UNITED
STATES SECURITIES AND EXCHANGE COMMISSION




Washington,
D.C. 20549





Form
10-K/A


(Amendment No.
1)





þ
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2007oro
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





Commission
file number 001-15751





eMAGIN
CORPORATION


(Exact
name of registrant as specified in its charter)





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





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


(Address
of principal executive offices)





(425)
749-3600


(Registrant’s telephone number, including area
code)





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





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





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





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





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





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





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





.   Large
accelerated filer £               Accelerated
filer £             Non-accelerated
filer R





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





As of
June 30, 2007, the aggregate market value of the issued and outstanding common
stock held by non-affiliates of the registrant, based upon the closing price of
the common stock as quoted on the National Association of Securities Dealers
Inc. OTC Bulletin Board of $0.66 was approximately $5.1
million.   For purposes of the above statement only, all
directors, executive officers and 10% shareholders are assumed to be
affiliates.  This determination of affiliate status is not necessarily
a conclusive determination for any other purpose.





Number of
shares of common stock outstanding as of March 14, 2008 was
12,620,900.





DOCUMENTS INCORPORATED BY REFERENCE
– None






1






EXPLANATORY
NOTE





eMagin
Corporation  (the “Company”) is filing this Amendment No. 1 to
its Annual Report on Form 10-K/A for the fiscal year ended December 31,
2007, which was originally filed with the Securities and Exchange Commission
(“SEC”) on April 14, 2008 (the “original Form 10-K”), to amend and restate
its Consolidated Balance Sheet as of December 31, 2007 and its Consolidated
Statement of Changes In Shareholders’ Equity (Capital Deficit), Consolidated
Statement of Cash Flows, and its applicable selected financial data for the
year ended December 31, 2007.





The
Company is filing this amendment to report its redeemable common stock
separately rather than include it in permanent equity as originally stated in
its 10-K for the fiscal year ended December 31, 2007. Accordingly, the Company
has restated the financial statements and presented the redeemable common stock
separate from permanent equity on its balance sheet.  The
aforementioned change had no impact on the Company’s total assets and total
liabilities on the balance sheet or the previously reported consolidated
statements of operations, including net income (loss) and earnings
(loss) per share.
  The
Company is revising certain disclosures as requested by the Securities and
Exchange Commission in their letter of comment May 15, 2008. The Company revised
the following:
  ●
                        Results
      of Operations – Year Ended December 31, 2007 Compared to December 31, 2006
      – Cost of Goods Sold●
                        Liquidity
      and Capital Resources●
                        Notes
      to the Consolidated Financial Statements – Note 8: Debt and Note 9: Income
      Taxes


This
Form 10-K/A includes new certifications as exhibits 31.1, 31.2, 32.1 and 32.2 by
our principal executive officer and principal financial officer as required by
Rules 12b-15 and 13a-14 promulgated under the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Except for the amended disclosures and
reclassification described above, the information in this Form 10-K/A has
not been updated to reflect events that occurred after April 14, 2008, the
filing date of our original Form 10-K. Accordingly, this Form 10-K/A should
be read in conjunction with our filings made with the SEC subsequent to the
filing of the original Form 10-K, including any amendments to those filings. The
following sections have been amended:


Part II -
Item 6:   Selected Financial Data


Part
II - Item 7: Management’s Discussion and Analysis of Financial Condition and
Results of Operation


Part II -
Item 8:   Financial Statements


Part
IV - Item 15:  Exhibits and Financial Statement
Schedules









2







FORM
10-K/A





FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007





INDEX








PagePART
      IItem
      1
            Business
            5Item
      1A
            Risk
      Factors
            17Item
      1B
            Unresolved
      Staff
      Comments
            22Item
      2
            Properties
            22Item
      3
            Legal
      Proceedings
            22Item
      4
            Submission
      of Matters to a Vote of Security Holders
            22PART
      IIItem
      5
            Market
      for Registrant’s Common Equity, Related Shareholder Matters and Issuer
      Purchases of Equity Securities
            23Item
      6
            Selected
      Financial
      Data
            25Item
      7
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            26Item
      7A
            Quantitative
      and Qualitative Disclosures About Market Risk
            31Item
      8
            Financial
      Statements and Supplementary Data
            32Item
      9
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            60Item
      9A
            Controls
      and
      Procedures
            60Item
      9B
            Other
      Information
            61PART
      IIIItem
      10
            Directors,
      Executive Officers, and Corporate Governance
            62Item
      11
            Executive
      Compensation
            65Item
      12
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            74Item
      13
            Certain
      Relationships and Related
      Transactions
            76Item
      14
            Principal
      Accountant Fees and
      Services
            77PART
      IVItem
      15
            Exhibits
      and Financial Statement
      Schedules
            77Signatures
            78













3










STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS





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





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











4










PART
I





ITEM
1. 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 of 800x600 picture
elements 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.
These products have received award recognition including: SID Display of the
Year andElectronicProductsMagazine Product
of the Year. 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 globally.





In 2006
we introduced our OLED-XL technology, which provides longer luminance half life
and enhanced efficiency of eMagin's SVGA+ and SVGA-3D product lines. We are in
the process of completing development of 2 additional OLED microdisplays, namely
the SVGA 3DS (SVGA 3D shrink, a smaller format SVGA display with a new cell
architecture with embedded features) and an SXGA (1280 x 1024 picture
elements).





In
January 2005 we announced the world's first personal display system to combine
OLED technology with head-tracking and 3D stereovision, the Z800 3DVisor(tm),
which was first shipped in mid-2005. This product was recognized as a Digital
Living Class of 2005 Innovators, and received the Consumer Electronics
Association’s coveted Consumer Electronics Show (CES) 2006 Best of Innovation
Awards for the entire display category as well as a Design and Innovations Award
for the electronic gaming category. In February 2007 the Z800 3DVisor, as
integrated in Chatten Associates’ head-aimed remote viewer, was recognized as
one of Advanced Imaging's Solutions of the Year.





We
believe that our OLED-on-silicon microdisplays offer a number of advantages over
current liquid crystal microdisplays, including greatly increased system level
power efficiency, 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 alternative
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 believe we are the only company to sell
full-color active matrix small molecule OLED-on-silicon
microdisplays.





eMagin
Corporation was created through the merger of Fashion Dynamics Corporation
("FDC"), which was organized on January 23, 1996 under the laws of the State of
Nevada and FED Corporation ("FED"), a developer and manufacturer of optical
systems and microdisplays for use in the electronics industry. FDC had no active
business operations other than to acquire an interest in a business. On March
16, 2000, FDC acquired FED. Simultaneous with this merger, we changed our name
to eMagin Corporation. Following the merger, the business conducted by eMagin is
the business conducted by FED prior to the merger.





Our
website is located at www.emagin.com and our e-commerce site is www.3dvisor.com.
We make available on our website, free of charge, our annual report on Forms
10K, our proxy statement, our quarterly reports on Forms 10Q, our current
reports on Form 8K, and all amendments to such 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, 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 as they
occur.








5




Industry
Overview





A study
by NanoMarkets (February 2007) predicts the overall OLED market will approach
$10.9 billion in 2010 and grow to $15.5 billion by 2014. These markets include
various sizes devices for a range of applications from cell phone size to
viewfinder displays to televisions to lighting. Displays in general are sold as
independent products (such as TV monitors) or as components of other systems
(such as laptop computers). Our products target one segment of the display
industry, the near-eye, personal display, which is viewed through a lens rather
than directly, in comparison to desktop computer screens which are known as
direct view displays. As an off-shoot of our work in microdisplays, we are also
participating in government-funded development studies for OLED-based
lighting.





Personal
displays, that is, near-eye systems based on microdisplays and optics, include
video headsets, camcorders, viewfinders and other portable devices.
Microdisplays are typically of such high resolution that they can be practically
viewed only with magnifying optics. Although microdisplays 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 computer screen at about 2 feet from the viewer
or a 60-inch TV screen at about 6 feet.  The wearable display market,
according to DisplaySearch, is expected to grow to at least $153 million in
2010. McLaughlin Consulting, in a report published December 2006, projects that,
with effective marketing, the Personal Viewer market could reach nearly $1
billion in 2010.





We
believe that the most significant driver of the longer term near-eye virtual
imaging microdisplay market is growing consumer demand for mobile access to
larger volumes of information and entertainment in smaller packages. This desire
for mobility has resulted in the development of 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.





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 in comparison with LCDs and other near-eye display
technologies:





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





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





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









6







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
and 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
also developed advanced lens technology which permits our OLED-on-silicon
microdisplays to provide large field of view images that can be viewed for
extended periods with reduced eye-fatigue. Molded plastic prism lenses have been
developed to help our OEM customers obtain better quality, large area virtual
images using our displays at relatively low cost in comparison to alternate
approaches.





Our
Products





Our first
commercial microdisplay products are based on our "SVGA series" OLED
microdisplays. We offer products utilizing both our proprietary “OLED” or
“OLED-XL” technologies, applied to the same integrated circuit base. We offer
our products to OEMs and other large volume buyers as both separate components,
integrated bundles coupled with our own optics, or full systems. We also offer
engineering support to enable customers to quickly integrate our products into
their own product development programs.





(1) OLED
Microdisplay Component Products





SVGA+ OLED
Microdisplay (Super Video
Graphics Array of 800x600 plus 52 added columns of data).  Our
0.62 inch diagonal SVGA+ OLED microdisplays have a resolution of 852x600 triad
pixels (1.53 million picture elements). The product was dubbed "SVGA+" because
it has 52 more display columns than a standard SVGA display, permitting users to
run either (1) standard SVGA (800 x 600 pixels) to interface to the analog
output of many portable computers or (2) 852 x 480, using all the data available
from a DVD player in a 16:9 wide screen entertainment format. The display also
has an internal NTSC monochrome video decoder for low power night vision
systems.





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





Microdisplays
Under Development.  We are developing two additional display
products, a smaller format (SVGA-3DS) version of our SVGA display, which will
have 800 x 600 triad pixels and be 0.44 inch diagonal and a 0.77 inch SXGA OLED
microdisplay with resolution of 1280x 1024 triad pixels. These new products
offer both analog and digital signal inputs in a compact display with greater
power efficiency. With the world’s finest pitch (11.1 microns) and a high level
of integrated functionality, the SVGA-3DS provides a simple path to system
integration in a small format. The SXGA split chip architecture offers
unprecedented power consumption savings for this display format in addition to a
highly flexible system interface configuration.





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





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








7







(2)
Personal Display Systems (Head-Wearable and Headset Systems)





Our Z800
3DVisors(tm) give users the ability to work with their hands while
simultaneously viewing information or video on the display. The Z800 3DVisor
enables more versatile portable computing, using a 0.59-inch diagonal
microdisplay (SVGA-3D capable of delivering an image that appears comparable to
that of a 19-inch monitor at 22 to 24 inches from the eye, or a 105 inch movie
screen at 12 foot distance. Our systems are currently being used for personal
entertainment, electronic gaming, and military training and simulation, among
other applications. We believe that personal display systems will fill the
increasing demand for instant data accessibility and privacy in mobile
workplaces. We sell the personal display systems to OEM systems and equipment
customers, through distributors, and through our e-commerce website,
www.3dvisor.com.





Our
Market Opportunity - Personal Display Systems Platforms, including Head-wearable
Displays





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 current and potential customers.





The
virtual-imaging markets we are targeting include 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. Applications we are targeting the following:





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. As a COTS (commercial off the shelf) component, OLED microdisplays
demonstrate performance characteristics important to military and other
demanding commercial and 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 inherent wide temperature range is especially of interest for military
applications because the display can turn on instantly at temperatures far below
freezing and can operate at very high temperatures in desert
conditions.





Our OLED
microdisplays have been selected for a range of defense-security applications,
including a situational awareness HMD for the US Army Land Warrior programs, a
handheld thermal imager for border patrol and training, and simulation virtual
monitors for Quantum 3D. The Land Warrior, a baseline 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. Rockwell Collins,
the principal contractor for the US Army's Land Warrior HMD system, and eMagin
applied their respective expertise in HMD and imaging technology to develop
rugged, yet lightweight and energy efficient products meeting the requirements
of tomorrow's soldier. Our display is also used in Rockwell Collins’
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.
Virtually Better Inc. has incorporated our Z800 3DVisor into its “Virtual Iraq”
treatment for post-traumatic stress disorders.  In addition, our
displays have been commercialized, or planned to be commercialized, by military
systems integrators including DRS, Elbit, Insight Technologies, Nivisys,
Qioptiq, Saab, Sagem, and Thales, , among others. We cannot assure that
Government projects will remain on schedule, or that they will be fully
implemented. Similar systems are of interest for other military applications as
well as for related operations such as urban security, fire and
rescue.







8








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. 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 Department of Defense agencies. 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.  Another recent example is Saab
Avitronics, which has chosen eMagin microdisplays for its news Multi-Purpose
Virtual Image Display (VID) which comprises high-performance magnifying optics
and the OLED, sealed in an aluminum casing.





Consumer





Once our
displays are manufactured in high volumes at reduced costs, we believe that our
head-wearable display products may enhance the following consumer
products:





·
            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. We
      believe that these new headset game systems can provide a game or
      telepresence experience not otherwise practical using conventional direct
      view display technology. The advent of video iPods and the rapidly
      increasing amount of downloadable content have accelerated the movement
      toward portable video technology. At the same time, the desire for larger
      screen sizes while retaining the iPod portability has been referenced in
      many publications. Virtual imaging uniquely provides a large, high
      resolution view in a small portable package, and we believe that our OLED
      on silicon technology is a best fit to help open this
    market.





·
            Notebook
      computers, which can use head-wearable devices to reduce power
      requirements 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.





·
            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.





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 have the potential to propel the growth of new products and
applications such as lightweight wearable computer systems.





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:






9







·
            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.




·
            Optimize
      manufacturing efficiencies by outsourcing while protecting proprietary
      processes. We 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, but we intend to outsource high volume
      manufacturing operations. There are numerous companies that provide these
      outsource services.





·
            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
      utilize in-house design capabilities supplemented by outsourced design
      services. 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 are
working cooperatively with the US Army, US Navy, and with several military
system integrators to further characterize operation of our displays in rugged
military environments. We have a Cooperative Research and Development Agreement
(CRADA) with the US Army Night Vision Electronic Sensors Directorate (NVESD) to
characterize performance of our displays. We are currently partnering with the
University of Michigan to develop advanced display process via a
government-sponsored research program. We intend to continue to establish
additional strategic relationships in the future.





We are a
member of the United States Display Consortium (USDC), a cooperative effort
between industry and government whose charter is to develop an infrastructure to
support North American flat panel display manufacturing. It has more than 100
members, as well as support from the Department of Defense. The USDC’s role is
to provide a common platform for flat panel display manufacturers, developers,
users and the manufacturing equipment and supplier base.





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 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.






10






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,
top-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:





·
            Low
      manufacturing cost;





·
            Low
      cost system solutions;





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





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





·
            High
      brightness for improved viewing;





·
            High-speed
      performance resulting in clear video
images;





·
            Wide
      operating temperature range; and





·
            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. Expensive transparent wafers with CMOS silicon laminated onto
quartz are not required for OLED microdisplays, as standard CMOS chips may
be used as backplanes.





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 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 extended.






11






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 image.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:





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 personal 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 and
are using them in our own personal display systems.





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





·
            Can
      be very low cost, with minimal assembly. A one piece, molded plastic optic
      attached to the microdisplay has been introduced and may potentially serve
      consumer end-product markets. Since our process is plastic molding, our
      per unit production costs are low;





·
            Allows
      a compact and lightweight lens system that can greatly magnify a
      microdisplay to produce a large field of view. For example, our WF05 prism
      lens, in combination with our SVGA OLED microdisplay, provides a virtual
      view equivalent to that of a 105-inch diagonal display viewed at 12
      feet;





·
            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;





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





·
            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.






12







Personal display system
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 have also incorporated low
cost, small size, high speed headtrackers to further enhance game and
telepresence applications.




Sales
and Marketing





We
primarily provide display components 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 in North America, Asia, and Europe primarily through direct
technical sales from our headquarters. Regular purchase orders are processed by
our customer service coordinators and technical questions related to product
purchases or product applications are processed by our technical support team.
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. Our personal display systems are sold through select
value-added resellers and on-line through PC Mall, Google Checkout, and our
e-commerce site, www.3dvisor.com.





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.





Near term
sales efforts for OLED microdisplays 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 200 OEM customers. An OEM design cycle
typically requires between 6 and 36 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
continue to receive follow-on orders and notification of product purchase
decisions. (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 2007, 51% of
our net revenue was to firms based in the United States and 49% was to
international firms as compared to 59% domestic revenue and 41% international
revenue during 2006.  In 2007, we had 10 customers that accounted for
more than 54% of our total revenue as compared to 5 customers that accounted for
more than 68% of our total revenue in 2006. In 2007, we did not have any
customers that accounted for more than 10% of our total revenue as compared to
2006, when we had one customer that accounted for 13% of our total
revenues.




Backlog





As of
March 14, 2008, we had a backlog of approximately $7.3 million for purchases
through December 31, 2008. This backlog consists of purchase orders and purchase
agreements but does not include expected revenue from R&D contracts or
expected NRE (non-recurring engineering) programs under
development.





The
majority of our backlog consists of purchase agreements for delivery over the
next 12 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. 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 development of custom
optics or other aspects of their end product, or by delays in government
programs contracted to them.





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
anticipate that achieving reductions in manufacturing costs will require new
technology developments. We also 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. In 2007, we spent approximately $2.9 million on
research and development. In 2007 we continued to research more efficient
materials and processes. We also completed the primary designs of our new
smaller display, the SVGA 3DS, as well as the design of the SXGA.






13






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").





U.S.
Government-Funded Research





We have
entered into several U.S. government contracts to fund a portion of our efforts
to develop next-generation OLED technologies for a variety of applications.
These include, among others, Small Business Innovation Research (SBIR) Phase II
program contracts for continued research and development and the fabrication of
prototypes. On contracts for which we are the prime contractor, we subcontract
portions of the work to various entities and institutions, including the
University of Michigan. Our recent government contracts include the
following:





OLED Performance and Reliability
Improvement for Active
Matrix OLED Microdisplays. Armed forces as well as other security related
agencies are relying increasingly on the benefits of OLED technology in active
matrix microdisplays. Applications range from night vision thermal imaging to
tactical awareness and communication systems to weapons-mounted sights, among
others. As the systems capabilities are expanded, the need for higher brightness
and ability to display static imagery such as maps and drawings is growing,
placing higher demands on the OLED technology. In 2007 eMagin was awarded a
contract managed by the Night Vision Electronic Sensors Directorate (NVESD) with
funding by the Department of Defense Appropriations Bill. The objective of the
program is to improve on the present performance of the microdisplay-based OLED
technology from lifetime, efficiency and reliability standpoints. For 2007, we
received approximately $360 thousand of the $1.12 million program. The
FY 2008 Department of Defense Appropriations Bill has provided for continuation
of a second phase of the program





Organic Light Emitting Diode (OLED)
Display Technology for Military Aircraft. In 2007 we continued our
efforts to develop a robust thin film encapsulation technique for OLED displays
under a Small Business Technology Transfer (STTR) program from the US Navy.
University of Michigan, Ann Arbor, MI is the university partner for this STTR.
Many new schemes to encapsulate OLED devices with thin film techniques were
developed, evaluated and tested under accelerated environmental condition. The
contract expired on February 29, 2008. For 2007 we received
approximately $328 thousand in funding under this
program.





Ultra High Resolution Display for
Army Medicine. In 2007 we formally initiated efforts on a multiple year
program under contract with the US Army TATRC (Telemedicine and
Advanced Technologies Research Center) with funding provided by
the FY 2006 and 2007 Department of Defense Appropriations Bills. The culmination
of this multiple year effort will provide an ultra-high resolution, wide field
of view display system suitable for dual-use application within Army medicine,
U.S. military simulation and training, and commercial uses. We received
approximately $698 thousand in funding during 2007 under this contract and
expect to receive approximately $2 million during 2008.





HighDynamicRangeMicrodisplay Feasibility
Study. The US Army/RDECOM/NVESD and eMagin Corporation have established a
CRADA (Cooperative Research and Development Agreement) with the goal of
evaluating and characterizing new and existing AMOLED microdisplay
configurations with an emphasis on the usable lifetime of the displays. This
work is aimed at developing AMOLED microdisplays capable of being fielded in a
wide range of US Army applications. The effort is for a 3 month period and is a
feasibility study aimed at evaluating several concepts leading to a higher
dynamic range without changing the existing pixel driver design of the
microdisplays. If successful, a second phase can be considered addressing a
complete high dynamic range OLED microdisplay. The total program cost for the 3
month program is approximately $236 thousand. The program started on March
14, 2008.





Manufacturing
Facilities





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





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.






14






We lease
additional non-clean room facilities for chemical mixing, cleaning, chemical
systems, and glass/silicon cutting. OLED chemicals can be 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 Bellevue, Washington where we operate our system development
effort and business development activities. 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. The equipment required for initial
profitable production is in place. Some equipment will be added when our
production volume increases or as needed.





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:





·
            OLED
      Materials, Structures, and Processes;·
            Display
      Color Processing and Sealing;·
            Active
      Matrix Circuit Methodologies and Designs;·
            Field
      Emission and General Display Technologies;·
            Lenses
      and Tracking (Eye and Head);·
            Ergonomics
      and Industrial Design; and·
            Wearable
      Computer Interface Methodology









15




We also
rely on proprietary processes, trade secrets, and know-how related to OLED
technologies and materials which are not patented. To protect this information
and know-how from unauthorized use or disclosure,, 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





The
industry in which we operate is highly competitive. We may face competition from
legacy technologies such as CRTs as well as from alternative flat panel display
technologies. We believe that our key competition will come from liquid crystal
on silicon microdisplays, or LCOS, also known as reflective liquid crystal
displays and small transmissive LCDs. While we believe that
OLED-on-silicon  has the capability to provide higher
quality image quality images, greater environmental ruggedness, reduced
electronics cost and complexity, and improved power efficiency advantages over
either type of liquid crystal based microdisplays, there is no assurance that
these benefits will be fully realized or that liquid crystal manufacturers will
not suitably improve these parameters to reduce these potential advantages of
OLEDs.





Most
companies pursuing liquid crystal on silicon technology, such
as  Syntax/Brillian Corporation, among others, have primarily
focused on projection microdisplays, which do not compete directly with us.
In most near-to-the-eye imaging markets, we face more serious
competition from developers of transmissive liquid crystal displays, such as
those developed by Kopin, or possibly laser scanning systems, such as those
developed by Microvision Corporation. Large amounts of investment in
an intrinsically weaker technology can potentially overcome advantages of one
technology over another.





To our
knowledge, the only other company that has publicly stated plans to develop OLED
microdisplays for near-eye applications is MicroEmissive Displays  (MED) in
Britain. MED has raised substantial funds and created a newer facility than
ours.  This competition has not been significant to date, but could become
more serious if they enter our markets with directly relevant display
designs and resolve their manufacturing and reliability-lifetime
issues.





We may
also compete with potential licensees of Universal Display Corporation, Eastman
Kodak, or Sumitomo Corporation and other companies, each of which
potentially can license OLED technology portfolios. Even though we could also
potentially license technology from these developers, potential competitors
could also obtain such licenses and may do so at more favorable royalty rates or
allocate more resources to the competitive effort than we could obtain. 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.





Employees





As of
March 14, 2008, we had a total of 65 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.





Subsequent
Events





On
January 30, 2008 the Moriah Agreement (as defined below) was
amended  and restated (a) to provide Borrowing Base eligibility for
Foreign Accounts at 70 percent of the accounts receivable balance so long as the
individual account has not experienced a past due history during the previous
two years, (b) to amend the note agreement to eliminate the optional conversion
of principal up to $2.0 million of principal into common stock at a price of
$1.50 per share in lieu of issuance of a warrant to purchase 750,000 shares of
the Company’s commons stock at a price of $1.50 per share with an expiration
date of January 29, 2013, and (c) to amend the Company’s share registration
obligation to complete the filing of a registration statement within thirty days
of the execution of the amendment.





On March
25, 2008 the Moriah Agreement was again amended (the “Moriah Amendment”) to
provide certain waivers, as described below, and a further extension of the
period during which the Company is obligated to file a registration statement
including shares issued or to be issued in connection with the Moriah
Agreement.  The Moriah Agreement, as amended, has specific terms to
which the Company must comply including (a) maintaining a lockbox account into
which payments from related accounts receivable must be deposited, (b) periodic
certifications as to borrowing base amounts equaling or exceeding net balances
outstanding under the Line of Credit, and (c) a requirement that a registration
statement with respect to shares held or to be issued to the lender be filed
within thirty days of January 30, 2008.  A delay in establishing the
required lockbox account created a technical default under the Line of Credit
agreement.  Similarly, the production and subsequent discovery of
defective displays resulted in an inadvertent overstatement of inventory during
December 2007, January 2008 and early February 2008 that created a technical
default under the agreement.  Finally, the Company was not able to
complete the registration of shares within the thirty day timeframe mandated in
the amended agreement. Pursuant to the March Amendment, Moriah
waived:  (a) the lockbox account requirement through March 14, 2008,
(b) compliance with the borrowing base requirement in so far as it related
exclusively to the defective displays inadvertently included in inventory
and (c) also extended the period for filing a registration statement for certain
shares issued or to be issued to the lender until April 29, 2008.





On April
2, 2008, the Company completed a private placement of its common stock with
several institutional investors for gross proceeds of $1,650,000.  The
transaction involved the sale of 1,586,539 shares of common stock at $1.04 per
share, or the 5-day average closing price of the Company’s common stock on the
trading days immediately preceding the closing date.  The Company also
issued to the investors 793,273 warrants to buy our common stock at a price of
$1.30 per share.  Pursuant to the transaction, the Company is
obligated to file a registration statement for the shares issued as well as
shares underlying the warrants by May 17, 2008.








16







ITEM 1A.  RISK FACTORS





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





RISKS
RELATED TO OUR FINANCIAL RESULTS





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





Our
accumulated losses are $199 million as of December 31, 2007.  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 including markets development, sales and
marketing, manufacturing equipment, acquisitions, 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.





As we
have reported, our business is expected to experience significant revenue growth
during the year ended December 31, 2008. We anticipate that our cash
requirements to fund operating or investing cash requirements over the next
twelve months may be greater than our current cash on hand and borrowing
availability under our revolving credit facility.  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. No assurance can be given
that additional financing will be available, or if available, will be on
acceptable terms.





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





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





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





Our
independent registered public accounting firm has expressed substantial doubt
about our ability to continue as a going concern, which may hinder our ability
to obtain future financing.




Our
consolidated financial statements as of December 31, 2007 have been prepared
under the assumption that we will continue as a going concern for the year
ending December 31, 2008. Our independent registered public accounting firm has
issued a report dated April 9, 2008 that included an explanatory paragraph
expressing substantial doubt as to our ability to continue as a going
concern without additional capital or financing becoming available. Our ability
to continue as a going concern ultimately depends on our ability to generate a
profit which is likely dependent upon our ability to obtain additional
equity or debt financing, attain further operating efficiencies and, ultimately,
to achieve profitable operations. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.









17







RISKS
RELATED TO MANUFACTURING







The manufacture of OLED-on-silicon is new and
OLEDmicrodisplays have not
been produced in significant quantities.





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





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





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





We
expect to depend on semiconductor contract manufacturers to supply our silicon
integrated circuits and other suppliers of key components, materials and
services.





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.





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.






18







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





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




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.





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





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





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





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





·
            successful
      expansion of our manufacturing
capabilities;





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





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





·
            the
      market acceptance of our customers' products;
  and





·
            product
      or technology introductions by our
competitors.





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






19







The display industry may be
cyclical.





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








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 competitive position could be damaged if
one or more of our competitors’ products get to the market sooner than our
products. We cannot assure you that our product will get to market ahead of our
competitors or that we will be able to compete successfully against current and
future competition.  The failure to do so would have a materially
adverse effect upon our business, operating results and financial
condition.





Our
competitors have many advantages over us.





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





Our
products are subject to lengthy OEM development periods.





We 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
sampling of our products by OEMs, the custom design of our products to meet
specific OEM product requirements, and the ultimate incorporation of our
products into OEM consumer products is significant often with a duration of
between one and three years. If our products fail to meet our OEM customers'
cost, performance or technical requirements or if unexpected technical
challenges arise in the integration of our products into OEM consumer products,
our operating results could be significantly and adversely affected. Long delays
in achieving customer qualification and incorporation of our products could
adversely affect our business.





Our
products will likely experience rapidly declining unit prices.





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





RISKS
RELATED TO OUR BUSINESS





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





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






20







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





Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), and the rules
and regulations promulgated by the SEC to implement Section 404, we are required
to include in our Form 10-K/A an annual report by our management
regarding the effectiveness of our internal control over financial
reporting.  The report includes, among other things, an assessment of
the effectiveness of our internal control over financial reporting as of the end
of our fiscal year.  This assessment must include disclosure of any
material weaknesses in our internal control over financial reporting identified
by management.





As of
December 31, 2007, our internal control over financial reporting was ineffective
due to the presence of material weaknesses, as more fully described in Item 9A
of this Form 10-K/A.   This could result in a loss of investor
confidence in the accuracy and completeness of our financial reports, which may
have an adverse effect on our stock price.








Our
business depends on new products and technologies.





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





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





Our
business has primarily operated on the basis of short-term purchase
orders.  We are now receiving longer term purchase agreements, such as
those which comprise our approximately $7.3 million backlog, and procurement
contracts, but we cannot guarantee that we will continue to do so. Our current
purchase agreements can be cancelled or revised without penalty, depending on
the circumstances. We plan production 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 eMagin may decline.





Our
business strategy may fail if we cannot continue to form strategic relationships
with companies that manufacture and use products that could incorporate our
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 foreign entities. Some customers in other countries have
longer receivable periods or warranty periods. In addition, many of the foreign
OEMs that are the most likely long-term purchasers of our microdisplays expose
us to additional political and currency risk. We may find it necessary to
locate manufacturing facilities abroad to be closer to our customers which could
expose us to various risks, including management of a multi-national
organization, the complexities of complying with foreign laws and customs,
political instability and the complexities of taxation in multiple
jurisdictions.





Our
business may expose us to product liability claims.





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





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.




21




RISKS RELATED TO OUR
STOCK







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





Sales of
significant amounts of common stock in the public market, or the perception that
such sales may occur, could materially affect the market price of our common
stock. These sales might also make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. As of March 14, 2008, we have outstanding (i) options to purchase
904,323 shares and (ii) warrants to purchase 9,090,509 shares of common
stock.





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





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





ITEM
1B. UNRESOLVED STAFF COMMENTS





Not
applicable.





ITEM
2. PROPERTIES





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





ITEM
3. LEGAL PROCEEDINGS





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




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







ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS





None.







22












PART
II





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





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





2006
            
            
            2007High
            
            
            Low
            
            
            High
            
            
            LowFirst
      quarter
            
            $
            7.10
            
            
            $
            4.60
            
            
            $
            1.08
            
            
            $
            0.26Second
      quarter
            
            $
            5.70
            
            
            $
            2.50
            
            
            $
            0.85
            
            
            $
            0.42Third
      quarter
            
            $
            3.80
            
            
            $
            1.80
            
            
            $
            1.64
            
            
            $
            0.65Fourth
      quarter
            
            $
            2.50
            
            
            $
            1.01
            
            
            $
            1.75
            
            
            $
            0.85





As of
March 14, 2008, there were 497 holders of record of our common stock. Because
brokers and other institutions hold many of the shares on behalf of
shareholders, we are unable to determine the actual number of shareholders
represented by these record holders.





Dividends





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





Recent
Issuances of Unregistered Stock





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





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




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





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







23








The
Company entered into agreements, effective as of August 7, 2007 with Moriah,
pursuant to which the Company may borrow an amount not to exceed
$2,500,000.  Such funds may be drawn down by the Company in tranches
of at least $25,000 up to five times each month. In connection with the
transaction, the Company issued, executed and delivered to Moriah a Secured
Convertible Revolving Loan Note (the “Moriah Agreement”) with a principal amount
not to exceed $2,500,000, of which up to $2,000,000 is convertible into up to
1,333,333 shares (at a conversion price of $1.50 per share), and a Securities
Issuance Agreement pursuant to which the Company issued 162,500 shares of its
common stock (recorded as temporary equity - see Note 10), which shares
had an aggregate market value at the Closing Date of $195,000.





On July
23, 2007, we entered into Amendment Agreements with the holders of the Notes
issued July 21, 2006 and March 28, 2007 (each a “Holder” and collectively, the
“Holders”) and agreed to issue each Holder an amended and restated Note (the
“Amended Notes”) in the principal amount equal to the principal amount
outstanding as of July 23, 2007.





The
changes to the Amended Notes include the following:





·
            The
      due date for the outstanding Notes (totaling after conversions an
      aggregate of $6,020,000) has been extended to December 21,
      2008;





·
            The
      Amended Notes are convertible into (i) 8,407,612 shares of the Company’s
      common stock. The conversion price for $5,770,000 of principal was revised
      from $2.60 to $0.75 per share. The conversion price of $0.35 per share for
      $250,000 of principal was
unchanged;





·
            $3,010,000
      of the Notes can convert into (ii) 3,010 shares of the Company’s newly
      formed Series A Convertible Preferred Stock (the “Preferred”) at a
      conversion price of $1,000 per share. The Preferred is convertible into
      common stock at the same price allowable by the Amended Notes,
      subject to adjustment as provided for in the Certificate of
      Designations;





·
            The
      Amended Notes adjust the exercise price from $3.60 to $1.03 per share for
      1,553,468 Warrants and require the issuance of 3,831,859 Warrants
      exercisable at $1.03 per share pursuant to which the holders may acquire
      common stock, until July 21, 2011;
and





·
            As
      of July 23, 2007 the interest rate was raised from 6% to
    8%.





On March
28, 2007, we entered into an amendment of the Note Purchase Agreement (the
“Stillwater Note Purchase Agreement”) for the sale of $500 thousand of senior
secured debentures (the “Stillwater Note”) and warrants to purchase
approximately 1.0 million shares of common stock, par value $.001 per share. The
investor purchased the Stillwater Note with a conversion price of $0.35 per
share that may convert into approximately 1.4 million shares of common stock and
warrants exercisable at $0.48 per share into approximately 1.0 million shares of
common stock expiring in 4.2 years. On April 9, 2007, we closed the transaction
and received approximately $460 thousand, net of offering costs
of approximately $40 thousand which are amortized over the life of the
Stillwater Note.  On July 23, 2007, Stillwater elected to convert
approximately $252 thousand of the 6% Senior Secured Convertible Note (“Original
Note”) representing $250 thousand of the principal amount of the Note due
on July 23, 2007 and approximately $2 thousand of accrued and unpaid interest.
The investor received 720,476 shares of Common Stock at the conversion price of
$0.35. The remaining principal amount was amended on July 23, 2007 to an
Amended Note as referred to above.




24





ITEM
6.  SELECTED FINANCIAL DATA (Restated -See Note
10)


The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”. The
statements of operations data for the years ended December 31, 2007, 2006, and
2005 and the balance sheet data at December 31, 2007 (restated) and 2006
are derived from our audited financial statements which are included elsewhere
in this Form 10-K/A.   The statement of operations data for the
year ended December 31, 2004 and 2003 and the balance sheet data at December 31,
2005, 2004 and 2003 are derived from our audited financial statements which are
not included in this Form 10-K/A .   The historical results
are not necessarily indicative of results to be expected for future periods. The
following information is presented in thousands, except per share
data.


Consolidated
Statements of Operations Data:





For
      the Year Ended December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(In
      thousands, except per share data)Revenue
            
            $
            17,554
            
            
            $
            8,169
            
            
            $
            3,745
            
            
            $
            3,593
            
            
            $
            2,578Cost
      of goods sold
            
            
            12,628
            
            
            
            11,359
            
            
            
            10,219
            
            
            
            5,966
            
            
            
            5,141Gross
      profit (loss)
            
            
            4,926
            
            
            
            (3,190
            )
            
            
            (6,474
            )
            
            
            (2,373
            )
            
            
            (2,563
            )Operating
      expenses:Research
      and development
            
            
            2,949
            
            
            
            4,406
            
            
            
            4,020
            
            
            
            898
            
            
            
            19Selling,
      general and administrative
            
            
            6,591
            
            
            
            8,860
            
            
            
            6,316
            
            
            
            4,428
            
            
            
            5,712Total
      operating expenses
            
            
            9,540
            
            
            
            13,266
            
            
            
            10,336
            
            
            
            5,326
            
            
            
            5,731Loss
      from operations
            
            
            (4,614
            )
            
            
            (16,456
            )
            
            
            (16,810
            )
            
            
            (7,699
            )
            
            
            (8,294
            )Other
      (expense) income, net
            
            
            (13,874
            )
            
            
            1,190
            
            
            
            282
            
            
            
            (5,012
            )
            
            
            3,571Net
      loss
            
            $
            (18,488
            )
            
            $
            (15,266
            )
            
            $
            (16,528
            )
            
            $
            (12,711
            )
            
            $
            (4,723
            )Basic
      and diluted loss per share
            
            $
            (1.59
            )
            
            $
            (1.52
            )
            
            $
            (1.94
            )
            
            $
            (1.98
            )
            
            $
            (1.31
            )Shares
      used in calculation of loss per share:Basic
      and diluted
            
            
            11,633
            
            
            
            10,058
            
            
            
            8,541
            
            
            
            6,428
            
            
            
            3,599





Consolidated
Balance Sheet Data: (Restated)





December
      31,2007
              (restated)
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Cash
      and cash equivalents
            
            $
            713
            
            
            $
            1,415
            
            
            $
            6,727
            
            
            $
            13,457
            
            
            $
            1,054Working
      capital (deficit)
            
            $
            (4,708
            )
            
            $
            (305
            )
            
            $
            8,868
            
            
            $
            14,925
            
            
            $
            106Total
      assets
            
            $
            6,648
            
            
            $
            7,005
            
            
            $
            14,142
            
            
            $
            18,436
            
            
            $
            3,749Long-term
      obligations
            
            $
            60
            
            
            $
            2,229
            
            
            $
            56
            
            
            $
            22
            
            
            $
            6,161Total
      Shareholders’ (capital deficit) equity
            
            $
            (4,170
            )
            
            $
            (1,164
            )
            
            $
            10,401
            
            
            $
            16,447
            
            
            $
            (4,767
            )










25








ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 Part I, Item 1A, "Risk Factors "). These forward-looking statements are
based largely on our current expectations and are subject to a number of risks
and uncertainties. Actual results could differ materially from these
forward-looking statements. Important factors to consider in evaluating such
forward-looking statements include (i) changes in external factors or in our
internal budgeting process which might impact trends in our results of
operations; (ii) unanticipated working capital or other cash requirements; (iii)
changes in our business strategy or an inability to execute our strategy due to
unanticipated changes in the industries in which we operate; and (iv) various
competitive market factors that may prevent us from competing successfully in
the marketplace.





Overview





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





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





Since our
inception in 1996 through 2004, we derived the majority of our revenues from
fees paid to us under research and development contracts, primarily with the
U.S. federal government. We have devoted significant resources to the
development and commercial launch of our products. We commenced limited initial
sales of our SVGA+ microdisplay in May 2001 and commenced shipping samples of
our SVGA-3D microdisplay in February 2002. From inception to December 31, 2007,
we have recognized an aggregate of approximately $35.7 million from sales of our
products, and as of March 14, 2008, we have a backlog of approximately $7.3
million in products ordered for delivery through December 31, 2008. 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 original equipment manufacturer (OEM) customers. We have also
shipped a limited number of our Z800 3DVisor personal display systems. In
addition to marketing OLED-on-silicon microdisplays as components, we also offer
microdisplays as an integrated package, which we call Microviewer that includes
a compact lens for viewing the microdisplay and electronic interfaces to convert
the signal from our customer's product into a viewable image on the
microdisplay. We are also developing head-wearable displays, including our Z800
3DVisor 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
believe that we are the only company to demonstrate publicly and market
full-color small molecule OLED-on-silicon microdisplays.





Company
History





Historically,
we have been a developmental stage company. As of January 1, 2003, we were no
longer classified as a development stage company. We have transitioned to
manufacturing our product and intend to significantly increase our marketing,
sales, and research and development efforts, and expand our operating
infrastructure. Currently, most of our operating expenses are fixed. 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.






26








Revenue
and Cost Recognition





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





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





Use
of Estimates





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





Fair
Value of Financial Instruments





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





Stock-based
Compensation





eMagin
maintains several stock equity incentive plans.  The 2005 Employee
Stock Purchase Plan (the “ESPP”) provides our employees with the opportunity to
purchase common stock through payroll deductions.  Employees purchase
stock semi-annually at a price that is 85% of the fair market value at certain
plan-defined dates.  As of December 31, 2007, the number of shares of
common stock available for issuance was 225,000.  As of December 31,
2007, the plan had not been implemented.





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





Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payment” (“SFAS 123R”), which requires the Company to recognize
expense related to the fair value of the Company’s share-based compensation
issued to employees and directors. SFAS 123R requires companies to estimate the
fair value of share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods in
the Company’s condensed consolidated statement of operations. The Company uses
the straight-line method for recognizing compensation expense. An estimate for
forfeitures is included in compensation expense for awards under SFAS
123R.  See Note 11 to the financial statements for a further
discussion on stock-based compensation.










27





Results
of Operations





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




As
      a Percentage of Total Revenue
              Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Consolidated
      Statements of Operations Data:Revenue
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %Cost
      of goods
      sold
            
            
            72
            
            
            
            139
            
            
            
            273Gross
      profit (loss)
            
            
            28
            
            
            
            (39
            )
            
            
            (173
            )Operating
      expenses:Research
      and development
            
            
            17
            
            
            
            54
            
            
            
            107Selling,
      general and administrative
            
            
            38
            
            
            
            109
            
            
            
            169operating
      expenses
            
            
            55
            
            
            
            163
            
            
            
            276Loss
      from operations
            
            
            (27
            )
            
            
            (202
            )
            
            
            (449
            )Other
      (expense) income
            
            
            (78
            )
            
            
            15
            
            
            
            8Net
      loss
            
            
            (105
            )%
            
            
            (187
            )%
            
            
            (441
            )%





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





Revenues





Revenues
increased by approximately $9.4 million to a total of approximately $17.6
million for the year ended December 31, 2007 from approximately $8.2 million for
the year ended December 31, 2006, representing an increase of 115%. This
increase was primarily due to increased microdisplay sales and increased
availability of finished displays due to manufacturing improvements. Our
contract revenue increased approximately $1.2 million while our product revenue
increased approximately $8.2 million. Average price per unit for microdisplays
was $371 in 2007 and $386 in 2006.  Our current expectation is that
revenue will continue to grow in 2008 if we successfully execute our business
plan.





Cost
of Goods Sold





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


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




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





Research
and Development Expenses





Research
and development expenses include salaries, development materials and other costs
specifically allocated to the development of new microdisplay products, OLED
materials and subsystems.  Research and development expenses for the
year ended December 31, 2007 were approximately $2.9 million as compared to
approximately $4.4 million for the year ended December 31, 2006.  The
decrease was due to the re-deployment of research and development personnel to
production contract services which are included in cost of goods
sold.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses consist primarily of salaries and fees for
professional services, legal fees incurred in connection with patent filings,
SEC and related matters, as well as other marketing and administrative
expenses.  General and administrative expenses decreased by
approximately $2.3 million to a total of approximately $6.6 million for the year
ended December 31, 2007 from $8.9 million for the year ended December 31, 2006.
The decrease was primarily related to a reduction of marketing, tradeshow
and personnel costs.






28










Other
(Expense)Income





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




For the
year ended December 31, 2007, interest expense was approximately $3.1 million as
compared to $1.3 million for the year ended December 31,
2006.   Interest expense for 2007 consisted of interest expense
associated with debt of approximately $744 thousand; the amortization of the
deferred costs associated with debt of approximately $418 thousand; and the
amortization of the debt discount associated with the debt of approximately $1.9
million.  Interest expense for the year ended December 31, 2006 was
comprised of interest associated with debt of approximately $124 thousand; the
amortization of the deferred costs associated with the notes payable of
approximately $221 thousand; and the amortization of the debt discount
associated with the debt of approximately $956 thousand.





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





The loss
on extinguishment of debt was $10.7 million for the year ended December 31, 2007
as compared to $0 for the year ended December 31, 2006. See Note 8 to the
financial statements:  Debt for additional information.





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





Off-Balance
Sheet Arrangements





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





Year
Ended December 31, 2006 Compared to Year Ended December 31, 2005





Revenues





Revenues
increased by approximately $4.5 million to a total of approximately $8.2 million
for the year ended December 31, 2006 from approximately $3.7 million for the
year ended December 31, 2005, representing an increase of 118%. This increase
was due to increased microdisplay demand and the broadening of our product
revenue through the sales of the Z800 3D Visor. Our contract revenue increased
approximately $150 thousand while our product revenue increased approximately
$4.3 million. Average price per unit for microdisplays was $386 in 2006 and $372
in 2005.





Cost
of Goods Sold





Cost of
goods sold includes direct and indirect costs associated with production of our
products. Cost of goods sold for the years ended December 31, 2006 and 2005 was
approximately $11.4 million and approximately $10.2, respectively, an increase
of $1.2 million.  The gross loss was approximately ($3.2) million and
approximately ($6.5) million, respectively, for the years ended December 31,
2006 and 2005, respectively.  The gross loss was (39%) for the year
ended December 31, 2006 as compared to (173%) for the year ended December 31,
2005.  The increase in cost of goods sold for the year ended December
31, 2006 was attributed to higher materials usage to support increased
production as well as approximately $343 thousand of stock compensation expense
reflected in accordance with SFAS No. 123R in 2006.    The
decrease in gross loss was attributed to fuller utilization of our fixed
production overhead due to higher unit volume.





Research
and Development Expenses





Research
and development expenses included salaries, development materials and other
costs specifically allocated to the development of new microdisplay products,
OLED materials and subsystems.  Research and development expenses for
the year ended December 31, 2006 were approximately $4.4 million as compared to
approximately $4.0 million for the year ended December 31, 2005.  The
increase was primarily due to the stock-based compensation expense of
approximately $435 thousand in 2006.





Selling, General
and Administrative Expenses





Selling,
general and administrative expenses consist primarily of salaries and fees for
professional services, legal fees incurred in connection with patent filings and
related matters, as well as other marketing and administrative
expenses.  General and administrative expenses increased by
approximately $2.9 million to a total of approximately $8.9 million for the year
ended December 31, 2006 from $6.3 million for the year ended December 31, 2005.
The increase in selling, general and administrative expenses was due primarily
to stock-based compensation expense of approximately $2.9 million and an
increase in marketing expenses related to our Z800 3DVisor.






29





Other Income
(Expense)





Other
income, net consists primarily of interest income earned on investments,
interest expense related to the secured debentures, and gain from the change in
the derivative liability.  For the year ended December 31, 2006,
interest income was approximately $91 thousand as compared to approximately $210
thousand for the year ended December 31, 2005.   The decrease in
interest income was primarily a result of lower cash balances available for
investment.  For the year ended December 31, 2006, interest expense
was approximately $1.3 million as compared to approximately $4 thousand for the
year ended December 31, 2005.   The increase in the interest
expense was a result of interest associated with our notes payable of
approximately $124 thousand, the amortization of the deferred costs associated
with the notes payable of approximately $221 thousand, and the amortization of
the debt discount of approximately $956 thousand.  For the year ended
December 31, 2006, income from the change in the derivative liability was
approximately $2.4 million as compared to $0 for the year ended December 31,
2005.





Liquidity
and Capital Resources





As of
December 31, 2007, we had approximately $0.8 million of cash and investments as
compared to $1.6 million as of December 31, 2006.  The decrease of
approximately $0.8 million was due primarily to cash used for operating
activities.





For the
year ended December 31, 2007, net cash used by operating activities was
approximately $1.9 million, primarily attributable to our $18.5 million net loss
offset primarily by the non-cash expense components of loss on extinguishment of
debt of $10.7 million, stock based compensation of $1.7 million, amortization of
discount on notes payable of $1.9 million, and issuance of common stock for
services of $1.3 million.  Net cash used by operating activities for
the year ended December 31, 2006 was approximately $10.4 million, primarily
attributable to our net loss of approximately $15.3 million.





For the
year ended December 31, 2007, net cash from investing activities was
approximately $61 thousand primarily related to the maturing of
investments.  Net cash used by investing activities for the year ended
December 31, 2006 was approximately $257 thousand primarily related to equipment
purchases.





Net cash
provided by financing activities for the year ended December 31, 2007 was
approximately $1.2 million and was comprised primarily of approximately $1.6
million in proceeds from debt issuance and offset by payments on long-term debt
and capitalized lease obligations of approximately $63 thousand and deferred
financing costs of approximately $368 thousand.  Net cash provided by
financing activities during the year ended December 31, 2006 was approximately
$5.3 million and was comprised primarily of approximately $6.0 million in
proceeds from debt issuance offset by payments on long-term debt and capitalized
lease obligations of approximately $55 thousand and deferred financing costs of
approximately $591 thousand.





Our
consolidated financial statements as of December 31, 2007 have been prepared
under the assumption that we will continue as a going concern for the year
ending December 31, 2008. Our independent registered public accounting firm has
issued a report dated April 9, 2008 that included an explanatory paragraph
expressing substantial doubt in our ability to continue as a going concern
without additional capital becoming available. Our ability to continue as a
going concern ultimately is dependent on our ability to generate a profit which
is likely dependent upon our ability to obtain additional equity or debt
financing, attain further operating efficiencies and, ultimately, to achieve
profitable operations. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.





As we
have reported our business experienced significant revenue growth during the
year ended December 31, 2007. This trend, if it continues, may result in higher
accounts receivable levels and may require increased production and/or higher
inventory levels.  In addition, in December 2008, we will be obligated
to repay approximately $6.0 million to the note holders.  If the funds
are not available, we will negotiate with the note holders to defer the payment
but no assurances can be made that they will agree.  We anticipate
that our cash requirements to fund these requirements as well as other operating
or investing cash requirements over the next twelve months will be greater than
our current cash on hand.  We anticipate that we will still require
additional funds over the next twelve months.  We do not currently
have commitments for these funds and no assurance can be given that additional
financing will be available, or if available, will be on acceptable terms. The
Company’s ability to obtain additional funding is impacted by its present
indebtedness. The Company’s notes payable have covenants which the Company was
in compliance with at December 31, 2007. The covenants contain certain
restrictive components that materially limit our ability to raise additional
secured debt which is presently limited to a maximum of $2.5 million. The
Company has a line of credit with a maximum of $2.5 million which is secured by
accounts receivable and inventory which effectively eliminates any additional
secured indebtedness under the note covenants. In addition, pursuant to the
notes payable agreement, the Company cannot enter into a consolidation, merger,
or acquisition under certain conditions without consent of the note holders. The
Company may raise additional unsecured debt under the note covenants given
certain restrictions and the notes payable agreement allows for additional
equity financing.If we are unable to obtain sufficient funds during
the next twelve months we will further reduce the size of our organization and
may be forced to reduce and/or curtail our production and operations, all of
which could have a material adverse impact on our business
prospects.





In
addition to the foregoing, as previously reported, we have retained CIBC World
Markets Corporation and Larkspur Capital Corporation to assist us in
investigating and evaluating various strategic alternatives, ranging from
investment to acquisition.






30





Contractual
Obligations





The
following chart describes the outstanding contractual obligations of eMagin as
of December 31, 2007 (in thousands):





Payments
      due by periodTotal
            
            
            1
      Year
            
            
            2-3
      Years
            
            
            4-5
      YearsOperating
      lease obligations
            
            $
            1,982
            
            
            $
            1,444
            
            
            $
            538
            
            
            $
            —Purchase
      obligations (a)
            
            
            1,647
            
            
            
            1,647
            
            
            
            —
            
            
            
            —Other
      long-term liabilities (b)
            
            
            7,119
            
            
            
            6,597
            
            
            
            272
            
            
            
            250Total
            
            $
            10,748
            
            
            $
            9,688
            
            
            $
            810
            
            
            $
            250





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





(b)
      This amount represents the obligation for Notes and estimated interest,
      royalty payments, capitalized software and the New York Urban Development
      settlement.





Effect
of Recently Issued Accounting Pronouncements





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





ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Market
rate risk





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





Interest
rate risk





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





Foreign
currency exchange rate risk





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





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








31









ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Financial
Statement Index








PageReport
      of Independent Registered Public Accounting Firm
            
            
            33Consolidated
      Balance Sheets as of December 31, 2007 (restated) and
      2006
            
            
            34Consolidated
      Statements of Operations for the years ended December 31, 2007, 2006, and
      2005
            
            
            35Consolidated
      Statements of Changes in Shareholders’ Equity (Capital Deficit) for the
      years ended December 31, 2007 (restated), 2006, and
      2005
            
            
            36Consolidated
      Statements of Cash Flows for the years ended December 31, 2007
      (restated) , 2006, and 2005
            
            
            37Notes
      to the Consolidated Financial Statements
            
            
            38













32








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 Board of
Directors and Stockholders
 eMagin
Corporation
 
 
 We have
audited the accompanying consolidated balance sheets of eMagin Corporation (the
"Company") as of December 31, 2007 and 2006, and the related consolidated
statements of operations, shareholders' equity (capital deficit) and cash flows
for each of the three years in the period ended December 31,
2007.  Our audits also included the financial statement
schedule -  Valuation and Qualifying Accounts - listed in
the index at item 15.  These financial statements and
schedule are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
financial statements and
schedule based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  We were
not engaged to perform an audit of the Company's internal control over financial
reporting.  Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of eMagin Corporation as
of December 31, 2007 and 2006, and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
financial statement schedule referred to above, when considererd in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
  The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 2 to the
consolidated financial statements, the Company has had recurring losses from
operations which it believes will continue, and has working capital and capital
deficits at December 31, 2007.  These factors raise substantial
doubt about the Company's ability to continue as a going
concern.  Management's plans in regard to these matters are also
discussed in Note 2.  The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
  As
discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for stock-based compensation effective
January 1, 2006.
  The
accompanying financial statements as of and for the year ended December 31, 2007
have been restated with respect to the change in presentation of certain shares
of common stock previously reported as permanent equity ("capital deficit"), now
presented as redeemable common stock - see Note 10.
  /s/
Eisner LLP
 
 New York,
New York
 January 8,
2009




33













eMAGIN
CORPORATION


CONSOLIDATED
BALANCE SHEETS





December
      31,2007
              (Restated- See Note 10)
            
            
            2006(In
      thousands, exceptshare
      and per share amounts)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            713
            
            
            $
            1,415Investments
      – held to maturity
            
            
            94
            
            
            
            171Accounts
      receivable, net
            
            
            2,383
            
            
            
            908Inventory
            
            
            1,815
            
            
            
            2,485Prepaid
      expenses and other current assets
            
            
            850
            
            
            
            656Total
      current assets
            
            
            5,855
            
            
            
            5,635Equipment,
      furniture and leasehold improvements, net
            
            
            292
            
            
            
            666Intangible
      assets, net
            
            
            51
            
            
            
            55Other
      assets
            
            
            232
            
            
            
            233Deferred
      financing costs, net
            
            
            218
            
            
            
            416Total assets
            
            $
            6,648
            
            
            $
            7,005LIABILITIES
      AND CAPITAL DEFICITCurrent
      liabilities:Accounts
      payable
            
            $
            620
            
            
            $
            1,192Accrued
      compensation
            
            
            891
            
            
            
            959Other
      accrued expenses
            
            
            729
            
            
            
            749Advance
      payments
            
            
            35
            
            
            
            444Deferred
      revenue
            
            
            179
            
            
            
            126Current
      portion of debt
            
            
            7,089
            
            
            
            1,223Derivative
      liability - warrants
            
            
            —
            
            
            
            1,195Other
      current liabilities
            
            
            1,020
            
            
            
            52Total current
      liabilities
            
            
            10,563
            
            
            
            5,940Long-term
      debt
            
            
            60
            
            
            
            2,229Total liabilities
            
            
            10,623
            
            
            
            8,169Commitments
      and contingenciesRedeemable
      common stock:  162,500 shares redeemable at December 31,
      2007
            
            
            195
            
            
            
            —Capital
      deficit:Preferred
      stock, $.001 par value: authorized 10,000,000 shares; no shares issued and
      outstanding
            
            
            —
            
            
            
            —Series
      A Senior Secured Convertible Preferred stock, stated value $1,000 per
      share, $.001 par value:  3,198 shares designated and none
      issued
            
            
            —
            
            
            
            —Common
      stock, $.001 par value: authorized 200,000,000 shares, issued and
      outstanding, 12,458,400 shares in 2007 and 10,341,029 shares in
      2006
            
            
            12
            
            
            
            10Additional
      paid in capital
            
            
            195,131
            
            
            
            179,651Accumulated
      deficit
            
            
            (199,313
            )
            
            
            (180,825
            )Total capital
      deficit
            
            
            (4,170
            )
            
            
            ( 1,164
            )Total liabilities
      and capital deficit
            
            $
            6,648
            
            
            $
            7,005




See notes
to Consolidated Financial Statements.













34







eMAGIN
CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS





For
      the Year Ended December 31,2007
            
            
            2006
            
            
            2005(In
      thousands, except per share data)Revenue:Product
      revenue
            
            $
            16,169
            
            
            $
            7,983
            
            
            $
            3,709Contract
      revenue
            
            
            1,385
            
            
            
            186
            
            
            
            36Total
      revenue, net
            
            
            17,554
            
            
            
            8,169
            
            
            
            3,745Cost
      of goods sold
            
            
            12,628
            
            
            
            11,359
            
            
            
            10,219Gross
      profit (loss)
            
            
            4,926
            
            
            
            (3,190
            )
            
            
            (6,474
            )Operating
      expenses:Research
      and development
            
            
            2,949
            
            
            
            4,406
            
            
            
            4,020Selling,
      general and administrative
            
            
            6,591
            
            
            
            8,860
            
            
            
            6,316Total
      operating expenses
            
            
            9,540
            
            
            
            13,266
            
            
            
            10,336Loss
      from operations
            
            
            (4,614
            )
            
            
            (16,456
            )
            
            
            (16,810
            )Other
      income (expense):Interest
      expense
            
            
            (3,087
            )
            
            
            (1,306
            )
            
            
            (4
            )Loss
      on extinguishment of debt
            
            
            (10,749
            )
            
            
            —
            
            
            
            —(Loss)
      gain on warrant derivative liability
            
            
            (853
            )
            
            
            2,405
            
            
            
            —Other
      income, net
            
            
            815
            
            
            
            91
            
            
            
            286Total
      other (expense) income, net
            
            
            (13,874
            )
            
            
            1,190
            
            
            
            282Net
      loss
            
            $
            (18,488
            )
            
            $
            (15,266
            )
            
            $
            (16,528
            )Loss
      per share, basic and diluted
            
            $
            (1.59
            )
            
            $
            (1.52
            )
            
            $
            (1.94
            )Weighted
      average number of shares outstanding:Basic
      and diluted
            
            
            11,633
            
            
            
            10,058
            
            
            
            8,541




See notes
to Consolidated Financial Statements.










35










eMAGIN
CORPORATION


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


(Restated
- See Note 10)







TotalCommon
      Stock
            
            
            Additional
            
            
            Accumulated
            
            
            Shareholders’
      EquityShares
            
            
            Amount
            
            
            Paid
      –in Capital
            
            
            Deficit
            
            
            (Capital
      Deficit)(In
      thousands)Balance,
      December 31, 2004
            
            
            7,964
            
            
            $
            8
            
            
            $
            165,471
            
            
            $
            (149,031
            )
            
            $
            16,448Sale
      of common stock, net of issuance costs
            
            
            1,662
            
            
            
            2
            
            
            
            8,398
            
            
            
            —
            
            
            
            8,400Stock
      options exercised
            
            
            11
            
            
            
            —
            
            
            
            37
            
            
            
            —
            
            
            
            37Exercise
      of common stock warrants
            
            
            306
            
            
            
            —
            
            
            
            1,584
            
            
            
            —
            
            
            
            1,584Issuance
      of common stock for services
            
            
            54
            
            
            
            —
            
            
            
            461
            
            
            
            —
            
            
            
            460Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (16,528
            )
            
            
            (16,528
            )Balance,
      December 31, 2005
            
            
            9,997
            
            
            $
            10
            
            
            $
            175,950
            
            
            $
            (165,559
            )
            
            $
            10,401Debt
      to equity conversion
            
            
            85
            
            
            
            —
            
            
            
            220
            
            
            
            —
            
            
            
            220Issuance
      of common stock for services
            
            
            254
            
            
            
            —
            
            
            
            580
            
            
            
            —
            
            
            
            580Stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            2,891
            
            
            
            —
            
            
            
            2,891Stock
      options exercised
            
            
            5
            
            
            
            —
            
            
            
            10
            
            
            
            —
            
            
            
            10Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (15,266
            )
            
            
            (15,266
            )Balance,
      December 31, 2006
            
            
            10,341
            
            
            $
            10
            
            
            
            179,651
            
            
            $
            (180,825
            )
            
            $
            (1,164
            )Debt
      to equity conversion
            
            
            797
            
            
            
            1
            
            
            
            310
            
            
            
            —
            
            
            
            311Issuance
      of common stock for services
            
            
            1,310
            
            
            
            1
            
            
            
            1,129
            
            
            
            —
            
            
            
            1,130Exercise
      of common stock warrants
            
            
            10
            
            
            
            —
            
            
            
            3
            
            
            
            —
            
            
            
            3Stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            1,652
            
            
            
            —
            
            
            
            1,652Expiration
      of derivative liability- warrants
            
            
            —
            
            
            
            —
            
            
            
            2,653
            
            
            
            —
            
            
            
            2,653Beneficial
      conversion premium
            
            
            —
            
            
            
            —
            
            
            
            5,078
            
            
            
            —
            
            
            
            5,078Fair
      value of warrants issued
            
            
            —
            
            
            
            —
            
            
            
            4,655
            
            
            
            —
            
            
            
            4,655Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            (18,488
            )
            
            
            (18,488
            )Balance,
      December 31, 2007
            
            
            12,458
            
            
            $
            12
            
            
            $
            195,131
            
            
            $
            (199,313
            )
            
            $
            (
      4,170
            )







See notes
to Consolidated Financial Statements.





36




eMAGIN
CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS







Year
      Ended December 31,2007
      (Restated)
                      
                      
                      2006
                      
                      
                      2005(In
      thousands)Cash
      flows from operating activities:Net
      loss
                      
                      $
                      (18,488
                      )
                      
                      $
                      (15,266
                      )
                      
                      $
                      (16,528
                      )Adjustments
      to reconcile net loss to net cash used in    operating
      activities:Depreciation
      and amortization
                      
                      
                      392
                      
                      
                      
                      841
                      
                      
                      
                      908Amortization
      of deferred financing fees
                      
                      
                      418
                      
                      
                      
                      221
                      
                      
                      
                      ---Reduction
      of provision for sales returns and doubtful accounts
                      
                      
                      (79
                      )
                      
                      
                      (39
                      )
                      
                      
                      (284
                      )Stock
      based compensation
                      
                      
                      1,652
                      
                      
                      
                      2,891
                      
                      
                      
                      ---Issuance
      of common stock for services, net
                      
                      
                      1,130
                      
                      
                      
                      553
                      
                      
                      
                      470Amortization
      of discount on notes payable
                      
                      
                      1,925
                      
                      
                      
                      956
                      
                      
                      
                      ---Loss
      (gain) on warrant derivative liability
                      
                      
                      853
                      
                      
                      
                      (2,405
                      )
                      
                      
                      ---Loss
      on extinguishment of debt
                      
                      
                      10,749
                      
                      
                      
                      ---
                      
                      
                      
                      ---Loss
      on other asset
                      
                      
                      ---
                      
                      
                      
                      157
                      
                      
                      
                      ---Write-off
      of miscellaneous receivable
                      
                      
                      103
                      
                      
                      
                      ---
                      
                      
                      
                      ---Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      (1,390
                      )
                      
                      
                      (42
                      )
                      
                      
                      (2
                      )Inventory
                      
                      
                      670
                      
                      
                      
                      1,354
                      
                      
                      
                      (1,821
                      )Prepaid
      expenses and other current assets
                      
                      
                      1
                      
                      
                      
                      389
                      
                      
                      
                      (175
                      )Advance
      payments
                      
                      
                      (409
                      )
                      
                      
                      384
                      
                      
                      
                      (4
                      )Deferred
      revenue
                      
                      
                      53
                      
                      
                      
                      30
                      
                      
                      
                      96Accounts
      payable, accrued compensation, and accrued expenses
                      
                      
                      (381
                      )
                      
                      
                      (566
                      )
                      
                      
                      1,613Other
      current liabilities
                      
                      
                      858
                      
                      
                      
                      153
                      
                      
                      
                      14Net
      cash used in operating activities
                      
                      
                      (1,943
                      )
                      
                      
                      (10,389
                      )
                      
                      
                      (15,713
                      )Cash
      flows from investing activities:Purchase
      of equipment
                      
                      
                      (16
                      )
                      
                      
                      (204
                      )
                      
                      
                      (898
                      )Proceeds
      from maturity of (purchase of) investments – held to
    maturity
                      
                      
                      77
                      
                      
                      
                      (51
                      )
                      
                      
                      (120
                      )Purchase
      of intangibles and other assets
                      
                      
                      ---
                      
                      
                      
                      (2
                      )
                      
                      
                      (54
                      )Net
      cash provided by (used in) investing activities
                      
                      
                      61
                      
                      
                      
                      (257
                      )
                      
                      
                      (1,072
                      )Cash
      flows from financing activities:Proceeds
      from sale of common stock, net of issuance costs
                      
                      
                      ---
                      
                      
                      
                      ---
                      
                      
                      
                      8,400Proceeds
      from exercise of stock options and warrants
                      
                      
                      3
                      
                      
                      
                      10
                      
                      
                      
                      1,621Proceeds
      from long-term debt
                      
                      
                      1,608
                      
                      
                      
                      5,970
                      
                      
                      
                      50Payments
      related to deferred financing costs
                      
                      
                      (368
                      )
                      
                      
                      (591
                      )
                      
                      
                      ---Payments
      of long-term debt and capitalized lease obligations
                      
                      
                      (63
                      )
                      
                      
                      (55
                      )
                      
                      
                      (16
                      )Net
      cash provided by financing activities
                      
                      
                      1,180
                      
                      
                      
                      5,334
                      
                      
                      
                      10,055Net
      decrease in cash and cash equivalents
                      
                      
                      (702
                      )
                      
                      
                      (5,312
                      )
                      
                      
                      (6,730
                      )Cash
      and cash equivalents, beginning of year
                      
                      
                      1,415
                      
                      
                      
                      6,727
                      
                      
                      
                      13,457Cash
      and cash equivalents, end of year
                      
                      $
                      713
                      
                      
                      $
                      1,415
                      
                      
                      $
                      6,727Cash
      paid for interest
                      
                      $
                      426
                      
                      
                      $
                      128
                      
                      
                      $
                      4Cash
      paid for taxes
                      
                      $
                      78
                      
                      
                      $
                      40
                      
                      
                      $
                      15Supplemental
      non-cash transactions:Conversion
      of debt to equity
                      
                      $
                      311
                      
                      
                      $
                      220
                      
                      
                      $
                      ---Issuance of 162,000
      shares of common stock for deferred financing
      costs
                      
                      $
                      195
                      
                      
                      $
                      ---
                      
                      
                      $
                      ---During
      the year ended December 31, 2007, the Company





            Entered
      into an intellectual property agreement with Kodak where Kodak was
      assigned the rights to a specific patent and as part of the consideration
      waived the royalty payments for the first six months of 2007 and reduced
      the royalty payment to 50% for the third and fourth quarters of
      2007. $869 thousand was recorded as other income from the gain on the
      licensing of intangible assets;





            Entered
      into an amended Note Purchase Agreement with investors and issued warrants
      that are exercisable at $1.03 per share into approximately 5.4 million
      shares of common stock valued at $5.5
million.






See notes
to Consolidated Financial Statements.









37







eMAGIN
CORPORATION


NOTES
TO THE CONSOLIDATED FINANCIAL STATMENTS





Note
1 - NATURE OF BUSINESS





eMagin
Corporation and its wholly owned subsidiary (the “Company”)
designs,  develops, manufactures, and markets virtual imaging products
for consumer, commercial, industrial and military applications.  The
Company’s products are sold mainly in North America, Asia, and
Europe.





Note
2 - SIGNIFICANT ACCOUNTING POLICIES





Principles
of consolidation





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





Basis
of presentation





The
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern.  The Company has had recurring losses
from operations which it believes will continue for the foreseeable
future.  The Company’s cash requirements over the next twelve months are
greater than the Company’s current cash, cash equivalents, and
investments.  At December 31, 2007, the Company has working capital
and capital deficits. These factors raise substantial doubt regarding the
Company’s ability to continue as a going concern without continuing to obtain
additional funding.  The Company does not have commitments for such
financing and no assurance can be given that additional financing will be
available, or if available, will be on acceptable terms. If the Company is
unable to obtain sufficient funds during the next twelve months, the Company
will further reduce the size of its organization and/or curtail operations which
will have a material adverse impact on the Company’s business prospects. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. To partially address the liquidity
issue, the Company completed a private placement of its common stock for gross
proceeds of $1.65 million on April 2, 2008.  Please see Note 17 –
Subsequent Events for additional information.




On
November 3, 2006, the Company effected a one-for-ten (1-for-10) reverse stock
split of its issued and outstanding common stock.   All common
and per share amounts in the accompanying financial statements have been
adjusted to reflect the 1-for-10 reverse stock split.





Use
of estimates





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





Revenue
and cost recognition





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





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










38










Research
and development expenses





Research
and development costs are expensed as incurred.





Cash
and cash equivalents





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





Investments-held
to maturity





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





Accounts
receivable





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





Allowance
for doubtful account





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





Inventory





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





Equipment,
furniture and leasehold improvements





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





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





Intangible
Assets





The
Company’s intangible assets consist of patents that are amortized over their
estimated useful lives of fifteen years using the straight line
method.  Total intangible amortization expense was approximately $4
thousand for each of the years ended December 31, 2007, 2006, and 2005,
respectively.





Advertising





Costs
related to advertising and promotion of products is charged to sales and
marketing expense as incurred.  Advertising expense for the years
ended December 31, 2007, 2006, and 2005 was $10 thousand, $296 thousand, and
$108 thousand, respectively.








39







Income
taxes





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





Loss
per common share





In
accordance with SFAS No. 128, "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")
reflects the potential dilution from the exercise of stock options and warrants.
These common equivalent shares have been excluded from the computation of
diluted EPS for all periods presented as their effect is antidilutive. The years
ended December 31, 2007, 2006, and 2005 do not include options and warrants to
purchase common equivalent shares of 9,234,832, 4,613,919, and 4,424,988,
respectively, as their effect would be antidilutive.





Comprehensive
income (loss)





SFAS No.
130, "Reporting Comprehensive Income", requires companies to report all changes
in equity during a period, except those resulting from investment by owners and
distributions to owners, for the period in which they are recognized.
Comprehensive income (loss) is the total of net income (loss) and other
comprehensive income (loss) items, such as unrealized gains or losses on foreign
currency translation adjustments. Comprehensive income (loss) must be
reported on the face of the annual financial statements. The Company's
operations did not give rise to any material items includable in comprehensive
income (loss), which were not already in net loss for the years ended December
31, 2007, 2006, and 2005. Accordingly, the Company's comprehensive loss is the
same as its net income (loss) for the periods presented.





Stock-based
compensation





On
January 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payment”, which requires the Company to recognize expense related
to the fair value of the Company’s share-based compensation issued to employees
and directors.  Prior to January 1, 2006, the Company accounted for
share-based compensation under the recognition and measurement provisions of
APB No. 25 and related interpretations, as permitted by SFAS No.
123.  We adopted SFAS No. 123R using the modified prospective
transition method.  Accordingly, periods prior to adoption have not
been restated.  Compensation cost recognized for the twelve months
ended December 31, 2007 and 2006 includes a) compensation cost for all
share-based compensation granted prior to, but not vested as of January 1, 2006,
based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No.123 and b) compensation cost for all share-based
compensation granted beginning January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS
No.123R.  The compensation cost was recognized using the straight-line
attribution method.    See Note 11 for a further discussion
on stock-based compensation.





Fair
value of financial instruments





At
December 31, 2007, the Company's cash, cash equivalents, accounts receivable,
short-term investments, accounts payable and debt are shown at cost which
approximates fair value due to the short-term nature of these
instruments.





Concentration
of Credit Risk





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





Note
3- RECENTLY ISSUED ACCOUNTING STANDARDS





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
157”).  SFAS 157 provides guidance for using fair value to measure
assets and liabilities.  It also responds to investors’ requests for
expanded information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings.  SFAS 157 applies
whenever other standards require (or permit) assets or liabilities to be
measured at fair value, and does not expand the use of fair value in any new
circumstances.  SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007.  SFAS 157 is
effective for the Company on January 1, 2008 and is not expected to have a
material impact on its consolidated results of operations and financial
condition.






40




In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial
Liabilities:  (“SFAS159”).  SFAS159 allows entities the
option to measure eligible financial instruments at fair value as of specified
dates. Such election, which may be applied on an instrument by instrument basis,
is typically irrevocable once elected. SFAS 159 is effective for fiscal
years beginning after November 15, 2007, and early application is allowed
under certain circumstances. SFAS 159 is effective for the Company on January 1,
2008 and is not expected to have a material impact on its consolidated results
of operations and financial condition.




In June
2007, the FASB ratified EITF No. 07-03, “Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Future Research and Development
Activities (“EITF 07-03”).    EITF 07-03 requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and
capitalized and recognized as an expense as the goods are delivered or the
related services are performed.  EITF 07-03 is effective, on a
prospective basis, for fiscal years beginning after December 15,
2007.  The Company will be required to adopt EITF 07-03 in the first
quarter of 2008.  The Company does not expect the adoption of EITF
07-03 to have a material effect on its operations or financial
position.




Note
4- RECEIVABLES





Receivables
consisted of the following (in thousands):





December
      31,2007
            
            
            2006Trade
      receivables
            
            $
            2,741
            
            
            $
            1,351Less
      allowance for doubtful accounts
            
            
            (358
            )
            
            
            (443
            )Net
      receivables
            
            $
            2,383
            
            
            $
            908





Note
5 - INVENTORY





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





December
      31,2007
            
            
            2006Raw
      materials
            
            $
            1,069
            
            
            $
            1,146Work
      in process
            
            
            370
            
            
            
            558Finished
      goods
            
            
            376
            
            
            
            781Total
      inventory
            
            $
            1,815
            
            
            $
            2,485





Note 6 – PREPAID EXPENSES AND OTHER CURRENT
ASSETS





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





December
      31,2007
            
            
            2006Vendor
      prepayments
            
            $
            537
            
            
            $
            294Other
      prepaid expenses*
            
            
            310
            
            
            
            353Other
      current assets
            
            
            3
            
            
            
            9Total
      prepaid expenses and other current assets
            
            $
            850
            
            
            $
            656


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







41








Note
7 – EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS





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





December
      31,2007
            
            
            2006Computer
      hardware and software
            
            $
            1,025
            
            
            $
            1,017Lab
      and factory equipment
            
            
            3,318
            
            
            
            3,312Furniture,
      fixtures, and office equipment
            
            
            306
            
            
            
            306Assets
      under capital leases
            
            
            66
            
            
            
            66Leasehold
      improvements
            
            
            473
            
            
            
            473Total
      equipment, furniture and leasehold improvements
            
            
            5,188
            
            
            
            5,174Less:  accumulated
      depreciation
            
            
            (4,896
            )
            
            
            (4,508
            )Equipment,
      furniture and leasehold improvements, net
            
            $
            292
            
            
            $
            666





Depreciation
expense was $388 thousand, $837 thousand, and $904 thousand for the years ended
December 31, 2007, 2006, and 2005, respectively.  Assets under capital
leases are fully amortized.





Note
8 – DEBT





Debt is
as follows (in thousands):


December
      31,2007
                
                
                2006Current
      portion of long-term debt:Capitalized
      lease obligations
                
                $
                —
                
                
                $
                6Other
      debt
                
                
                44
                
                
                
                58Line
      of credit
                
                
                1,108
                
                
                
                —6%
      Senior Secured Convertible Notes
                
                
                —
                
                
                
                2,880Less:  Unamortized
      discount on notes payable
                
                
                —
                
                
                
                (1,721
                )8%
      Amended Senior Secured Convertible Notes
                
                
                5,962
                
                
                
                —Less:  Unamortized
      discount on notes payable
                
                
                (25
                )
                
                
                —Current
      portion of long-term debt, net
                
                
                7,089
                
                
                
                1,223Long-term
      debt:Other
      debt
                
                
                60
                
                
                
                1046%
      Senior Secured Convertible Notes
                
                
                —
                
                
                
                2,890Less:  Unamortized
      discount on notes payable
                
                
                —
                
                
                
                (765
                )Long-term
      debt, net
                
                
                60
                
                
                
                2,229Total
      debt, net
                
                $
                7,149
                
                
                $
                3,452




Maturities
with respect to the other debt, line of credit and the 8% Amended Senior Secured
Convertible Notes as of December 31, 2007 are as follows (in
thousands):





Years
      Ending December 31,2008
            
            $
            7,0892009
            
            
            60





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





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






42







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





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





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





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





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





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





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





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





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





On August
7, 2007, the Company enteredinto a loan agreement
with Moriah Capital, L.P. (“Moriah)and established a
revolving line of credit (the “Loan”) of $2.5 million.  The Company is
permitted to borrow an amount not to exceed 90% of its eligible accounts
receivable and 50% of its eligible inventory capped at $600
thousand.  As part of the transaction, the Company issued 162,500
shares of unregistered common stock valued at $195 thousand and paid a servicing
fee of $82,500 to Moriah which will be amortized to interest expense over
the life of the agreement.  For the year ended December 31, 2007,
approximately $93 thousand was amortized to interest expense.  In
conjunction with entering into this loan and issuing unregistered common stock,
the Company granted Moriah registration rights.  The Loan can be
converted into shares of the Company’s common stock pursuant to the terms of the
Loan Conversion agreement.  The Loan matures on August 8, 2008 however
the Company has the option of extending it an additional year.  On
January 30 and on March 25, 2008, the loan agreement was
amended.  Please see Note 17 - Subsequent Events for additional
information.





For the
year ended December 31, 2007, interest expense consisted of interest paid or
accrued on outstanding debt of $836 thousand.




Note
9 - 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:




For
      the years ended December 31,2007
                                                                
                                                                
                                                                2006
                                                                
                                                                
                                                                2005U.S.
      Federal income tax provision (benefit) at federal statutory
      rate
                                                                
                                                                
                                                                (
      34
                                                                )%
                                                                
                                                                
                                                                (34
                                                                )%
                                                                
                                                                
                                                                (35
                                                                )%Change
      in valuation allowance
                                                                
                                                                
                                                                18
                                                                %
                                                                
                                                                
                                                                32
                                                                %
                                                                
                                                                
                                                                35
                                                                %Loss
      on extinguishment of debt
                                                                
                                                                
                                                                20
                                                                %
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Other,
      net
                                                                
                                                                
                                                                (4
                                                                )%
                                                                
                                                                
                                                                2
                                                                %
                                                                
                                                                
                                                                -0
                                                                %
                                                                
                                                                
                                                                0
                                                                %
                                                                
                                                                
                                                                0
                                                                %








43








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


For
      the years ended December 31,2007
              
              
              2006
              
              
              2005Federal
      and state net operating loss carry-forwards
              
              $
              42,266
              
              
              $
              41,554
              
              
              $
              37,159Research
      and development carry-forwards
              
              
              1,397
              
              
              
              —
              
              
              
              —Other
      provision and expenses not currently deductible
              
              
              1,746
              
              
              
              520
              
              
              
              216Total
      deferred tax assets
              
              
              45,409
              
              
              
              42,074
              
              
              
              37,375Less
      valuation allowance
              
              
              (45,409
              )
              
              
              (42,074
              )
              
              
              (37,375
              )Net
      deferred tax asset
              
              $
              0
              
              
              $
              0
              
              
              $
              0




As of
December 31, 2007, eMagin has federal and state net operating loss carryforwards
of approximately $150 million and $1.4 million that will be available to offset
future taxable income, if any, through December 2027. The utilization of net
operating losses is subject to a limitation due to the change of ownership
provisions under Section 382 of the Internal Revenue Code and similar state
provisions. Such limitation may result in the expiration of the net operating
losses before their utilization. The Company has done preliminary analysis
regarding prior year ownership changes, and although more analysis needs to be
done, we have tentatively determined that the Section 382 limitation on the
utilization of net operating losses is not material.




As of
December 31, 2007 and 2006, the Company has net deferred tax assets of
approximately of $45 and $42 million, respectively, primarily
resulting from the future tax benefit of net operating loss
carryforwards.  Such net deferred tax assets are fully offset by a
valuation allowance due to the uncertainty as to their
realizability.  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 $3.3 million for
the year ended December 31, 2007 and $4.7 million for the year ended December
31, 2006.





The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007.  The Company did not
have unrecognized tax benefits which would require an adjustment to the January
1, 2007 beginning balance of retained earnings.  The Company did not
have any unrecognized tax benefits at January 1, 2007 and December 31,
2007.





The
Company recognizes interest accrued and penalties related to unrecognized tax
benefits in tax expense.  During the years ended December 31, 2007 and
2006 the Company recognized no interest and penalties.





The
Company files income tax returns in the U.S. federal jurisdiction and New
York.  The tax years 2004-2006 remain open to examination by major
taxing jurisdictions to which the Company is subject.





Note
10 - SHAREHOLDERS' EQUITY (Restated)





Preferred
Stock





2007





The
Company has designated but not issued 3,198 shares of the Company’s preferred
stock as Series A Senior Secured Convertible Preferred Stock (“the Preferred
Stock”) at a stated value of $1,000 per share.  The Preferred Stock is
entitled to cumulative dividends which accrue at a rate of 8% per annum, payable
on December 21, 2008.  Each share of the Preferred Stock has voting
rights equal to (1)  in any case in which the Preferred Stock votes
together with the Company's Common Stock or any other class or series of stock
of the Company, the number of shares of Common Stock issuable upon
conversion of such shares of Preferred Stock at such time (determined without
regard to the shares of Common Stock so issuable upon such conversion in respect
of accrued and unpaid dividends on such share of Preferred Stock) and (2) in any
case not covered by the immediately preceding clause one vote per share of
Preferred Stock.  The Preferred Stock has a mandatory redemption at
December 21, 2008.





Common
Stock (Restated)





2007





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





On August
7, 2007, the Company enteredinto a loan agreement
with Moriah Capital, L.P. (“Moriah)and established a
revolving line of credit (the “Loan”) of $2.5 million.  As part of the
transaction, the Company issued 162,500 shares of unregistered common stock
valued at $195 thousand, recognized as deferred financing costs, and paid a
servicing fee of $82,500 to Moriah which will be amortized to interest expense
over the life of the agreement.  For the year ended December 31, 2007
approximately $116 thousand was amortized to interest expense.  In
conjunction with entering into this loan and issuing unregistered common stock,
the Company granted Moriah registration rights.  The Loan can be
converted to shares of the Company’s common stock pursuant to the terms of the
Loan Conversion agreement.  The Loan matures on August 8, 2008 however
the Company has the option of extending it an additional year.  On
January 30, and March 25, 2008, the loan agreement was
amended.  Please see Note 17 - Subsequent Events for additional
information.






44






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





A
registration rights agreement was entered into in connection with the Loan which
requires the Company to file a registration statement for the resale of the
common stock issued.  The Company must use its best efforts to have
the registration statement declared effective by the end of a specified grace
period and also maintain the effectiveness of the registration statement until
all shares of common stock have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) of the Securities Act.  Please
see Note 17 – Subsequent Events for additional information.





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




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





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





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





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





For the
year ended December 31, 2007, there were no stock options exercised and the
Company received approximately $3 thousand in proceeds for warrants exercised.
For the year ended December 31, 2007, the Company also issued approximately 1.5
million shares of common stock for payment of approximately $1.3 million for
services rendered and to be rendered in the future.  As such, the
Company recorded the fair value of the services rendered in
prepaid expenses and selling, general and administrative expenses
in the accompanying consolidated statement of operations for the year ended
December 31, 2007.






45







2006




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





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




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





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





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




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





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





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





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








46







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





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





2005





On
October 20, 2005, the Company entered into a Securities Purchase Agreement,
pursuant to which the Company sold and issued 1,661,906 shares of common stock,
par value $0.001 per share, at a price of $5.50 per share and warrants to
purchase up to 997,143 shares of common stock for an aggregate purchase
price of approximately $9.14 million.  The net proceeds received after
expenses were approximately $8.4 million.





The
warrants are exercisable at a price of $10.00 per share and expire on April 20,
2011.  Of the 997,143 warrants, 664,763 of the warrants are
exercisable on or after May 20, 2006.  The remaining 332,381 are
exercisable after March 31, 2007, however these warrants will be cancelled if
the Company’s net revenue for fiscal year 2006 exceeds $20 million or if the
investor has sold more than 25% of the shares purchased under the securities
purchase agreement prior to December 31, 2006.









47









As a
result of the above transaction, the outstanding 121,335 Series A Common Stock
Purchase Warrants, that were issued to participants of the Securities Purchase
Agreement dated January 9, 2004, were re-priced from $10.50 to $5.50 and the
outstanding 650,001 Series F Common Stock Purchase Warrants, that were issued to
participants of the Securities Purchase Agreement dated October 25, 2004, were
re-priced from $12.10 to $10.90.





A
registration rights agreement was entered into in connection with the private
placement which requires the Company to file a registration statement for the
resale of the common stock and the shares underlying the
warrants.  The Company must use its best efforts to have the
registration statement declared effective by the end of a specified grace period
and also maintain the effectiveness of the registration statement until all
common stock have been sold or may be sold without volume restrictions pursuant
to Rule 144(k) of the Securities Act.  If the Company fails to have
the registration statement declared effective within the grace period or fails
to maintain the effectiveness, the agreement requires the Company to pay each
investor cash payments equal to 2.0% of the aggregate purchase price monthly
until the failure is cured.  If the Company fails to pay the
liquidated damages, interest at 15.0% will accrue until the liquidated damages
are paid in full.  The registration statement was filed and declared
effective within the specified grace period.  As of December 31, 2006,
the registration statement remains effective.





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





In 2005,
the Company received approximately $1.6 million for the exercise of
approximately 11,100 options and 306,000 warrants.  The Company also
issued approximately 54,300 shares of common stock for the payment of $461
thousand of services rendered and to be rendered in the future.  The
fair value of the services was measured at market value of the common stock at
the time of payment.  As such, the Company recorded the fair value of
the services rendered in selling, general and administrative expenses in the
accompanying audited consolidated statement of operations for the year ended
December 31, 2005.





Note
11 - STOCK COMPENSATION





Employee
stock purchase plan





In 2005,
the stockholders approved the 2005 Employee Stock Purchase Plan
(“ESPP”).  The ESPP provides the Company’s employees with the
opportunity to purchase common stock through payroll deductions. Employees
purchase stock semi-annually at a price that is 85% of the fair market value at
certain plan-defined dates. At December 31, 2006, the number of shares of common
stock available for issuance was 225,000 and the plan will automatically
increase 75,000 shares on January 1 of each year for a period of three years
starting January 1, 2006. As of December 31, 2007, the plan had not been
implemented.





Incentive
compensation plans





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





In 2003,
the Company established the 2003 Stock Option Plan (the "2003 Plan"). The 2003
Plan provided for the granting of options to purchase an aggregate of 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.  The shareholders approved an amendment to the 2003 Plan
to provide grants of shares of common stock in addition to options to purchase
shares of common stock.  In 2005, approximately 2.4 million shares
were added to the plan.






48







On
February 20, 2008, the Board of Directors authorized the establishment of the
2007 Incentive Stock Plan.  Please see Note 17 - Subsequent events for
addition information.





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, 2007, 2006 and 2005 is
summarized as follows:


Number
      of Shares
            
            
            Weighted
      Average Exercise Price
            
            Weighted
      Average Remaining Contractual Life (In Years)
            
            Aggregate
      Intrinsic ValueBalances
      at December 31, 2004
            
            
            1,355,916
            
            
            $
            11.40Options
      granted
            
            
            582,400
            
            
            
            9.60Options
      exercised
            
            
            (11,059
            )
            
            
            3.40Options
      cancelled
            
            
            (121,993
            )
            
            
            13.90Balances
      at December 31, 2005
            
            
            1,805,264
            
            
            
            10.90Options
      granted
            
            
            185,744
            
            
            
            4.30Options
      exercised
            
            
            (5,000
            )
            
            
            2.10Options
      forfeited
            
            
            (453,115
            )
            
            
            7.47Options
      cancelled
            
            
            (467,148
            )
            
            
            11.97Balances
      at December 31, 2006
            
            
            1,065,745
            
            
            
            2.94Options
      granted
            
            
            228,577
            
            
            
            1.41Options
      exercised
            
            
            —
            
            
            
            —Options
      forfeited
            
            
            (203,943
            )
            
            
            2.90Options
      cancelled
            
            
            (196,056
            )
            
            
            2.67Balances
      at December 31, 2007
            
            
            894,323
            
            
            $
            2.62
            
            5.36
            
            $6,524Vested
      or expected to vest at
              December
      31, 2007 (1)
            
            
            877,408
            
            
            $
            2.67
            
            5.36
            
            $—Exercisable
      at December 31, 2007
            
            
            682,883
            
            
            $
            2.57
            
            5.53
            
            $—


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





At
December 31, 2007, there were 813,185 shares available for grant under the 2003
Plan and the 2000 Plan.






49







The
following table summarizes information about stock options outstanding at
December 31, 2007:





Options
      Outstanding
            
            Options
      ExercisableNumber
      Outstanding
            
            Weighted
      Average Remaining Contractual Life (In Years)
            
            Weighted
      Average Exercise Price
            
            Number
      Exercisable
            
            Weighted
      Average Exercisable Price$1.00
      - $1.51
            
            228,577
            
            9.60
            
            $  1.41
            
            205,277
            
            $
      1.46$2.60
      - $2.70
            
            624,546
            
            3.91
            
            2.61
            
            445,506
            
            2.60$3.50
      - $5.80
            
            12,000
            
            4.68
            
            5.61
            
            12,000
            
            5.61$6.60
      - $22.50
            
            29,200
            
            3.57
            
            10.91
            
            20,100
            
            11.23894,323
            
            5.36
            
            $  2.62
            
            682,883
            
            $
      2.57





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





The
aggregate intrinsic value in the table above represents the difference between
the exercise price of the underlying options and the quoted price of the
Company’s common stock for the options that were in-the-money.  As of
December 31, 2007 there were 23,300 options that were
in-the-money.   The Company’s closing stock price was $1.28 as of
December 31, 2007. The Company issues new shares of common stock upon exercise
of stock options.





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






50







Stock
based compensation





On
January 1, 2006, the Company adopted the provisions of SFAS No. 123R, which
requires the Company to recognize expense related to the fair value of the
Company’s share-based compensation issued to employees and
directors.  Prior to January 1, 2006, the Company accounted for
share-based compensation under the recognition and measurement provisions of
APB No. 25 and related interpretations, as permitted by SFAS No.
123.  The Company adopted SFAS No. 123R using the modified prospective
transition method.  Accordingly, periods prior to adoption have
not been restated.  Compensation cost recognized for the twelve months
ended December 31, 2007 and 2006 includes a) compensation cost for all
share-based compensation granted prior to, but not vested as of January 1, 2006,
based on the grant-date fair value estimated in accordance with the original
provisions of SFAS No.123 and b) compensation cost for all share-based
compensation granted beginning January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS
No.123R.  The compensation cost was recognized using the straight-line
attribution method.





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





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





For the
year ended December 31, 2007, stock compensation was approximately $1.7
million.  At December 31, 2007, total unrecognized compensation costs
related to stock options was approximately $1.7 million, net of estimated
forfeitures.  Total unrecognized compensation cost will be adjusted
for future changes in estimated forfeitures and is expected to be recognized
over a weighted average period of approximately 2.6 years.  For the
year ended December 31, 2006, stock compensation was approximately $2.9
million.





The
Company recognizes compensation expense for options granted to non-employees in
accordance with the provision of Emerging Issues Task Force (“EITF”) consensus
Issue 96-18, “Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services,”
which requires using a fair value options pricing model and re-


measuring
such stock options to the current fair market value at each reporting period as
the underlying options vest and services are rendered.





In
determining the fair value of stock options granted during the years ended
December 31, 2007, 2006, and 2005, the following key assumptions were used in
the Black-Scholes option pricing model:





For
      the years ended December 31,2007
            
            
            2006
            
            
            2005Dividend
      yield
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %Risk
      free interest rates
            
            
            3.28%
      - 4.23
            %
            
            
            4.59%
      - 4.82
            %
            
            
            4.4
            %Expected  volatility
            
            
            105%
      -106
            %
            
            
            123%
      - 126
            %
            
            
            126
            %Expected
      term ( in
      years)
            
            5
      years
            
            
            5
      years
            
            
            5
      years





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








51







The
following table shows the proforma effect on eMagin’s net loss and net loss per
share had compensation expense been determined based on the fair value at the
award grant date in accordance with SFAS No. 123 for the twelve months ended
December 31, 2005 (in thousands, except per share data):





For
      the year ended December 31, 2005Net
      loss applicable to common stockholders, as reported
            
            $
            (16,528
            )Add:  Stock-based
      employee compensation expense included in reported net
loss
            
            
            —Deduct: 
      Stock-based employee compensation expense determined under fair value
      method
            
            
            (3,035
            )Pro
      forma net loss
            
            $
            (19,563
            )Net
      loss per share:Basic
      and diluted, as reported
            
            $
            (1.94
            )Basic
      and diluted, pro
      forma
            
            $
            (2.29
            )






52






Warrants





At
December 31, 2007, 8,340,509 warrants to purchase shares of common stock are
outstanding and exercisable at exercise prices ranging from $0.35 to $27.60 and
expiration dates ranging from June 10, 2008 to February 27, 2012.





Outstanding
      WarrantsShares
            
            
            Weighted
      Average Exercise PriceBalances
      at December 31, 2004
            
            
            2,161,823
            
            
            $
            11.40Warrants
      granted
            
            
            997,143
            
            
            
            10.00Warrants
      exercised
            
            
            (370,820
            )
            
            
            6.10Warrants
      cancelled
            
            
            (168,421
            )
            
            
            26.70Balances
      at December 31, 2005
            
            
            2,619,725
            
            
            $
            10.20Warrants
      granted
            
            
            1,805,037
            
            
            
            3.49Warrants
      exercised
            
            
            —
            
            
            
            —Warrants
      expired
            
            
            (876,588
            )
            
            
            6.90Balances
      at December 31, 2006
            
            
            3,548,174
            
            
            $
            7.05Warrants
      granted
            
            
            4,831,859
            
            
            
            0.88Warrants
      exercised
            
            
            (9,524
            )
            
            
            0.35Warrants
      expired
            
            
            (30,000
            )
            
            
            4.26Balances
      at December 31, 2007
            
            
            8,340,509
            
            
            $
            2.65





On
January 30 and March 25, 2008, the loan agreement with Moriah was amended and
restated and 750,000 warrants and 250,000 warrants, respectively, were issued
with exercise prices of $1.50 per share.  Please see Note 17 –
Subsequent Events for additional information.





Note
12 - COMMITMENTS AND CONTINGENCIES





Royalties





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





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




For the
years ended December 31, 2007, 2006, and 2005, royalty expense of approximately
$1.2 million, $515 thousand, and $191 thousand, respectively, is included in
cost of goods sold.





Operating
leases





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





The
Company’s manufacturing facilities are leased from IBM in New
York.  eMagin leases approximately 40,000 square feet to house its
equipment for OLED microdisplay fabrication and for research and development, an
assembly area and administrative offices.  In 2004, eMagin
entered into an agreement to extend the term of the lease until
2009.






53







In July
2005, eMagin signed a sub-lease agreement for approximately 19,000 square feet
in Bellevue Washington. The leased space is used as the Company’s corporate
headquarters.  This lease will expire in 2009.  The
Company’s lease at the Redmond Washington location expired in August 2005
and was not renewed.


The
future minimum lease payments through 2009 are as follows (in
thousands):





2008
            
            $
            1,4442009
            
            
            538$
            1,982




Rent
expense for the years ended December 31, 2007, 2006, and 2005 was approximately
$1.3 million, $1.3 million, and $1.0 million, respectively. The Redmond lease
was paid in common stock valued at $42 thousand for the 2005 and 2004 rent
period.





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, 2007,
2006 and 2005.





Legal
proceedings





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





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





Note
13 – RELATED PARTY TRANSACTIONS





2007





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




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





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






54







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





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





A family
member of an outside director of eMagin is the holder of a Series A warrant to
purchase an aggregate of 4,286 shares of common stock. As a result of the
Stillwater transaction, the exercise price of all Series A warrants was reduced
from $5.50 to $0.35 per share.   Family members of an outside
director of eMagin are holders of Series F warrants to purchase an aggregate of
10,000 shares of common stock.   As a result of the debt
transactions, the exercise price of all Series F warrants was ultimately reduced
from $8.60 to $4.09 per share.





2006





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





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





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





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






55







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





2005





On
October 20, 2005, the Company entered into a Securities Purchase Agreement to
sell to certain qualified institutional buyers and accredited investors an
aggregate of 1,661,906 shares of eMagin’s common stock, par value $0.001 per
share (the “Shares”), and warrants to purchase an additional 997,143 shares of
common stock, for an aggregate purchase price of approximately $9.1 million. The
purchase price of the common stock and corresponding warrant was $5.50 per
share.





The
warrants are exercisable at a price of $10.00 per share and expire on October
20, 2010. Of the 997,143 warrants, 664,762 of the warrants are exercisable on or
after May 20, 2006. The remaining 332,380 are exercisable after March 31,
2007.





Stillwater
LLC is a beneficial owner of more than 5% of the Company’s common
stock.  Rainbow Gate Corporation, a corporation in which its
investment manager is the sole member of Stillwater LLC and its controlling
shareholder is the same as Ginola Limited, participated in the sale of equity
pursuant to the Securities Purchase Agreement by investing $500
thousand.  Stillwater LLC disclaims beneficial ownership of shares
owned by Rainbow Gate Corporation.





Chelsea
Trust Company, as trustee of a trust with the same directors and/or controlling
shareholders as Ginola Limited, participated in the sale of equity pursuant to
the Securities Purchase Agreement by investing $250 thousand.  Ginola
Limited disclaims beneficial ownership of shares owned by Chelsea Trust
Company.





In
connection with the issuance of the Shares and the warrants pursuant to the
Securities Purchase Agreement, the Company was required to lower the exercise
prices of existing Series A and F warrants from $10.50 and $12.10 per share,
respectively, to $5.50 and $10.90 per share, respectively, pursuant to the
anti-dilution provisions of the Series A and F warrants.





A family
member of an outside director of eMagin is the holder of a Series A warrant to
purchase an aggregate of 4,286 shares of common stock. Accordingly, the exercise
price of all Series A warrants was reduced from $10.50 to $5.50 per
share.





Note
14 – SEPARATION AND EMPLOYMENT AGREEMENTS





Executive
Separation and Consulting Agreement





On
January 11, 2007, Gary Jones resigned as the President, Chief Executive Officer,
and as a Director of the Company.  Mr. Jones and the Company entered
into an Executive Separation and Consulting Agreement (“the
Agreement”).  Under the Agreement, the Company made a payment to
Mr. Jones in an amount equal to: all accrued salary as of the date of the
Agreement plus an additional 30 days of salary (approximately $47
thousand); 360 hours of unused vacation (approximately $55 thousand);
advance for legal and accounting fees associated with 2004 stock options
($30 thousand); and an advance for future travel expenditures ($5 thousand). Mr.
Jones also received 500,000 shares of registered common stock of the Company
valued at $430 thousand. In his consulting relationship, Mr. Jones will be paid
$460 thousand upon the consummation of a strategic
transaction.   The Company will provide up to $7.5 thousand for
reasonable moving expenses of personal property from the New York
office.  In addition, the Company will pay up to an additional $30
thousand to Mr. Jones related to personal legal fees.





Compensation
Agreement





On
January 11, 2007, Dr. K.C. Park was appointed Interim Chief Executive Office,
President, and a Director of the Company.  On February 12, 2007, the
Company entered into a Compensation Agreement (“the Agreement”) with Dr.
Park.  Under the Agreement, the Company paid Dr. Park an annual base
salary equal to $300 thousand plus a quarterly increase in his base salary in
the amount of $12.5 thousand per fiscal quarter through December 31,
2007.  The Company agreed to issue Dr. Park an aggregate of 250,000
restricted shares of common stock within 10 business days of the completion of a
change of control of the Company.  In addition, if a change of control
transaction is completed and Dr. Park is not offered a senior executive position
in the new organization, the Company has agreed to pay Dr. Park three month’s
salary.  K.C. Park resigned effective January 31,
2008.  Please see Note 17 - Subsequent Events.





Effective
January 30, 2008, the Company entered into an amended employment agreement with
Susan K. Jones, its Chief Marketing and Strategy Officer.  The amended
agreement provides for an increase in compensation, extends the term of the
agreement to January 31, 2010, changes certain incentive award payment
requirements, clarifies the basis for incentive award determination, and extends
the change-of-control/material change/termination-without-cause compensation
payout periods. Please see Note 17 - Subsequent Events.





Note
15 - CONCENTRATIONS





The
Company had no customers that accounted for more than 10% of its total revenues
in 2007.  In 2006, the Company had one customer that accounted for 13%
of its total revenues.  In 2005, the Company had no customers that
accounted for more than 10% of its total revenues.






56







For the
year ended December 31, 2007, approximately 51% of the Company’s net revenues
were made to customers in the United States and approximately 49% of the
Company’s net revenues were made to international customers.  For the
year ended December 31, 2006, approximately 59% of the Company's net revenues
were made to customers in the United States and approximately 41% of the
Company's net revenues were made to international customers.  For the
year ended December 31, 2005, approximately 49% of the Company’s net revenues
were made to customers in the United States and approximately 51% of the
Company’s net revenues were made to international customers.





There
were 5 customers which comprised 54% of the outstanding accounts receivable at
December 31, 2007.  At December 31, 2006, there were 5 customers which
comprised 69% of the outstanding accounts receivable.





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




Note
16 – AMEX DELISTING





On
October 9, 2006, the Company received notice from the American Stock Exchange
(the “AMEX”) Listing Qualifications Department stating that the Company does not
meet certain continued listing standards as set forth in Part 10 of the AMEX
Company Guide (the “Company Guide”). Specifically, pursuant to a review by the
AMEX of the Company’s 10-Q for the three and six months ended June 30, 2006, the
AMEX has determined that the Company is not in compliance with Sections
1003(a)(ii) and 1003(a)(iii) of the Company Guide, respectively, which state, in
relevant part, that the AMEX will normally consider suspending dealings in, or
removing from the list, securities of a company that (a) has stockholders'
equity of less than $4.0 million if such company has sustained losses from
continuing operations and/or net losses in three of its four most recent fiscal
years; or (b) has stockholders' equity of less than $6.0 million if such company
has sustained losses from continuing operations and/or net losses in its five
most recent fiscal years, respectively.





On
November 6, 2006, the Company submitted a plan advising the AMEX of actions that
it would take, which may bring it into compliance with Sections 1003 (a)(ii) and
1003(a)(iii) of the Company Guide within a maximum of 18 months of receipt of
the notice letter. On January 5, 2007, the Company received notice from the
staff of the AMEX indicating that it intended to strike the Company’s common
stock from listing on AMEX by filing a delisting application with the Securities
and Exchange Commission as it had determined that the Company has failed to
comply with the continued listing standards.  The Company requested a
verbal hearing which was held on February 27, 2007.





On March
1, 2007, the Company received notice from the AMEX indicating that the AMEX
would initiate the delisting process with respect to the Company’s common
stock.  On March 12, 2007, in accordance with Part 12 of the Company
Guide, the Company was suspended from trading on the AMEX.   The
Company’s common stock is trading on the Over-the-Counter Bulletin Board under
the symbol, EMAN.





The
delisting from the AMEX triggered a compliance condition on the notes
payable.  As a result the Company was required to pay the note holders
monthly interest at 1% rather than .5% on the outstanding principal of the notes
payable.  The Company received a waiver from the note holders that
allowed the Company to accrue the interest and delay the interest payment until
the earliest of the Company (i) completing $2 million of debt or equity
financing or (ii) the occurrence of a Repurchase Event per the
note.  On July 23, 2007, the Company entered into Amended Agreements
with the note holders where the 1% monthly interest will no longer accrue and
the accrued interest was forgiven.





Note
17 – SUBSEQUENT EVENTS





Effective
January 2, 2008, John Atherly resigned as Chief Financial
Officer.  There was no separation agreement executed between Mr.
Atherly and the Company.  Michael D. Fowler became the Company’s
Interim Chief Financial Officer effective December 27, 2007.





Effective
January 31, 2008, K.C. Park resigned as Interim Chief Executive Officer,
President and Director.  Dr. Park and the Company entered into a
Separation Agreement and General Release (“Separation
Agreement”).  The Company will pay Dr. Park severance of $60 thousand
to be payable over a three month period.  Dr. Park and the Company
also entered into a Consulting Agreement (“Agreement”) for a term beginning
February 1 and ending on August 1, 2008.  He will be paid a sum of $75
thousand, payable in monthly installments of $10 thousand for the first three
months of the term and $15 thousand for the remaining three months of the
term.  In addition to the compensation, Dr. Park will be entitled to
receive non-qualified stock options to acquire 18,750 shares of common stock on
each three month anniversary of the Agreement at the fair market value on the
date of the grant and will be fully vested and exercisable on the date of the
grant.  If the Agreement is not renewed at the end of the term,
he will be entitled to an additional grant of 18,750 shares of common stock with
the same terms.  In addition, on May 1, 2008, Dr. Park will be
entitled to receive non-qualified stock options to acquire 51,703 shares of
common stock at the fair market value and will be fully vested.





Effective
January 30, 2008, the Company entered into an amended employment agreement with
Susan K. Jones, its Chief Marketing and Strategy Officer.  The amended
agreement provides for an increase in compensation, extends the term of the
agreement to January 31, 2010, changes certain incentive award payment
requirements, clarifies the basis for incentive award determination, and extends
the change-of-control/material change/termination-without-cause compensation
payout periods.








57






Michael
D. Fowler, the Company’s Interim Chief Financial Officer, has indicated his
intention to resign his position with the Company following the filing of the
Annual Report on Form 10-K for December 31, 2007 to pursue other
interests.





Line
of Credit





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





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





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





Incentive
Compensation Plan





On
February 20, 2008, the Board of Directors authorized the establishment of the
2007 Incentive Stock Plan with 2,000,000 options available for
grant.  The 2007 Incentive Stock Plan is intended to provide long-term
performance incentives to directors, executives, selected employees and
consultants and reward them for making major contributions to the success and
well being of the Company.





Private
Placement





On April
2, 2008, the Company completed a private placement of its common stock with
several institutional investors for gross proceeds of $1.65
million.  The transaction involved the sale of 1,586,539 shares of
common stock at $1.04 per share, or the 5-day average closing price of the
Company’s common stock on the trading days immediately preceding the
closing date.  The Company also issued to the investors 793,273
warrants to buy our common stock at a price of $1.30 per
share.  Pursuant to the transaction, the Company is obligated to file
a registration statement for the shares issued as well as shares underlying the
warrants by May 17, 2008.






58







Note
18 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)





Summarized
quarterly financial information for 2007 and 2006 are as follows (in thousands
except per share data):





Quarters
      EndedMarch
      31, 2007
            
            
            June
      30, 2007
            
            
            September
      30, 2007
            
            
            December
      31, 2007Revenues
            
            $
            3,609
            
            
            $
            4,232
            
            
            $
            5,071
            
            
            $
            4,642Gross
      margin
            
            $
            494
            
            
            $
            1,286
            
            
            $
            2,012
            
            
            $
            1,134Net
      loss
            
            $
            (2,937
            )
            
            $
            (1,728
            )
            
            $
            (12,651
            )
            
            $
            (1,172
            )Net
      loss per share – basic and diluted
            
            $
            (0.27
            )
            
            $
            (0.15
            )
            
            $
            (1.06
            )
            
            $
            (0.10
            )Weighted
      average number of shares outstanding – basic and diluted
            
            
            10,792
            
            
            
            11,176
            
            
            
            11,935
            
            
            
            12,249Quarters
      EndedMarch
      31, 2006
            
            
            June
      30, 2006
            
            
            September
      30, 2006
            
            
            December
      31, 2006Revenues
            
            $
            1,641
            
            
            $
            1,674
            
            
            $
            2,292
            
            
            $
            2,562Gross
      margin (loss)
            
            $
            (1,388
            )
            
            $
            (1,291
            )
            
            $
            (648
            )
            
            $
            137Net
      loss
            
            $
            (5,160
            )
            
            $
            (4,838
            )
            
            $
            (3,769
            )
            
            $
            (1,499
            )Net
      loss per share – basic and diluted
            
            $
            (0.52
            )
            
            $
            (0.48
            )
            
            $
            (0.37
            )
            
            $
            (0.15
            )Weighted
      average number of shares outstanding – basic and diluted
            
            
            10,004
            
            
            
            10,011
            
            
            
            10,077
            
            
            
            10,196
















59













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





None.





ITEM
9A. CONTROLS AND PROCEDURES





(a)
Disclosure Controls and Procedures





Our
principal executive and principal financial officers have evaluated the
effectiveness of our disclosure controls and procedures, as defined in Rules 13a
– 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), as of the end of the period covered by this annual
report.  They  have concluded that, based on such
evaluation, our disclosure controls and procedures were not effective due to the
material weaknesses in our internal control over financial reporting as of
December 31, 2007, as further described below.





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





Overview





Internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
refers to the process designed by, or under the supervision of, our principal
executive officer and principal financial officer, and effected by our board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.  Management is responsible for establishing and
maintaining adequate internal control over financial reporting for
eMagin.





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





Management
has used the framework set forth in the report entitled “Internal Control --
Integrated Framework” published by the Committee of Sponsoring Organizations
(“COSO”) of the Treadway Commission to evaluate the effectiveness of eMagin’s
internal control over financial reporting.  As a result of the
material weaknesses described below, management has concluded that the Company’s
internal control over financial reporting was not effective as of December 31,
2007.





Management’s
Assessment





Management
has determined that, as of the December 31, 2007 measurement date, there were
material weaknesses in both the design and effectiveness of our internal control
over financial reporting.  Management has assessed these deficiencies
and has determined that there were four general categories of material
weaknesses in eMagin’s internal control over financial reporting.  As
a result of our assessment that material weaknesses in our internal control over
financial reporting existed as of December 31, 2007, management has concluded
that our internal control over financial reporting was not effective as of
December 31, 2007.  A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of our
annual or interim financial statements will not be prevented or detected on a
timely basis.





In
management’s opinion, our assessment as of December 31, 2007 regarding the
existence of material weaknesses in our internal control over financial
reporting relates to (1) the absence of adequate staffing, proper role
descriptions, inadequate training and excessive employee turnover, (2) the lack
of controls or ineffectively designed controls, (3) the failure in design and
operating effectiveness of information technology controls over financial
reporting, and (4) failures in operating control effectiveness identified during
the testing of the internal control over financial
reporting.  Management and our audit committee have assigned a
high priority to the short-term and long-term improvement of our internal
control over financial reporting.








60







The
material weaknesses we have identified include:





Deficiencies pertaining to a lack of
human resources within our finance and accounting functions.  During the
latter part of 2007 we experienced significant turnover of personnel in our
finance and accounting department, including the positions of Chief Financial
Officer and Staff Accountant.  The reduced staffing resulted in
instances of altered responsibilities and improper role definition leading to
lapses in proper segregation of duties.  The lack of appropriately
skilled personnel and less effective monitoring activities related to employee
turnover could result in material misstatements to financial statements not
being detected in a timely manner.





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




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





Deficiencies related to failures in
operating effectiveness of the internal control over financial
reporting.  Certain internal control procedures were developed
during the latter part of 2007.  When testing occurred to confirm the
effectiveness of the internal control over financial reporting, controls were
not operating effectively.  Insufficient time remained to remediate
these material weaknesses prior to year-end.





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





(c)
Changes in Internal Control over Financial Reporting





There has
been no change in our internal control over financial reporting, as defined in
Rules 13a-15(f) of the Exchange Act, during our most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.  However, we have initiated
or intend to initiate a number of remediation measures to address the control
deficiencies and material weaknesses identified above.  The
remediation measures include or are expected to include the
following:





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





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





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





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





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





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





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





ITEM
9B. OTHER INFORMATION





None.







61













PART
III





ITEM
10.  DIRECTORS, OFFICERS AND CORPORATE GOVERNANCE.





The
following table sets forth the names of our directors and executive officers as
of March 31, 2008:





Name
            
            Age
            
            PositionAdm.
      Thomas Paulsen (Ret.) (2)(3*)
            
            
            71
            
            Interim
      Chief Executive Officer and President, Chairman of the Board,
      DirectorMichael
      D. Fowler
            
            
            64
            
            Interim
      Chief Financial OfficerSusan
      K. Jones
            
            
            56
            
            Chief
      Market and Strategy Officer, SecretaryClaude
      Charles (1)
            
            
            71
            
            DirectorPaul
      Cronson
            
            
            51
            
            DirectorIrwin
      Engelman (1*)
            
            
            73
            
            DirectorDr.
      Jacob Goldman (2*)(3)
            
            
            86
            
            DirectorBrig.
      Gen. Stephen Seay (Ret.) (1)(3)
            
            
            61
            
            Director








(1)
            Audit
      Committee





(2)
            Governance
      & nominating Committee





(3)
            Compensation
      Committee


*
Committee Chair




Rear
Admiral Thomas Paulsen was appointed Interim CEO and President in January 2008
and 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 of Umbanet, Inc. since 2002. Since
2000, Admiral Paulsen has served on the Board of Governors of the Institute of
Knowledge Management, George Washington University. Since 1994, he has
served as the Chairman of the Advisory Board and President Emeritus of the
Center for Advanced Technologies (CAT) and a Managing Partner on the National
Knowledge and Intellectual Property Management Taskforce, a not-for-profit
company headquartered in Dallas, Texas, and is a member of the Board of
Governors for the Japanese American National Museum, Los Angeles,
California.




Michael
D. Fowler became the Company’s Interim Chief Financial Officer on December 27,
2007. Mr. Fowler has been a partner with Tatum, LLC (“Tatum”) for 4
years.  Tatum is an executive services firm.  From 2005 to
2007, Mr. Fowler served as Chief Financial Officer for Torrent Energy, a
NASDAQ-traded natural gas exploration company.  From 2004-2005, Mr.
Fowler served as the Chief Financial Officer for Pacific West Bank. From
2003-2005, Mr. Fowler provided strategic financial planning services to
a  number of companies, including Swan Island Networks, a security
software provider to the Departments of Homeland Security and Defense, Apex
Construction Systems, a building materials manufacturer and Portland Teachers
Credit Union, a regional financial institution.  From 2001 to 2003,
Mr. Fowler served as the Chief Financial Officer of Wellpartner, Inc.
a venture-backed, internet/mail order pharmacy Company.  Mr.
Fowler has a Master of Business Administration and a Bachelor of Science in
electrical engineering from University of Utah.





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





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






62







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 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.




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





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





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





CORPORATE
GOVERNANCE





Code
of Ethics





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





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





Section
16(a) Beneficial Ownership Reporting Compliance





Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires our directors and
executive officers and persons who own more than 10% of the issued and
outstanding shares of eMagin common stock to file reports of initial ownership
of common stock and other equity securities and subsequent changes in that
ownership with the SEC and the NYSE. Officers, directors and greater than ten
percent stockholders are required by SEC regulation to furnish us with copies of
all Section 16(a) forms they file. To our knowledge, based solely on a
review of the copies of such reports furnished to us and written representations
that no other reports were required, during the fiscal year ended December 31,
2007 all Section 16(a) filing requirements applicable to our officers, directors
and greater than 10% beneficial owners were complied with except as noted
below:





There was
one Form 4 filed late by Dr. K. C. Park and Susan K. Jones filed a Form 5 as a
result of certain unfiled Form 4 filings.






63









General Information Concerning the
Board of Directors





The Board
of Directors of eMagin is classified into three classes: Class A, Class B and
Class C. As of March 31, 2008, Irwin Engelman is the only Class A Director, and
will hold office until the next Annual Meeting of our stockholders. Paul
Cronson, Admiral Thomas Paulsen, and General Stephen Seay are Class B directors
who will hold office until the 2009 Annual Meeting. Claude Charles
and  Dr. Jacob Goldman are Class C directors who will hold office
until the next Annual Meeting.  There was no Annual Meeting held
during 2007.   In each case, each director will hold office until
his successor is duly elected or appointed and qualified in the manner provided
in our Amended and Restated Certificate of Incorporation and our Amended and
Restated Bylaws, or as otherwise provided by applicable law.





Our Board
of Directors held 20 meetings during 2007. Our independent directors met in
executive session on a periodic basis in connection with regular meetings, as
well as in their capacity as members of our Audit Committee and Compensation
Committee.





Compensation
of Directors





Non-management
directors receive options under the 2003 Stock Option Plan. Under the 2003 Plan,
a grant of options to purchase 6,000 shares of common stock will automatically
be granted on the date a director is first elected or otherwise validly
appointed to the Board with an exercise price per share equal to 100% of
the market value of one share on the date of grant. Such options granted will
expire ten years after the date of grant and will become exercisable in four
equal installments commencing on the date of grant and annually thereafter. For
calendar years 2007 and 2008, Directors shall receive an annual cash retainer of
$10,000 and an annual stock retainer of 25,000 options, fully vested, at market
price on the date of issuance. In addition to the options to purchase 6,000
shares of common stock automatically granted upon joining the Board, each
Director thereafter will receive an annual grant of options to purchase 1,000
shares of common stock at the fair market value as determined on the date of
grant, which options will vest on December 31 in the year granted. Directors
receive an additional 500 upon re-election. Directors are also granted options
based on committee assignments consisting of options to purchase 500 shares per
year for members of the compensation committee, 1,000 shares for the governance
committee and 1,500 shares for the audit committee. Each committee chair will
receive 250 additional shares.  In addition, each non-management
director receives $1,000 for each in-person Board meeting, and $500 for each
teleconference meeting or Committee meeting. Directors are eligible for
reimbursement for ordinary expenses incurred in connection with attendance at
such meetings.





The Audit
Committee is responsible for determining the adequacy of our internal accounting
and financial controls, supervising matters relating to audit functions,
reviewing and setting internal policies and procedures regarding audits,
accounting and other financial controls, reviewing the results of our audit
performed by the independent public accountants, and recommending the selection
of independent public accountants. The Audit Committee has adopted an Audit
Charter, which is posted on our website
at  http://www.emagin.com/investors.The  Audit Committee is
composed of three Directors, Claude Charles, Irwin Engelman, and Adm. Stephen
Seay. The Board has determined that each of the members of the Audit Committee
is unrelated, an outside member with no other affiliation with us and is
independent. The Board has determined that Mr. Engelman is an “audit committee
financial expert” as defined by the SEC. During 2007, the Audit Committee held 5
meetings via teleconference.





Compensation
Committee. The
Compensation Committee determines matters pertaining to the compensation and
expense reporting of certain of our executive officers, and administers our
stock option, incentive compensation, and employee stock purchase plans. The
Compensation Committee is presently composed of three Directors, Jack Goldman,
Thomas Paulsen, and Stephen Seay, each of whom the Board has determined to be
independent and none of whom has been an employee of the Company. During 2007,
the Compensation Committee held 4 meetings in person or through a conference
call.





Governance and
Nominating Committee. The Governance and Nominating Committee is
responsible for considering potential Board members, nominating Directors for
election to the Board, implementing the Company’s corporate governance and
ethics policies, and for all other purposes outlined in the Governance and
Nominating Committee Charter, which is posted on our website
at  http://www.emagin.com/investors .   The Governance
and Nominating Committee is composed of Jack Goldman and Thomas Paulsen, each of
whom the Board has determined to be independent. During 2007, the Governance and
Nominating Committee held 1meeting.





Nomination
of Directors





As
provided in its charter and our company’s corporate governance principles, the
Governance and Nominating Committee is responsible for identifying individuals
qualified to become directors. The Governance and Nominating Committee seeks to
identify director candidates based on input provided by a number of sources,
including (1) the Governance and Nominating Committee members, (2) our other
directors, (3) our stockholders, (4) our Chief Executive Officer or Chairman,
and (5) third parties such as professional search firms. In evaluating potential
candidates for director, the Nominating and Corporate Governance Committee
considers the entirety of each candidate’s credentials.








64








Qualifications
for consideration as a director nominee may vary according to the particular
areas of expertise being sought as a complement to the existing composition of
the Board of Directors. However, at a minimum, candidates for director must
possess:





•
            high
      personal and professional ethics and integrity;•
            the
      ability to exercise sound judgment;•
            the
      ability to make independent analytical inquiries;•
            a
      willingness and ability to devote adequate time and resources to
      diligently perform Board and committee duties; and•
            the
      appropriate and relevant business experience and
  acumen





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





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





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





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





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





ITEM 11. EXECUTIVE COMPENSATION





COMPENSATION
DISCUSSION AND ANALYSIS





This
section describes the compensation program for our executive officers. In
particular, this section focuses on our 2007 compensation program and related
decisions.





Compensation
Discussion and Analysis




The
objectives of our compensation program are as follows:





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





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





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





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








65





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




Compensation
for the Chairman, Interim Chief Executive Officer and President





Admiral
Paulsen is currently serving as Interim Chief Executive Officer. Admiral Paulsen
receives an annual stipend of $60,000 for serving as Non-Executive Chairman of
the Board. No change has occurred in Admiral Paulsen’s compensation as a
director of the Company as a result of his accepting the temporary position of
Interim Chief Executive Officer and President.








66





Summary
Compensation Table





The
following table sets forth information regarding compensation paid to our
principal executive officer, principal financial officer, and our highest paid
executive officer, all of whose total annual salary and bonus for the years
ended December 31, 2007, 2006 and 2005 exceeded $100,000.





SUMMARY
      COMPENSATION TABLESalary
            Bonus
            Stock
      Awards
            
            Option
      awards
            Non-equity
      incentive plan compensation
            Change
      in pension value and non qualified deferred compensation
            All
      Other Compensation
            
            TotalName
      and principal position
            Year
            ($)
            ($)
            ($)
            
            ($),
      (a)
            ($)
            ($)
            ($)
            
            ($)K.C. Park,
      Interim President and Chief Executive Officer (1)
            2007
            313,462
            -
            40,000
            (4)
            -
            -
            -
            -
            
            353,4622006
            200,000
            -
            -
            
            -
            -
            -
            -
            
            -2005
            119,923
            -
            -
            
            141,362
            -
            -
            -
            
            141,362Gary
      Jones, President and Chief Executive Officer (2)
            2007
            102,060
            -
            430,000
            (5)
            -
            -
            -
            51,638
            (6)
            583,6982006
            368,170
            -
            -
            
            -
            -
            -
            127,928
            (7)
            496,0982005
            320,313
            -
            -
            
            404,150
            -
            -
            147,420
            (7)
            871,883John
      D. Atherly, Chief Financial Officer (3)
            2007
            243,000
            -
            -
            
            -
            -
            -
            -
            
            243,0002006
            242,308
            -
            -
            
            -
            -
            -
            -
            
            242,3082005
            221,406
            -
            -
            
            316,240
            -
            -
            -
            
            537,646Susan
      Jones, Executive Vice President, Chief Marketing and Strategy Officer, and
      Secretary
            2007
            278,888
            -
            -
            
            -
            -
            -
            175,184
            (8)
            454,0722006
            289,163
            -
            -
            
            -
            -
            -
            81,379
            (8)
            370,5422005
            259,568
            26,049
            -
            
            316,240
            -
            -
            26,049
            (8)
            627,906








(1)
      Dr. Park was appointed Interim President and Chief Executive Officer in
      January 2007 and resigned his post in January 2008.  Prior to
      January 2007, Dr. Park served as  Executive Vice President of
      International Operations.(2)
      Mr. Jones resigned as President and Chief Executive Officer in January
      2007.(3)
      Mr. Atherly resigned as Chief Financial Officer in January
      2008.(4)
      This amount represents a retention bonus in the form of a stock grant that
      was issued to the named executive officer.(5)
      This amount represents a payment in the form of a stock grant pursuant to
      Mr. Jones' severance agreement.  Previously granted options that
      remained unexercised were also forfeited pursuant to the severance
      agreement.(6)
      This amount represents legal and accounting fee reimbursement for the
      benefit of the named executive officer.(7)
      This amount represents relocation expense reimbursement for the benefit of
      the named executive officer.(8)
      This amount represents deferred dollar amount earned in sales incentive
      compensation by the named executive
officer.






67






Column
      note:(a)  The
      amounts in this column represent the fair value of option awards to the
      named executive officer as computed on the date of the option grants using
      the Black-Scholes option-pricing model.




Grants
of Plan-Based Awards





There
were no grants of plan-based awards to named executive officers for the year
ended December 31, 2007.





Outstanding
Equity Awards at Fiscal Year-End





The
following table sets forth information with respect to the outstanding equity
awards of our principal executive officers and principal financial officer
during 2007, and each person who served as an executive officer of eMagin
Corporation as of December 31, 2007:





OUTSTANDING
      EQUITY AWARDS AT YEAR-END





Option
      awards
            
            Stock
      awardsNumber
      of securities underlying unexercised options (#)
            
            
            Number
      of securities underlying unexercised options (#)
            
            
            Equity
      incentive plan awards: Number of securities underlying unexercised
      options
            
            Options
      exercise price
            
            Option
      expiration
            
            Number
      of shares or units of stock that have not vested
            
            
            Market
      value of shares or units of stock that have not vested
            
            
            Equity
      incentive plan awards:
              Number
      of unearned shares other rights that have not vested
            
            
            Equity
      incentive plan awards:
              Market
      or payout value of unearned shares, units or other rights that have not
      vestedName
      and principal position
            
            Exercisable
            
            
            Unexercisable
            
            
            
            (#),
      (a)
            
            ($)
            
            Date
            
            
            (#)
            
            
            ($)
            
            
            
            (#)
            
            
            ($)K.C. Park,
      Interim
            
            
            465
            
            
            
            -
            
            
            
            465
            
            
            2.60
            
            July
      21, 2008
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -President
      and
            
            
            19,500
            
            
            
            -
            
            
            
            19,500
            
            
            2.60
            
            May
      10, 2009
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Chief
      Executive
            
            
            3,676
            
            
            
            -
            
            
            
            3,676
            
            
            2.60
            
            January
      11, 2010
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Officer
      (1)
            
            
            6,500
            
            
            
            -
            
            
            
            6,500
            
            
            2.60
            
            March
      17, 2010
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -6,500
            
            
            
            -
            
            
            
            6,500
            
            
            2.60
            
            November
      30, 2012
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -6,846
            
            
            
            -
            
            
            
            6,846
            
            
            2.60
            
            April
      24, 2013
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -4,108
            
            
            
            -
            
            
            
            4,108
            
            
            2.60
            
            August
      30, 2013
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -4,108
            
            
            
            -
            
            
            
            4,108
            
            
            2.60
            
            December
      1, 2013
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -John
      D. Atherly,
            
            
            24,375
            
            
            
            8,125
            
            
            
            32,500
            
            
            2.60
            
            June
      16, 2011
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Chief
      Financial
            
            
            -
            
            
            
            25,000
            (3)
            
            
            25,000
            
            
            2.60
            
            June
      16, 2011
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Officer
      (2)
            
            
            16,250
            
            
            
            -
            
            
            
            16,250
            
            
            2.60
            
            March
      17, 2012
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -11,700
            
            
            
            -
            
            
            
            11,700
            
            
            2.60
            
            November
      30, 2012
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Susan
      Jones,  and
            
            
            48,750
            
            
            
            -
            
            
            
            48,750
            
            
            2.60
            
            May
      17, 2009
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Executive
      Vice
            
            
            16,770
            
            
            
            -
            
            
            
            16,770
            
            
            2.60
            
            January
      11, 2010
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -President,
      Chief
            
            
            9,685
            
            
            
            -
            
            
            
            9,685
            
            
            2.60
            
            January
      11, 2010
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Marketing
      and
            
            
            16,250
            
            
            
            -
            
            
            
            16,250
            
            
            2.60
            
            March
      17, 2010
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Strategy
      Officer,
            
            
            11,700
            
            
            
            -
            
            
            
            11,700
            
            
            2.60
            
            November
      30, 2012
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Secretary
            
            
            11,932
            
            
            
            -
            
            
            
            11,932
            
            
            2.60
            
            April
      24, 2013
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -7,159
            
            
            
            -
            
            
            
            7,159
            
            
            2.60
            
            August
      30, 2013
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -7,159
            
            
            
            -
            
            
            
            7,159
            
            
            2.60
            
            December
      1, 2013
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -




(1)
      Dr. Park was appointed Interim President and Chief Executive Officer in
      January 2007 and resigned his post in January
  2008.


(2) Mr.
Atherly resigned as Chief Financial Officer in January 2008 and has forfeited
all options shown above.


(3)
25,000 options subject to vesting when the Company completes four consecutive
EBITDA positive quarters.






68






Column
note:




On
      November 3, 2006, a reverse stock split, ratio of 1-for-10, became
      effective.  All stock options presented reflect the stock
      split.


(a) The
options in this column were repriced.   On July 21, 2006, certain
employees agreed to cancel a portion of their existing stock options in return
for repricing the remaining stock options at $2.60 per share.  The
repriced unvested options continued to vest on the original
schedule.




Option
Exercises and Stock Vested





No
executive officer identified in the Summary Compensation Table above exercised
an option in fiscal year 2007.  There were no shares of stock awarded
or vested with respect to any of those executive officers.





Pension
Benefits





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





Non-qualified
Deferred Compensation





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





Employment
Agreements





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






69







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





On
January 11, 2007, Dr. K.C. Park was appointed Interim Chief Executive Officer,
President, and a Director of the Company.  On February 12, 2007, the
Company entered in a Compensation Agreement (“the Agreement”) with Dr.
Park.  Under the Agreement, the Company has agreed to pay Dr. Park an
annual base salary equal to $300 thousand plus a quarterly increase in his base
salary in the amount of $12.5 thousand per fiscal quarter through December 31,
2007.  The Company agreed to issue Dr. Park an aggregate of 250,000
restricted shares of common stock within 10 business days of the completion of a
change of control of the Company.  In addition, if a change of control
transaction is completed and Dr. Park is not offered a senior executive position
in the new organization, the Company has agreed to pay Dr. Park three month’s
salary.  On January 31, 2008, Dr. Park resigned his positions as
Interim Chief Executive Officer, President and Director.





Potential
Payments Upon Termination or Change-in-Control





The
following table sets forth information regarding potential payments and benefits
Ms. Jones would receive upon termination of employment under specified
circumstances, assuming that the triggering event in question occurred on
December 31, 2007, the last business day of the fiscal year:





Name
            
            Voluntary
      Resignation w/o Good Reason
            
            
            Voluntary
      Resignation for Good Reason
            
            
            Involuntary
      Termination without Cause
            
            
            Involuntary
      Termination with Cause
            
            
            Involuntary
      Termination with a Change in ControlSusan
      JonesCash
      severance
            
            $
            —
            
            
            $
            566,860
            (1)
            
            $
            566,860
            (1)
            
            $
            —
            
            
            $
            566,860
            (1)Post-termination
      health and welfare
            
            $
            —
            
            
            $
            —
            
            
            $
            11,988
            (2)
            
            $
            —
            
            
            $
            —Vesting
      of stock options
            
            $
            —
            
            
            $
            —
            (3)
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            (3)





(1) This
amount reflects the lump sum that is payable within thirty days of the
triggering event to the named executive.  All calculations were made
as of December 31, 2007 using then current salary figures for the named
executive.





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





(3)  This
amount would reflect the value of the stock option awards that were unvested as
of December 31, 2007 which would accelerate and vest under the terms of eMagin’s
option plans following a triggering event.  As of December 31, 2007,
all stock options were fully vested.






70







Director
Compensation Arrangements





The
following table sets forth with respect to the named director, compensation
information inclusive of equity awards and payments made in the year ended
December 31, 2007.  The table includes only directors that were not
employees of eMagin Corporation.  Any director who was also an
executive officer is included in the Summary Compensation Table.





DIRECTOR
      COMPENSATIONName
            Fees
      earned or paid in cash($)
            Stock
      awards
              ($)
            Option
      awards($)
            Non-equity
      incentive plan compensation($)
            Change
      in pension value and nonqualified deferred compensation
      earnings($)
            All
      other compensation
              ($)
            Total($)Claude
      Charles
            8,000
            -
            42,932
            -
            -
            -
            50,932Paul
      Cronson
            8,000
            -
            40,228
            -
            -
            -
            48,228Irwin
      Engelman
            8,000
            -
            33,924
            -
            -
            -
            41,924Jack
      Goldman
            8,000
            -
            42,139
            -
            -
            -
            50,139Thomas
      Paulsen
            66,672
            -
            41,184
            -
            -
            -
            107,856Stephen
      Seay
            8,000
            -
            32,586
            -
            -
            -
            40,586








71












The
following table sets forth information with respect to the outstanding equity
awards of our directors as of December 31, 2007:






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








72










OUTSTANDING
      EQUITY AWARDS AT YEAR-ENDOption
      awards
            Stock
      awardsNumber
      of securities underlying unexercised options (#)
            Number
      of securities underlying unexercised options (#)
            Equity
      incentive plan awards:  Number of securities underlying
      unexercised options
            Options
      exercise price
            Option
      expiration
            Number
      of shares or units of stock that have not vested
            Market
      value of shares or units of stock that have not vested
            Equity
      incentive plan awards:
              Number
      of unearned shares other rights that have not vested
            Equity
      incentive plan awards:
              Market
      or payout value of unearned shares, units or other rights that have not
      vestedName
      and principal
              position
            Exercisable
            Unexercisable
            (#),
      (a)
            ($)
            Date
            (#)
            ($)
            (#)
            ($)





Thomas
      Paulsen
            
            
            3,900
            
            
            
            
            
            
            3,900
            
            
            
            2.60
            
            July
      30, 2010
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -1,300
            
            
            
            -
            
            
            
            1,300
            
            
            
            2.60
            
            June
      15, 2014
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -1,625
            
            
            
            -
            
            
            
            1,625
            
            
            
            2.60
            
            September
      30, 2015
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -3,250
            
            
            
            -
            
            
            
            3,250
            
            
            
            2.60
            
            October
      3, 2015
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -813
            
            
            
            -
            
            
            
            813
            
            
            
            2.60
            
            December
      31, 2015
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -11,213
            
            
            
            -
            
            
            
            11,213
            
            
            
            1.51
            
            November
      23, 2017
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -25,000
            
            
            
            -
            
            
            
            25,000
            
            
            
            1.44
            
            December
      3, 2017
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Stephen
      Seay
            
            
            3,900
            
            
            
            -
            
            
            
            3,900
            
            
            
            2.60
            
            February
      14, 2016
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -3,900
            
            
            
            -
            
            
            
            3,900
            
            
            
            1.51
            
            November
      23, 2017
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -25,000
            
            
            
            -
            
            
            
            25,000
            
            
            
            1.44
            
            December
      3, 2017
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -




Column
      note:On
      November 3, 2006, a reverse stock split, ratio of 1-for-10, became
      effective.  All stock options presented reflect the stock
      split.





Compensation
Committee Interlocks and Insider Participation





None of
the members of our Compensation Committee has been an officer or employee of
eMagin during years ending December 31, 2005, 2006 and 2007.  In addition,
during the most recent fiscal year, no eMagin executive officer served on the
Compensation Committee (or equivalent), or the Board, of another entity whose
executive officer(s) served on our Compensation Committee or
Board.   On January 31, 2008, Dr. K.C. Park resigned as our
Interim Chief Executive Officer and President; and Thomas Paulsen, a director
and Chairman of both the Board of Directors and the Compensation Committee,
assumed that role on an interim basis until Dr. Park’s replacement is
named.  No change in Admiral Paulsen’s compensation as a director of
the Company has occurred as a result of his accepting the temporary position of
Interim Chief Executive Officer and President.




Compensation
Committee Report




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




Thomas
Paulsen (Chairman)


Jacob
Goldman


Stephen
Seay





73








ITEM
12. EQUITY COMPENSATION PLAN INFORM AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





Equity
Compensation Plan Information





The
following table sets forth the aggregate information of our equity compensation
plans in effect as of December 31, 2007:




Plan
            
            Number of
              securities to be
              issued upon exercise
              of outstanding options,
              warrants and rights
            
            
            Weighted-average
              exercise price of
              outstanding options,
              warrants and rights
            
            
            Number of securities
              remaining available for
              future issuance under
              equity compensation plans
              (excluding securities reflected
              in first columnEquity
      compensation plans approved by security holders
            
            
            487,674
            
            
            $
            2.14
            
            
            
            817,215Equity
      compensation plans not approved by security holders
            
            
            406,649
            
            
            $
            3.02





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 2, 2008, unless otherwise noted. Unless otherwise indicated, the
stockholders listed in the table have sole voting and investment power with
respect to the shares indicated.




Name
      of Beneficial Owner
            
            Common
      Stock Beneficially Owned
            
            
            Percentage
      of Common StockMoriah
      Capital L.P.  (1)
            
            
            1,162,500
            
            
            
            3.5
            %Stillwater
      LLC (2)
            
            
            5,902,171
            
            
            
            17.6
            %Alexandra
      Global Master Fund Ltd (3)
            
            
            3,120,455
            
            
            
            9.3
            %Ginola
      Limited (4)
            
            
            5,061,384
            
            
            
            15.1
            %Susan
      K Jones (5)
            
            
            960,996
            
            
            
            2.9
            %Rainbow
      Gate Corporation (6)
            
            
            1,933,796
            
            
            
            5.8
            %Kettle
      Hill (7)
            
            
            721,155
            
            
            
            1.7
            %Paul
      Cronson (8)
            
            
            539,899
            
            
            
            1.6
            %K.
      C. Park (8)
            
            
            52,660
            
            
            
            *Claude
      Charles (10)
            
            
            50,400
            
            
            
            *Jack
      Goldman (11)
            
            
            48,727
            
            
            
            *Thomas
      Paulsen (12)
            
            
            47,101
            
            
            
            *Engelman,
      Irwin (13)
            
            
            35,076
            
            
            
            *Seay,
      Stephen(14)
            
            
            32,800
            
            
            
            *All
      executive officers and directors as a group (consisting of  8
      individuals) (15)
            
            
            1,714,999
            
            
            
            5.1
            %





*Less
than 1*% of the outstanding common stock





**
Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options,
warrants, or convertible debt currently exercisable or convertible, or
exercisable or convertible within 60 days of April 2, 2008 are deemed
outstanding for computing the percentage of the person holding such option or
warrant.  Percentages are based on a total of 14,207,439 shares of
common stock outstanding on April 2, 2008, and the shares issuable upon the
exercise of options, warrants exercisable, and debt convertible on or within 60
days of April 2, 2008, as described below.










74







(1) This
figure represents (i) 162,500 shares owned by Moriah Capital, L.P and (ii)
warrants held by Moriah Capital L.P. to purchase 1,000,000 shares.


(2) This
figure represents: (i) 2,224,769 shares owned by Stillwater LLC, which includes
262,842 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 2,029,784 shares, which includes
warrants to purchase 737,621 shares held by Rainbow Gate Corporation, in which
the sole member of Stillwater LLC is the investment manager of Rainbow Gate
Corporation; and (iii) 1,647,618 shares of common stock underlying an 8%
senior convertible note which includes 933,333 shares of common stock
underlying an 8% senior convertible note held by Rainbow Gate Corporation, which
the sole member of Stillwater LLC is the investment manager of Rainbow Gate
Corporation. Mortimer D.A. Sackler exercises the sole voting power with respect
to the shares held in the name of Stillwater LLC, and Mortimer D.A. Sackler
exercises the sole voting power with respect to the shares held in the name of
Rainbow Gate Corporation


(3) This
figure represents:  (1) 363,636 shares owned by Alexandra Global
Master Fund; (ii) warrants held to purchase 1,018,182 shares; and (iii)
1,738,637 shares of common stock underlying an 8% senior convertible note.
Alexandra Investment Management, LLC, a Delaware limited liability company
(“AIM”), serves as investment adviser to Alexandra Global Master Fund Ltd., a
British Virgin Islands company (“Alexandra”).  By reason of such
relationship, AIM may be deemed to share dispositive power over the shares of
common stock stated as beneficially owned by Alexandra. AIM disclaims beneficial
ownership of such shares of common stock. Mr. Mikhail A. Filimonov (“Filimonov”)
is the Chairman, Chief Executive Officer, Chief Investment Officer and a
managing member of AIM.  By reason of such relationships, Filimonov
may be deemed to share dispositive power over the shares of common stock stated
as beneficially owned by Alexandra.  Filimonov disclaims beneficial
ownership of such shares of common stock.


(4) This
figure represents: (i) 1,226,934 shares owned by Ginola Limited, which include
262,842 shares held indirectly by Rainbow Gate Corporation, 65,080 shares owned
by Ogier Trustee(Jersey) Limited, as trustee, 57,371 shares owned by Chelsea
Trust Company Limited, as trustee, and 240,385 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 1,834,451 common shares, which includes warrants to purchase
737,621 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 32,540 shares owned by Ogier Trustee (Jersey) Limited, as
trustee, 27,273 shares of common stock issuable upon exercise of a common stock
purchase warrant held indirectly by Chelsea Trust Company Limited, as trustee,
and 120,193 shares of common stock issuable upon exercise of common stock
purchase warrant held by Crestflower Corporation (Ginola Limited disclaims
beneficial ownership of the shares owned by Ogier Trustee (Jersey) Limited, as
trustee and Chelsea Trust Company Limited, as trustee); and (iii) 1,999,999
shares of common stock underlying an 8% senior convertible note, which includes
933,333 shares of common stock underlying an 8% senior convertible note held by
Rainbow Gate Corporation, in which the sole shareholder of Ginola Limited is
also the sole shareholder of Rainbow Gate Corporation. Stillwater LLC and Ginola
Limited are beneficially owned by separate individuals and therefore do not
exert voting control over one another. However, Stillwater LLC does include the
shares held by Rainbow Gate as “beneficially owned” since the sole member
of Stillwater LLC is investment manager and sole director of Rainbow Gate
Corporation and exerts voting control over such shares Jonathan White,
Christopher Renouf, Richard Thomas, Peter Bertram, Marc Yates, Steven
Meiklejohn, Clive Chaplin, Michael Lombardi, Nicholas Kershaw, Christopher
Byrne, Simon Willing, Matthew Swan, Paul Willing, Philip Norman, Nicholas Ward,
Philip Le Cornu, Peter Gatehouse, Susan Ford, Robert Fraser, Paul Perris, Raulin
Amy, Daniel Richards, Jane Pearce, Roger Le Tissier, William Simpson, Marcus
Leese, Simon Davies exercise the shared voting power with respect to the shares
held in the name of Ogier Trustee (Jersey) Limited. Stuart Baker, Joerg Fischer,
Charles Lubar, Christopher Mitchell, Leslie Schreyer, and Jonathan White
exercise the shared voting power with respect to the shares held in the name of
Chelsea Trust Company Limited. Jonathan White, Joerg Fischer and Steven
Meiklejohn exercise the shared voting power with respect to the shares held in
the name of Crestflower Corporation. Jonathan White, Joerg Fischer and Steven
Meiklejohn are the directors of Ginola Limited and exercise the shared voting
power with respect to the shares held in the name of Ginola
Limited.


(5) This
figure represents shares owned by Gary Jones and Susan Jones who are married to
each other, including (i) 672,799 shares owned by Gary Jones and 158,792 shares
owned by Susan Jones; and (ii) 129,405 shares of common stock issuable upon
exercise of stock options held by Susan Jones.


(6) This
figure represents:  (1) 262,642 shares owned by Rainbow Gate
Corporation; (ii) warrants held by to purchase 737,621 shares; and (iii) 933,333
shares of common stock underlying an 8% senior convertible note. Mortimer D.A.
Sackler exercises the sole voting power with respect to the shares held in
the name of Rainbow Gate Corporation.


(7) This
figure represents (i) 480,769 shares of common stock owned by Kettle Hill of
which 110,577 shares held by Kettle Hill Partners, LP, 197,115 shares held by
Kettle Hill Partners II, LP, and 173,077 shares held by Kettle Hill Offshore,
Ltd. and (ii) warrants held by Kettle Hill to purchase 240,386 common shares
which includes warrants to purchase 55,289 shares held by Kettle Hill Partners,
LP, warrants to purchase 98,558 shares held by Kettle Hill Partners II, LP, and
warrants to purchase 86,539 shares held by Kettle Hill Offshore,
Ltd.  Kettle Hill Capital Management, LLC acts as investment manager
for Kettle Hill Partners, LP, Kettle Hill Partners II LP, and Kettle Hill
Offshore, Ltd.


(8) This
figure represents 19,198 shares owned by Mr. Cronson, 208,235 shares underlying
warrants, 45,800 shares underlying options, and 266,666 shares of common stock
underlying an 8% senior convertible note held directly and indirectly by Paul
Cronson. This includes (i) 12,097 common stock shares and 4,286 shares
underlying warrants held indirectly by a family member of Paul Cronson; (ii)
4,366 shares underlying warrants held indirectly by Larkspur Corporation of
which he is the Managing Director and (iii) 186,666 shares underlying warrants
and 266,666 shares of common stock underlying an 8% senior convertible note held
indirectly by Navacorp III, LLC. Mr. Paul Cronson exercises the sole voting
power with respect to the shares held in the name of Larkspur Corporation, and
Paul Cronson exercises the sole voting power with respect to the shares held in
the name of Navacorp III, LLC.


(9) This
figure represents:  (i) 957 shares owned by Dr. Park; and (ii) 51,703
shares of common stock issuable upon exercise of stock options.


(10) This
figure represents shares underlying options.


(11) This
figure represents shares underlying options.


(12) This
figure represents shares underlying options.


(13) This
figure represents shares underlying options.


(14) This
figure represents shares underlying options.


(15) This
figure represents:  (i) 851,746 shares; (ii) warrants held to purchase
208,235 shares; (iii) 441,012 shares of common stock issuable upon exercise of
stock options.







75








ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE




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





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





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





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





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





A family
member of an outside director of eMagin is the holder of a Series A warrant to
purchase an aggregate of 4,286 shares of common stock. As a result of the
Stillwater transaction, the exercise price of all Series A warrants was reduced
from $5.50 to $0.35 per share.   Family members of an outside
director of eMagin are holders of Series F warrants to purchase
an aggregate of 10,000 shares of common stock.   As a result
of the debt transactions, the exercise price of all Series F warrants was
ultimately reduced from $8.60 to $4.09 per share.





Director
Independence





Board of
Directors has determined that Messrs. Thomas Paulsen, Claude Charles, Jacob
Goldman, Irwin Engelman, and Stephen Seay are
each independent directors as of December 31, 2007.  Thomas
Paulsen was appointed Interim CEO and President in January 2008 and is no longer
independent.




The Board
of Directors has established a compensation committee which is
currently comprised of Thomas Paulsen, Jacob Goldman, and Stephen Seay each of
whom is independent as of December 31, 2007.  As of January 2008,
Thomas Paulsen is no longer independent.







76








The Board of Directors has established
a corporate governance and nominating committee, which is comprised of
Thomas Paulsen and Jacob Goldman, each of whom is independent as of
December 31, 2007. As of January 2008, Thomas Paulsen is no longer
independent.





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





ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





Eisner
LLP has served as eMagin’s independent auditors for the years ended December 31,
2007 and 2006.  For the year ended December 31, 2007, the fees for
audit services totaled approximately $318 thousand which included approximately
$251 thousand associated with the annual audit and reviews of the Company’s
quarterly reports on Form 10-Q and approximately $67 thousand associated with
the Company’s statutory and regulatory filings.  For the year ended
December 31, 2006, the fees for audit services totaled approximately $203
thousand which included approximately $186 thousand associated with the annual
audit and reviews of the Company’s quarterly reports on Form 10-Q and
approximately $23 thousand associated with the Company’s statutory and
regulatory filings.





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





ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES





(a)  Financial
Statements and Schedules





1.  Financial
Statements(Restated)





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





A.  Consolidated
Balance Sheets at December 31, 2007 (Restated) and 2006.


B.  Consolidated
Statements of Operations for the Years Ended December 31, 2007, 2006, and
2005.


C.  Consolidated
Statements of Changes in Shareholders’ Equity (Capital Deficit) for the Years
Ended December 31, 2007 (Restated), 2006, and 2005.


D.  Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007
(Restated),  2006, and 2005.





2.Financial
Statement Schedules





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





A.  Schedule
II – Valuation and Qualifying Accounts





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





(b)  Exhibits





The
exhibits listed in the accompanying Index to Exhibits on pages 74  to
78 are filed or incorporated by reference as part of this Annual Report on Form
10-K/A.







77















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  12th day of
January, 2009 .




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




In
accordance with the Exchange Act, this report has been signed below by the
following persons on  January 12, 2009 , on behalf of the registrant
and in the capacities Indicated.








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













78







eMAGIN
CORPORATION


SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS











Allowance
for doubtful accounts





Year
      Ended
            
            Beginning
      Balance
            
            
            Charged
      to Expenses
            
            
            Amounts
      Written Off
            
            
            Ending
      Balance(In
      thousands)December
      31, 2007
            
            $
            (443
            )
            
            $
            —
            
            
            $
            85
            
            
            $
            (358
            )December
      31, 2006
            
            $
            (487
            )
            
            $
            —
            
            
            $
            44
            
            
            $
            (443
            )December
      31, 2005
            
            $
            (771
            )
            
            $
            164
            
            
            $
            120
            
            
            $
            (487
            )













79


eMAGIN
CORPORATION


INDEX
TO EXHIBITS




Exhibit
      Number
            
            Description2.1
            
            Agreement
      and Plan of Merger between Fashion Dynamics Corp., FED Capital Acquisition
      Corporation and FED Corporation dated March 13, 2000 (incorporated by
      reference to exhibit 2.1 to the Registrant's Current Report on Form 8-K/A
      filed on March 17, 2000).3.1
            
            Amended
      and Restated Articles of Incorporation (incorporated by reference to
      exhibit 99.2 to the Registrant's Definitive Proxy Statement filed on June
      14, 2001).3.2
            
            Amended
      Articles of Incorporation (incorporated by reference to exhibit A to the
      Registrant's Definitive Proxy Statement filed on June 13,
      2003).3.3
            
            Bylaws
      of the Registrant (incorporated by reference to exhibit 99.3 to the
      Registrant's Definitive Proxy Statement filed on June 14,
      2001).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).*4.7
            
            Form
      of Series F Warrant (incorporated by reference to exhibit 4.1 to the
      Registrant's current report on Form 8-K filed on October 26,
      2004).4.8
            
            Form
      of Common Stock Purchase Warrant dated October 20, 2005, filed October 31,
      2005, as filed in the Registrant's Form 8-K incorporated herein by
      reference.10.3
            
            Nonexclusive
      Field of Use License Agreement relating to OLED Technology for miniature,
      high resolution displays between the Eastman Kodak Company and FED
      Corporation dated March 29, 1999 (incorporated by reference to exhibit
      10.6 to the Registrant's Annual Report on Form 10-K/A for the year ended
      December 31, 2000 filed on April 30, 2001).10.4
            
            Amendment
      Number 1 to the Nonexclusive Field of Use License Agreement relating to
      the LED Technology for miniature, high resolution displays between the
      Eastman Kodak Company and FED Corporation dated March 16, 2000
      (incorporated by reference to exhibit 10.7 to the Registrant's Annual
      Report on Form 10-K/A for the year ended December 31, 2000 filed on April
      30, 2001).10.5
            
            Lease
      between International Business Machines Corporation and FED Corporation
      dated May 28, 1999 (incorporated by reference to exhibit 10.9 to the
      Registrant's Annual Report on Form 10-K for the year ended December 31,
      2000 filed on March 30, 2001).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).










80




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.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.










81




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.10.26
            
            2004
      Non-Employee Compensation Plan, filed July 7, 2004, as filed in the
      Registrant’s Form S-8, incorporated herein by
  reference.*10.27
            
            Form
      of Letter Agreement by and among eMagin and the holders of the Class A,
      Class B and Class C common stock purchase warrants, filed August 9, 2004,
      as filed in the Registrant's Form 8-K incorporated herein by
      reference.10.28
            
            Securities
      Purchase Agreement dated as of October 21, 2004 by and among eMagin and
      the purchasers listed on the signature pages thereto, filed October 26,
      2004, as filed in the Registrant's Form 8-K incorporated herein by
      reference.10.29
            
            Placement
      Agency Agreement dated as of October 21, 2004 by and among eMagin and W.R.
      Hambrecht & Co., LLC, filed October 26, 2004, as filed in the
      Registrant's Form 8-K incorporated herein by reference.10.30
            
            Agreement,
      dated as of June 29, 2004, by and between eMagin and Larkspur Capital
      Corporation, filed October 26, 2004, as filed in the Registrant's Form 8-K
      incorporated herein by reference.10.31
            
            Amendment
      No. 4 to Lease by and between eMagin and International Business Machines
      Corporation, filed December 20, 2004, as filed in the Registrant's Form
      8-K incorporated herein by reference.10.32
            
            Sublease
      Agreement dated as of July 14, 2005 by and between eMagin and Capgemini
      U.S., LLC, filed August 2, 2005, as filed in the Registrant's Form 8-K
      incorporated herein by reference.10.33
            
            Amended
      and Restated 2003 Stock Option Plan, filed September 1, 2005, as filed in
      the Registrant’s Definitive Proxy Statement, incorporated herein by
      reference.*10.34
            
            Amended
      and Restated 2004 Non-Employee Compensation Plan, filed September 1, 2005,
      as filed in the Registrant’s Definitive Proxy Statement, incorporated
      herein by reference.*10.35
            
            2005
      Employee Stock Purchase Plan, filed September 1, 2005, as filed in the
      Registrant’s Definitive Proxy Statement, incorporated herein by
      reference.*10.36
            
            Securities
      Purchase Agreement dated as of October 20, 2005, by and among eMagin and
      the purchasers listed on the signature pages thereto, filed October 31,
      2005, as filed in the Registrant's Form 8-K incorporated herein by
      reference.10.37
            
            Registration
      Rights Agreement dated as of October 20, 2005, by and among eMagin and the
      purchasers listed on the signature pages thereto, filed October 31, 2005,
      as filed in the Registrant's Form 8-K incorporated herein by
      reference.







82







10.38
            
            Employment
      Agreement effective as of January 1, 2006 by and between eMagin and Gary
      Jones, filed January 27, 2006, as filed in the Registrant's Form 8-K
      incorporated herein by reference.10.39
            
            Employment
      Agreement effective as of January 1, 2006 by and between eMagin and Susan
      Jones, filed January 27, 2006, as filed in the Registrant's Form 8-K
      incorporated herein by reference.10.40
            
            Amendment
      to Employment Agreement as of April 17, 2006 by and between eMagin and
      Gary Jones.10.41
            
            Amendment
      to Employment Agreement as of April 17, 2006 by and between eMagin and
      Susan Jones.10.42
            
            Form
      of Note Purchase Agreement dated July 21, 2006, by and among the Company
      and the investors named on the signature pages thereto, filed July 25,
      2006, as filed in the Registrant's Form 8-K incorporated herein by
      reference.10.43
            
            Form
      of 6% Senior Secured Convertible Note Due 2007-2008 of the Company dated
      July 21, 2006, filed July 25, 2006, as filed in the Registrant's Form 8-K
      incorporated herein by reference.10.44
            
            Form
      of Common Stock Purchase Warrant of the Company dated July 21, 2006, filed
      July 25, 2006, as filed in the Registrant's Form 8-K incorporated herein
      by reference.10.45
            
            Pledge
      and Security Agreement dated as of July 21, 2006 by and between the
      Company and Alexandra Global Master Fund Ltd., as collateral agent, filed
      July 25, 2006, as filed in the Registrant's Form 8-K incorporated herein
      by reference.10.46
            
            Patent
      and Trademark Security Agreement dated as of July 21, 2006 by and between
      the Company and Alexandra Global Master Fund Ltd., as collateral agent,
      filed July 25, 2006, as filed in the Registrant's Form 8-K incorporated
      herein by reference.10.47
            
            Lockbox
      Agreement dated as of July 21, 2006 by and between the Company and
      Alexandra Global Master Fund Ltd., as collateral agent, filed July 25,
      2006, as filed in the Registrant's Form 8-K incorporated herein by
      reference.10.48
            
            Form
      of Note Purchase Agreement dated July 21, 2006, by and between the Company
      and Stillwater LLC, filed July 25, 2006, as filed in the Registrant's Form
      8-K incorporated herein by reference.10.49*
            
            2004
      Amended and Restated Non-Employee Compensation Plan, filed September 21,
      2006, as filed in the Registrant's Definitive Proxy Statement incorporated
      herein by reference.10.50
            
            Executive
      Separation and Consulting Agreement dated as of January 11, 2007 by and
      between eMagin Corporation and Gary W. Jones, filed January 19, 2007, as
      filed in the Registrant's Form 8-K/A incorporated herein by
      reference.10.51
            
            Letter
      Agreement dated as of February 12, 2007 by and between eMagin Corporation
      and Dr. K.C. Park, filed February 16, 2007, as filed in the Registrant's
      Form 8-K incorporated herein by reference.10.52
            
            Allonge
      to the 6% Senior Secured Convertible Notes Due 2007-2008 of eMagin
      Corporation dated as of March 9, 2007, filed March 13, 2007, as filed in
      the Registrant's Form 8-K incorporated herein by
  reference.10.53
            
            First
      Amendment to Note Purchase Agreement as of March 28, 2007 by and between
      eMagin Corporation and Stillwater LLC, as filed in the Registrant's
      Form 8-K dated April 25, 2007 incorporated herein by
      reference.10.54
            
            Note
      Purchase Agreement as of April 9, 2007 by and between eMagin
      Corporation and Stillwater LLC, as filed in the Registrant's Form 8-K
      dated April 25, 2007 incorporated herein by reference.10.55
            
            Note
      Purchase Agreement as of April 9, 2007 by and between eMagin
      Corporation and Stillwater LLC, as filed in the Registrant's Form 8-K
      dated April 25, 2007 incorporated herein by reference.10.56
            
            Amendment
      Agreement, dated as of July 23, 2007, incorporated by reference to the
      Company’s Form 8-K as filed on July 25, 2007.10.57
            
            Form
      of Amended and Restated 8% Senior Secured Convertible Note due 2008,
      incorporated by reference to the Company’s Form 8-K as filed on July 25,
      2007.







83







10.58
            
            Form
      of Amended and Restated Common Stock Purchase Warrant, incorporated by
      reference to the Company’s Form 8-K as filed on July 25,
    2007.10.59
            
            Form
      of Amendment No. 1 to Patent and Security Agreement, , filed July 25,
      2007, Incorporated by reference to the Company’s Form 8-K as filed on July
      25, 2007.10.60
            
            Form
      of Amendment No. 1 to Pledge and Security Agreement, filed July 25, 2007,
      Incorporated by reference to the Company’s Form 8-K as filed on July 25,
      2007.10.61
            
            Form
      of Lockbox Agreement, filed July 25, 2007, incorporated by reference to
      the Company’s Form 8-K as filed on July 25, 2007.10.62
            
            6%
      Senior Secured Convertible Note, dated April 9, 2007, by and between the
      Company and Stillwater LLC, incorporated by reference to the Company’s
      Form 8-K as filed on April 26, 2007.10.63
            
            Common
      Stock Purchase Warrant, dated April 9, 2007, by and between the Company
      and Stillwater LLC, incorporated by reference to the Company’s Form 8-K as
      filed on April 26, 2007.10.64
            
            Employment
      Agreement between the Company and Tatum, LLC, dated December 26, 2007,
      incorporated by reference to the Company’s Form 8-K as filed on January 3,
      2008.10.65
            
            Form
      of Common Stock Purchase Warrant, incorporated by reference to the
      Company’s Form 8-K/A as filed on February 8, 2008.10.66
            
            Amendment
      No. 1 to Loan and Security Agreement, dated as of January 30, 2008, to the
      Loan and Security Agreement, dated August 7, 2007, incorporated by
      reference to the Company’s Form 8-K/A as filed February 8,
      2008.10.67
            
            Warrant
      Issuance Agreement, dated January 30, 2008, incorporated by reference to
      the Company’s Form 8-K/A as filed February 8, 2008.10.68
            
            Form
      of Amended and Restated Common Stock Purchase Warrant, incorporated by
      reference to the Company’s Form 8-K/A as filed on February 8,
      2008.10.69
            
            Form
      of Common Stock Purchase Warrant, incorporated by reference to the
      Company’s Form 8-K, as filed on March 31, 2008.10.70
            
            Amendment
      No. 2 to Loan and Security Agreement, dated as of March 25, 2008 to the
      Loan and Security Agreement, dated August 7, 2007, as amended on January
      30, 2008, incorporated by reference to the Company’s Form 8-K, as filed
      March 31, 2008.10.71
            
            Amendment
      No. 1 to Warrant Issuance Agreement, dated as of March 25, 2008, as
      amended on January 30, 2008, incorporated by reference to the Company’s
      Form 8-K, as filed March 31, 2008.10.72
            
            Form
      of Common Stock Purchase Warrant, incorporated by reference to the
      Company’s Form 8-K, as filed on April 4, 2008.10.73
            
            Securities
      Purchase Agreement, dated as of April 2, 2008, incorporated by reference
      to the Company’s Form 8-K, as filed April 4, 2008.10.74
            
            Registration
      Rights Agreement, dated as of April 2, 2008, incorporated by reference to
      the Company’s Form 8-K, as filed April 4, 2008.23.1
            
            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.






84