**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, 2006****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 common stock outstanding as of May 12, 2006 was
      100,104,944.
























**eMagin
      Corporation**


**Form
      10-Q**


**For
      the Quarter ended March 31, 2006**





**Table
      of Contents**


**Page****PART
                I FINANCIAL INFORMATION**Item
                1
            Condensed
                Consolidated Financial StatementsCondensed
                Consolidated Balance Sheets as of March 31, 2006 (unaudited) and
                December
                31, 2005
            3Condensed
                Consolidated Statements of Operations for the Three Months ended
                March 31,
                2006 and 2005 (unaudited)
            4Condensed
                Consolidated Statements of Changes in Shareholders’ Equity for the Three
                Months ended March 31, 2006 (unaudited)
            5Condensed
                Consolidated Statements of Cashflows for the Three Months ended March
                31,
                2006 and 2005 (unaudited)
            6Notes
                to Condensed Consolidated Financial Statements (unaudited)
            7Item
                2
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            14Item
                3
            Quantitative
                and Qualitative Disclosures About Market Risk
            18Item
                4
            Controls
                and Procedures
            18**PART
                II OTHER INFORMATION**Item
                1
            Legal
                Proceedings
            19Item
                1A
            Risk
                Factors
            19Item
                2
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            24Item
                3
            Defaults
                Upon Senior Securities
            25Item
                4
            Submission
                of Matters to a Vote of Security Holders
            25Item
                5
            Other
                Information
            25Item
                6
            Exhibits
            25**SIGNATURES****CERTIFICATIONS**









2


**ITEM
      1. Condensed Consolidated Financial Statements**








**eMAGIN
      CORPORATION**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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





**March
                31,**
            
            **December
                31,****2006**
              **(unaudited)**
            
            **2005****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            1,662
            
            $
            6,727Investments
                - held to maturity
            
            
            124
            
            
            120Accounts
                receivable, net
            
            
            1,129
            
            
            762Inventory
            
            
            3,572
            
            
            3,839Prepaid
                expenses and other current assets
            
            
            1,285
            
            
            1,045Total
                current assets
            
            
            7,772
            
            
            12,493Equipment,
                furniture and leasehold improvements, net
            
            
            1,097
            
            
            1,299Intangible
                assets, net
            
            
            58
            
            
            57Other
                assets
            
            
            233
            
            
            233Total
                assets
            
            $
            9,160
            
            $
            14,082**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            1,325
            
            $
            562Accrued
                compensation
            
            
            886
            
            
            1,010Other
                accrued expenses
            
            
            721
            
            
            1,894Deferred
                revenue
            
            
            39
            
            
            96Current
                portion of capitalized lease obligations
            
            
            13
            
            
            16Other
                current liabilities
            
            
            46
            
            
            47Total
                current liabilities
            
            
            3,030
            
            
            3,625Capitalized
                lease obligations
            
            
            4
            
            
            6Long-term
                debt
            
            
            43
            
            
            50Total
                liabilities
            
            
            3,077
            
            
            3,681Commitments
                and contingenciesShareholders’
                equity: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, 100,049,382 shares as of March 31, 2006 and 99,972,458
                shares
                as of December 31, 2005
            
            
            100
            
            
            100Additional
                paid-in capital
            
            
            176,702
            
            
            175,860Accumulated
                deficit
            
            
            (170,719
            )
            
            (165,559
            )Total
                shareholders’ equity
            
            
            6,083
            
            
            10,401Total
                liabilities and shareholders’ equity
            
            $
            9,160
            
            $
            14,082








See
      notes
      to Condensed Consolidated Financial Statements .


3


**eMAGIN
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


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


**(unaudited)**





**Three
                Months Ended March 31,****2006**
            
            **2005**Revenue:Product
                revenue
            
            $
            1,571
            
            $
            690Contract
                revenue
            
            
            70
            
            
            —Total
                revenue, net
            
            
            1,641
            
            
            690Cost
                of goods sold
            
            
            3,029
            
            
            1,956Gross
                loss
            
            
            (1,388
            )
            
            (1,266
            )Operating
                expenses:Research
                and development
            
            
            1,238
            
            
            886Selling,
                general and administrative
            
            
            2,588
            
            
            1,335Total
                operating expenses
            
            
            3,826
            
            
            2,221Loss
                from operations
            
            
            (5,214
            )
            
            (3,487
            )Other
                income (expense):Interest
                expense
            
            
            —
            
            
            (1
            )Other
                income, net
            
            
            54
            
            
            19Total
                other income, net
            
            
            54
            
            
            18Net
                loss
            
            $
            (5,160
            )
            $
            (3,469
            )Loss
                per share, basic and diluted
            
            $
            (0.05
            )
            $
            (0.04
            )Weighted
                average number of shares outstanding:Basic
                and diluted
            
            
            100,038,000
            
            
            81,432,000








See
      notes
      to Condensed Consolidated Financial Statements .






4





**eMAGIN
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**


**(In
      thousands)**








**Additional**
            
            
            
            **Total****Common
                Stock**
            
            **Paid-In**
            
            **Accumulated**
            
            **Shareholders’****Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit**
            
            **Equity**Balance,
                December 31, 2005
            
            
            99,972
            
            $
            100
            
            $
            175,860
            
            $
            (165,559
            )
            $
            10,401Stock-based
                compensation
            
            
            -----
            
            
            -----
            
            
            792
            
            
            -----
            
            
            792Issuance
                of common stock for services
            
            
            77
            
            
            -----
            
            
            50
            
            
            -----
            
            
            50Net
                loss
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            (5,160
            )
            
            (5,160
            )Balance,
                March 31, 2006, (unaudited)
            
            
            100,049
            
            $
            100
            
            $
            176,702
            
            $
            (170,719
            )
            $
            6,083














See
      notes
      to Condensed Consolidated Financial Statements .




5





**eMAGIN
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(In
      thousands)**







**Three
                months ended****March
                31,****2006**
            
            **2005****(unaudited)**Cash
                flows from operating activities:Net
                loss
            
            $
            (5,160
            )
            $
            (3,469
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            257
            
            
            188Provision
                for sales returns and doubtful accounts
            
            
            ---
            
            
            19Stock-based
                compensation
            
            
            792
            
            
            ---Issuance
                of common stock for services
            
            
            50
            
            
            12Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (367
            )
            
            (37
            )Inventory
            
            
            267
            
            
            (908
            )Prepaid
                expenses and other current assets
            
            
            (244
            )
            
            271Deferred
                revenue
            
            
            (57
            )
            
            ---Accounts
                payable, accrued compensation, and other accrued expenses
            
            
            (537
            )
            
            180Other
                current liabilities
            
            
            (1
            )
            
            10Net
                cash used in operating activities
            
            
            (5,000
            )
            
            (3,734
            )Cash
                flows from investing activities:Purchase
                of equipment
            
            
            (54
            )
            
            (232
            )Purchase
                of intangibles and  other assets
            
            
            (2
            )
            
            35Net
                cash used by investing activities
            
            
            (56
            )
            
            (197
            )Cash
                flows from financing activities:Proceeds
                from exercise of stock options and warrants
            
            
            ---
            
            
            1,246Payments
                of long-term debt and capital leases
            
            
            (9
            )
            
            (3
            )Net
                cash (used) provided by financing activities
            
            
            (9
            )
            
            1,243Net
                (decrease) increase in cash and cash equivalents
            
            
            (5,065
            )
            
            (2,688
            )Cash
                and cash equivalents beginning of period
            
            
            6,727
            
            
            13,457Cash
                and cash equivalents end of period
            
            $
            1,662
            
            $
            10,769Cash
                paid for interest
            
            $
            ---
            
            $
            1Cash
                paid for taxes
            
            $
            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 generally accepted
      accounting principles 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, 2005.





Certain
      prior-period balances have been reclassified to conform to the current period
      presentation. These reclassifications had no impact on revenue, net loss, assets
      or liabilities in either period presented. The results of operations for the
      period ended March 31, 2006 are not necessarily indicative of the results to
      be
      expected for the full year.





The
      consolidated financial statements have been prepared assuming that the Company
      will continue as a going concern. The Company has had recurring losses from
      operations which it believes will continue through 2006. These factors raise
      substantial doubt regarding the Company’s ability to continue as a going concern
      without obtaining additional funding. Management is currently negotiating
      establishment of a standby debt facility with existing investors and or the
      placement of debt with new investors to address this funding requirement. If
      management is unsuccessful in its efforts to obtain additional funding, the
      Company will reduce its operating plan which will have an impact on its ability
      to achieve profitability. The condensed consolidated financial statements do
      not
      include any adjustments that might result from the outcome of this
      uncertainty.





*Use
      of estimates*





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





*Revenue
      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, the 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.  Amounts can
      be billed on a bi-monthly basis.





*Stock-Based
      Compensation*





The
      Company maintains several stock equity incentive plans. The 2005 Employee Stock
      Purchase Plan (the “ESPP”) provides the Company’s employees with the opportunity
      to purchase common stock through payroll deductions. Employees purchase stock
      semi-annually at a price that is 85% of the fair market value at certain
      plan-defined dates. As of March 31, 2006, the number of shares of common stock
      available for issuance was 1,500,000. As of March 31, 2006, the plan had not
      been implemented.





The
      2003
      Stock Option Plan (the”2003 Plan”) provides for grants of shares of common stock
      and options to purchase shares of common stock to employees, officers, directors
      and consultants. Under the 2003 plan, an ISO grant is granted at the market
      value of the Company’s 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 at the date of grant. These options have a term of up to 10 years and
      vest
      over a schedule determined by the Board of Directors, generally five years.
      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 nine (9) years which
      commenced January 1, 2005.





On
      January 1, 2006, the Company adopted the provisions of Financial Accounting
      Standards Board (“FASB”) Statement No. 123(R), “ *Share-Based
      Payment”* ,
      (“SFAS
      No. 123R”), which requires the Company to recognize expense related to the fair
      value of the Company’s share-based compensation. Prior to January 1, 2006, the
      Company accounted for share-based compensation under the recognition and
      measurement provisions of Accounting Principles Board Opinion No. 25
      ("APB No. 25"), “ *Accounting for Stock Issued
      to Employees”,* and
      related interpretations, as permitted by FASB Statement No. 123, "Accounting
      for
      Stock-Based Compensation" (“SFAS No. 123”). In accordance with APB No. 25, no
      compensation cost was required to be recognized for options granted that had
      an
      exercise price equal to the market value of the underlying common stock on
      the
      date of grant.





The
      Company adopted SFAS No. 123R using the modified prospective transition method
      and consequently has not retroactively adjusted results for prior periods.
      Under
      this transition method, compensation cost associated with stock options
      includes: a) compensation cost for all share-based compensation granted prior
      to, but not vested as of January 1, 2006, based on the grant-date fair value
      estimated in accordance with the original provisions of SFAS No.123 and b)
      compensation cost for all share-based compensation granted beginning January
      1,
      2006, based on the grant-date fair value estimated in accordance with the
      provisions of SFAS No.123R. The Company uses the straight-line method for
      recognizing compensation expense. Compensation expense for awards under SFAS
      123R includes an estimate for forfeitures.





See
      Note
      7 for further information regarding the Company’s stock-based compensation
      assumptions and expenses, including the impact of adoption on the Company’s
      condensed Consolidated Financial Statements and pro forma disclosures for prior
      periods as if we had recorded stock-based compensation expense.





**Note
      2: Receivables**





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







8


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,**
              **2006**
              **(unaudited)**
            
            **December
                31, 2005**Accounts
                receivable
            
            $
            1,616
            
            $
            1,249Less
                allowance for doubtful accounts
            
            
            (487
            )
            
            (487
            )Net
                receivables
            
            $
            1,129
            
            $
            762





**Note
      3: Research and Development Costs**





Research
      and development costs are expensed as incurred.





**Note
      4: 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 equivalent shares totaling 44,620,483 and
      33,626,127 have been excluded from the computation of diluted EPS
      for the three months ended March 31, 2006 and 2005, respectively,
      because their effect would be antidilutive.





**Note
      5: 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,
                2006**
              **(unaudited)******
            
            
            **December
                31, 2005**Raw
                materials
            
            $
            2,105
            
            $
            2,353Work
                in process
            
            
            330
            
            
            107Finished
                goods
            
            
            1,137
            
            
            1,379Total
                Inventory
            
            $
            3,572
            
            $
            3,839





**Note
      6: Debt**





Debt
      is
      as follows (in thousands):





**March
                31, 2006**
              **(unaudited)**
            
            **December
                31, 2005**Current
                portion of capitalized lease obligations
            
            $
            13
            
            $
            16Long-term
                capitalized lease obligations
            
            
            4
            
            
            6Long-term
                debt
            
            
            43
            
            
            50Total
                debt
            
            $
            60
            
            $
            72


9




**Note
      7: Stock-based Compensation**





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





The
      following table summarizes the allocation of non-cash stock-based compensation
      to our expense categories for the three month period ended March 31, 2006 (in
      thousands):





Cost
                of revenue
            
            $
            135Research
                and development
            
            
            128Selling,
                general and administrative
            
            
            529Total
                stock compensation expense
            
            $
            792





Stock-based
      compensation was $792,000 for the quarter ended March 31, 2006. At March 31,
      2006, total unrecognized non-cash compensation costs related to stock options
      was $6.9 million, net of estimated forfeitures. Total unrecognized compensation
      cost will be adjusted for future changes in estimated forfeitures and is
      expected to be recognized over a weighted average period of approximately 5.5
      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.





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





**For
                the Quarter Ended**
              **March
                31,****2006**
            
            **2005**Dividend
                yield
            
            0%
            
            0%Risk
                free interest rates
            
            4.8%
            
            2.8%Expected
                volatility
            
            
            123.2
            %
            
            125.9
            %Expected
                term (in years)
            
            
            5
            
            
            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.






10





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




**March
                31, 2005**
              **(unaudited)**Net
                loss, as reported
            
            $
            (3,469
            )Deduct: 
                Stock-based employee compensation expense determined under fair value
                method
            
            
            (1,481
            )Pro
                forma net loss
            
            $
            (4,950
            )Net
                loss per share:Basic
                and diluted, as reported
            
            $
            (0.04
            )Basic
                and diluted, pro forma
            
            $
            (0.06
            )





A
      summary
      of the Company’s stock option activity for the three months ended March 31, 2006
      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, 2006
            
            
            18,052,636
            
            $
            1.09Options
                granted
            
            
            1,080,000
            
            
            0.55Options
                exercised
            
            
            ----
            
            
            ----Options
                cancelled
            
            
            (709,400
            )
            
            0.99Outstanding
                at March 31, 2006
            
            
            18,423,236
            
            $
            1.05
            
            
            4.61
            
            $
            729,000Vested
                or expected to vest at March 31, 2006
            
            
            10,197,214
            
            $
            1.01
            
            
            3.92
            
            $
            931,000Exercisable
                at March 31, 2006
            
            
            9,352,608
            
            $
            1.03
            
            
            3.56
            
            $
            725,000










**Options
                  Outstanding**
              
              **Options
                  Exercisable****Number
                  Outstanding**
              
              **Weighted
                  Average Remaining Contractual Life (In Years)**
              
              **Weighted
                  Average Exercise Price**
              
              **Number
                  Exercisable**
              
              **Weighted
                  Average Exercisable Price**$0.21
                  - $0.85
              
              
              8,029,258
              
              
              4.39
              
              $
              0.51
              
              
              4,603,688
              
              $
              0.45$1.00
                  - $1.50
              
              
              5,298,914
              
              
              5.68
              
              
              1.15
              
              
              1,537,523
              
              
              1.14$1.52
                  - $6.30
              
              
              5,095,064
              
              
              3.84
              
              
              1.81
              
              
              3,211,397
              
              
              1.8118,423,236
              
              
              
              
              $
              1.05
              
              
              9,352,608
              
              $
              1.03




The
      aggregate intrinsic value in the table above represents the difference between
      the exercise price of the underlying options and the quoted price of the
      Company’s common stock for the 2,973,241 options that were in-the-money at March
      31, 2006. The Company’s closing stock price was $0.55 as of March 31, 2006.
      The Company issues new shares of common stock upon exercise of stock
      options.





11


**Note
      8: Shareholders’ Equity**





In
      the
      quarter ended March 31, 2006, there were no warrants and stock options exercised
      as compared to the quarter ended March 31, 2005 where the Company received
      approximately $1.2 million in proceeds from the exercise of approximately 2.4
      million warrants and options. For the three months ended March 31, 2006 and
      2005, the Company also issued approximately 77,000 and 12,000 shares of common
      stock, respectively, for the payment of approximately $50,000 and $12,000,
      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,
      2006 and 2005, respectively.





**Note
      9: 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 $125,000 which commenced on January 1,
      2001. Under this agreement, the Company must pay to Eastman Kodak a certain
      percentage of net sales of certain products, which percentages are
      defined in the agreement. The percentages are on a sliding scale depending
      on
      the amount of sales generated. Any minimum royalties paid will be
      credited against the amounts due based on the percentage of sales. The
      royalty agreement terminates upon the expiration of the last-to-expire
      issued patent.





The
      Company paid $125,000 for the minimum amount due for 2006 and 2005. The amount
      was recorded in prepaid expenses and will be amortized as the
      Company records the royalty expense as defined in the agreement. Royalty
      expense was $85,000 and $23,000 for the three months ended March 31, 2006 and
      2005, 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 $347,000 and $234,000 for the three months ended March 31, 2006
      and 2005, respectively.





**Note
      10: Legal Proceedings** ******





On
      December 6, 2005, New York State Urban Development Corporation commenced action
      in the Supreme Court of the State of New York, County of New York against the
      Company, asserting breach of contract and seeking to recover a $150,000 grant
      which was made to the Company based on goals set forth in the agreement for
      recruitment of employees.  The Company has received an extension of time to
      answer the Complaint and is in on-going negotiations with New York State Urban
      Development Corporation in order to resolve this matter.


******


**Note
      11: Employment Agreements**




On
      January 24, 2006, pursuant to actions taken by the Compensation Committee of
      the
      Board of Directors of eMagin Corporation (the “Company”), Mr. Gary W. Jones
      entered into a revised executive employment agreement, to conform to the
      recently established Sarbanes-Oxley requirements, in connection with his service
      as Chief Executive Officer and President of the Company. Mr. Jones also serves
      as Chairman of the Company. Additionally, Ms. Susan K. Jones entered into a
      revised executive employment agreement, to conform to the recently established
      Sarbanes-Oxley requirements, in connection with her service as the Company’s
      Chief Marketing and Strategy Officer, Executive Vice President and Corporate
      Secretary.







12


Key
      terms
      of the executive employment agreements are described herein. Each agreement
      is
      effective for an initial term of three years, effective January 1, 2006. The
      agreement provides for an annual salary, benefits made available by the Company
      to its employees and eligibility for an incentive bonus pursuant to one or
      more
      incentive compensation plans established by the Company from time to time.
      The
      Company may terminate the employment of Executive at any time with or without
      notice and with or without cause (as such term is defined in the agreement).
      If
      the Executive’s employment is terminated without cause, or if Executive resigns
      with good reason (as such term is defined in the agreement), or if Executive’s
      position is terminated or significantly changed as result of change of control
      (as such term is defined in the agreement), Executive shall be entitled to
      receive salary until the end of the agreement’s full term or twelve months,
      whichever is greater, payment for accrued vacation, and bonuses which would
      have
      been accrued during the term of the agreement. If Executive voluntarily
      terminates employment with the Company, other than for good reason or is
      terminated with cause (as such term is defined in the agreement), Executive
      shall cease to accrue salary, vacation, benefits, and other compensation on
      the
      date of the voluntary or with cause termination. The Executive Employment
      Agreement includes other conventional terms and also contains invention
      assignment, non-competition, non-solicitation and non-disclosure
      provisions.





On
      April
      17, 2006, the parties entered into amendments to the employment agreements
      pursuant to which the parties clarified that t he
      Company has agreed to pay for health benefits equivalent to medical and dental
      benefits provided during the executive’s full time employment until the end of
      the agreement’s full term or twenty-four (24) months, whichever is
      greater.





13


**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. In January
      2006, we unveiled prototypes of our upcoming X800 3DVisor and Eyebud(tm)
      Personal Display Systems. The Eyebud for use with video iPods was identified
      as
      an important new electronics product by several major publications including
      USA
      Today.





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.






14





**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 selling price is fixed, title to the goods
      has changed and there is a reasonable assurance of collection of the
      sales proceeds.  We obtain written purchase authorizations from
      our customers for a specified amount of product at a specified price
      and consider delivery to have occurred at the time
      of shipment.  Revenue is recognized at shipment and we
      record a reserve for estimated sales returns, which
      is reflected as a reduction of revenue at the time of revenue recognition.
      We defer revenue 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.





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**





In
      accordance with accounting principles generally accepted in the United States
      of
      America, management utilizes 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, stock-based compensation expense and other factors. Management
      believes it 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 appropriates 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, 2006, the number of shares of common stock available for issuance
      was
      1,500,000. As of March 31, 2006, the plan had not been implemented.





15


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.





On
      January 1, 2006, we adopted the provisions of Financial Accounting Standards
      Board (“FASB”) Statement No. 123(R), “ *Share-Based
      Payment”* ,
      and
      (“SFAS No. 123R”), which requires us to recognize expense related to the fair
      value of our share-based compensation issued to employees and directors. Prior
      to the January 1, 2006, we accounted for share-based compensation under the
      recognition and measurement provisions of Accounting Principles
      Board Opinion No. 25 ("APB No. 25"), “ *Accounting for Stock Issued
      to Employees”,* and
      related interpretations, as permitted by FASB Statement No. 123, "Accounting
      for
      Stock-Based Compensation" (“SFAS No. 123”). In accordance with APB No. 25, no
      compensation cost was required to be recognized for options granted that had
      an
      exercise price equal to the market value of the underlying common stock on
      the
      date of grant.





We
      adopted SFAS No. 123R using the modified prospective transition method and
      consequently have not retroactively adjusted results for prior periods. Under
      this transition method, compensation cost associated with stock options
      includes: a) compensation cost for all share-based compensation granted prior
      to, but not vested as of January 1, 2006, based on the grant-date fair value
      estimated in accordance with the provisions of SFAS No.123 and b) compensation
      cost for all share-based compensation granted beginning January 1, 2006, based
      on the grant-date fair value estimated in accordance with the original
      provisions of SFAS No.123R. We use the straight-line method for recognizing
      compensation expense. Compensation expense for awards under SFAS 123R includes
      an estimate for forfeitures.





**Results
      of Operations**





**THREE
      MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31,
      2005**





**Revenues**





Revenues
      for the three months ended March 31, 2006 were approximately $1.6 million
      as compared to approximately $0.7 million for the three months ended March
      31,
      2005, an increase of 138%. The increase in revenue was due to increased revenue
      and unit shipments of our microdisplays and a broadening of our product revenue
      through sales of the Z800 3DVisor. The average selling price per unit of a
      microdisplay increased to $414 as compared to $332 in the first quarter of
      2005.





**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, 2006
      was approximately $3.0 million as compared to $2.0 million for the three
      months ended March 31, 2005, an increase of approximately $1.0 million. 
The gross loss for the three months ended March 31, 2006 was approximately
      ($1.4) million as compared to approximately ($1.3) million for the three months
      ended March 31, 2005. This translates to a gross margin of (85%) for the three
      months ended March 31, 2006 as compared to a gross margin of (183%) for the
      three months ended March 31, 2005. The increase to cost of goods sold in 2006
      was attributed to higher staffing levels and materials usage to support
      increased product production as well as approximately $135,000 of non cash
      stock
      compensation expense associated with the adoption of SFAS No. 123R.





**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.  Gross research
      and development expenses for the three months ended March 31, 2006
      were approximately $1.2 million as compared to approximately $0.9 million
      for the three months ended March 31, 2005, an increase of
      approximately $300,000.  This increase was due to increased personnel costs
      related to additional headcount and stock-based compensation expense of
      approximately $128,000 related to the adoption of SFAS No. 123R.





16





*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, 2006 were
      approximately $2.6 million as compared to approximately $1.3 million for
      the three months ended March 31, 2005.  Of the approximately
      $1.3 million  increase, approximately  $0.7 million was
      primarily due to an increase in advertising expenses related to our Z800
      3DVisor, trade show participation and increased personnel costs related to
      additional headcount as well as stock-based compensation expense of
      approximately $529,000 related to the adoption of SFAS No. 123R.





*Other
      Income, net* .
      Other
      income, net consists primarily of interest income earned on investments. For
      the
      three months ended March 31, 2006 interest income was $54,000 as compared to
      $18,000 for the three months ended March 31, 2005. The
      increase in net other income was primarily a result of a higher earned interest
      rate on our invested balances.





**Liquidity
      and Capital Resources**





As
      of
      March 31, 2006, we had approximately $4.7 million of working capital as compared
      to approximately $8.9 million as of December 31, 2005. This decrease of
      approximately $4.2 million was due primarily to uses of working capital to
      fund
      operations.





Cash
      flow
      used in operating activities during the first quarter of 2006 was approximately
      $5.0 million as compared to cash used of approximately $3.7 million during
      the
      first quarter of 2005. The increase in use of funds was primarily attributable
      to the cash portion of our net loss of approximately $4.1 million and
      approximately $0.9 million used in relation to increases in accounts receivables
      due to higher sales and decreases in liabilities resulting from payments to
      vendors and employees.





Cash
      used
      in investing activities during the first quarter of 2006 was $56,000 as compared
      to cash used of $197,000 during the first quarter of 2005. The reduction of
      cash
      used in investing activities was primarily due to lower purchases of equipment.
      Equipment purchased in the first quarter of 2006 was $54,000 as compared to
      $232,000 in the first quarter of 2005.





Cash
      used
      in financing activities during the first quarter of 2006 was $9,000 as compared
      to cash provided from financing activities of approximately $1.2 million during
      the first quarter of 2005. We received approximately $1.2 million of proceeds
      from the exercise of employee stock options and warrants during the first
      quarter of 2005.





Our
      condensed consolidated financial statements as of March 31, 2006 have been
      prepared under the assumption that we will continue as a going concern for
      the
      year ending December 31, 2006. Our independent registered public accounting
      firm
      have issued their report dated March 15 , 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





We
      currently expect that our business will experience significant revenue growth
      during 2006 which will result in higher accounts receivable levels and higher
      inventory levels as shown by first quarter results. To fund these requirements
      as well as other operating or investing cash requirements over the next 12
      months, we anticipate that our cash requirements will be significant. We
      intend
      to seek outside financing in the form of debt
      collateralized by our assets and to a lesser extent the sale of
      equity .
      We have
      not yet obtained any commitments for such financing and no assurance can be
      given that additional financing will be available, or if available, will be
      on
      acceptable terms. Though
      we
      have a proven history of successfully raising capital there is no guarantee
      that
      we will be successful with our current efforts. If we are unable to obtain
      sufficient funds in the near future, we will reduce the size of our organization
      and will rely on our current cash and raw materials to support a reduced
      operating plan that should still support modest growth in our business, but
      may
      have a material adverse impact on us and our business prospects.




**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.






17





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





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








18


**PART
      II - OTHER INFORMATION**





**ITEM
      1. Legal Proceedings**





On
      December 6, 2005, New York State Urban Development Corporation commenced action
      in the Supreme Court of the State of New York, County of New York against
      eMagin, asserting breach of contract and seeking to recover a $150,000 grant
      which was made to eMagin based on goals set forth in the agreement for
      recruitment of employees. ****** eMagin
      has received an extension of time to answer the Complaint and is in on-going
      negotiations with New York State Urban Development Corporation in order to
      resolve this matter.





**ITEM
      1A. Risk Factors**





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





**RISKS
      RELATED TO OUR FINANCIAL RESULTS**





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





Accumulated
      losses excluding non-cash transactions as of March 31, 2006 were $69 million
      and
      acquisition related non-cash transactions were $102 million, which resulted
      in
      an accumulated net loss of $171 million. We have not yet achieved profitability
      and we can give no assurances that we will achieve profitability within the
      foreseeable future as we fund operating and capital expenditures in areas such
      as establishment and expansion of markets, sales and marketing, operating
      equipment and research and development. We cannot assure investors that we
      will
      ever achieve or sustain profitability or that our operating losses will not
      increase in the future.





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





In
      the
      event that cash flow from operations is less than anticipated and we are unable
      to secure additional funding to cover our expenses, in order to preserve cash,
      we would be required to reduce expenditures and effect reductions in our
      corporate infrastructure, either of which could have a material adverse effect
      on our ability to continue our current level of operations. To the extent that
      operating expenses increase or we need additional funds to make acquisitions,
      develop new technologies or acquire strategic assets, the need for additional
      funding may be accelerated and there can be no assurances that any such
      additional funding can be obtained on terms acceptable to us, if at all. If
      we
      were not able to generate sufficient capital, either from operations or through
      additional debt or equity financing, to fund our current operations, we would
      be
      forced to significantly reduce or delay our plans for continued research and
      development and expansion. This could significantly reduce the value of our
      securities.





***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
      consolidated financial statements as of March 31, 2006 have been prepared under
      the assumption that we will continue as a going concern for the year ending
      December 31, 2006. Our independent registered public accounting firm have issued
      a report dated March 15, 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.







19





***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.





***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.






20





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





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




**RISKS
      RELATED TO THE MICRODISPLAY INDUSTRY**




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





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





***The
      microdisplay systems business is intensely competitive.***





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.






21





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





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





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





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





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






22








**RISKS
      RELATED TO OUR BUSINESS**





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





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





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





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





***Our
      business depends on new products and technologies.***





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





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





Our
      business has primarily operated on the basis of short-term purchase orders.
      We
      are now receiving longer term purchase agreements and procurement contracts,
      but
      we cannot guarantee that we will continue to do so. Our current purchase
      agreements can be cancelled or revised without penalty, depending on the
      circumstances. We plan production 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 our company 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.






23





***Our
      business may expose us to product liability claims.***





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





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





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




**RISKS
      RELATED TO OUR STOCK**







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





Sales
      of
      significant amounts of common stock in the public market, or the perception
      that
      such sales may occur, could materially affect the market price of our common
      stock. These sales might also make it more difficult for us to sell equity
      or
      equity-related securities in the future at a time and price that we deem
      appropriate. As of March 17, 2006, we have outstanding (i) options to purchase
      18,423,236 shares and (ii) warrants to purchase 26,197,247 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 the company. Some of the provisions of our certificate of
      incorporation, our bylaws and Delaware law could, together or separately,
      discourage potential acquisition proposals or delay or prevent a change in
      control. In particular, our board of directors is authorized to issue up to
      10,000,000 shares of preferred stock (less any outstanding shares of preferred
      stock) with rights and privileges that might be senior to our common stock,
      without the consent of the holders of the common stock.





**ITEM
      2. Unregistered Sales of Equity Securities and Use of Proceeds**





On
      February 14, 2006, we issued options to purchase an aggregate of 60,000 shares
      of common stock at a price equal to $0.46 per share to a director as
      compensation for services performed on our behalf as his capacity as director
      of
      our company.





On
      March
      14, 2006, we issued options to purchase an aggregate of 1,020,000 shares of
      common stock at a price equal to $0.55 per share to employees as compensation
      for services performed on behalf of our company.





*All
      of
      the above issuance and sales were deemed to be exempt under Rule 506 of
      Regulation D and Section (2) of the Securities Act of 1933, as amended. No
      advertising or general solicitation was employed in offering the securities.
      The
      offerings and sales were made to a limited number of persons, all of whom were
      accredited investors, business associates of eMagin or executive officers of
      eMagin, and transfer was restricted by eMagin in accordance with the requirement
      of the
      Securities Act of 1933. In addition to representations by the above-referenced
      persons, we have made independent determinations that the above-referenced
      persons were accredited or sophisticated investors, and that they were capable
      of analyzing the merits and risks of their investment, and that they understood
      the speculative nature of their investment. Furthermore, all of the
      above-referenced persons were provided with access to our Securities and
      Exchange Commission filings.






24





**ITEM
      3. Defaults Upon Senior Securities**




None.





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





None.





**ITEM
      5. Other Information**





None.




**ITEM
      6. Exhibits**




**EXHIBIT
              NUMBER**
            
            **DESCRIPTION**31.1
            
            Certification by
              Chief
              Executive Officer pursuant to Sarbanes Oxley Section
              30231.2
            
            Certification by
              Chief
              Financial Officer pursuant to Sarbanes Oxley Section
              30232.1
            
            Certification by
              Chief
              Executive Officer pursuant to 18 U.S.C. Section
              135032.2
            
            Certification by
              Chief
              Financial Officer pursuant to 18 U.S.C. Section
              1350




25


**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, 2006.








**eMAGIN
                CORPORATION**By:
            /s/ Gary
              W.
              JonesGary
              W. Jones*Chief
                Executive Officer*
              *Principal
                  Executive Officer*




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


26