**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**




**Washington,
      D.C. 20549**








**Form
      10-Q**








(Mark
                One)R
            **QUARTERLY
                REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the quarterly period ended March 31, 2007****or**£
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the transition period from
                to**





**Commission
      file number 001-15751**





**eMAGIN
      CORPORATION**


*(Exact
      name of registrant as specified in its charter* *)*





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





**10500
      NE 8** **th** **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 (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 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





The
      number of shares of common stock outstanding as of April 30, 2007 was
      11,049,164.





1





**eMagin
      Corporation**


**Form
      10-Q**


**For
      the Quarter ended March 31, 2007**





**Table
      of Contents**


**Page****PART
                I FINANCIAL INFORMATION**Item
                1
            Condensed
                Consolidated Financial StatementsCondensed
                Consolidated Balance Sheets as of March 31, 2007 (unaudited) and
                December
                31, 2006
            3Condensed
                Consolidated Statements of Operations for the Three Months ended
                March 31,
                2007 and 2006 (unaudited)
            4Condensed
                Consolidated Statements of Changes in Shareholders’ Capital Deficit for
                the Three Months ended March 31, 2007 (unaudited)
            5Condensed
                Consolidated Statements of Cash Flows for the Three Months ended
                March 31,
                2007 and 2006 (unaudited)
            6Notes
                to Condensed Consolidated Financial Statements (unaudited)
            7Item
                2
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            16Item
                3
            Quantitative
                and Qualitative Disclosures About Market Risk
            20Item
                4
            Controls
                and Procedures
            20**PART
                II OTHER INFORMATION**Item
                1
            Legal
                Proceedings
            21Item
                1A
            Risk
                Factors
            21Item
                2
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            26Item
                3
            Defaults
                Upon Senior Securities
            26Item
                4
            Submission
                of Matters to a Vote of Security Holders
            26Item
                5
            Other
                Information
            26Item
                6
            Exhibits
            26**SIGNATURES****CERTIFICATIONS**







2





**ITEM
      1. Condensed Consolidated Financial Statements**





**eMAGIN
      CORPORATION**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(In
      thousands, except share data)**





**March
                  31,2007**
                **(unaudited)**
            
            **December
                31, 2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            192
            
            $
            1,415Investments
                - held to maturity
            
            
            175
            
            
            171Accounts
                receivable, net
            
            
            1,466
            
            
            908Inventory
            
            
            1,975
            
            
            2,485Prepaid
                expenses and other current assets
            
            
            764
            
            
            656Total
                current assets
            
            
            4,572
            
            
            5,635Equipment,
                furniture and leasehold improvements, net
            
            
            549
            
            
            666Intangible
                assets, net
            
            
            54
            
            
            55Other
                assets
            
            
            233
            
            
            233Deferred
                financing costs, net
            
            
            283
            
            
            416Total
                assets
            
            $
            5,691
            
            $
            7,005**LIABILITIES
                AND SHAREHOLDERS’ CAPITAL DEFICIT**Current
                liabilities:Accounts
                payable
            
            $
            1,434
            
            $
            1,192Accrued
                compensation
            
            
            1,065
            
            
            959Other
                accrued expenses
            
            
            1,052
            
            
            749Advanced
                payments
            
            
            254
            
            
            444Deferred
                revenue
            
            
            64
            
            
            126Current
                portion of capitalized lease obligations
            
            
            4
            
            
            6Current
                portion of debt
            
            
            3,916
            
            
            1,217Derivative
                liability - warrants
            
            
            735
            
            
            1,195Other
                current liabilities
            
            
            45
            
            
            52Total
                current liabilities
            
            
            8,569
            
            
            5,940Long-term
                debt
            
            
            89
            
            
            2,229Total
                liabilities
            
            
            8,658
            
            
            8,169Commitments
                and contingenciesShareholders’
                capital deficit:Preferred
                stock, $.001 par value: authorized 10,000,000 shares; no shares issued
                and
                outstanding
            
            
            —
            
            
            —Common
                stock, $.001 par value: authorized 200,000,000 shares, issued and
                outstanding, 11,049,164 shares as of March 31, 2007 and 10,341,029
                shares
                as of December 31, 2006
            
            
            11
            
            
            10Additional
                paid-in capital
            
            
            180,784
            
            
            179,651Accumulated
                deficit
            
            
            (183,762
            )
            
            (180,825
            )Total
                shareholders’ capital deficit
            
            
            (
                2,967
            )
            
            (
                1,164
            )Total
                liabilities and shareholders’ capital deficit
            
            $
            5,691
            
            $
            7,005





See
      notes
      to Condensed Consolidated Financial Statements .






3


**eMAGIN
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(In
      thousands, except share and per share data )**


**(unaudited)**





**Three
                Months Ended March 31,****2007**
            
            
            **2006**Revenue:Product
                revenue
            
            $
            3,523
            
            $
            1,571Contract
                revenue
            
            
            86
            
            
            70Total
                revenue, net
            
            
            3,609
            
            
            1,641Cost
                of goods sold
            
            
            3,115
            
            
            3,029Gross
                profit (loss)
            
            
            494
            
            
            (1,388
            )Operating
                expenses:Research
                and development
            
            
            853
            
            
            1,238Selling,
                general and administrative
            
            
            2,221
            
            
            2,588Total
                operating expenses
            
            
            3,074
            
            
            3,826Loss
                from operations
            
            
            (2,580
            )
            
            (5,214
            )Other
                income (expense):Interest
                expense
            
            
            (840
            )
            
            —Gain
                on warrant derivative liability
            
            
            460
            
            
            —Other
                income, net
            
            
            23
            
            
            54Total
                other (expense) income
            
            
            (357
            )
            
            54Net
                loss
            
            $
            (2,937
            )
            $
            (5,160
            )Loss
                per share, basic and diluted
            
            $
            (0.27
            )
            $
            (0.52
            )Weighted
                average number of shares outstanding:Basic
                and diluted
            
            
            10,792,074
            
            
            10,003,839








See
      notes
      to Condensed Consolidated Financial Statements .




4





**eMAGIN
        CORPORATION**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ CAPITAL
        DEFICIT**
 **(In
        thousands)**
 
 
 **Additional**
              
              
              
              **Total****Common
                  Stock**
              
              **Paid-In**
              
              **Accumulated**
              
              **Shareholders’****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **Deficit**BalaBalance,
                  December 31, 2006
              
              
              10,341
              
              $
              10
              
              $
              179,651
              
              $
              (180,825
              )
              $
              (
                  1,164
              )StocStock-based
                  compensation
              
              
              —
              
              
              —
              
              
              514
              
              
              —
              
              
              514IssuIssuance
                  of common stock for services
              
              
              708
              
              
              1
              
              
              619
              
              
              —
              
              
              620Net
                  Net loss
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,937
              )
              
              (2,937
              )BalaBalance,
                  March 31, 2007 (unaudited)
              
              
              11,049
              
              $
              11
              
              $
              180,784
              
              $
              (183,762
              )
              $
              (2,967
              )
    See
        notes
        to Condensed Consolidated Financial Statements






5





**eMAGIN
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(In
      thousands)**





**Three
                Months Ended****March
                31,****2007**
            
            **2006****(unaudited)**Cash
                flows from operating activities:Net
                loss
            
            $
            (2,937
            )
            $
            (5,160
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            117
            
            
            257Amortization
                of deferred financing fees
            
            
            133
            
            
            —Reduction
                of provision for sales returns and doubtful accounts
            
            
            (8
            )
            
            —Stock-based
                compensation
            
            
            514
            
            
            792Issuance
                of common stock for services
            
            
            620
            
            
            50Amortization
                of discount on notes payable
            
            
            574
            
            
            —Gain
                on warrant derivative liability
            
            
            (460
            )
            
            —Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (558
            )
            
            (367
            )Inventory
            
            
            510
            
            
            267Prepaid
                expenses and other current assets
            
            
            (108
            )
            
            (244
            )Deferred
                revenue
            
            
            (62
            )
            
            (57
            )Accounts
                payable, accrued compensation, other accrued expenses, and advanced
                payments
            
            
            461
            
            
            (537
            )Other
                current liabilities
            
            
            —
            
            
            (1
            )Net
                cash used in operating activities
            
            
            (1,204
            )
            
            (5,000
            )Cash
                flows from investing activities:Purchase
                of equipment
            
            
            —
            
            
            (54
            )Purchase
                of investments - held to maturity
            
            
            (4
            )
            
            —Purchase
                of intangibles and other assets
            
            
            —
            
            
            (2
            )Net
                cash used in investing activities
            
            
            (4
            )
            
            (56
            )Cash
                flows from financing activities:Payments
                of long-term debt and capital leases
            
            
            (15
            )
            
            (9
            )Net
                cash used in financing activities
            
            
            (15
            )
            
            (9
            )Net
                decrease in cash and cash equivalents
            
            
            (1,223
            )
            
            (5,065
            )Cash
                and cash equivalents beginning of period
            
            
            1,415
            
            
            6,727Cash
                and cash equivalents end of period
            
            $
            192
            
            $
            1,662Cash
                paid for interest
            
            $
            87
            
            $
            —Cash
                paid for taxes
            
            $
            31
            
            $
            26





See
      notes
      to Condensed Consolidated Financial Statements .











6





**eMAGIN
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





**Note
      1: Description of the Business and Summary of Significant Account Policies**





***The
      Business***





eMagin
      Corporation is a developer and manufacturer of optical systems and microdisplays
      for use in the electronics industry. eMagin also develops and markets
      microdisplay systems and optics technology for commercial, industrial and
      military applications.





***Basis
      of Presentation***





In
      the
      opinion of management, the accompanying unaudited condensed consolidated
      financial statements of eMagin Corporation and its subsidiary reflects all
      adjustments, including normal recurring accruals, necessary for a fair
      presentation. Certain information and footnote disclosure normally included
      in
      annual financial statements prepared in accordance with accounting principles
      generally accepted in the United States have been condensed or omitted pursuant
      to instruction, rules and regulations prescribed by the Securities and Exchange
      Commission. The Company believes that the disclosures provided herein are
      adequate to make the information presented not misleading when these unaudited
      condensed consolidated financial statements are read in conjunction with the
      audited consolidated financial statements contained in the Company’s Annual
      Report on Form 10-K for the year ended December 31, 2006. The results of
      operations for the period ended March 31, 2007 are not necessarily indicative
      of
      the results to be expected for the full year.




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.




The
      condensed 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 through the foreseeable
      future.  The Company’s cash requirements over the next twelve months are
      greater than the Company’s cash, cash equivalents, and investments at March 31,
      2007. The Company has working capital and shareholders’ deficits at March 31,
      2007. 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 condensed consolidated financial statements do not include any
      adjustments that might result from the outcome of this uncertainty .




***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.





***Revenue
      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.






7





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.





***Stock-based
      Compensation***





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 8
      for a
      further discussion on stock-based compensation .





**Note
      2: Recently Issued Accounting Pronouncements**





The
      Financial Accounting Standards Board (“FASB”) has issued interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement
      No. 109” (“FIN 48”), regarding accounting for, and disclosure of, uncertain tax
      positions. FIN 48 clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with FASB
      Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure, and
      transition. FIN 48 is effective for fiscal years beginning after December 15,
      2006. The Company adopted the provisions of FIN 48 on January 1, 2007. See
      Note
      10 for further discussion on income taxes.





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
      and is required to be adopted by the Company in the first quarter of 2008.
      The
      Company is evaluating the effect that the adoption of SFAS 157 will have on
      its
      consolidated results of operations and financial condition.




8


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. The Company is currently evaluating
      the
      impact SFAS 159 will have on its consolidated financial position and results
      of
      operations.




**Note
      3: Receivables**




The
      majority of the Company’s commercial accounts receivable are 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.





The
      Company determines the allowance for doubtful accounts
      by considering a number of factors, including the length of time the
      trade accounts receivable are past due, eMagin's previous loss history, the
      customer's current ability to pay its obligation, and the condition of
      the general economy and the industry as a whole.   The Company 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.





Receivables
      consisted of the following (in thousands):





**March
                31, 2007**
              **(unaudited)**
            
            **December
                31, 2006**Accounts
                receivable
            
            $
            1,909
            
            $
            1,351Less
                allowance for doubtful accounts
            
            
            (443
            )
            
            (443
            )Net
                receivables
            
            $
            1,466
            
            $
            908





**Note
      4: Research and Development Costs**





Research
      and development costs are expensed as incurred.





**Note
      5: Net Loss per Common Share**





In
      accordance with SFAS No. 128, net loss per common share amounts ("basic EPS")
      was computed by dividing net loss by the weighted average number
      of common shares outstanding and excluding any
      potential dilution.  Net loss per common share assuming dilution
      ("diluted EPS") was computed by reflecting potential dilution from the
      exercise of stock options and warrants.  Common stock equivalent
      shares are excluded from the computation if their effect is antidilutive. As
      of
      March 31, 2007 and 2006, there were stock options and warrants outstanding
      to
      acquire 4,363,909 and 4,462,048 shares of our common stock, respectively. These
      shares were excluded from the computation of diluted loss per share because
      their effect would be antidilutive.





9





**Note
      6: Inventories**





Inventory
      is stated at the lower of cost or market. Cost is determined using the first-in
      first-out method.  The Company reviews the value of its inventory and
      reduces the inventory value to its net realizable value based upon current
      market prices and contracts for future sales. The components of inventories
      are
      as follows (in thousands):





**March
                31,****2007**
              **(unaudited)**
            
            **December
                31, 2006**Raw
                materials
            
            $
            969
            
            $
            1,146Work
                in process
            
            
            542
            
            
            558Finished
                goods
            
            
            464
            
            
            781Total
                Inventory
            
            $
            1,975
            
            $
            2,485





**Note
      7: Debt**





Debt
      is
      as follows (in thousands):


**March
                  31,****2007**
            
            **December
                  31, 2006****Current
                portion of long-term debt:**Capitalized
                lease obligations
            
            $
            4
            
            $
            6Other
                debt
            
            
            58
            
            
            586%
                Senior Secured Convertible Notes
            
            
            5,770
            
            
            2,880Less:
                Unamortized discount on notes payable
            
            
            (1,912
            )
            
            (1,721
            )Current
                portion of long-term debt, net
            
            
            3,920
            
            
            1,223**Long-term
                debt:**Other
                debt
            
            
            89
            
            
            1046%
                Senior Secured Convertible Notes
            
            
            —
            
            
            2,890Less:
                Unamortized discount on notes payable
            
            
            —
            
            
            (765
            )Long-term
                debt, net
            
            
            89
            
            
            2,229Total
                debt, net
            
            $
            4,009
            
            $
            3,452





The
      6%
      Senior Secured Convertible Notes have 50% of the aggregate principal amount
      maturing on July 21, 2007 and the remaining 50% maturing on January 21, 2008.
      Interest of approximately $87 thousand was paid to investors on March 1,
      2007. For the
      three months ended March 31, 2007, debt discount of approximately $574 thousand
      was amortized to interest expense.





The
      Notes
      have specific terms that the Company must adhere to, i.e. maintaining minimum
      cash and cash equivalent balances and trading its stock on specific Exchanges.
      On March 9, 2007, the terms of the Note were amended to allow the Company to
      trade its common stock on the Over-The-Counter Bulletin Board and also requiring
      the Company to maintain cash and cash equivalent balances of $200 thousand
      from
      February 26, 2007 through March 31, 2007. Subsequent to March 31, 2007, the
      company must maintain cash and cash equivalent balances of $600 thousand. On
      March 12, 2007, the Company was suspended from trading on the AMEX and is
      currently trading the Company’s common stock on the Over-The Counter Bulletin
      Board. The delisting from the AMEX triggered a compliance condition on the
      notes
      payable. As a result the Company is required to pay the noteholders monthly
      interest at 1% rather than .5% on the outstanding principal of the notes
      payable. The Company received a waiver from the noteholders that allows 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 May 10, 2007, the
      requirement to maintain cash and cash equivalents balances of $200 thousand
      was extended through July 21, 2007 and any previous claim that may have
      otherwise been made regarding the potential breach by the Company of the minimum
      cash balance requirement was waived. Subsequent to July 21, 2007, the Company
      must maintain $600 thousand in cash and cash equivalent balances. See Note
      9:
      Shareholders’ Equity for additional information on the Notes.






10


**Note
        8: Stock-based Compensation**
 
 Stock
        based compensation is accounted for in accordance with the provisions of
        SFAS
        No. 123R. Under SFAS 123R, the fair value of stock awards is estimated at
        the
        date of grant using the Black-Scholes option valuation model. Stock-based
        compensation expense is reduced for estimated forfeitures and is amortized
        over
        the vesting period using the straight-line method.
 
 The
        following table summarizes the allocation of non-cash stock-based compensation
        to our expense categories for the three month periods ended March 31, 2007
        and
        2006 (in thousands):
 
 **Three
                  Months Ended**
                **March
                  31, 2007**
              
              **Three
                  Months Ended**
                **March
                  31, 2006**Cost
                  of revenue
              
              $
              69
              
              $
              135Research
                  and development
              
              
              103
              
              
              128Selling,
                  general and administrative
              
              
              342
              
              
              529Total
                  stock compensation expense
              
              $
              514
              
              $
              792
 
 For
        the
        three months ended March 31, 2007 and 2006, stock compensation was approximately
        $514 thousand and $792 thousand, respectively, net of estimated forfeitures.
        At
        March 31, 2007, total unrecognized non-cash compensation costs related to
        stock
        options was approximately $2.6 million, net of 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
        2.7 years.
 
 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.
 
 There
        were no stock options granted during the three month period ended March 31,
        2007. For the three month period ended March 31, 2006, the following key
        assumptions were used in the Black-Scholes option pricing model to determine
        the
        fair value of stock options granted:
  **For
                  the Three Months Ended**
                **March
                  31, 2006**Dividend
                  yield
              
              
              0
              %Risk
                  free interest rates
              
              
              4.8
              %Expected
                  volatility
              
              
              123.2
              %Expected
                  term (in years)
              
              
              5
 
 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 our stock-based awards
        are expected to be outstanding and was determined based on historical experience
        and vesting schedules of similar awards.


11


A
      summary
      of the Company’s stock option activity for the three months ended March 31, 2007
      is presented in the following tables:




**Number
                of Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Life**
              **(In
                Years)**
            
            **Aggregate
                Intrinsic Value**Outstanding
                at January 1, 2007
            
            
            1,065,745
            
            $
            2.94Options
                granted
            
            
            —Options
                exercised
            
            
            —Options
                forfeited
            
            
            (193,943
            )
            
            2.79Options
                cancelled
            
            
            (56,067
            )
            
            2.84Outstanding
                at March 31, 2007
            
            
            815,735
            
            $
            2.98
            
            
            3.92
            
            $
            —Vested
                or expected to vest at March 31, 2007 (1)
            
            
            758,634
            
            $
            2.98
            
            
            3.92
            
            $
            —Exercisable
                at March 31, 2007
            
            
            540,028
            
            $
            2.94
            
            
            3.20
            
            $
            —





**Options
                Outstanding**
            
            **Options
                Exercisable****Number
                Outstanding**
            
            **Weighted
                Average Remaining Contractual Life**
              **(In
                Years)**
            
            **Weighted
                Average Exercise Price**
            
            **Number
                Exercisable**
            
            **Weighted
                Average Exercisable Price**$2.10
                - $2.70
            
            726,706
            
            4.11
            
            $
                2.56
            
            470,639
            
            $
                2.53$3.40
                - $5.80
            
            55,679
            
            1.40
            
            3.88
            
            50,179
            
            3.67$6.60
                - $22.50
            
            33,350
            
            4.16
            
            10.66
            
            19,210
            
            11.30815,735
            
            3.92
            
            $
                2.98
            
            540,028
            
            $
                2.94


(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. There were no options in-the-money at March 31, 2007.
      The Company’s closing stock price was $0.72 as of March 31, 2007. The Company
      issues new shares of common stock upon exercise of stock options.





**Note
      9: Shareholders’ Equity**




On
      November 3, 2006, the Company effected a one-for-ten (1-for-10) reverse stock
      split of its issued and outstanding common stock. 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
      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”)
      together with warrants to purchase approximately 1.8 million shares of common
      stock, par value $.001 per share. 50% of the aggregate principal amount matures
      on July 21, 2007 and the remaining 50% matures on January 21, 2008. For the
      year
      ended December 31, 2006, two note holders converted their promissory notes
      valued at approximately $0.22 million and were issued an aggregate of
      approximately 85 thousand shares.  The
      Notes
      pay 6% per annum interest quarterly. The delisting from the AMEX on March 12,
      2007 triggered a compliance condition on the notes payable and as a result
      the
      Company is required to pay the noteholders monthly interest at 1% rather than
      .5% on the outstanding principal of the notes payable. The Company received
      a
      waiver from the noteholders that allows 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. The Company received approximately $5.4 million, net of deferred
      costs of approximately $0.6 million which are amortized over the life of the
      Notes.








12


The
        Company accounted for the net proceeds from the issuance of the Notes as
        two
        separate components: a detachable warrant component and a debt component.
         The Company determined the relative fair value of warrants to be $3.4
        million which was recorded as debt discount, a reduction of the carrying
        value
        of the Notes. The following assumptions were used to determine the fair value
        of
        the warrants:
 
 Dividend
                  yield
              
              0%Risk
                  free interest rates
              
              4.99%Expected
                  volatility
              
              122%Expected
                  term (in years)
              
              5.0
                  years
  The
        discount is being amortized to interest expense using the straight-line method
        as it approximates the effective interest method over the term of the
        Notes .
 
 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 three months ended March 31, 2007, the Company
        recorded approximately $0.46 million of gain from the change in the fair
        value
        of the derivative liability.
 
 A
        registration rights agreement was entered into in connection with the Notes
        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. As
        of
        March 31, 2007, 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.
 
 As
        a
        result of the issuance of the Notes, the outstanding 116,576 Series A Common
        Stock Purchase Warrants, that were issued to certain accredited and/or
        institutional investors pursuant to the Securities Purchase Agreement dated
        January 9, 2004, were re-priced from $5.50 to $2.60 and the outstanding 650,001
        Series F Common Stock Purchase Warrants, that were issued to certain accredited
        and/or institutional investors pursuant to the Securities Purchase Agreement
        dated October 25, 2004, were re-priced from $10.90 to $8.60.
 
 For
        the
        three months ended March 31, 2007 and 2006, there were no options or warrants
        exercised.
 
 For
        the
        three months ended March 31, 2007 and 2006, the Company also issued
        approximately 708 thousand and 12 thousand shares of common stock, respectively,
        for the payment of approximately $620 thousand and $12
        thousand, respectively, 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 unaudited condensed consolidated statement of operations
        for the three months ended March 31, 2007 and 2006, respectively.










13


**Note
      10: Income Taxes**


The
        Company adopted the provisions of FIN 48 on January 1, 2007. The Company
        continues to fully recognize its tax benefits which are offset by a valuation
        allowance due to the uncertainty that the deferred tax assets will be realized.
        We will continue to evaluate the realizability of our domestic net deferred
        tax
        assets and may record additional benefits in future earnings if we determine
        the
        realization of these assets is more likely than not. As at January 1, 2007
        and March 31, 2007, the Company did not have any unrecognized tax benefits.


The
      Company files Federal and State corporate tax returns. All tax years since
      inception are open to tax examination by the taxing authorities for possible
      adjustments to the net operating losses but not for assessment. The Statute
      of
      Limitations for assessment of tax is generally three years for Federal and
      four
      years for State tax returns. The years currently open for Federal income tax
      assessment include calendar years 2003 through 2006 and calendar years 2002
      through 2006 for State tax assessment purposes. The Company is not currently
      under examination by any jurisdictions for any of the open years
      listed.





The
      Company is in the process of preparing its Section 382 study and has not
      determined the impact that such study will have on its NOL carryforward.





The
      implementation of FIN 48 has not resulted in any adjustment to the Company’s
      beginning tax position or tax position for the three month period ended March
      31, 2007.





**Note
      11: Commitments and Contingencies**





***Royalty
      Payments***





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. Royalty expense was approximately $255
      thousand and $85 thousand, respectively, for the three months ended March 31,
      2007 and 2006, respectively.





***Contractual
      Obligations***





The Company leases
      office facilities and office, lab and factory equipment under operating leases
      expiring through 2009.  Certain leases provide for payments of monthly
      operating expenses. The Company currently has lease commitments for space in
      Hopewell Junction, New York and Bellevue, Washington. Rent expense was
      approximately $332 thousand and $347 thousand for the three months ended March
      31, 2007 and 2006, respectively.





**Note
      12: Legal Proceedings** ******





None.





**Note
      13: 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 thousand 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 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 thousand 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.






14





**Note
      14: 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 is required to pay the noteholders monthly interest
      at
      1% rather than .5% on the outstanding principal of the notes payable. The
      Company received a waiver from the noteholders that allows 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 .





**Note
      15: Subsequent Events**





On
      March
      28, 2007, the Company entered into a Note Purchase Agreement for the sale of
      $500 thousand of senior secured debentures (the “Note”) and warrants to purchase
      approximately 1.0 million 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 1.4 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. If the Notes are not converted, 50% of the
      principal amount will be due on July 21, 2007 and the remaining 50% will be
      due
      on January 21, 2008. 6% interest is payable in quarterly installments on
      outstanding notes with the first installment to be paid June 1, 2007. 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.







15





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





**Statement
      of Forward-Looking Information**





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





**Overview**





We
      design, develop, manufacture, and market 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 plus 52
      added columns of data) OLED microdisplay, was initially offered for sampling
      in
      2001, and our first SVGA-3D (Super Video Graphics Array plus built-in
      stereovision capability) OLED microdisplay was shipped in early 2002. We 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).





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 received a CES Design and
      Innovations Award for the electronic gaming category and also received the
      coveted Best of Innovation Awards for the entire display category. The product
      was also recognized as a Digital Living Class of 2005 Innovators.





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 we are the only company to sell full-color active matrix small molecule
      OLED-on-silicon microdisplays.




16





**Company
      History**





From
      inception through January 1, 2003, we were a developmental stage company. We
      have transitioned to manufacturing our products and intend to significantly
      increase our marketing, sales, and research and development
      efforts, and expand our operating infrastructure. Most of our operating
      expenses are fixed in the near term. If we are unable to
      generate significant revenues, our net losses in any
      given period could be greater than expected.





**CRITICAL
      ACCOUNTING POLICIES**





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





**Revenue
      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**





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





**Stock-based
      Compensation**





We
      maintain 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
      March 31, 2007, the plan had not been implemented.









17





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”, 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.





**NEW
      ACCOUNTING PRONOUNCEMENTS**





See
      Note
      2 of the Condensed Consolidated Financial Statements in Item 1 for a full
      description of recent accounting pronouncements, including the expected dates
      of
      adoption and estimated effects on results of operations and financial
      condition.





**RESULTS
      OF OPERATIONS**





**THREE
      MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006**





**Revenues**





Revenues
      for the three months ended March 31, 2007 were approximately $3.6 million
      as compared to approximately $1.6 million for the three months ended March
      31,
      2006, an increase of approximately 120%. Higher revenue for the three month
      period was primarily due to increased microdisplay demand and increased
      availability of finished displays due to manufacturing improvements.





**Cost
      of Goods Sold**





Cost
      of
      goods sold includes direct and indirect costs associated with
      production.  Cost of goods sold for the three months ended March 31, 2007
      was approximately $3.1 million as compared to approximately $3.0 million
      for the three months ended March 31, 2006, an increase of approximately $0.1
      million.  The gross margin for the three months ended March 31, 2007
      was approximately $0.5 million as compared to a gross loss of approximately
      ($1.4) million for the three months ended March 31, 2006. This translates to
      a
      gross margin of 14% for the three months ended March 31, 2007 as compared to
      a
      gross loss of (85%) for the three months ended March 31, 2006. The gross margin
      improvement was attributed to fuller utilization of our fixed production
      overhead due to higher unit volume. We expect that gross margins will improve
      in
      2007 as a result of continued leverage of our production overhead if unit volume
      and revenue continue to increase.





**Operating
      Expenses**





*Research
      and Development* . 
      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 three months ended March 31, 2007
      were approximately $0.9 million as compared to $1.2 million for the three
      months ended March 31, 2006, a decrease of approximately $0.3 million.  The
      decrease was due to a reduction of research and development expenditures and
      personnel costs in the quarter as compared to the quarter ended March 31,
      2006.





*Selling,
      General and Administrative* .
      Selling, general and administrative expenses consist principally 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.  Selling, general and
      administrative expenses for the three months ended March 31, 2007 were
      approximately $2.2 million as compared to approximately $2.6 million for
      the three months ended March 31, 2006.  The decrease of approximately $0.4
      million for the quarter ended March 31, 2007 was primarily related to a
      reduction of marketing, tradeshow and personnel costs in the quarter as compared
      to the quarter ended March 31, 2006.




18





*Other
      Income, net* .
      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 three months ended March 31, 2007, interest
      income was approximately $16 thousand compared to approximately $54 thousand
      for
      the three months ended March 31, 2006. The decrease in interest income was
      primarily a result of lower cash balances available for investment. For the
      three months ended March 31, 2007, interest expense was $840 thousand as
      compared to $0 for the three months ended March 31, 2006. The increase in
      the interest expense was a result of interest associated with our notes payable
      of $133 thousand, the amortization of the deferred costs associated with the
      notes payable of $133 thousand, and the amortization of the debt discount of
      $574 thousand. The gain from the change in the derivative liability was $460
      thousand and $0, respectively, for the quarters ended March 31, 2007 and
      2006.





**Liquidity
      and Capital Resources**





As
      of
      March 31, 2007, we had approximately $0.4 million of cash and investments as
      compared to $1.6 million as of December 31, 2006. The decrease of approximately
      $1.2 million was due primarily to cash used for operating
      activities.





Cash
      flow
      used in operating activities during the three months of 2007 was approximately
      $1.2 million as compared to cash used of approximately $5.0 million during
      the
      three months of 2006. The decrease was attributable to a reduction in net losses
      of approximately $2.2 million, approximately $600,000 of stock rather than
      cash
      issued for services and an increase in accounts payable of approximately
      $500,000 rather than a reduction of $500,000 during the first quarter of 2006.





Cash
      used
      in investing activities during the three months ended March 31, 2007 was
      approximately $4 thousand as compared to approximately $56 thousand during
      the
      three months ended March 31, 2006. The reduction of cash used in investing
      activities was primarily due to lower purchases of equipment.





Cash
      used
      in financing activities during the three months ended March 31, 2007 was
      approximately $15 thousand as compared to approximately $9 thousand during
      the
      three months ended March 31, 2006. The funds were used to make payments on
      long-term debt and capital leases.





Our
      condensed consolidated financial statements as of March 31, 2007 have been
      prepared under the assumption that we will continue as a going concern for
      the
      year ending December 31, 2007. Our independent registered public accounting
      firm
      had issued a report dated March 27 , 2007 in
      connection with the audit of the financial statements for the year ended
      December 31, 2006, 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 dependant 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
      period ended March 31, 2007. This trend, if it continues, may result in higher
      accounts receivable levels and may require increased production and/or higher
      inventory levels both of which require working capital. In addition, in July
      2007 and January 2008, we areresponsible
      for repaying $3.1 million to the noteholders. If the funds are not available,
      we
      will negotiate with the noteholders 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.





To
      address these liquidity issues we have pursued asset based borrowing facilities
      and have received offers
      that would establish the $2.5 million revolving credit line allowed for in
      our
      notes payable agreement. We have not entered into a binding commitment for
      these
      funds and no assurance can be given that the final terms will be acceptable.
      We
      believe that these funds if available would be sufficient to fund our working
      capital requirements over the next 12 months, however they would not be
      sufficient to fund both working capital requirements and retirement of our
      notes
      payable. If
      we are
      unable to obtain sufficient funds we 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.







19




**Off-Balance
      Sheet Arrangements**




We
      do not
      have any 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.





**ITEM
      3. 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.





**ITEM
      4. Controls and Procedures**





a) *Evaluation
      of Disclosure Controls and Procedures.* Based on
      an evaluation of our disclosure controls and procedures (as defined in
      Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
      1934, as amended) required by paragraph (b) of Rule 13a-15 or
      Rule 15d-15, as of March 31, 2007, our Chief Executive Officer and Chief
      Financial Officer have concluded that our disclosure controls and procedures
      were effective in ensuring that information required to be disclosed by us
      in
      the reports that we file or submit under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in the
      Commission’s rules and forms. Our Chief Executive Officer and Chief
      Financial Officer also concluded that, as of March 31, 2007, our disclosure
      controls and procedures were effective in ensuring that information required
      to
      be disclosed by us in the reports that we file or submit under the Exchange
      Act
      is accumulated and communicated to our management, including our Chief Executive
      Officer and Chief Financial Officer, to allow timely decisions regarding
      required disclosure..





(b) *Changes
      in Internal Controls.* During
      the quarter ended March 31, 2007, there were no changes in our internal control
      over financial reporting identified in connection with the evaluation required
      by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected,
      or
      is reasonably likely to materially affect, our internal control over financial
      reporting.











20


**PART
      II - OTHER INFORMATION**





**ITEM
      1. Legal Proceedings**





None





**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. If any of the following
      risks actually occurs, our business, financial condition or results of
      operations could be harmed. 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 approximately $184 million as of March 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 establishment and expansion of markets,
      sales and marketing, operating equipment and research and development. We cannot
      assure investors that we will ever achieve or sustain profitability or that
      our
      operating losses will not increase in the future.





***We
      may not be able to execute our business plan and may not generate cash from
      operations.***





As
      we
      have reported, our business is currently experiencing significant revenue growth
      during the quarter ended March 31, 2007. 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. 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. We
      do not
      currently have any financing commitments and no assurance can be given that
      additional financing will be available, or if available, will be on acceptable
      terms. 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.





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




Our
      condensed consolidated financial statements as of March 31, 2007 have been
      prepared under the assumption that we will continue as a going concern for
      the
      year ending December 31, 2007. Our independent registered public accounting
      firm
      had issued a report dated March 27, 2007 in connection with the audit of the
      financial statements for the year ended December 31, 2006, 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 dependant 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.




***RISKS
      RELATED TO MANUFACTURING***




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





If
      we are
      unable to produce our products in sufficient quantity, we will be unable to
      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.






21





***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 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.





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





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






22




**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.






23





***The
      display industry is cyclical*** *.*





The
      display industry is characterized by fabrication facilities that require large
      capital expenditures and long lead times for supplies and the subsequent
      processing time, leading to frequent mismatches between supply and demand.
      The
      OLED microdisplay sector may experience overcapacity if and when all of the
      facilities presently in the planning stage come on line leading to a difficult
      market in which to sell our products.





***Competing
      products may get to market sooner than ours.***





Our
      competitors are investing substantial resources in the development and
      manufacture of microdisplay systems using alternative technologies such as
      reflective liquid crystal displays (LCDs), LCD-on-Silicon ("LCOS")
      microdisplays, active matrix electroluminescence and scanning image systems,
      and
      transmissive active matrix LCDs. Our 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. If our products fail to
      meet
      our OEM customers' cost, performance or technical requirements or if unexpected
      technical challenges arise in the integration of our products into OEM consumer
      products, our operating results could be significantly and adversely affected.
      Long delays in achieving customer qualification and incorporation of our
      products could adversely affect our business.





***Our
      products will likely experience rapidly declining unit prices.***





In
      the
      markets in which we expect to compete, prices of established products tend
      to
      decline significantly over time. In order to maintain our profit margins over
      the long term, we believe that we will need to continuously develop product
      enhancements and new technologies that will either slow price declines of our
      products or reduce the cost of producing and delivering our products. While
      we
      anticipate many opportunities to reduce production costs over time, there can
      be
      no assurance that these cost reduction plans will be successful nor is there
      any
      assurance that our costs can be reduced as quickly as any reduction in unit
      prices. We may also attempt to offset the anticipated decrease in our average
      selling price by introducing new products, increasing our sales volumes or
      adjusting our product mix. If we fail to do so, our results of operations would
      be materially and adversely affected.





**RISKS
      RELATED TO OUR BUSINESS**





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





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






24





***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.





***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 $6.1 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 a foreign entity. Some customers in other countries have
      longer receivable periods or warranty periods. In addition, many of the OEMs
      that are the most likely long-term purchasers of our microdisplays are located
      abroad exposing us to additional political and currency risk. We may find it
      necessary to locate manufacturing facilities abroad to be closer to our
      customers which could 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.






25




**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 April 30, 2007, we have outstanding (i) options to purchase
      815,735 shares and (ii) warrants to purchase 4,548,174 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
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.**





None.





**ITEM
      3. Defaults Upon Senior Securities**





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 is currently trading the
      Company’s common stock 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 is required to pay the noteholders monthly interest
      at
      1% rather than .5% on the outstanding principal of the notes payable. The
      Company received a waiver from the noteholders that allows 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
        May
        10, 2007, the requirement to maintain cash and cash equivalents
        balances of $200 thousand was extended through July 21, 2007 and any previous
        claim that may have otherwise been made regarding the potential breach by
        the
        Company of the minimum cash balance requirement was waived. Subsequent to
        July
        21, 2007, the Company must maintain $600 thousand in cash and cash equivalent
        balances.





**ITEM
      4. Submission of Matters to a Vote of Security Holders**





None.





**ITEM
      5. Other Information**





None.




**ITEM
      6. Exhibits**








26






**EXHIBIT
                NUMBER**
            
            **DESCRIPTION**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*




*Filed
      herewith.








27


**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 15th day of May 2007.




**eMAGIN
              CORPORATION**By:
            /s/ K.C.
              ParkK.C.
              Park*Interim
                Chief Executive Officer*
              *Principal
                Executive Officer*





By:
            /s/ John
              AtherlyJohn
              Atherly*Chief
                Financial Officer*
              *Principal
                Accounting and Financial
                Officer*







28