plants realizable production capacity. We anticipate that as product is produced
and  shipped  that  expenses  related to costs of goods sold will be our largest
expense category in the coming year.

We currently  anticipate that we will also continue to experience  growth in our
operating  expenses  throughout the coming year. In  particular,  we expect that
salaries  for  employees  would  be the  principle  uses  of  cash  followed  by

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<PAGE>
outsourced  costs  related  to new  microdisplay  designs  and costs  related to
professional   service   such  as  those   required  to  support   certification
requirements associated with Sarbanes Oxley section 404.

We also intend to purchase  approximately $3 million of capital equipment during
2005 to  further  increase  our  production  capacity  and  enable us to be less
sensitive to prolonged equipment downtime.

As of  April,  13 2005 we have  approximately  $10.9  million  in cash  and cash
equivalents.  Based on our  current  business  plans we expect that this cash on
hand will be sufficient to meet our cash requirements over the next 12 months.

Our cash requirements  depend on numerous factors,  including  completion of our
new product  development  activities,  ability to  commercialize  our  products,
timely market acceptance of our products and our customer's  product,  and other
factors.  We expect to  carefully  devote  capital  resources  to  continue  our
development  programs  directed at  commercializing  our  products in our target
markets,  hire and train additional  staff,  expand our research and development
activities,  develop and expand our manufacturing  capacity and begin production
activities.  Any delays could change the cash requirements of the company. While
we believe that we are in position to handle a significant  production increase,
there can be no assurance  that we will not experience  some issues  relating to
yield and throughput  risk, as well as supply delivery risk that could result in
production delays.

CONTRACTUAL OBLIGATIONS

The following  chart describes the  outstanding  contractual  obligations of the
Company as of December 31, 2004:
<TABLE>
<CAPTION>
                                                         Payments due by period
 Contractual Obligations              Total           1 Yr          2-3 Yrs         4-5 Yrs        6-9 Yrs
---------------------------------- --------------- ------------- --------------- -------------- ------------
<S>                                <C>             <C>           <C>             <C>            <C>
Long-term debt                     $         -     $         -   $         -     $         -    $       -
Capital lease obligations (a)      $    42,868     $    18,372   $    24,496     $         -    $       -
Operating lease obligations        $ 3,995,350     $   953,436   $ 1,831,233     $ 1,210,681    $       -
Purchase obligations     (b)       $ 2,613,073     $ 2,613,073   $         -     $         -    $       -
Other long-term liabilities (c)    $   875,000     $   125,000   $   125,000     $   125,000    $ 500,000
                                   --------------- ------------- --------------- -------------- ------------
Total                              $ 7,526,291     $ 3,709,881   $ 1,980,729     $ 1,335,681    $ 500,000
                                   =============== ============= =============== ============== ============
</TABLE>
     (a)  Capital lease  obligation  includes  interest not shown on the balance
          sheet.
     (b)  The majority of purchase  orders  outstanding  contain no cancellation
          fee except for minor re-stocking fees. The purchase obligations listed
          include   $740,000  in  2005  purchase  orders  for  secured  purchase
          obligations  that  carry the  obligation  to pay  either in part or in
          full.
     (c)  This amount represents the obligation for royalty payments.


EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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<PAGE>
     In November 2004, the FASB issued FAS No. 151, "An amendment of ARB No. 43,
Chapter  4" This  statement  amends  the  guidance  in ARB No.  43,  Chapter  4,
"Inventory  Pricing",  to clarify the  accounting  for abnormal  amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).  This
Statement  requires  that those items be recognized  as  current-period  charges
regardless  of whether they meet the  criterion of "so  abnormal".  In addition,
this statement  requires that  allocation of fixed  production  overheads to the
costs  of  conversion  be  based  on  the  normal  capacity  of  the  production
facilities. The statement is effective for fiscal years beginning after June 15,
2005  with  early  adoption  permitted.   eMagin  is  currently  evaluating  the
requirements  and impact of FAS No. 151,  but at this point does not believe the
adoption will have a material  impact on its financial  position,  cash flows or
results of operations.

     FASB Statement 123R (Revision 2004),  "Share-Based  Payment", was issued in
December 2004 and is effective for reporting  periods  beginning  after December
31, 2005. The new statement requires all share-based payments to employees to be
recognized in the financial  statements based on their fair values.  The Company
currently accounts for its share-based payments to employees under the intrinsic
value method of accounting set forth in Accounting  Principles Board Opinion No.
25,  "Accounting  for Stock  Issues to  Employees".  Additionally,  the  company
complies with the stock-based employer compensation  disclosure  requirements of
SFAS  No.  148,  "Accounting  for  Stock-Based  Compensation  -  Transition  and
Disclosure,  an amendment of FASB Statement No. 123". The Company will adopt the
new statement in its financial statements for the quarter ending March 31, 2006.

Factors Which May Affect Future Results

     In evaluating our business,  prospective  investors and shareholders should
carefully consider the risks factors, any of which could have a material adverse
impact on our business,  operating results and financial condition and result in
a complete loss of your investment.

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<PAGE>
RISKS RELATED TO OUR FINANCIAL RESULTS

WE HAVE A HISTORY OF LOSSES  SINCE OUR  INCEPTION  AND MAY INCUR  LOSSES FOR THE
FORESEEABLE FUTURE.

     Accumulated losses excluding non-cash transactions as of December 31, 2004,
were $47  million  and  acquisition  related  non-cash  transactions  were  $102
million, which resulted in an accumulated net loss of $149 million, the majority
of which was related to the March 2000 merger and the  subsequent  write-down of
our  goodwill.  The  non-cash  losses were  dominated  by the  amortization  and
write-down of goodwill and purchased  intangibles  and write-down of acquired in
process research and development related to the March 2000 acquisition, and also
included  some  non-cash  stock-based  compensation.  We have  not yet  achieved
profitability  and we can give no assurances that we will achieve  profitability
within the foreseeable  future as we fund operating and capital  expenditures in
areas such as  establishment  and  expansion  of markets,  sales and  marketing,
operating  equipment and research and  development.  We cannot assure  investors
that we will ever achieve or sustain  profitability or that our operating losses
will not increase in the future.

WE MAY NOT BE ABLE TO EXECUTE OUR BUSINESS  PLAN AND MAY NOT GENERATE  CASH FROM
OPERATIONS

     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 would be required 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. To the extent
that  operating   expenses   increase  or  we  need  additional  funds  to  make
acquisitions, develop new technologies or acquire strategic assets, the need for
additional  funding may be accelerated  and there can be no assurances  that any
such additional funding can be obtained on terms acceptable to us, if at all. If
we were not able to  generate  sufficient  capital,  either from  operations  or
through additional debt or equity financing, to fund our current operations,  we
would be forced  to  significantly  reduce  or delay  our  plans  for  continued
research and  development  and expansion.  This could  significantly  reduce the
value of our securities.

RISKS RELATED TO MANUFACTURING

THE MANUFACTURE OF  OLED-ON-SILICON  IS NEW AND OLED MICRODISPLAYS HAVE NOT BEEN
PRODUCED IN SIGNIFICANT QUANTITIES.

     If we are unable to produce our products in sufficient quantity, we will be
unable to attract  customers.  In  addition,  we cannot  assure you that once we
commence  volume  production we will attain yields at high  throughput that will
result in profitable gross margins or 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 initially  expect to 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.  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 EXPECT  TO  DEPEND ON  SEMICONDUCTOR  CONTRACT  MANUFACTURERS  TO SUPPLY  OUR
SILICON INTEGRATED CIRCUITS AND OTHER SUPPLIERS OF KEY COMPONENTS, MATERIALS AND
SERVICES.

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<PAGE>
     We  do  not  manufacture  the  silicon  integrated  circuits  on  which  we
incorporate  our OLED  technology.  Instead,  we expect to  provide  the  design
layouts  to  semiconductor  contract  manufacturers  who  will  manufacture  the
integrated  circuits on silicon wafers. We also expect to depend on suppliers of
a variety of other components and services,  including  circuit boards,  graphic
integrated circuits, passive components,  materials and chemicals, and equipment
support.  Our inability to obtain sufficient  quantities of high quality silicon
integrated  circuits or other necessary  components,  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.

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

     We rely on our license  agreement with Eastman Kodak for the development of
our products, and the termination of this license,  Eastman Kodak's licensing of
its OLED technology to others for microdisplay applications, or the sublicensing
by Eastman Kodak of our OLED technology to third parties,  could have a material
adverse impact on our business.

     Our principal  products under  development  utilize OLED technology that we
license from Eastman  Kodak.  We rely upon Eastman  Kodak to protect and enforce
key patents held by Eastman Kodak, relating to OLED display technology.  Eastman
Kodak's patents 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.  We may be required to expend  significant  resources  to monitor and
police our intellectual property rights. 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.

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.  The  viewfinder  microdisplay
market sector is well established with entrenched  competitors with whom we must
compete.

THE MICRODISPLAY SYSTEMS BUSINESS IS INTENSELY COMPETITIVE.

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<PAGE>
     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:

     o    our success in designing,  manufacturing  and delivering  expected new
          products,  including those  implementing  new technologies on a timely
          basis;

     o    our ability to address the needs of our  customers  and the quality of
          our customer services;

     o    the  quality,  performance,  reliability,  features,  ease  of use and
          pricing of our products;

     o    successful expansion of our manufacturing capabilities;

     o    our  efficiency of  production,  and ability to  manufacture  and ship
          products on time;

     o    the  rate  at  which  original   equipment   manufacturing   customers
          incorporate our product solutions into their own products;

     o    the market acceptance of our customers' products; and

     o    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 IS CYCLICAL.

     The display  industry  is  characterized  by  fabrication  facilities  that
require  large  capital  expenditures  and long lead times for  supplies and the
subsequent  processing time,  leading to frequent  mismatches between supply and
demand. 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.

COMPETING PRODUCTS MAY GET TO MARKET SOONER THAN OURS.

     Our competitors are investing  substantial resources in the development and
manufacture  of  microdisplay  systems using  alternative  technologies  such as
reflective   liquid   crystal   displays   (LCDs),    LCD-on-Silicon    ("LCOS")
microdisplays, active matrix electroluminescence and scanning image systems, and
transmissive active matrix LCDs.

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.

OUR PRODUCTS ARE SUBJECT TO LENGTHY OEM DEVELOPMENT PERIODS.

     We plan to 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

                                       32
<PAGE>
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. 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  nor is there any assurance  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.

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 retaining
or attracting new personnel may have a materially adverse affect on our business
and our operating  results.  In addition,  difficulties  in hiring and retaining
technical personnel could delay the implementation of our business plan.

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,
including  Gary W.  Jones,  our chief  executive  officer.  We 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.

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 is operated on the basis of short-term  purchase orders and we
cannot  guarantee  that we will be able to obtain  long-term  contracts for some
time.  Our current  purchase  agreements  can be  cancelled  or revised  without
penalty,  depending on the circumstances.  In the absence of a backlog of orders
that can only be  canceled  with  penalty,  we plan  production  on the basis of
internally generated forecasts of demand, 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 the Company may decline.

                                       33
<PAGE>

OUR  BUSINESS  STRATEGY  MAY  FAIL  IF WE  CANNOT  CONTINUE  TO  FORM  STRATEGIC
RELATIONSHIPS  WITH  COMPANIES  THAT  MANUFACTURE  AND USE  PRODUCTS  THAT COULD
INCORPORATE OUR OLED-ON-SILICON TECHNOLOGY.

     Our  prospects  will be  significantly  affected  by our ability to develop
strategic   alliances  with  OEMs  for  incorporation  of  our   OLED-on-silicon
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  would  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 a foreign entity. Some customers in other countries
have longer  receivable  periods or warranty periods.  In addition,  many of the
OEMs that are the most likely  long-term  purchasers  of our  microdisplays  are
located  abroad  exposing 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 give 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.

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.

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 THE COMPANY 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 20, 2005, we have outstanding (i) options to
purchase  14,262,162 shares; and (ii) warrants to purchase  19,119,289 shares of
common  stock;  and  (iii) 0  shares  of  common  stock  underlying  convertible
securities.

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.

                                       34
<PAGE>
     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  the  company.  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.

                                       35
<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENT INDEX

<TABLE>
<CAPTION>
                                                                                                      Page
<S>                                                                                                      <C>
Report of Independent Registered Public Accounting Firm................................................F-2

Consolidated Balance Sheet as of December 31, 2004 ....................................................F-3

Consolidated Statement of Operations for the years ended December 31, 2004 and 2003 ...................F-4

Consolidated Statements of Stockholders' Equity for the years ended December 31,

      2004 and 2003 ...................................................................................F-5

Consolidated Statement of Cash Flows for the years ended December 31, 2004 and 2003 ...................F-6

Notes to the Consolidated Financial Statements ........................................................F-7
</TABLE>


                                      F-1

<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Stockholders
eMagin Corporation



We  have  audited  the  accompanying   consolidated   balance  sheet  of  eMagin
Corporation  and  subsidiary  (the  "Company") as of December 31, 2004,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for the years ended December 31, 2004 and 2003. These financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audit.

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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  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  enumerated above present fairly, in
all material respects, the consolidated financial position of eMagin Corporation
and  subsidiary  as of December 31, 2004 and the  consolidated  results of their
operations  and their  consolidated  cash flows for the years ended December 31,
2004 and 2003 in conformity with accounting principles generally accepted in the
United States of America.




/s/
Eisner LLP
New York, New York
February 11, 2005


                                      F-2

<PAGE>
                        eMagin Corporation and Subsidiary
                           Consolidated Balance Sheet
                                December 31, 2004
<TABLE>
<CAPTION>
ASSETS
Current assets:

<S>                                                                                   <C>
   Cash and cash equivalents                                                          $  13,457,465
   Accounts receivable, net                                                                 535,748
   Prepaid expenses and other current assets                                                879,853
   Inventory                                                                              2,017,886
                                                                                      -------------
      Total current assets                                                               16,890,952

Equipment and leasehold improvements, net                                                 1,304,465
Intangible assets, net                                                                       54,123
Other long-term assets                                                                      186,258
                                                                                      -------------

      Total assets                                                                    $  18,435,798
                                                                                      =============
LIABILITIES
Current liabilities:

   Accounts payable                                                                   $     822,328
   Accrued payroll and benefits                                                             674,212
   Other accrued expenses, net                                                              356,784
   Advanced payments                                                                         64,196
   Current portion of capitalized lease obligations                                          14,080
   Other current liabilities                                                                 34,762
                                                                                      -------------
      Total current liabilities                                                           1,966,362

   Capitalized lease obligations                                                             22,177
                                                                                      -------------

      Total liabilities                                                                   1,988,539
                                                                                      -------------
Commitments and contingencies

STOCKHOLDERS' EQUITY
   Preferred Stock - authorized 10,000,000 shares, none issued
   Common Stock - $.001 par value, authorized 200,000,000 shares,
    issued and outstanding 79,638,817 shares                                                 79,639
   Paid-in surplus                                                                      165,398,936
   Accumulated deficit                                                                 (149,031,316)
                                                                                      -------------
      Total stockholders' equity                                                         16,447,259
                                                                                      -------------
      Total liabilities and stockholders' equity                                      $  18,435,798
                                                                                      =============

         See notes to consolidated financial statements
</TABLE>
                                      F-3
<PAGE>

                        eMagin Corporation and Subsidiary
                      Consolidated Statements of Operations
<TABLE>
<CAPTION>

                                                                        Year Ended December 31,
                                                                         2004              2003
                                                                   ------------       ------------
<S>                                                                   <C>                <C>
Revenue:
   Product revenue                                                 $  3,501,621       $  2,213,290
   Contract revenue                                                     108,000            364,809
   Sales returns and allowances                                         (16,754)                 -
                                                                   ------------       ------------
    Total revenue, net                                                3,592,867          2,578,099

 Cost of goods sold                                                   5,966,181          5,141,448
                                                                   ------------       ------------

Gross loss                                                           (2,373,314)        (2,563,349)
                                                                   ------------       ------------

Costs and expenses:
  Research and development                                              897,969             18,810
  Stock based compensation                                               87,565          2,183,418
  Selling, general and administrative                                 4,340,129          3,529,047
                                                                   ------------       ------------
    Total costs and expenses, net                                     5,325,663          5,731,275
                                                                   ------------       ------------

Other income (expense):
  Gain on debt settlement                                                     -          4,637,993
  Interest expense                                                   (5,087,057)        (1,283,254)
  Other income, net                                                      75,296            216,570
                                                                   ------------       ------------
    Total other (expense) income                                     (5,011,761)         3,571,309
                                                                   ------------       ------------
    Net loss                                                       $(12,710,738)      $ (4,723,315)
                                                                   ============       ============

Basic and diluted net loss per common share                        $      (0.20)      $      (0.13)
                                                                   ============       ============
Weighted average outstanding common stock                            64,278,144         35,998,435
                                                                   ============       ============

</TABLE>
                 See notes to consolidated financial statements

                                       F-4
<PAGE>
                        eMagin Corporation and Subsidiary
                 Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                   Common       Common     Deferred       Paid-in     Accumulated       Total
                                   Shares        Stock   Compensation     Surplus       Deficit
                               -----------------------------------------------------------------------------------
<S>                                   <C>         <C>         <C>         <C>           <C>            <C>
Balance - December 31, 2002         30,854,980  $ 30,854    $ (462,983) $119,221,276  $(131,597,263) $(12,808,115)
Conversion of debt to equity         6,101,972     6,102             -     4,447,996              -     4,454,098
Debt settlement                      1,997,840     1,998             -     1,409,971              -     1,411,969
Exercise of warrants                 1,479,900     1,480             -     1,136,595              -     1,138,075
Cashless exercise of warrants          270,910       271             -         (271)              -             -
Original issue discount on
 financing                                   -         -             -     1,383,203              -     1,383,203
Beneficial conversion on
 financing                                   -         -             -       616,797              -       616,797
Stock issued for services              656,435       656             -       561,302              -       561,958
Options exercised                      846,793       847             -       279,199              -       280,046
Issuance of equity for
 interest and penalties                486,582       486             -       734,841              -       735,327
Amortization of deferred
 compensation                                -         -       375,418             -              -       375,418
Stock option compensation                    -         -             -     1,808,000              -     1,808,000
Net loss for period                          -         -             -             -     (4,723,315)   (4,723,315)
                               -----------------------------------------------------------------------------------

Balance - December 31, 2003         42,695,412    42,694       (87,565)  131,598,910   (136,320,578)   (4,766,539)
Sale of equity                      16,408,364    16,409             -    16,368,162              -    16,384,571
Conversion of debt to equity        11,394,621    11,395             -     8,556,029              -     8,567,424
Issuance of warrants for
 early conversion of debt to
 equity                                      -        -              -     3,180,000                    3,180,000
Exercise of warrants                 3,533,348     3,534             -     3,785,927                    3,789,461
Options exercised                    5,221,052     5,221             -     1,379,263              -     1,384,484
Stock issued for services              386,020       386                     530,645                      531,031
Amortization of deferred
 compensation                                -         -        87,565             -              -        87,565
Net loss for period                          -         -             -             -    (12,710,738)  (12,710,738)
                               -----------------------------------------------------------------------------------

Balance - December 31, 2004         79,638,817   $79,639    $        -  $165,398,936  $(149,031,316) $ 16,447,259
                               ===================================================================================
</TABLE>
               See notes to consolidated financial statements

                                      F-5
<PAGE>
                        eMagin Corporation and Subsidiary
                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>


                                                                         Year Ended December 31,
                                                                          2004              2003
                                                                       ------------    ------------
 <S>                                                                    <C>             <C>
Cash flows from operating activities:
Net loss                                                               $(12,710,738)   $ (4,723,315)
Adjustments to reconcile net loss to net cash used in operating
activities:
   Depreciation and amortization                                            619,582         884,291
   Amortization of financing fees                                             7,863          37,244
   Bad debt expense                                                         466,923               -
   Non-cash stock based compensation                                         87,565       2,183,418
   Non-cash interest related charges                                      5,094,005       1,255,791
   Gain on debt settlement                                                        -      (4,637,993)
   Stock issued for services                                                531,031         561,958
  Changes in:
       Trade receivables                                                   (234,133)       (528,401)
       Unbilled costs and estimated profits on contracts in progress         75,359          50,000
       Inventory                                                         (1,742,469)        (24,419)
       Prepaid expenses and other current assets                           (400,393)       (276,109)
       Other long-term assets                                               (99,351)        112,500
       Advanced payments                                                    (58,166)        122,362
       Deferred revenue                                                           -         (30,400)
       Accounts payable, accrued expenses and accrued payroll               (49,789)       (185,776)
       Other current liabilities                                             16,754          (5,497)
                                                                       ------------    ------------
             Net cash used in operating activities                       (8,395,957)     (5,204,146)
                                                                       ------------    ------------

Cash flows used in investing activities:
   Purchase of equipment                                                   (720,805)     (1,120,256)
                                                                       ------------    ------------
Cash flows from financing activities:
   Proceeds from sales of common stock, net of issuance costs            16,384,571               -
   Proceeds from exercise of stock options and warrants                   5,173,945       1,418,121
   Proceeds from long- and short-term debt                                        -       6,000,000
   Payments of long- and short-term debt                                    (38,184)       (122,775)
                                                                       ------------    ------------
             Net cash provided by financing activities                   21,520,332       7,295,346
                                                                       ------------    ------------

Net increase in cash and cash equivalents                                12,403,570         970,944
Cash and cash equivalents - beginning of year                             1,053,895          82,951
                                                                       ------------    ------------
Cash and cash equivalents - end of year                                $ 13,457,465    $  1,053,895
                                                                       ============    ============

Cash paid for interest                                                 $      7,927    $     15,649
                                                                       ============    ============
Non-cash transactions:
Conversion of debt to equity                                           $  8,567,424    $  4,454,098
Issuance of equity for penalties on interest                           $          -    $    735,327
Issuance of equity for settlement of accounts payable                  $          -    $  1,411,969

</TABLE>
                 See notes to consolidated financial statements

                                       F-6
<PAGE>

                        eMAGIN CORPORATION AND SUBSIDIARY
                   Notes to Consolidated Financial Statements
                           December 31, 2004 and 2003

Note A - NATURE OF BUSINESS

eMagin  Corporation  is a  developer  and  manufacturer  of optical  systems and
microdisplays  for  use  in  the  electronics  industry.  eMagin's  wholly-owned
subsidiary,  Virtual Vision Inc., develops and markets  microdisplay systems and
optics technology for commercial, industrial and military applications.

Note B - SIGNIFICANT ACCOUNTING POLICIES

[1] Principles of consolidation:

The  accompanying  consolidated  financial  statements  include the  accounts of
eMagin  Corporation  and its  wholly  owned  subsidiary,  Virtual  Vision,  Inc.
(collectively  the  "Company").  Inter-company  transactions  and  balances  are
eliminated in consolidation.


[2] Revenue and cost recognition:

Revenue is recognized  when products are shipped and risk of loss is transferred
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,  the selling price is fixed or
determinable and collection is reasonably assured.

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.  Amounts can be
billed on a bi-monthly  basis.

[3] Research and development expenses:

Research and development  costs are expensed as incurred.

[4] 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.

[5] Accounts receivable:

The majority of commercial  accounts  receivable are due from Original Equipment
Manufacturers  ("OEM"s).  Credit is extended based on evaluation of a customers'
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. The Company  determines  the allowance by  considering a number of factors,
including the length of time trade accounts  receivable  are past due,  eMagin's
previous loss history, the customer's current ability to pay its obligation, and
the  condition of the general  economy and the industry as a whole.  The Company
writes  off  accounts  receivable  when they  become  uncollectable,  and if any
payments  are  subsequently  received  on such  receivables,  are  reported as a
reduction of bad debt expense in the year the payment is received.

[6] Allowance for doubtful accounts:

                                      F-7
<PAGE>
The  allowance  for doubtful  accounts  reflects an estimate of probable  losses
inherent in the accounts receivable  balance.  The allowance is determined based
on known troubled accounts, historical experience, and other currently available
evidence.

[7] 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
our  suppliers,  and the  estimated  utility  of the  inventory.  If our  review
indicates a reduction in utility below carrying  value,  we reduce the inventory
to a new cost basis.

[8] Equipment and leasehold improvements:

Equipment  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", eMagin 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.

[9] Income taxes:

Deferred  income taxes are recorded by applying  enacted  statutory tax rates to
temporary  differences  between the financial statement carrying amounts and the
tax bases of existing  assets  expected to apply to taxable  income in the years
that the asset is to be  recovered,  and  liabilities.  At December 31, 2004 and
2003,, the Company has net deferred tax assets of approximately  $59 million,and
$57 million,  respectively,  primarily  resulting from the future tax benefit of
net operating  loss  carryforwards  discussed  below and  temporary  differences
relating to amortization of intangible assets.  Such net deferred tax assets are
fully  offset  by a  valuation  allowance  due to the  uncertainty  as to  their
realizability.

[10] Loss per common share:

In accordance with SFAS No. 128, "Basic 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") is
computed by reflecting the potential dilution from the exercise of stock options
and warrants.  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, 2004 and 2003 do not include  options and warrants to
purchase 14,464,123 and 21,725,607,  respectively,  of common equivalent shares,
as their effect would be antidilutive.

[11] 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
securities  classified as  available-for-sale  and  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, 2004 and 2003.  Accordingly,  the
Company's  comprehensive  loss  is the  same as its net  income  (loss)  for the
periods presented.

                                      F-8
<PAGE>

[12] Stock-based compensation:

The Company has elected to apply  Accounting  Principals Board (APB) Opinion No.
25,  "Accounting for Stock Issued to Employees", and related  interpretations in
accounting for its  stock-based  compensation  plans.  Accordingly,  the Company
records expense for employee stock compensation plans equal to the excess of the
market price of the  underlying the Company shares at the date of grant over the
exercise price.

As of  December  31,  2004,  the  Company  has  outstanding  options to purchase
13,559,162  shares.  Under APB No. 25, when the exercise price of employee stock
options equals the market price of the underlying  stock on the date of grant no
compensation expense is recorded.  The Company discloses information relating to
the fair value of stock-based  compensation  awards in accordance with Statement
of Financial  Accounting  Standards  No.123  ("SFAS No. 123"),  "Accounting  for
Stock-Based  Compensation".  The following  table  illustrates the effect on net
loss and loss per share as if the Company had applied the fair value recognition
provision  of SFAS No. 123.  The fair value of each option grant is estimated on
the  date of  grant  using  the  Black-Scholes  option-pricing  model  with  the
following  assumptions  used for  grants  in 2004 and  2003,  respectively:  (1)
average  expected  volatility of 63% and 100%,  (2) average  risk-free  interest
rates of 3.94% and 3.52%, and (3) expected lives of 5-7 years and 7-10 years and
(4) dividends of 0% and 0%.

The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect
the portion of the  estimated  fair values of awards that were earned during the
years ended  December  31, 2004 and 2003.  The  weighted  average fair value per
option was $1.57 and $0.76 for options granted in 2004 and 2003, respectively.

<TABLE>
<CAPTION>
                                                                                           2004          2003
                                                                                        -----------    ----------
                                                                                              (in thousands)

<S>                                                                                     <C>            <C>
Net loss                                                                                $ (12,711)     $  (4,723)
Stock-based employee compensation expense included in reported net loss                        88          2,183
Stock-based employee compensation expense determined under fair value method               (6,777)        (3,748)

                                                                                        -----------    ----------
      Pro forma net loss                                                                $ (19,400)     $  (6,288)
                                                                                        ===========    ==========
Net loss per share:
     Basic and diluted, as reported                                                     $   (0.20)     $   (0.13)
     Basic and diluted, pro forma                                                       $   (0.30)     $   (0.17)
</TABLE>
[13] Fair value of financial instruments:

At December 31, 2004 the Company's cash, cash equivalents,  accounts  receivable
and accounts payable are earned at cost which appropriates fair value due to the
short-term nature of these instruments.

[14] Use of estimates:

The  preparation  of financial  statements  in  conformity  with U.S.  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the reported  amounts of assets and liabilities and 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.
Consequently, a change in conditions could affect these estimates.

[15] Reclassifications:

Certain  amounts in the 2003  financial  statements  have been  reclassified  to
conform to the 2004 presentation.

                                      F-8
<PAGE>
Note C - RECEIVABLES

Receivables at December 31, 2004 consist of the following:

         Trade receivables                         $ 1,282,117
         Contract receivables                           25,000
                                                   ------------
              Total                                  1,307,117
          Less allowance for doubtful accounts        (771,369)
                                                   ------------
              Net receivables                      $   535,748
                                                   ============
Note D - INVENTORY

The components of inventories as of December 31, 2004 are as follows:

         Raw materials                             $ 1,420,612
         Work in process                               168,645
         Finished goods                                428,629
                                                   ------------
             Total Inventory                       $ 2,017,886
                                                   ============

Note E - EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements and their estimated lives are as follows at
December 31, 2004:
<TABLE>
<CAPTION>
                                                       Useful
                                                       Lives

<S>                                                      <C>      <C>
          Computer hardware and software                 3        $    582,389
          Lab and factory equipment                      3           2,730,497
          Furniture, fixtures and office equipment      10             145,812
          Capital leases                                 3              66,075
          Leasehold improvements                        (a)            472,512
          Construction In Progress                       0              74,450
                                                                  -------------
               Total Fixed Assets                                    4,071,735
           Less accumulated depreciation                            (2,767,270)
                                                                  -------------
               Equipment and leasehold improvements               $  1,304,465
                                                                  =============
</TABLE>

(a) The  shorter  of either the life of the  lease,  or the  useful  life of the
asset.

Note F - DEBT

Debt consisted of a capitalized leased obligation as of December 31, 2004:

         a     Current portion                     $    14,080
         b     Long-term portion                        22,177
                                            -------------------
               Total                               $    36,257
                                            ===================

Note G - DEBT SETTLEMENT AND DEBT CONVERSION

In 2003, the Company entered into settlements and restructuring  agreements with
certain of eMagin's creditors,  pursuant to which the creditors agreed to accept
shares of eMagin's  common stock in full or partial  satisfaction  of the amount
owed to them, or which allowed us to either make discounted  payments to them or

                                      F-9
<PAGE>
to make payments  under more  favorable  payment terms than  previously  were in
place. As a result of the above transactions, the Company recorded $4,637,993 as
a gain on  settlement  of debt for the year ended  December  31,  2003.  No such
settlements were made in the year ended December 31, 2004.

In  February  2004,  we entered  into an  agreement  whereby  the holders of our
Secured Convertible Notes (the "Notes"), which were due in November 2005, agreed
to an early  conversion  of all of the $7.825  million  principal  amount of the
Notes,  together  with the  $742,424  of accrued  interest  on the  Notes,  into
11,394,621  shares of common stock of eMagin.  On the date of the conversion the
Company recorded, $1,598,335 in interest expense related to the unamortized debt
discount  and  beneficial  conversion  feature and  $74,637 in interest  expense
related to the write-off of deferred financing costs.

In  consideration  of the Note holders  agreeing to the early  conversion of the
Notes,  eMagin issued the Note holders  warrants to purchase an aggregate of 2.5
million shares of common stock (the "Warrants"),  which Warrants are exercisable
at a price of $2.76 per share.  1.5 million of the Warrants,  "D warrants",  are
exercisable  until December 31, 2005. The remaining 1.0 million of the Warrants,
"E  warrants",  are  exercisable  until June 10, 2008.  Using the Black  Scholes
method of valuating warrants,  an expense totaling $3.18 million was recorded in
interest  expense in the first quarter of 2004 to record an estimated  value for
these warrants.  The fair value of the warrants was estimated at $2.30 using the
Black-Scholes  option-pricing  model with the following  assumptions for the two
sets of warrants: (1) average expected volatility of 100%, (2) average risk-free
interest rates of 3.52%,  (3) dividends of 0%, and (4) Average Term (in days) of
670 for the D warrants and 1,460 for the E warrants.


Note H - INCOME TAXES

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:
<TABLE>
<CAPTION>
                                                                   2004          2003
                                                                ------------  ------------
<S>                                                                <C>           <C>
     U.S. Federal income tax provision (benefit)
        at federal statutory rate                                  (35)%         (35)%
     Change in valuation allowance                                  35 %          35 %
                                                                ------------  ------------
                                                                     0 %           0 %
                                                                ============  ============
</TABLE>


Significant components of eMagin's deferred tax assets  as of December 31,  2004
are as follows (numbers are in thousands):

                         Net operating losses                  $  39,262
                         Goodwill and other intangibles           19,894
                         Allowance for doubtful accounts             274
                         Deferred payroll                             25
                         Accrued vacation pay                         81
                                                               -----------
                              Total                               59,536
                         Less valuation allowance                (59,536)
                                                               -----------
                              Net Deferred Tax Asset           $       0
                                                               ===========

As of  December  31,  2004,  eMagin has  federal  and state net  operating  loss
carryforwards  of  approximately  $98 million  that will be  available to offset
future taxable  income,  if any,  through  December 2019. The utilization of net
operating  losses is subject to a  substantial  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.  A valuation  allowance  has been
established  to  reserve  for the  deferred  tax  assets  arising  from  the net
operating  losses and other temporary  differences  due to the uncertainty  that
their benefit will be realized in the future. The valuation  allowance increased
approximately  $2,869,000 and  $27,169,000 for the years ended December 31, 2004
and 2003, respectively.

                                      F-10
<PAGE>
In 2003, in connection with the  restructuring of its indebtedness (see Note G),
the Company  realized  income of  $4,637,993.  Under Section 108 of the Internal
Revenue Code,  this income is excludable  for federal income tax purposes to the
extent  that the  amount of the  Company's  liabilities  immediately  before the
restructuring  exceeds the fair market value of its assets as a going concern at
such time. The Company  estimates the entire $4,637,993 is excludable under this
exception.

Pursuant  to Section 108 of the  Internal  Revenue  Code,  the  excluded  income
reduces the Company's tax  attributes as of January 1, 2005.  Such  reduction is
first applied to reduce net operating loss carryforwards.

Note I - STOCKHOLDERS' EQUITY

The authorized common stock of the Company consists of 200,000,000 shares with a
par value of $0.001 per share.

In April of 2003,  the Company  converted  a  $1,000,000  loan plus  interest to
Travelers in common  shares  totaling  2,137,757 at a conversion  price from the
original  agreement of approximately  $0.53 per share, based on the market value
of our common stock on the date the agreement was entered into (see Note G).

The Company also converted a $3,000,000  loan plus interest to SK Corporation in
common  shares  totaling  2,495,833  at a  conversion  price  from the  original
agreement  of  approximately  $1.28 per share,  based on the market value of our
common stock on the date the agreement was entered into (see Note G).

In September 2003, the Company converted two Series B Convertible  Debentures in
the amount of $121,739 each into 1,468,382  share of the Company's  common stock
at a conversion  price from the original  note  purchase  agreement of $0.18 per
share.  This  transaction  included a write-down of the  unamortized  beneficial
conversion feature at the time of conversion.

In 2003,  the Company  received  approximately  $1.1 million for the exercise of
1,479,900  warrants to purchase shares of common stock.  The Company also issued
270,910 common shares in cashless  exercises of warrants in exchange for 579,329
warrant shares.

In 2003,  the  Company  negotiated  settlements  of amounts  due and amounts for
future  services,  rendered via issuance of 656,435  shares of common stock.  As
such,  the  Company  recorded  the  fair  value  of the  services  received  and
receivable  in the future of  $561,958 in  selling,  general and  administrative
expenses, prepaid expenses and reduction of accounts payable.

During  2003,  the  Company  received  $280,046  for the  exercise of options to
purchase 846,793 shares of common stock.

The Company's April 25, 2003 Registration  Rights  Agreement,  which was entered
into in connection with the Company's April 2003 financing, required the Company
to file a registration  statement with the Securities and Exchange Commission no
later than 30 calendar days after the closing of the April 2003  financing.  The
Company  was not able to file the  registration  statement  within the  required
period and caused a default under the Registration Rights Agreement. As a result
of this default,  the Company was required to issue an additional 486,582 common
shares for penalties and interest pursuant to the Registration Rights Agreement.
For the year ended December 31, 2003, the Company  recorded a charge to earnings
of $735,324 for the penalties and interest.  The Company filed its  registration
statement in July of 2003.

In connection with the April 2003 financing,  eMagin issued 387,496 warrants for
expenses related to the offering. These warrants were issued to Larkspur Capital
Corporation,  a company in which one of the Company's  directors is the managing
director.

On January 9, 2004, we entered into a Securities Purchase Agreement with several
accredited  institutional and private investors whereby such investors purchased
an aggregate of 3,333,363  shares of common stock and 4,312,212  warrant  shares
for an aggregate purchase price of $4,200,039.

The shares of common stock were priced at a 20% discount to the average  closing
price of the stock from December 30, 2003 to January 6, 2004,  which ranged from
$1.38 to $1.94 per share during the period for an average closing price of $1.26
per share. In addition, the investors received warrants to purchase an aggregate
of  2,000,019  shares of common  stock  (subject to  anti-dilution  adjustments)
exercisable  at a price of $1.74 per share for a period of five (5)  years.  The
warrants were priced at a 10% premium to the average  closing price of the stock
for the pricing period.

                                      F-11
<PAGE>

In  connection  with the  Securities  Purchase  Agreement,  eMagin  also  issued
additional warrants to the investors to acquire an aggregate of 2,312,193 shares
of common  stock.  1,206,914 of such warrants are  exercisable,  within 6 months
from the effective date of the registration statement covering these securities,
at a price of $1.74 per share (a 10% premium to the average closing price of the
stock for the pricing  period),  and 1,105,279 of such warrants are  exercisable
within 12 months from the effective date of the registration  statement covering
these  securities,  at a price of $1.90 per share (a 20%  premium to the average
closing price of the stock for the pricing period).

The  Company  also  entered  into  a  registration  rights  agreement  with  the
aforementioned  investors  with  respect to the common  stock  issued and common
stock  issuable  upon  the  exercise  of  the  warrants.  The  Company  filed  a
registration statement for the sale of the shares sold and the shares underlying
the warrants which went effective February 12, 2004.

In February 2004, the Company and all of the holders of the Secured  Convertible
Notes (the "Notes"),  which were due in November 2005, entered into an agreement
whereby  the  holders  agreed to an early  conversion  of 100% of the  principal
amount of the Notes aggregating $7.825 million, together with all of the accrued
interest of approximately  $742,000 on the Notes,  into 11,394,621 shares of the
Company's  common  stock.  The listing of the shares  issuable  pursuant to such
agreement was approved by the American Stock Exchange.

In  consideration  of the  Noteholders  agreeing to the early  conversion of the
Notes, eMagin agreed to issue the Noteholders  warrants to purchase an aggregate
of 2.5 million  shares of common  stock (the  "warrants"),  which  warrants  are
exercisable at a price of $2.76 per share. 1.5 million of the warrants (series D
warrants)  are  exercisable  until the later of (i) twelve  (12) months from the
date upon which a  registration  statement  covering  the shares  issuable  upon
exercise of the Warrants is declared  effective by the  Securities  and Exchange
Commission, or (ii) December 31, 2005. The remaining 1.0 million of the warrants
(series E  warrants)  are  exercisable  until  four (4) years from the date upon
which the registration  statement  covering such shares is declared effective by
the  Securities  and  Exchange  Commission.  Using the Black  Scholes  method of
valuating  warrants,  an expense totaling $3.18 million was recorded in interest
expense  during 2004 to record an estimated  fair value of these  warrants.  The
fair value of the  warrants,  $3.18  million,  was  estimated at $2.30 using the
Black-Scholes  option-pricing  model with the following  assumptions for the two
sets of warrants: (1) average expected volatility of 100%, (2) average risk-free
interest rates of 3.52%,  (3) dividends of 0%, and (4) Average Term (in days) of
670 for the series D warrants and 1,460 for the series E warrants.

In connection with the above conversion, eMagin also entered into a Registration
Rights  Agreement  with the  holders of the Notes  providing  the  holders  with
certain  registration rights under the Securities Act of 1933, as amended,  with
respect to the common stock issuable upon exercise of the warrants.

                                      F-12
<PAGE>
In August 2004, the Company and certain of the holders of its outstanding  Class
A, B and C common stock purchase warrants entered into an agreement  pursuant to
which the Company and the holders of the warrants agreed to the $0.90 re-pricing
and exercise of Class A, B and C common stock purchase warrants.  As a condition
to the  transaction,  the holders of the  warrants  agreed to limit the right of
participation  that they were  granted in  January  9, 2004.  As a result of the
transaction,   the  holders  agreed  to  re-price  and  exercise  approximately,
2,099,894 Class A, B and/or C common stock purchase warrants for an aggregate of
$1,889,900.

On October 21, 2004, the Company entered into a Securities  Purchase  Agreement,
pursuant  to which we sold and issued  10,334,525  shares of common  stock,  and
series F common  stock  warrants to purchase  5,129,762  our common stock for an
aggregate purchase price of $10,772,500. The Common Shares were priced at $1.05.
The Common Shares and the shares  underlying the warrants were drawn-down off of
a shelf  registration  statement  which was filed by the Company on May 5, 2004,
and declared  effective by the  Securities  and Exchange  Commission on June 10,
2004. Net proceeds  received after deducting  expenses was  approximately  $9.75
million.

The Series F Warrants are  exercisable  from April 25, 2005 until April 25, 2010
at an  exercise  price  of $1.21  per  share,  subject  to  adjustment  upon the
occurrence  of  specific  events,  including  stock  dividends,   stock  splits,
combinations or  reclassifications  of our common stock or distributions of cash
or  other  assets.  In  addition,  the  Series  F  Warrants  contain  provisions
protecting  against dilution resulting from the sale of additional shares of our
common stock for less than the exercise  price of the Series F Warrants,  or the
market price of the common stock, on the date of such issuance or sale.

On October 28, 2004, we entered into a Securities Purchase  Agreement,  pursuant
to which we sold and  issued  2,740,476  shares of common  stock,  and  series F
common stock purchase warrants to purchase our common stock to purchasers for an
aggregate  purchase price of $2,877,500.  The common stock shares were priced at
$1.05. The common shares and the shares  underlying the warrants were drawn-down
off of a shelf registration  statement which was filed by us on May 5, 2004, and
declared  effective by the Securities and Exchange  Commission on June 10, 2004.
Net proceeds received after deducting expenses was approximately $2.65 million.

The Series F Warrants are  exercisable  from April 25, 2005 until April 25, 2010
to purchase up to 1,370,238 shares of common stock at an exercise price of $1.21
per  share,  subject to  adjustment  upon the  occurrence  of  specific  events,
including stock dividends,  stock splits,  combinations or  reclassifications of
our common stock or  distributions  of cash or other  assets.  In addition,  the
Series F Warrants contain provisions  protecting against dilution resulting from
the sale of  additional  shares of our common  stock for less than the  exercise
price of the Series F Warrants,  or the market price of the common stock, on the
date of such issuance or sale.

As a result of the above transaction, 1,213,352 warrants, the outstanding Series
A Common  Stock  Purchase  Warrants,  that were  issued to  participants  of the
Securities Purchase Agreement dated January 9, 2004 were re-priced from $1.74 to
$1.05.

The Company  paid a  Placement  Agent  $814,000,  a fee equal to 6% of the gross
proceeds of these offerings.

In addition, the Company engaged Larkspur Capital Corporation,  a Related Party,
to act as an adviser in connection with the sale of these  securities.  For such
services,  the Company paid Larkspur Capital  Corporation a fee of $136,500,  an
amount equal to 1% of the gross proceeds of these offerings and 93,255 warrants.

In 2004, the Company received  $5,173,945 for the exercise of 5,221,052  options
and 3,533,348 warrants.

The  Company  also  issued  386,020  shares of common  stock for the  payment of
$531,031 for services  rendered and to be rendered in the future.  As such,  the
Company recorded the fair value of the services rendered in selling, general and
administrative  expenses in the accompanying audited  consolidated  statement of
operations for the year ended December 31, 2004.



                                      F-13
<PAGE>
Note J - STOCK COMPENSATION

[1] Stock option plans:

In 1994, the Company  established  the 1994 Stock Plan (the "1994 Plan"),  which
has been  assumed by eMagin.  The plan  provided  for the granting of options to
purchase an aggregate of 1,286,000  shares of the common stock to employees  and
consultants of FED. This Plan expired in 2004.

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,  eMagin  established the 2003 Stock Option Plan (the "2003 Plan").  The
2003 Plan  provided  for the  granting of options to purchase  an  aggregate  of
9,200,000  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
2,000,000  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.

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, 2004 and
2003 are summarized as follows:

                                                                      Weighted
                                                                      Average
                                                                      Exercise
                                                          Shares       Price
                                                        ------------ -----------
       Outstanding at December 31, 2002                   5,893,085     $  0.75
             2003 Options granted                         7,528,676        0.42
             2003 Options exercised                        (846,793)       0.33
             2003 Options canceled                         (413,198)       2.14
                                                        ------------ -----------
       Outstanding at December 31, 2003                  12,161,770        0.53
             2004 Options granted                         6,779,900        1.60
             2004 Options exercised                      (5,221,052)       0.27
             2004 Options forfeited                        (161,456)       2.27
                                                        ------------ -----------
       Outstanding at December 31, 2004                  13,559,162     $  1.14
                                                        ============ ===========

At December 31, 2004,  there were 428,849  shares  available for grant under the
2003 Plan and the 2000 Plan.


The following table summarizes  information  about stock options  outstanding at
December 31, 2004:

                                      F-14
<PAGE>
<TABLE>
<CAPTION>

                                            Options Outstanding                          Options Exercisable
                             --------------------------------------------------- -----------------------------------
                                                Weighted
                                                 Average
                                                Remaining          Weighted                           Weighted
                                               Contractual         Average                             Average
                                Number             Life            Exercise           Number         Exercisable
Range of Exercise Prices     Outstanding        (In Years)          Price           Exercisable         Price
------------------------     -----------     ---------------   ----------------- ----------------- -----------------
<C>         <C>               <C>                  <C>             <C>             <C>                  <C>
   $ 0.18 - $ 1.02            5,993,909            4.72            $ 0.53          5,270,401            $ 0.48
   $ 1.21 - $ 1.96            6,594,753            5.58              1.62          1,206,270              1.56
   $ 2.10 - $ 6.30              970,500            5.96              2.33             88,417              2.52
                             -----------                       ----------------- ----------------- -----------------
                             13,559,162                            $ 1.14          6,565,088            $ 0.71
                             ===========                       ================= ================= =================
</TABLE>

[2] Stock based compensation:

Non-cash  stock-based  compensation  expense represents expenses associated with
stock option grants to the Company's officers and employees at below fair market
value as  additional  compensation  for their  services  and to  induce  them to
lock-up their options for a longer time than would  normally be specified  under
the Company's standard option grant. Deferred compensation is amortized over the
remaining vesting period of the underlying options.

[3] Warrants:

At December 31, 2004, 21,618,229 warrants to purchase shares of common stock are
outstanding and exercisable at exercise prices  ranging from $0.43  to $2.76 and
expiration dates ranging from January 14, 2005 to February 27, 2012.

                                                                  Weighted
                                                                  Average
                                                                  Exercise
                                                    Shares        Price
                                                   ---------     ---------
Outstanding at December 31, 2002                   6,894,153     $    0.93
      2003 Warrants granted                        8,137,417          0.82
      2003 Warrants exercised                     (2,059,229)         0.78
      2003 Warrants expired                         (636,052)         2.75
                                                  ----------     ---------
Outstanding at December 31, 2003                  12,336,289          0.80
      2004 Warrants granted                       13,355,866          1.69
      2004 Warrants exercised                     (3,533,348)         1.52
      2004 Warrants expired                         (540,578)         1.12
                                                  ----------     ---------
Outstanding at December 31, 2004                  21,618,229     $    1.14
                                                  ==========     =========


Note K - RECENTLY ISSUED ACCOUNTING STANDARDS

In November  2004,  the FASB issued FAS No. 151,  "An  amendment  of ARB No. 43,
Chapter  4" This  statement  amends  the  guidance  in ARB No.  43,  Chapter  4,
"Inventory  Pricing",  to clarify the  accounting  for abnormal  amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).  This
Statement  requires  that those items be recognized  as  current-period  charges
regardless  of whether they meet the  criterion of "so  abnormal".  In addition,
this statement  requires that  allocation of fixed  production  overheads to the
costs  of  conversion  be  based  on  the  normal  capacity  of  the  production
facilities. The statement is effective for fiscal years beginning after June 15,
2005  with  early  adoption  permitted.   eMagin  is  currently  evaluating  the
requirements  and impact of FAS No. 151,  but at this point does not believe the
adoption will have a material  impact on its financial  position,  cash flows or
results of operations.

FASB  Statement  123R  (Revision  2004),  "Share-Based  Payment",  was issued in
December 2004 and is effective for public  entities that file as small  business
issuers as of the first  interim or annual  reporting  period that begins  after
December 31,  2005.  The new  statement  requires  all  share-based  payments to
employees  to be  recognized  in the  financial  statements  based on their fair
values. The Company currently accounts for its share-based payments to employees
under  the  intrinsic  value  method  of  accounting  set  forth  in  Accounting
Principles  Board Opinion No. 25,  "Accounting  for Stock Issues to  Employees".
Additionally,  the company complies with the stock-based  employer  compensation
disclosure   requirements   of  SFAS  No.  148,   "Accounting   for  Stock-Based
Compensation  - Transition  and  Disclosure,  an amendment of FASB Statement No.
123". The Company plans to adopt the new  statement in its financial  statements
for the quarter ending March 31 2006.  Although the impact cannot be ascertained
at this time,  the  Company  believes  this will have a  material  impact on its
financial statements and result of operations.



                                      F-15
<PAGE>
Note L - COMMITMENTS AND CONTINGENCIES

[1] Royalties:

The  Company,  in  accordance  with a royalty  agreement,  is  obligated to make
minimum annual royalty payments to a corporation commencing January 1, 2001. The
minimum annual royalty,  of $31,500 per year, due under this agreement commences
in the first year of the agreement, and increases to minimum royalty payments of
$125,000  in  2006.  Under  this  agreement,  the  Company  must  pay a  certain
percentage of net sales of 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 may be credited against the amounts
due based on the percentage of sales. The royalty agreement  terminates upon the
expiration of the last-to-expire issued patent.

For the years ended December 31, 2004 and 2003, royalty expense of approximately
$193,775 and $115,000 respectively, is included in cost of goods sold.

[2] Operating leases:

The  Company  leases  certain  office  facilities  and  office,  lab and factory
equipment under operating leases expiring  through 2009.  Certain leases provide
for payments of monthly  operating  expenses.  The future minimum lease payments
through 2009 are as follows:

                    Year ending December 31,

               2005                $      953,436
               2006                       902,085
               2007                       929,148
               2008                       957,022
               2009                       253,658
                                        ---------
                    Total          $    3,995,349
                                        =========

Rent expense for the years ended  December  31, 2004 and 2003 was  approximately
$769,766 and $839,738,  respectively.  eMagin's  lease with IBM expires in March
2009.  eMagin's  lease with Redson  Building  Partners  was paid in common stock
valued at $48,000 for the 2004 rent and expires May 31, 2005.

[3] 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, 2004 and 2003.

[4] Legal proceedings

The Company is subject to various claims and  proceedings in the ordinary course
of  business.  The  Company  believes  that  none of  these  current  claims  or
proceedings  individually  or in the  aggregate,  will have a  material  adverse
impact on the Company; results of operations, cash flows or financial condition,
although it can make no assurances in this regard.

Note M - Related Party Transactions

On February  27,  2002,  eMagin  Corporation  and a group of several  accredited
institutional  and  individual  investors  entered  into a  Securities  Purchase
Agreement  providing  for  the  issuance  and  sale to the  investors  of (i) an
aggregate of  approximately  3.6 million  shares of our common  stock,  and (ii)
warrants  exercisable  for a period of three (3) years from the Closing Date for
an  aggregate  of  approximately  1.4 million  shares of eMagin's  common  stock
(subject to certain customary  anti-dilution  adjustments) (see Note I). Rainbow
Gate Corporation, a corporation in which Mortimer D.A. Sackler is the investment
manager,  invested  $500,000 in the Company  under the  agreement  and  received
pursuant to such  investment  (i) 723,275 shares of eMagin's  common stock,  and
(ii) warrants  exercisable  for 289,310  shares of eMagin's  common  stock.  Mr.
Sackler  is  currently  a  beneficial  owner of more  than five  percent  of the
outstanding shares of eMagin's common stock.

On June 20, 2002, the Company  entered into a $0.2 million Secured Note Purchase
Agreement with Mortimer D.A.  Sackler (the "Bridge  Note")(see  Note F(c)).  The
secured note accrues  interest at 11% per annum and was originally due to mature
on June 30,  2003 and was  amended as a result of a financing  we  completed  in
April 2003. The Company also granted warrants,  exercisable for a period of five
years,  to purchase  300,000  shares of common  stock with an exercise  price of

                                      F-16
<PAGE>
$0.4257 per share to the investor,  provided,  however,  this warrant may not be
exercised  by the  investor  so long as the  investor is the  beneficial  owner,
directly or  indirectly,  of more than ten percent  (10%) of the common stock of
eMagin for purposes of Section 16 of the Securities  Exchange Act 1934. The fair
value of the warrants issued to this Investor,  which approximated  $84,000, has
been  recorded as  original  issue  discount,  resulting  in a reduction  in the
carrying  value of this debt.  The original  issue  discount was amortized  into
interest  expense  over the  period of the  debt.  Pursuant  to the  April  2003
financing  described below,  the investor agreed,  to (a) amend the secured note
issued to them,  (b) terminate the security  agreement  dated June 20, 2002 that
was entered into in connection  with the purchase of the original  secured notes
and allow the  investors  to enter into a new security  agreement  with him on a
pari passu basis in order for eMagin to continue its  operations  as a developer
of virtual imaging  technology,  and (c)  simultaneously  participate in the new
financing.  The  amendments to the note included (i) amending the note issued on
June 20, 2002 so as to provide that the note shall be convertible  and will have
the same conversion price as the notes issued pursuant to the April 2003 secured
note purchase agreement, (ii) extending the maturity dates of the note from June
30, 2003 to November 1, 2005, and (iii)  revising and clarifying  certain of the
other  terms  and  conditions  of the note,  including  provisions  relating  to
interest payments, conversions, default and assignment of the note.

On  April  25,  2003,  eMagin  Corporation  and a group  of  several  accredited
institutional and individual investors  (collectively,  the "Investors") entered
into  a  Restructuring   Agreement  whereby  Investors  agreed  to  lend  eMagin
$6,000,000  in exchange for (i) the issuance of $6,000,000  principal  amount of
9.00% Secured Convertible Promissory Notes due on November 1, 2005 (the "Secured


Notes") and (ii) Warrants (the "Warrants") to purchase an aggregate of 7,749,921
shares of common  stock of eMagin  (subject to certain  customary  anti-dilution
adjustments),  which Warrants are  exercisable  for a period of three (3) years.
Mr.  Rivkin,  who at the time of the  transaction  was a member  of our Board of
Directors,  participated as an investor in the transaction and invested $125,000
in the Company. In return for such investment, Mr. Rivkin received (i) a Secured
Convertible  Promissory Note in an aggregate  principal amount of $125,000,  and
(ii) warrants  exercisable  for 161,456  shares of eMagin's  common  shares.  In
addition,  Stillwater LLC, an entity  controlled by Mr.  Mortimer D.A.  Sackler,
agreed to invest an  aggregate  of  $2,600,000  under the  transaction  and will
receive (i)  Secured  Convertible  Promissory  Notes in an  aggregate  principal
amount of $2,600,000,  and (ii) warrants exercisable for 3,358,300 of our common
shares. As part of the transactions,  Messrs.  Sackler and Rivkin,  who were the
holders of an aggregate of  $1,325,000  principal  amount of secured  notes that
were purchased  pursuant to a secured note purchase agreement entered into as of
November 27, 2001 (collectively, the "Original Secured Notes"), and Mr. Sackler,
who additionally was the holder of a $200,000  principal Bridge Note,  agreed to
(a) amend  their  respective  Original  Secured  Notes and Bridge Note issued to
them,  (b) terminate  the Security  Agreement  dated  November 20, 2001 that was
entered into in connection  with the purchase of the Original  Secured Notes and
the Security Agreements dated June 20, 2002 that were entered into in connection
with the purchase of the Bridge Note and allow the new investors to enter into a
New  Security  Agreement  (as defined  below) with them on a pari passu basis in
order for the  Company to continue  its  operations  as a  developer  of virtual
imaging technology. The amendments to the Original Secured Notes and Bridge Note
included  (i)  amending  the Bridge  Note so as to provide  that the Bridge Note
shall be convertible and will have the same conversion price as the Notes issued
pursuant to the Secured Note  Purchase  Agreement,  (ii)  extending the maturity
dates of the  Original  Secured  Notes and  Bridge  Note  from June 30,  2003 to
November 1, 2005, and (iii)  revising and clarifying  certain of the other terms
and  conditions  of the  Original  Secured  Notes  and  Bridge  Note,  including
provisions relating to interest payments,  conversions,  default and assignments
of the Original  Secured Notes and Bridge Note. On April 25, 2003,  Mr.  Sackler
transferred  all of his  holdings  in the Company to  Stillwater  LLC, a limited
liability company in which Mr. Sackler is the sole member.

eMagin is party to a financial  advisory and investment  banking  agreement with
Larkspur Capital  Corporation.  Paul Cronson, a director of eMagin, is a founder
and shareholder of Larkspur Capital  Corporation.  Larkspur Capital  Corporation
received as compensation for financial  advisory and investment banking services
in  connection  with the January 2004 private  placement a cash fee of 6 3/4% of
the funds raised and warrants to purchase eMagin shares of common stock equal to
2.5% of the cash netted to eMagin.  $283,503 and 43,651  common  stock  purchase
warrants  exercisable at $2.41 per share which expire in January 2009, were paid
under the terms of the agreement.

A family member of an outside director of eMagin  participated in the Securities
Purchase Agreement in January 2004's private placement in the amount of $90,000.

eMagin is party to a financial  advisory and investment  banking  agreement with
Larkspur Capital  Corporation  "Larkspur".  Paul Cronson, an outside director of
eMagin,  is  a  founder  and  shareholder  of  Larkspur.  Larkspur  received  as
compensation  for  financial   advisory  and  investment   banking  services  in
connection  with the January 2004 private  placement a cash fee of 6 3/4% of the
funds  raised and  warrants to purchase  eMagin  shares of common stock equal to
2.5% of the cash netted to eMagin.  $283,503 and 43,651  common  stock  purchase
warrants  exercisable at $2.41 per share which expire in January 2009, were paid
under the terms of the agreement.

                                      F-17
<PAGE>
Stillwater LLC, a limited  liability company and a beneficial owner of more than
five  percent  of the  outstanding  shares of  eMagin's  common  stock,  held an
aggregate of $4 million of the notes converted in February 2004. Ginola Limited,
a  beneficial  owner of more  than five  percent  of the  outstanding  shares of
eMagin's common stock, held an aggregate of $1.3 million of the notes which were
converted.

An outside director of eMagin, held $250,000 of the notes converted.

A family member of an outside director of eMagin  participated in the re-pricing
of  the  Securities  Purchase  Agreement  in  August.  2,099,894  warrants  were
re-priced  and  exercised.  The family member  re-priced and exercised  25,862 B
warrants and 23,684 C warrants.

Paul Cronson,  an outside  director of eMagin,  is a founder and  shareholder of
Larkspur was engaged as advisor in  connection  with the sale of the  securities
sold in October 2004 and received a fee of $136,500.

Note - N Concentrations

In 2004, we had two customers that  individually  accounted for more than 10% of
our total sales.  One customer  accounted  for 17% of net revenues and the other
accounted for 15%. For the year ended December 31, 2003, one company represented
approximately 21% of net revenues.

For the year ended  December 31, 2004,  approximately  78% of the  Company's net
revenues  were made to customers in the United States and  approximately  22% of
the Company's net revenues were made to  international  customers.  For the year
ended  December 31, 2003,  approximately  70% of the Company's net revenues were
made to customers in the United  States and  approximately  30% of the Company's
net revenues were made to international customers.

At  December  31,  2004,  there  were 3  customers  which  comprised  50% of the
outstanding accounts receivable.

The  Company  purchases  principally  all  of its  silicon  wafers  from  Taiwan
Semiconductor Manufacturing Company Ltd.

                                      F-18
<PAGE>
ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

     None

ITEM 8A.  CONTROLS AND PROCEDURES

(a)  Evaluation  of  Disclosure  Controls and  Procedures.  As of the end of the
period covered by this report, we conducted an evaluation, under the supervision
and with the  participation  of our chief executive  officer and chief financial
officer of our disclosure  controls and procedures (as defined in Rule 13a-15(e)
and Rule 15d-15(e) of the Exchange Act). Based upon this  evaluation,  our chief
executive  officer and chief  financial  officer  concluded  that our disclosure
controls and procedures are effective to ensure that information  required to be
disclosed  by us in the reports that we file or submit under the Exchange Act is
recorded, processed,  summarized and reported, within the time periods specified
in the Commission's rules and forms.

     Notwithstanding the foregoing,  in connection with the audit of this annual
report on Form 10-KSB for the year ended December 31, 2004, on March 28, 2005 we
determined that the conversion of the debt to equity during the first quarter of
2004 should have been classified as a debt  transaction and therefore an expense
should have been recorded in connection with the conversion. As set forth in our
quarterly  report on Form  10-QSB/A  for the period ended March 31, and June 30,
2004 which was filed with the SEC on April 12, 2005,  the  Consolidated  Balance
Sheets,  Consolidated Statements of Operations,  Consolidated Statements of Cash
Flows,  Statement  of Changes in  Shareholders'  Equity  and  Selected  Notes to
Consolidated  Financial  Statements  have been restated,  where  applicable,  to
classify  the  conversion  as a  debt  transaction  and  record  an  expense  in
connection  with the  conversion.  In addition,  on March 28, 2005 we determined
that the  re-pricing  of our  original  Class A, B and C warrants in August 2004
should have been  classified as an equity  transaction  and therefore no expense
should have been recorded in connection  with the re-pricing of the warrants and
that the unamortized debt discount and the deferred  financing costs should have
been recorded as interest expense.  As set forth in our quarterly report on Form
10-QSB/A for the period ended September 30, 2004 which was filed with the SEC on
April 12, 2005, the  Consolidated  Balance  Sheets,  Consolidated  Statements of
Operations,  Consolidated  Statements  of Cash  Flows,  Statement  of Changes in
Shareholders'  Equity and Selected Notes to  Consolidated  Financial  Statements
have been restated,  where  applicable,  to record the unamortized debt discount
and the  deferred  financing  costs  as  interest  expense.  Accordingly,  these
restatements,  which were due to interpretations of the accounting  treatment of
such transactions  which was subsequently  determined to be incorrect,  has lead
management to determine  that our disclosure  controls and  procedures  were not
effective  as of the end of the  period  covered by this  report to ensure  that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded,  processed,  summarized and reported, within
the time periods specified in the Commission's rules and forms.

(b)  Changes in internal controls.  There was no change in our internal controls
or in other  factors  that could affect  these  controls  during our last fiscal
quarter that has  materially  affected,  or is  reasonably  likely to materially
affect, our internal control over financial reporting.

     Notwithstanding the foregoing,  we engaged John Atherly in June 2004 as our
Chief  Financial  Officer,  and in May 2005, we appointed  Irwin Engelman to our
board of  directors  and  appointed  Mr.  Engelman as the  Chairman of our Audit
Committee  immediately  following our annual meeting of  shareholders  which was
held on September 30, 2005. In addition, we have hired a new Director of Finance
to assist  the Chief  Financial  Officer  with our  filing  and other  financial
reporting  obligations.  We believe  these  additions in  personnel  enhance our
ability  to meet  our  financial  and  other  reporting  obligations  as well as
strengthen  our  disclosure  controls and  procedures so that they are currently
effective  to ensure  that  information  required to be  disclosed  by us in the
reports that we file or submit  under the  Exchange Act is recorded,  processed,
summarized and reported,  within the time periods  specified in the Commission's
rules and forms.

ITEM 8B. OTHER INFORMATION


None.

                                       36
<PAGE>
                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.

Our executive officers and directors, and their ages and positions are:
<TABLE>
<CAPTION>
Name                                                   Age      Position
<S>                                                    <C>      <C>
Gary W. Jones                                          49       Chairman, Chief Executive Officer, President
John Atherly                                           46       Chief Financial Officer
Dr. K. C. Park                                         67       Executive Vice President, International Operations
Susan K. Jones                                         53       Chief Marketing and Strategy Officer, Secretary
Claude Charles (1)                                     67       Director
Paul Cronson (1)                                       47       Director
Jacob (Jack) Goldman (2*) (3)                          82       Director
Rear Admiral Thomas Paulsen, USN (Ret.) (2)            68       Director
Jack Rivkin (1*) (3*)                                  64       Director
Dr. Jill Wittels (2)                                   55       Director
</TABLE>
(1) Audit Committee
(2) Governance and Nominating Committee
(3) Compensation Committee
(*) Committee chairman

     Gary W.  Jones  has  served  as  Chairman,  Chief  Executive  Officer,  and
President  of eMagin  since 1992,  and as Acting  Chief  Financial  Officer from
August  2002 to June 2004.  Mr.  Jones has over 20 years of  experience  in both
public and private companies in the areas of business  development,  high volume
manufacturing,  product development,  research, and marketing. Prior to founding
FED Corporation/eMagin  Corporation,  Mr. Jones served as Director of the Device
Development and Processing division at MCNC Center for Microelectronics in North
Carolina  from  1985  to  1992.  From  1977  to  1985  Mr.  Jones  managed  both
semiconductor  manufacturing  and  research  and  development  programs at Texas
Instruments.  Mr. Jones  received a B.S. in electrical  engineering  and physics
from  Purdue  University.  Mr.  Jones has  served  as a member of the  Executive
Committee of the Board of the United States Display Consortium.

     John  Atherly  has served as Chief  Financial  Officer  since June of 2004.
Before joining eMagin Corporation,  Mr. Atherly worked for Click2learn,  Inc., a
NASDAQ  listed  enterprise  Software  Company  from  1990 - 2004.  He  held  the
positions  of Vice  President of Finance and CFO for  approximately  8 years and
prior to that held the positions of Director of Finance and  Controller.  During
his 14 years  with  Click2learn  Mr.  Atherly  managed  the firm's  finance  and
administration,  human resources, IT and manufacturing organizations.  From 1987
to 1990, Mr. Atherly was a Finance and Operations Manager at MicroDisk Services,
a manufacturing  firm serving the software  industry.  Mr. Atherly holds a BA in
Business Administration from the University of Washington.

     Dr. K.C.  Park was  re-named  Executive  Vice  President  of  International
Operations  in 2004.  Previously he held the position of President of our wholly
owned subsidiary,  Virtual Vision,  Inc., from 2002 to 2004 after serving as our
Executive Vice President of International  Operations from 1998 to 2002.  During
his  twenty-seven  year  tenure  with IBM he  managed  flat  panel  display  and
semiconductor programs at the IBM Watson Research Center, directed the corporate
display programs at the IBM Corporate  Headquarters,  and established  Technical
Operations in IBM Korea and served as Senior Managing Director.  Dr. Park joined
LG  Electronics  in 1993 as  Executive  Vice  President  and  initiated  and led
corporate-wide  efforts  to shift the major  emphasis  of the  corporation  into
multimedia. Dr. Park holds a B.S. from the University of Minnesota, an M.S. from
MIT, and a Ph.D. in Solid State  Chemistry  from the University of Minnesota and
an MBA from New York University.

     Susan K. Jones has served as Executive Vice  President and Secretary  since
1992,  and assumed  responsibility  of Chief  Marketing and Strategy  Officer in
2001.  Ms.  Jones  has 25  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 is 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.

                                       37
<PAGE>


     Claude  Charles has served as a director  since April of 2000.  Mr. Charles
has served as President of Great Tangley  Corporation  since 1999.  From 1996 to
1998 Mr.  Charles was  Chairman of Equinox  Group  Holdings  in  Singapore.  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.

     Paul Cronson has served as a director  since July of 2003.  Mr.  Cronson is
Managing  Director of Larkspur  Capital  Corporation,  which he founded in 1992.
Larkspur is a broker  dealer  that is a member of the  National  Association  of
Securities  Dealers 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  from until
1992.  Mr.  Cronson  received his BA from Columbia  College in 1979, and his MBA
from Columbia University School of Business Administration in 1982. He is on the
Board of Umbanet,  in New York City,  a private  company  specializing  in email
based distributed applications and secure messaging.

     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.

     Admiral Thomas  Paulsen has served as a director  since July 2003.  Admiral
Thomas  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 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.

     Jack  Rivkin  has served as a director  since June of 1996.  Mr.  Rivkin is
Executive Vice President and Chief  Investment  Officer of Neuberger  Berman,  a
Lehman  Brothers  Company.  He previously  served as Executive Vice President of
Citigroup Investments Inc., through which the Travelers Group investments in the
Company were  managed.  He also served as Vice  Chairman and a director of Smith
Barney,  and held  positions  at Procter and Gamble,  Mitchell  Hutchins,  Paine
Webber and Lehman Brothers. Mr. Rivkin holds an engineering degree in metallurgy
from the Colorado School of Mines and an MBA from Harvard University.

                                       38
<PAGE>

     Dr. Jill Wittels has served as a director  since July 2003.  Since February
2001, Dr. Wittels has been the Corporate Vice  President,  Business  Development
for L-3  Communications,  a merchant supplier of intelligence,  surveillance and
reconnaissance systems and products, secure communications systems and products,
avionics and ocean products, training devices and services, microwave components
and telemetry, instrumentations,  space and navigation products. Dr. Wittels has
over 25 years of management, engineering and leadership experience. Prior to L-3
Communications,  Dr.  Wittels  worked  for 21  years  with BAE  Systems  and its
predecessor  companies,  including  Lockheed Martin,  Loral and Honeywell.  Most
recently,  she served as vice  president  and  general  manager of BAE  Systems'
Information  and  Electronic  Warfare   Systems/Infrared   and  Imaging  Systems
division. Dr. Wittels began her career as a systems engineer and has also served
as a  Congressional  Fellow  for  the  American  Physical  Society,  a  research
associate  at  Massachusetts  Institute  of  Technology  and a  senior  visiting
scientist for the National Academy of Sciences.  Dr. Wittels received a Bachelor
of Science degree in Physics from MIT in 1970 and received a PhD in Physics from
MIT in 1975. She serves on the Board of Overseers for the Department of Energy's
Fermi National Accelerator Lab, is a member of the American Physical Society and
a member of the American  Astronomical  Society. Dr. Wittels presently serves on
the Boards of Directors of Innovative  Micro  Technology Inc. and of Millivision
Inc.

     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. Each Class A director  will hold office until the 2005 Annual  Meeting of our
stockholders.  Currently,  Mr.  Gary Jones and Mr.  Jack  Rivkin are the Class A
directors. Each Class B director will hold office until the 2006 Annual Meeting.
Mr. Paul  Cronson  and Admiral  Thomas  Paulsen are Class B  directors.  Class C
directors will hold office until the 2007 Annual Meeting.  Currently, Mr. Claude
Charles,  Dr. Jill Wittels and Dr. Jacob  Goldman are the Class C directors.  In
each case, each director will hold office until his successor is duly elected or
appointed and qualified in the manner provided in eMagin's  Amended and Restated
Certificate  of  Incorporation  and  our  Amended  and  Restated  Bylaws,  or as
otherwise provided by applicable law.

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   will  be  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 posting such  information  on our website,  at the address
and  location  specified  above  and,  to the  extent  required  by the  listing
standards of the American Stock Exchange, by filing a Current Report on Form 8-K
with the SEC, disclosing such information.

                                       39
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION

Summary compensation table for named executive officers
The  following  table  provides  information  about the total  compensation  for
services in all  capacities to the Company or its  subsidiary for the last three
fiscal  years of those  persons who at  December  31,  2004,  were (i) the Chief
Executive  Officer of the  Company  and (ii) the other most  highly  compensated
executive  officers of the Company whose total annual salary and bonus  exceeded
$100,000 (collectively, the "named executive officers").
<TABLE>
<CAPTION>
                                                                                                     Long-Term
                                                                                                    Compensation
                                                                                                       Awards
                                                                                   Other Annual      (Securities
                                                                                                     Underlying
             Name and Positions                  Year      Salary    Bonus         Compensation       Options)
============================================== ========= ========== ======== ===== ============== ==================
<S>                 <C>                          <C>       <C>       <C>     <C>       <C>                <C>
Gary W. Jones      President, Chief              2004      305,090     -     (1)      46,636              1,200,000
                   Executive Officer             2003      305,090     -                 -                  516,260
                   Chairman, Director            2002      297,260     -                 -                3,589,827

Susan K. Jones     Executive Vice President,     2004      245,933     -     (2)         -                  750,000
                   Chief Strategy and
                   Marketing                     2003      245,933     -                 -                  403,825
                   Officer, and Secretary        2002      239,621     -                 -                2,293,368

K.C. Park          Executive Vice President      2004      168,000     -     (3)      17,200                300,000
                   of International              2003      168,000     -                 -                  231,697
                   Operations                    2002      175,000     -                 -                  938,310

John Atherly       Chief Financial Officer       2004      105,000     -     (4)         -                  750,000
                                                 2003       N/A        -                 -                      N/A
                                                 2002       N/A        -                 -                      N/A

Rick Haug          Vice President, Display       2004      156,000     -     (5)         -                  120,000
                   Manufacturing Operations      2003      156,000     -     (5)         -                  164,394
                                                 2002      156,000     -     (5)         -                  701,071


</TABLE>
(1) In 2004, Mr. Jones was paid a base salary  305,090,  the balance of deferred
pay in the  amount  of  $140,798,  as well  as a  reimbursement  for  relocation
expenses of $46,636.  Mr. Jones was paid the balance of his deferred pay through
the  application  of these amounts to the exercise of options.  In May 2004, Mr.
Jones was granted 1,200,000 shares as part of a company-wide bonus program.

(2) In 2004,  Ms.  Jones was paid a base salary of  $245,933  and the balance of
deferred  pay in the amount of  $110,134.  Ms. Jones was paid the balance of her
deferred  pay  through  the  application  of these  amounts to the  exercise  of
options.  In May  2004,  Ms.  Jones  was  granted  750,000  shares  as part of a
company-wide bonus program.

(3) In 2004,  Dr.  Park was paid a base  salary  of  $168,000,  the  balance  of
deferred pay in the amount of $63,190, as well as a reimbursement for relocation
expenses of $17,200.  Mr. Park was paid the balance of his  deferred pay through
the  application  of these amounts to the exercise of options.  In May 2004, Dr.
Park was granted 300,000 shares as part of a company-wide bonus program.

(4) Mr. Atherly's base salary is $210,00.  He joined eMagin  Corporation in June
2004 and was paid a salary of $105,000. He was granted 750,000 shares as part of
his hiring package. Of these 750,000 option shares granted,  500,000 shares vest
quarterly  over a period of five  years.  250,000  shares are  target  incentive
options  based on  successful  completion  of four  consecutive  EBITA  positive
quarters.

(5) In 2004,  Mr.  Haug was paid a base  salary of  $156,000  and the balance of
deferred  pay in the amount of  $44,835.  $10,000 of which was paid  through the
application  of this amount to the  exercise of  options.  In 2003,  he earned a
total of $156,000  where he received  partial  payment of his salary of $126,111
plus a partial payment of deferred 2002 salary of $29,889. In 2003, Mr. Haug was
granted 164,394 option shares for continuing to defer the balance of his pay. In
2002,  Mr. Haug earned a total of $156,000  of which  $42,287 was  deferred.  In
October 2002,  Mr. Haug was awarded  617,228  option shares which were issued in
July of 2003 after shareholder approval.

                                       40
<PAGE>
Options/SARs Grants During Last Fiscal Year

     The following table provides  information related to options granted to our
named executive officers during the fiscal year ended December 31, 2004.
<TABLE>
<CAPTION>

                               Number of           % of Total
                              Securities             Options          Exercise
                              Underlying           Granted in          Price
               Name         Options Granted        Fiscal 2004        ($/Share)      Expiration Date
      -----------------    ------------------    ----------------  ---------------   -----------------
<S>                             <C>                    <C>             <C>                <C>
      Gary W. Jones (1)         1,200,000               18%              $1.81              5/17/09
      Susan K Jones (1)           750,000               11%              $1.81              5/17/09
      John Atherly  (2)           500,000                7%              $1.69              6/16/11
      John Atherly  (2)           250,000                4%               N/A (3)           6/16/11
      Dr. K.C. Park (1)           300,000                4%              $1.79              5/10/09
      Rick Haug     (1)           120,000                2%              $1.69              6/16/09

</TABLE>
     (1)  Options awarded as part of a company-wide bonus program.
     (2)  Options  awarded  as  inducement  option  compensation  award  to  new
          employees.
     (3)  Issued as a performance  based award.  The named employee must achieve
          EBITDA  profitability  for 4  consecutive  quarters  with the  options
          priced at the most recent American Stock Exchange  closing trade price
          of the stock before the accomplishment is reported in a 10K or 10Q.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value

     The following table provides information  regarding the aggregate number of
options  exercised during the fiscal year ended December 31, 2004 by each of the
named  executive  officers and the number of shares subject to both  exercisable
and unexercisable  stock options as of December 31, 2004. The common stock price
at December 31, 2004 was $1.19 per share.
<TABLE>
<CAPTION>

                                                       # of Securities                  Value of Unexercised
                       Shares                       Underlying Unexercised                  In-the-money
                     Acquired on     Value           Options at FY-End                   Options at FY-End
                      Exercise    Realized (1)     Exercisable    Unexercisable     Exercisable     Unexercisable
=================   ============= ===========    =============  ==============     ============    =============
<S>                  <C>           <C>            <C>                 <C>           <C>                    <C>
Gary Jones            2,792,666   $3,870,534      1,460,604        1,200,000      $   911,469        $     -
Susan K. Jones        1,531,796   $2,123,445      1,648,377          750,000      $   604,641        $     -
Dr. K.C. Park           215,057   $  177,467      1,027,318          300,000      $   700,603        $     -
Richard Haug             91,777   $  171,164        920,774          120,000      $   621,583        $     -
John Atherly (2)              -   $        -              -          750,000      $         -        $     -


     (1)  Value Realized is calculated  based upon the spread between the market
          value of the common  stock on the date of exercise  minus the exercise
          price. The Company received $1,175,447 upon exercise of the options.

     (2)  Performance  based award is not  exercisable at December 31, 2004. The
          value of this award cannot be ascertained at this date due to the fact
          that the  exercise  price will not be  determined  until the target is
          reached.


</TABLE>

     Compliance  with  Internal  Revenue  Code  Section  162(m)  disallows a tax
deduction to publicly held companies for  compensation  paid to certain of their
executive officers to the extent that such compensation exceeds $1.0 million per
covered officer in any fiscal year. The limitation  applies only to compensation
that is not qualified performance based compensation under the IRS code.

                                       41
<PAGE>
ITEM 11.  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 April 26, 2005, unless otherwise noted. Unless otherwise indicated,
the stockholders listed in the table have sole voting and investment power with
respect to the shares indicated.

<TABLE>
<CAPTION>
                                                             Common Stock       Percentage of
Name of Beneficial Owner                                   Beneficially Owned   Common Stock**
---------------------------------------------------------  ------------------   ---------------
<S>            <C>                                          <C>                     <C>
Stillwater LLC (1)........................................     14,576,266              16.7%
George Haywood (2)........................................     10,169,952              11.9%
Gary W. Jones  (3)........................................      8,778,980              10.2%
Susan K Jones  (3)........................................      8,778,980              10.2%
Ginola Limited(4).........................................      8,654,795              10.2%
Rainbow Gate (5)..........................................      2,016,745               2.4%
Dr. K.C. Park(6)..........................................      1,258,580               1.5%
Jack Rivkin(7)............................................      1,213,896               1.5%
Ogier Trustee (Jersey) Limited (8)........................        976,200               1.2%
Paul Cronson (9)..........................................        506,657                  *
Claude Charles (10).......................................        315,000                  *
Chelsea Trust Company Limited ............................        119,161                  *
Jack Goldman(11)..........................................        107,500                  *
John Atherly (12).........................................        100,000                  *
Adm. Thomas Paulsen (13)..................................         85,000                  *
Dr. Jill Wittels (14).....................................         85,000                  *
All executive officers and directors Officers as a
group (consisting of 9 individuals) (15) .................     12,450,613              14.6%
</TABLE>

*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 or
warrants  currently  exercisable or  convertible,  or exercisable or convertible
within  60 days of April 26,  2005 are  deemed  outstanding  for  computing  the
percentage  of the person  holding  such  option or  warrant  but are not deemed
outstanding  for computing the percentage of any other person.  Percentages  are
based on a total of 82,172,176  shares of common stock  outstanding on April 26,
2005,  and the  shares  issuable  upon the  exercise  of  options  and  warrants
exercisable on or within 60 days of April 26, 2005, as described below.


(1) This figure represents:  (i) 9,326,145 shares owned by Stillwater LLC, which
includes  1,719,326 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  5,250,121  shares,  which
includes:  (a) a warrant to purchase 300,000 shares that may not be exercised by
Stillwater LLC so long as Stillwater LLC is the  beneficial  owner,  directly or
indirectly,  of more than ten  percent  (10%) of the common  stock of eMagin for
purposes of Section 16 of the Securities  Exchange Act of 1934, and (b) warrants
to purchase 297,419 shares held by Rainbow Gate  Corporation,  in which the sole
member of Stillwater LLC is the investment manager of Rainbow Gate Corporation;


(2) This figure includes 3,586,664 common shares underlying warrants.


(3) This figure  represents  shares  owned by Gary Jones and Susan Jones who are
married to each other,  including (i) 1,893,937  shares of common stock issuable
upon exercise of stock options held by Gary Jones and (ii)  1,886,066  shares of
common stock  issuable upon exercise of stock options held by Susan Jones.  This
does not include (i)  1,116,667  shares  underlying  options owned by Gary Jones
which are not  exercisable  within 60 days of April 26,  2005;  and (ii) 729,167
shares underlying  options owned by Susan Jones which are not exercisable within
60 days of April 26, 2005.

                                       42
<PAGE>
(4) This figure represents:  (i) 6,026,598 shares owned by Ginola Limited, which
include  1,719,326 shares held indirectly by Rainbow Gate  Corporation,  650,800
shares owned by Ogier Trustee(Jersey)  Limited, as trustee, 119,161 shares owned
by Chelsea  Trust  Company  Limited,  as trustee,  and 396,223  shares  owned by
Crestflower  Corporation.  Ginola Limited disclaims  beneficial ownership of the
shares owned by Crestflower  Corporation,  Ogier Trustee  (Jersey)  Limited,  as
trustee,  and Chelsea Trust Company Limited, as trustee;  and (ii) warrants held
by Ginola Limited to purchase  2,628,197 common shares,  which includes warrants
to purchase 297,419 shares held by Rainbow Gate  Corporation,  in which the sole
shareholder  of Ginola  Limited is also the sole  shareholder  of  Rainbow  Gate
Corporation,  and warrants to purchase  325,400  shares  owned by Ogier  Trustee
(Jersey) Limited, as trustee.  Ginola Limited disclaims  beneficial ownership of
the shares owned by Ogier Trustee (Jersey) Limited, as trustee.


 (5) This figure includes 297,419 shares underlying warrants.


(6) This figure includes 1,135,651 common stock shares issuable upon exercise of
stock options,  and does not include 291,667 shares underlying  options owned by
Dr. K. C. Park which are not exercisable within 60 days of April 26, 2005.


(7) This figure represents 639,093 shares owned by Mr. Rivkin,  warrants held by
Mr. Rivkin to purchase  244,803 shares of common stock, and 330,000 common stock
shares issuable upon exercise of stock options.


(8) This figure includes 325,400 shares underlying warrants.


(9) This figure represents 190,984 shares owned by Mr. Cronson,  215,673, shares
underlying  warrants,  and 100,000 shares  underlying  options held directly and
indirectly  by Paul Cronson.  This includes (i) 120,974  common stock shares and
42,857 shares  underlying  warrants  held  indirectly by a family member of Paul
Cronson;  and (ii) 43,651 shares underlying warrants held indirectly by Larkspur
Corporation of which he is the Managing Director.


(10) This figure represents shares underlying options.


(11) This figure represents shares underlying options.


(12) This figure  represents  shares  underlying  options.  This figure does not
include  900,000 shares of common stock issuable upon exercise of stock that are
not presently  exercisable and are not  exercisable  within 60 days of April 26,
2005.


(13) This figure represents shares underlying options.


(14) This figure represents shares underlying options.


(15) This figure  includes  (i)  warrants to purchase  460,476  shares of common
stock, and (ii) 6,038,154 shares of common stock issuable upon exercise of stock
options.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


On  April  25,  2003,  eMagin  Corporation  and a group  of  several  accredited
institutional and individual investors  (collectively,  the "Investors") entered
into a Global  Restructuring  and Secured Note Purchase  Agreement (the "Secured
Note  Purchase  Agreement")  dated as of April  25,  2003 (the  "Closing  Date")
whereby  Investors  agreed to lend eMagin  $6,000,000  in  exchange  for (i) the
issuance of $6,000,000 principal amount of 9.00% Secured Convertible  Promissory
Notes due on  November 1, 2005 (the  "Secured  Notes")  and (ii)  Warrants  (the
"Warrants")  to purchase an  aggregate  of  7,749,921  shares of common stock of
eMagin (subject to certain customary anti-dilution adjustments),  which Warrants
are exercisable for a period of three (3) years. Mr. Rivkin,  who at the time of
the  transaction  was a member of our  Board of  Directors,  participated  as an
investor in the transaction and invested $125,000 in the Company.  In return for
such investment,  Mr. Rivkin received (i) a Secured Convertible  Promissory Note
in an aggregate principal amount of $125,000,  and (ii) warrants exercisable for
161,456 of our common shares. In addition,  Stillwater LLC, an entity controlled
by Mr. Mortimer D.A. Sackler,  agreed to invest an aggregate of $2,600,000 under

                                       43
<PAGE>
the  transaction  and received (i) Secured  Convertible  Promissory  Notes in an
aggregate  principal  amount of $2,600,000,  and (ii) warrants  exercisable  for
3,358,300 of our common shares. As part of the transactions, Messrs. Sackler and
Rivkin,  who were the holders of an aggregate of $1,325,000  principal amount of
secured notes that were purchased  pursuant to a secured note purchase agreement
entered  into as of  November  27, 2001  (collectively,  the  "Original  Secured
Notes"),  and Mr.  Sackler,  who  additionally  was  the  holder  of a  $200,000
principal  Bridge Note,  agreed to (a) amend their  respective  Original Secured
Notes and Bridge Note issued to them, (b) terminate the Security Agreement dated
November 20, 2001 that was entered into in  connection  with the purchase of the
Original Secured Notes and the Security Agreements dated June 20, 2002 that were
entered  into in  connection  with the purchase of the Bridge Note and allow the
new  investors to enter into a New Security  Agreement  (as defined  below) with
them on a pari passu basis in order for the Company to continue  its  operations
as a developer of virtual imaging technology.

The  amendments  to the  Original  Secured  Notes and Bridge Note  included  (i)
amending  the  Bridge  Note so as to  provide  that  the  Bridge  Note  shall be
convertible and will have the same conversion price as the Notes issued pursuant
to the Secured Note Purchase Agreement, (ii) extending the maturity dates of the
Original  Secured  Notes and Bridge Note from June 30, 2003 to November 1, 2005,
and (iii) revising and  clarifying  certain of the other terms and conditions of
the Original  Secured Notes and Bridge Note,  including  provisions  relating to
interest payments, conversions,  default and assignments of the Original Secured
Notes and Bridge Note. On April 25, 2003,  Mr.  Sackler  transferred  all of his
holdings in the Company to Stillwater LLC, a limited  liability company in which
Mr. Sackler is the sole member.

In February 2004, the Company and all of the holders of the Secured  Convertible
Notes (the "Notes"),  which were due in November 2005, entered into an agreement
whereby  the  holders  agreed to an early  conversion  of 100% of the  principal
amount of the Notes aggregating $7.825 million, together with all of the accrued
interest of  approximately  $742,000  on the Notes,  into  11,394,621  shares of
common  stock of eMagin.  The  listing of the shares  issuable  pursuant to such
agreement was approved by the American Stock Exchange.

In  consideration  of the  Noteholders  agreeing to the early  conversion of the
Notes,  eMagin has  agreed to issue the  Noteholders  warrants  to  purchase  an
aggregate of 2.5 million shares of common stock (the "warrants"), which warrants
are  exercisable at a price of $2.76 per share.  1.5 million of the warrants are
exercisable until the later of (i) twelve (12) months from the date upon which a
registration  statement  covering  the  shares  issuable  upon  exercise  of the
Warrants is declared  effective by the  Securities and Exchange  Commission,  or
(ii)  December  31,  2005.  The  remaining  1.0  million  of  the  warrants  are
exercisable  until  four (4)  years  from the date upon  which the  registration
statement  covering  such shares is declared  effective  by the  Securities  and
Exchange  Commission.   Stillwater  LLC,  a  limited  liability  company  and  a
beneficial owner of more than five percent of the outstanding shares of eMagin's
common  stock,  held an aggregate of $4 million of the notes  converted.  Ginola
Limited,  a beneficial owner of more than five percent of the outstanding shares
of  eMagin's  common  stock,  held an  aggregate  of $1.3  million  of the notes
converted.

In connection with the above conversion, eMagin also entered into a Registration
Rights  Agreement  with the  holders of the Notes  providing  the  holders  with
certain  registration rights under the Securities Act of 1933, as amended,  with
respect to the common stock  issuable upon  exercise of the warrants.  eMagin is
party to a financial  advisory and  investment  banking  agreement with Larkspur
Capital  Corporation.  Paul  Cronson,  a director  of eMagin,  is a founder  and
shareholder  of  Larkspur  Capital  Corporation.  Larkspur  Capital  Corporation
received as compensation for financial  advisory and investment banking services
in  connection  with the January 2004 private  placement a cash fee of 6 3/4% of
the funds raised for a fee of $283,503 and warrants to purchase eMagin shares of
common  stock  equal to 2.5% of the cash  netted to eMagin for a total of 43,651
common stock purchase warrants exercisable at $2.41 per share.

In August 2004,  eMagin and the certain of the holders of its outstanding  Class
A, B and C common stock purchase warrants entered into an agreement  pursuant to
which  eMagin  and the  holders of the  warrants  agreed to the  re-pricing  and
exercise of an aggregate of 500,952,  862,085 and 736,857 currently  outstanding
Class  A,  B and C  common  stock  purchase  warrants.  As a  condition  to  the
transaction,  the  holders  of  the  warrants  agreed  to  limit  the  right  of
participation  that they were granted pursuant to Section 4.11 of the Securities
Purchase Agreement, dated January 9, 2004, under which they originally purchased
such securities.


                                       44
<PAGE>
Specifically,  the Company  agreed to lower the exercise  price of such warrants
from  $1.74,   $1.74  and/or  $1.90,   respectively,   to  $.90  per  share,  in
consideration of the holders agreeing to: (i) limit their right of participation
with  respect to any proposed  financing  transaction  to the maximum  number of
shares  that AMEX  will  allow  the  Investors  to  purchase  in any  subsequent
financing  without  the Company  being  required  to seek  shareholder  approval
(provided,  however, that in no event will the participation of all investors of
the January 2004 financing in any such subsequent  financing  exceed 35% of such
financing);  and (ii)  immediately  exercise the  re-priced  Class A, B and/or C
common stock purchase warrants.

As a result  of the  transaction,  the  holders  have  agreed  to  re-price  and
exercise,  for  an  aggregate  of  approximately  $1,889,900,  an  aggregate  of
2,099,894 Class A, B and/or C common stock purchase warrants.

The Class B common  stock  purchase  warrants  were due to expire on August  12,
2004, while the Class A and C common stock purchase warrants remain  exercisable
until  January  9, 2009 and  February  12,  2005,  respectively.  Following  the
completion of the  transaction,  the Company  continues to have  outstanding  an
aggregate of 1,213,352 and 184,212 Class A and C common stock purchase warrants,
respectively.  The remaining outstanding  unexercised Class A and C common stock
purchase warrants continue to be exercisable as per their original terms.

On October  21,  2004,  eMagin  entered  into a  Securities  Purchase  Agreement
pursuant  to which we sold and issued  10,259,524  shares of common  stock,  par
value $0.001 per share, and Series F Common Stock Purchase  Warrants to purchase
our  common  stock  to  purchasers  who are a party to the  Securities  Purchase
Agreement for an aggregate purchase price of $10,772,500. The common shares were
priced at $1.05. The common shares, Series F Warrants and common shares issuable
upon  exercise  of the  warrants  were  drawn-down  off of a shelf  registration
statement  which was filed by us on May 5, 2004,  and declared  effective by the
Securities and Exchange Commission on June 10, 2004.

The Series F Warrants are  exercisable  from April 25, 2005 until April 25, 2010
to purchase up to 1,370,238 shares of common stock at an exercise price of $1.21
per  share,  subject to  adjustment  upon the  occurrence  of  specific  events,
including stock dividends,  stock splits,  combinations or  reclassifications of
our common stock or  distributions  of cash or other  assets.  In addition,  the
Series F Warrants contain provisions  protecting against dilution resulting from
the sale of  additional  shares of our common  stock for less than the  exercise
price of the Series F Warrants,  or the market price of the common stock, on the
date of such issuance or sale.  The Series F Warrants do not entitle the holders
to any voting or other rights as a stockholder  until such Series F Warrants are
exercised  and common stock is issued.  Under the terms of the  offering,  in no
event shall any holder of the Series F Warrants  become the beneficial  owner of
more  than  4.99% of the  number  of  shares  of our  common  stock  outstanding
immediately after giving effect to such issuance. An exercise that is limited by
this provision may be permitted at a later date if, on such date,  such exercise
would not cause such beneficial  ownership to exceed 4.99%.  This limitation may
be waived,  in whole or in part,  by a holder of the Series F Warrants  upon, at
the election of such holder,  not less than 61 days' prior notice to us, and the
provisions of this  limitation  shall  continue to apply until such 61st day (or
such later date,  as  determined  by such  holder,  as may be  specified in such
notice  of  waiver);  provided,  however,  that  four of the  investors  in this
offering  delivered a waiver of this  limitation to us prior to the closing date
of this offering,  which waiver took effect as of the closing date. In addition,
in no event shall the Company issue to holders of the Series F Warrants, without
first  obtaining  shareholder  approval,  shares of common stock  which,  in the
aggregate, would exceed 19.9% of the number of shares outstanding on the closing
date. The rights of the holder of the Series F Warrants are more fully set forth
in Exhibit 4.1 to our Form 8-K filed with the SEC on October 26, 2004.

On October  29,  2004,  eMagin  entered  into a  Securities  Purchase  Agreement
(pursuant to which we sold and issued, on November 3, 2004,  2,740,476 shares of
common  stock,  par value $0.001 per share,  and Series F Common Stock  Purchase
Warrants  to  purchase  our common  stock to  purchasers  who are a party to the
Securities  Purchase  Agreement for an aggregate purchase price of approximately
$2,877,500.  The common  shares  were priced at $1.05.  The Company  also issued
75,000 shares to its legal counsel in consideration  of legal services  rendered
in connection with a recently completed  offering.  The common shares,  Series F
Warrants, common shares issuable upon exercise of the warrants and common shares
issued  to  its  legal  counsel  were  drawn-down  off of a  shelf  registration
statement  which was filed by us on May 5, 2004,  and declared  effective by the
Securities and Exchange  Commission on June 10, 2004. The Series F Warrants were
issued under the same terms as our October 21, 2004 financing described above.


                                       45
<PAGE>

ITEM 13.  EXHIBITS, LIST, AND REPORTS ON FORM 8-K

(a) Index to Exhibits

Exhibit
Number            Description
--------------------------------------------------------------------------------

2.1       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).

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).

10.1      2000 Stock Option Plan,  (incorporated by reference 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  OLED  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).

                                       46
<PAGE>

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),

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,  2001
          (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.

10.9      Amendment Number 4 to Lease between  International  Business  Machines
          Corporation and FED Corporation dated December 14, 2004.

10.10     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).

10.11     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).

10.12     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).

10.13     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).

10.14     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).

10.15     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).

10.16     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
          herein.

10.17     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 herein.

10.18     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 herein by reference.

                                       47
<PAGE>

10.19     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.

10.20     Registration  Rights Agreement dated as of April 25, 2003 by and among
          eMagin and certain initial investors identified on the signature pages
          thereto  filed April 28, 2003, as filed in the  Registrant's  Form 8-K
          incorporated herein by reference.

10.21     Securities Purchase Agreement dated as of January 9, 2004 by and among
          eMagin and the investors  identified on the signature  pages  thereto,
          filed  January  9,  2004,  as  filed  in  the  Registrant's  Form  8-K
          incorporated herein by reference.

10.22     Registration Rights Agreement dated as of January 9, 2004 by and among
          eMagin and certain initial investors identified on the signature pages
          thereto.  Incorporated herein by reference to our January 9, 2004 Form
          8-K.

10.23     Master Amendment  Agreement dated as of February 17, 2004 by and among
          eMagin and the investors  identified on the signature  pages  thereto,
          filed  March  4,  2004,  as  filed  in  the   Registrant's   Form  8-K
          incorporated herein by reference.

10.24     Registration  Rights  Agreement  dated as of February  17, 2004 by and
          among eMagin and certain initial investors identified on the signature
          pages  thereto,  filed  March 4, 2004,  as  filed  in the Registrant's
          Form 8-K incorporated herein by reference.

10.25     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, filed March 4, 2004, as filed in the Registrant's
          Form 8-K incorporated herein by reference.

23.1      Consent of Independent Registered Public Accounting Firm.

31.1      Certification  by Chief Executive  Officer  pursuant to Sarbanes Oxley
          Section 302.

31.2      Certification  by Chief Financial  Officer  pursuant to Sarbanes Oxley
          Section 302.

32.1      Certification  by  Chief  Executive  Officer  pursuant  to 18 U.S.  C.
          Section 1350.

32.2      Certification  by  Chief  Financial  Officer  pursuant  to 18 U.S.  C.
          Section 1350.

* Each of the Exhibits noted by an asterisk is a management compensatory plan or
arrangement.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

For year ended December 31, 2004, the Company made a cash payment to Eisner LLP,
our Independent  Registered Public Accounting Firm, of $82,425, of which $64,440
was for 2003 audit expenses,  $7,000 was for 2004 audit expenses and $10,985 was
for 2004 audit related fees.

For 2004 Eisner LLP billed the Company audit fees totaling  $93,697,  consisting
of $21,197  related to the quarterly  reports on Form 10 QSB and $72,500 related
to the annual report on Form 10 KSB, and audit related fees totaling $60,969. We
currently  have not  received  all  invoices  for 2004 audit  expenses  and have
accrued an additional amount of $20,000. No tax fees or other fees were incurred
by the Company for Eisner LLP.

In 2004,  the Company also paid Grant  Thornton  LLP,  our previous  Independent
Registered Public Accounting Firm, a total of $110,335, of which $31,000 was for
audit fees in 2004 and the balance of $79,335 was for outstanding 2003 invoices.
The  Company  paid  $6,000  to an  independent  accountant  for tax  preparation
services.

For the year  ended  December  31,  2003,  the  aggregate  fees for the audit of
eMagin's annual  financial  statements and the review of Forms 10-Q for the 2003
fiscal year were $70,000.  Aggregate fees billed for all other services rendered
by Eisner LLP for the 2003  fiscal year were $0.  Aggregate  fees billed for all
other  services  rendered  by Grant  Thornton  for the  2003  fiscal  year  were
$135,335.

The Audit Committee has considered whether the provision for services covered by
fees  other  than  audit  fees is  compatible  with  maintaining  the  principal
auditor's independence.

                                       48
<PAGE>

                                   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 2nd day of November 2005.

EMAGIN CORPORATION

BY:         /s/ Gary Jones
            --------------
            Gary Jones
            CHIEF EXECUTIVE OFFICER,
            PRESIDENT

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


            NAME                      TITLE                             DATE



/S/ Gary Jones                President, Chief Executive      November 2, 2005
------------------            Officer, and Director
Gary Jones

/S/ John Atherly              Chief Financial Officer         November 2, 2005
------------------
John Atherly

/s/ Claude Charles            Director                        November 2, 2005
------------------
Claude Charles

/s/ Paul Cronson              Director                        November 2, 2005
------------------
Paul Cronson

/S/ Dr. Jacob E Goldman       Director                        November 2, 2005
-----------------------
Dr. Jacob E Goldman

/s/ Adm. Thomas Paulsen       Director                        November 2, 2005
------------------
Adm. Thomas Paulsen


/s/ Dr. Jill Wittels          Director                        November 2, 2005
------------------
Dr. Jill Wittels

/S/ Irwin Engelman            Director                        November 2, 2005
------------------
Irwin Engelman


                                       49