**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 June 30, 2007****or**£
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the transition period
                from           to**





**Commission
      file number 001-15751**





**eMAGIN
      CORPORATION**


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





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





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


*(Address
      of principal executive offices)*





**(425)
      749-3600**


*(Registrant’s
      telephone number, including area code)*





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





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








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





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





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





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


The
        number of shares of common stock outstanding as of July 31, 2007 was
        11,965,133.
 
 1


**eMagin
      Corporation**


**Form
      10-Q**


**For
      the Quarter ended June 30, 2007**





**Table
      of Contents**


**Page****PART
                I   FINANCIAL INFORMATION**Item
                1
            Condensed
                Consolidated Financial StatementsCondensed
                Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December
                31, 2006
            3Condensed
                Consolidated Statements of Operations for the Three and Six Months
                ended
                June 30, 2007 and 2006 (unaudited)
            4Condensed
                Consolidated Statements of Changes in Shareholders’ Capital Deficit for
                the Six Months ended June 30, 2007 (unaudited)
            5Condensed
                Consolidated Statements of Cash Flows for the Six Months ended June
                30,
                2007 and 2006 (unaudited)
            6Notes
                to Condensed Consolidated Financial Statements (unaudited)
            7Item
                2
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            15Item
                3
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            19Item
                4
            Controls
                and
                Procedures
            19**PART
                II OTHER INFORMATION**Item
                1
            Legal
                Proceedings
            20Item
                1A
            Risk
                Factors
            20Item
                2
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            25Item
                3
            Defaults
                Upon Senior
                Securities
            25Item
                4
            Submission
                of Matters to a Vote of Security
                Holders
            26Item
                5
            Other
                Information
            26Item
                6
            Exhibits
            26**SIGNATURES****CERTIFICATIONS**







2








**ITEM
      1.  Condensed Consolidated Financial Statements**





**eMAGIN
      CORPORATION**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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





**June
                30,****2007**
              **(unaudited)**
            
            
            **December
                31, 2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            690
            
            
            $
            1,415Investments
                – held to maturity
            
            
            174
            
            
            
            171Accounts
                receivable, net
            
            
            1,272
            
            
            
            908Inventory
            
            
            1,810
            
            
            
            2,485Prepaid
                expenses and other current assets
            
            
            681
            
            
            
            656Total
                current assets
            
            
            4,627
            
            
            
            5,635Equipment,
                furniture and leasehold improvements, net
            
            
            442
            
            
            
            666Intangible
                assets, net
            
            
            53
            
            
            
            55Other
                assets
            
            
            231
            
            
            
            233Deferred
                financing costs, net
            
            
            191
            
            
            
            416Total
                assets
            
            $
            5,544
            
            
            $
            7,005**LIABILITIES
                AND SHAREHOLDERS’ CAPITAL DEFICIT**Current
                liabilities:Accounts
                payable
            
            $
            1,208
            
            
            $
            1,192Accrued
                compensation
            
            
            1,394
            
            
            
            959Other
                accrued expenses
            
            
            905
            
            
            
            749Advanced
                payments
            
            
            160
            
            
            
            444Deferred
                revenue
            
            
            81
            
            
            
            126Current
                portion of capitalized lease obligations
            
            
            —
            
            
            
            6Current
                portion of  debt
            
            
            4,685
            
            
            
            1,217Derivative
                liability - warrants
            
            
            1,157
            
            
            
            1,195Other
                current liabilities
            
            
            45
            
            
            
            52Total
                current liabilities
            
            
            9,635
            
            
            
            5,940Long-term
                debt
            
            
            78
            
            
            
            2,229Total
                liabilities
            
            
            9,713
            
            
            
            8,169Commitments
                and contingenciesShareholders’
                capital deficit:Preferred
                stock, $.001 par value: authorized 10,000,000 shares; no shares issued
                and
                outstanding
            
            
            —
            
            
            
            —Common
                stock, $.001 par value: authorized 200,000,000 shares, issued and
                outstanding, 11,264,657 shares as of June 30, 2007 and
                10,341,029  shares as of December 31, 2006
            
            
            11
            
            
            
            10Additional
                paid-in capital
            
            
            181,310
            
            
            
            179,651Accumulated
                deficit
            
            
            (185,490
            )
            
            
            (180,825
            )Total
                shareholders’ capital deficit
            
            
            (4,169
            )
            
            
            (1,164
            )Total
                liabilities and shareholders’ capital deficit
            
            $
            5,544
            
            
            $
            7,005





See
      notes
      to Condensed Consolidated Financial Statements.






3






**eMAGIN
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


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


**(unaudited)**





**Three
                Months Ended June 30,**
            
            
            **Six
                Months Ended June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Revenue:Product
                revenue
            
            $
            4,144
            
            
            $
            1,674
            
            
            $
            7,667
            
            
            $
            3,245Contract
                revenue
            
            
            88
            
            
            
            —
            
            
            
            174
            
            
            
            70Total
                revenue, net
            
            
            4,232
            
            
            
            1,674
            
            
            
            7,841
            
            
            
            3,315Cost
                of goods sold
            
            
            2,946
            
            
            
            2,965
            
            
            
            6,061
            
            
            
            5,994Gross
                profit (loss)
            
            
            1,286
            
            
            
            (1,291
            )
            
            
            1,780
            
            
            
            (2,679
            )Operating
                expenses:Research
                and development
            
            
            887
            
            
            
            1,304
            
            
            
            1,740
            
            
            
            2,542Selling,
                general and administrative
            
            
            1,543
            
            
            
            2,248
            
            
            
            3,764
            
            
            
            4,836Total
                operating expenses
            
            
            2,430
            
            
            
            3,552
            
            
            
            5,504
            
            
            
            7,378Loss
                from operations
            
            
            (1,144
            )
            
            
            (4,843
            )
            
            
            (3,724
            )
            
            
            (10,057
            )Other
                income (expense):Interest
                expense
            
            
            (1,333
            )
            
            
            —
            
            
            
            (2,174
            )
            
            
            —Gain
                on warrant derivative liability
            
            
            182
            
            
            
            —
            
            
            
            643
            
            
            
            —Other
                income, net
            
            
            567
            
            
            
            5
            
            
            
            590
            
            
            
            59Total
                other (expense) income
            
            
            (584
            )
            
            
            5
            
            
            
            (941
            )
            
            
            59Net
                loss
            
            $
            (1,728
            )
            
            $
            (4,838
            )
            
            $
            (4,665
            )
            
            $
            (9,998
            )Loss
                per share, basic and diluted
            
            $
            (0.15
            )
            
            $
            (0.48
            )
            
            $
            (0.42
            )
            
            $
            (1.00
            )Weighted
                average number of shares outstanding:Basic
                and diluted
            
            
            11,175,888
            
            
            
            10,011,351
            
            
            
            10,983,981
            
            
            
            10,007,595








See
      notes
      to Condensed Consolidated Financial Statements.








4






**eMAGIN
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ CAPITAL
      DEFICIT**


**(In
      thousands)**








**Additional**
            
            
            
            
            
            **Total****Common
                Stock**
            
            
            **Paid-In**
            
            
            **Accumulated**
            
            
            **Shareholders’****Shares**
            
            
            **Amount**
            
            
            **Capital**
            
            
            **Deficit**
            
            
            **Deficit**Balance,
                December 31, 2006
            
            
            10,341
            
            
            $
            10
            
            
            $
            179,651
            
            
            $
            (180,825
            )
            
            $
            (1,164
            )Stock-based
                compensation
            
            
            —
            
            
            
            —
            
            
            
            899
            
            
            
            —
            
            
            
            899Issuance
                of common stock for services
            
            
            914
            
            
            
            1
            
            
            
            757
            
            
            
            —
            
            
            
            758Exercise
                of common stock warrants
            
            
            10
            
            
            
            —
            
            
            
            3
            
            
            
            —
            
            
            
            3Net
                loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (4,665
            )
            
            
            (4,665
            )Balance,
                June 30, 2007 (unaudited)
            
            
            11,265
            
            
            $
            11
            
            
            $
            181,310
            
            
            $
            (185,490
            )
            
            $
            (4,169
            )








See
      notes
      to Condensed Consolidated Financial Statements.






5








**eMAGIN
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(In
      thousands)**





**Six
                Months Ended****June
                30,****2007**
            
            
            **2006****(unaudited)**Cash
                flows from operating activities:Net
                loss
            
            $
            (4,665
            )
            
            $
            (9,998
            )Adjustments
                to reconcile net loss to net cash used in    operating
                activities:Depreciation
                and amortization
            
            
            227
            
            
            
            513Amortization
                of deferred financing fees
            
            
            265
            
            
            
            —Reduction
                of provision for sales returns and doubtful accounts
            
            
            (35
            )
            
            
            (13
            )Stock-based
                compensation
            
            
            899
            
            
            
            1,581Issuance
                of common stock for services
            
            
            677
            
            
            
            192Amortization
                of discount on notes payable
            
            
            1,452
            
            
            
            —Gain
                on warrant derivative liability
            
            
            (643
            )
            
            
            —Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (329
            )
            
            
            (180
            )Inventory
            
            
            675
            
            
            
            226Prepaid
                expenses and other current assets
            
            
            55
            
            
            
            213Deferred
                revenue
            
            
            (45
            )
            
            
            2Accounts
                payable, accrued compensation, other accrued expenses, and advanced
                payments
            
            
            323
            
            
            
            1,106Other
                current liabilities
            
            
            (7
            )
            
            
            101Net
                cash used in operating activities
            
            
            (1,151
            )
            
            
            (6,257
            )Cash
                flows from investing activities:Purchase
                of equipment
            
            
            —
            
            
            
            (194
            )Purchase
                of investments – held to maturity
            
            
            (4
            )
            
            
            (4
            )Purchase
                of intangibles and other assets
            
            
            —
            
            
            
            (2
            )Net
                cash used in investing activities
            
            
            (4
            )
            
            
            (200
            )Cash
                flows from financing activities:Proceeds
                from exercise of warrants
            
            
            3
            
            
            
            —Proceeds
                from long-term debt
            
            
            500
            
            
            
            —Payments
                related to deferred financing costs
            
            
            (40
            )
            
            
            —Payments
                of long-term debt and capital leases
            
            
            (33
            )
            
            
            (15
            )Net
                cash provided by (used in) financing activities
            
            
            430
            
            
            
            (15
            )Net
                decrease in cash and cash equivalents
            
            
            (725
            )
            
            
            (6,472
            )Cash
                and cash equivalents beginning of period
            
            
            1,415
            
            
            
            6,727Cash
                and cash equivalents end of period
            
            $
            690
            
            
            $
            255Cash
                paid for interest
            
            $
            180
            
            
            $
            —Cash
                paid for taxes
            
            $
            46
            
            
            $
            35During
                the six months ended June 30, 2007, the Company:




·
              entered
                  into a Note Purchase Agreement with an investor and issued warrants
                  that
                  are exercisable at $0.48 per share into approximately 1.0 million
                  shares
                  of common stock valued at $605 thousand;
                  and


·
              entered
                  into an intellectual property agreement with Kodak where Kodak
                  was
                  assigned the rights to a specific patent and as part of the consideration
                  waived the royalty payments for the first six months of 2007. The
                  $560 thousand was recorded as a gain from the licensing of intangible
                  assets.


See
      notes
      to Condensed Consolidated Financial Statements.






6





**eMAGIN
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED
      FINANCIAL STATEMENTS**


**(Unaudited)**





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





***The
      Business***





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





***Basis
      of Presentation***





In
      the
      opinion of management, the accompanying unaudited condensed consolidated
      financial statements of eMagin Corporation and its subsidiary reflects all
      adjustments, including normal recurring accruals, necessary for a fair
      presentation.  Certain information and footnote disclosure normally
      included in annual financial statements prepared in accordance with accounting
      principles generally accepted in the United States have been condensed or
      omitted pursuant to instruction, rules and regulations prescribed by the
      Securities and Exchange Commission.  The Company believes that the
      disclosures provided herein are adequate to make the information presented
      not
      misleading when these unaudited condensed consolidated financial statements
      are
      read in conjunction with the audited consolidated financial statements contained
      in the Company’s Annual Report on Form 10-K for the year ended December 31,
      2006.  The results of operations for the period ended June 30, 2007
      are not necessarily indicative of the results to be expected for the full
      year.




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





The
      condensed consolidated financial
      statements have been prepared assuming that the Company will continue as a
      going
      concern.  The Company has had recurring losses from operations which it
      believes will continue through the foreseeable future.  The Company’s cash
      requirements over the next twelve months are greater than the Company’s cash,
      cash equivalents, and investments at June 30, 2007.The Company does not
      have commitments
      for such financing and no assurance can be given that additional financing
      will
      be available, or if available, will be on acceptable terms.If the Company is unable
      to obtain
      sufficient funds during the next twelve months, the Company will further reduce
      the size of its organization and/or curtail operations which will have a
      material adverse impact on the Company’s business prospects.  The
      Company has working capital and shareholders’ deficits at June 30, 2007. These
      factors raise substantial doubt regarding the Company’s ability to continue as a
      going concern unless the Company obtains additional funding.The
      condensed consolidated financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.  On August 7, 2007, the Company entered into an
      asset based loan agreement establishing a$2.5 million revolvingline
      of credit allowed for in our notes
      payable agreement. See Note 13:  Subsequent
      Events.




***Use
      of Estimates***





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





***Revenue
      Recognition***





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




7





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





***Stock-based
      Compensation***





Effective
      January 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payment” (“SFAS 123R”), which requires the Company to recognize
      expense related to the fair value of the Company’s share-based compensation
      issued to employees and directors. SFAS 123R requires companies to estimate
      the
      fair value of share-based payment awards on the date of grant using an
      option-pricing model. The value of the portion of the award that is ultimately
      expected to vest is recognized as expense over the requisite service periods
      in
      the Company’s condensed consolidated statement of operations. The Company uses
      the straight-line method for recognizing compensation expense. An estimate
      for
      forfeitures is included in compensation expense for awards under SFAS
      123R.  See Note 8 for a further discussion on stock-based
      compensation.





**Note
      2:  Recently Issued Accounting Pronouncements**





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




In
      February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
      Financial Assets and Financial
      Liabilities:  (“SFAS159”).  SFAS159 allows entities the
      option to measure eligible financial instruments at fair value as of specified
      dates. Such election, which may be applied on an instrument by instrument basis,
      is typically irrevocable once elected. SFAS 159 is effective for fiscal years
      beginning after November 15, 2007, and early application is allowed under
      certain circumstances. The Company is currently evaluating the impact SFAS
      159
      will have on its consolidated financial position and results of
      operations.




**Note
      3:  Receivables**




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





The
      Company determines the allowance for doubtful accounts
      by considering a number of factors, including the length of time the
      trade accounts receivable are past due, eMagin's previous loss history, the
      customer's current ability to pay its obligation, and the condition of
      the general economy and the industry as a whole.   The Company will
      record a specific reserve for individual accounts when the Company becomes
      aware
      of a customer's inability to meet its financial obligations, such as in the
      case
      of bankruptcy filings or deterioration in the customer's operating results
      or
      financial position.  If circumstances related to customers change, the
      Company would further adjust estimates of the recoverability of
      receivables.






8





Receivables
      consisted of the following (in thousands):





**June
                30,****2007**
              **(unaudited)**
            
            
            **December
                31, 2006**Accounts
                receivable
            
            $
            1,680
            
            
            $
            1,351Less
                allowance for doubtful accounts
            
            
            (408
            )
            
            
            (443
            )Net
                receivables
            
            $
            1,272
            
            
            $
            908





**Note
      4:  Research and Development Costs**





Research
      and development costs are expensed as incurred.





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





In
      accordance with SFAS No. 128, net loss per common share amounts ("basic EPS")
      was computed by dividing net loss by the weighted average number
      of common shares outstanding and excluding any
      potential dilution.  Net loss per common share assuming dilution
      ("diluted EPS") was computed by reflecting potential dilution from the
      exercise of stock options and warrants.  Common stock equivalent
      shares are excluded from the computation if their effect is
      antidilutive.  As of June 30, 2007 and 2006, there were stock options
      and warrants outstanding to acquire 5,297,927 and 3,608,175 shares of our common
      stock, respectively.  These shares were excluded from the computation
      of diluted loss per share because their effect would be
      antidilutive.





**Note
      6:  Inventories**





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





**June
                30,****2007**
              **(unaudited)**
            
            
            **December
                31, 2006**Raw
                materials
            
            $
            937
            
            
            $
            1,146Work
                in process
            
            
            412
            
            
            
            558Finished
                goods
            
            
            461
            
            
            
            781Total
                Inventory
            
            $
            1,810
            
            
            $
            2,485






9





**Note
      7:  Debt**





Debt
      is
      as follows (in thousands):


**June
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006****Current
                portion of long-term debt:**Capitalized
                lease obligations
            
            $
            —
            
            
            $
            6Other
                debt
            
            
            54
            
            
            
            586%
                Senior Secured Convertible Notes
            
            
            6,270
            
            
            
            2,880Less:  Unamortized
                discount on notes payable
            
            
            (1,639
            )
            
            
            (1,721
            )Current
                portion of long-term debt, net
            
            
            4,685
            
            
            
            1,223**Long-term
                debt:**Other
                debt
            
            
            78
            
            
            
            1046%
                Senior Secured Convertible Notes
            
            
            —
            
            
            
            2,890Less:  Unamortized
                discount on notes payable
            
            
            —
            
            
            
            (765
            )Long-term
                debt, net
            
            
            78
            
            
            
            2,229Total
                debt, net
            
            $
            4,763
            
            
            $
            3,452





The
      6%
      Senior Secured Convertible Notes have 50% of the aggregate principal amount
      maturing on July 23, 2007 and the remaining 50% maturing on January 21, 2008,
      both have been deferred until December 21, 2008.  See Note
      13:  Subsequent Events.  Interest of approximately $93
      thousand was paid to investors on June 1, 2007.  For the six months
      ended June 30, 2007, the investors have been paid $180
      thousand.   For the three and six months ended June 30, 2007,
      debt discount of approximately $878 thousand and $1.5 million was amortized
      to
      interest expense, respectively.





On
      March
      28, 2007, the Company entered into a Note Purchase Agreement for the sale of
      $500 thousand of 6% senior secured convertible debentures (the “Note”) and
      warrants to purchase approximately 1.0 million shares of common stock, par
      value
      $.001 per share.  The investor purchased the Note with a conversion
      price of $0.35 per share that may convert into approximately 1.4 million shares
      of common stock and issued warrants exercisable at $0.48 per share for
      approximately 1.0 million shares of common stock expiring in July
      2011.  If the Notes are not converted, 50% of the principal amount
      will be due on July 23, 2007 and the remaining 50% will be due on January 21,
      2008.  6% interest is payable in quarterly installments on outstanding
      notes with the first installment paid June 1, 2007.  On April 9, 2007,
      the Company closed the transaction and received approximately $460 thousand,
      net
      of offering costs of approximately $40 thousand, which are amortized over the
      life of the Note. On July 23, 2007, the investor converted $250,000 of the
      principal amount of the Note due on July 23, 2007 and $2,166.50 of accrued
      and
      unpaid interest totaling $252,166.50 and received 720,476 shares of Common
      Stock
      at the conversion price of $0.35.





The
      Company accounted for the net proceeds from the issuance of the Note as two
      separate components: a detachable warrant component and a debt component.
 The Company determined the relative fair value of warrants to be
      approximately $605 thousand.  The Company recorded $105 thousand,
      representing the excess of the fair value of the warrants over the proceeds
      of
      the Note,  as interest expense during the quarter ended June 30,
      2006. The following assumptions were used to determine the fair value of
      the warrants:





Dividend
                yield
            
            0%Risk
                free interest rates
            
            4.67%Expected  volatility
            
            124%Expected
                term (in years)
            
            4.28
                years




The
      Company recorded a debt discount, a reduction of the carrying amount of the
      Note, of $500 thousand.  The debt discount is limited to the proceeds
      of the Note.  The discount is being amortized to interest expense
      using the straight-line method as it approximates the effective interest method
      over the term of the Notes.





The
      Notes
      have specific terms that the Company must adhere to, i.e. maintaining minimum
      cash and cash equivalent balances and trading its stock on specific
      Exchanges.   On May 10, 2007, the requirement to maintain cash
      and cash equivalents balances of $200 thousand was extended through July 21,
      2007 and any previous claim that may have otherwise been made regarding the
      potential breach by the Company of the minimum cash balance requirement was
      waived.  The delisting from the AMEX on March 12, 2007 triggered a
      compliance condition on the notes payable and as a result, the Company is
      required to pay the note holders an additional 1% per month penalty interest
      in
      addition to the monthly .5% interest rate on the outstanding principal of the
      notes payable. The Company received a waiver from the note holders that allows
      the Company to accrue the interest and delay the interest payment until the
      earliest of the Company (i) completing $2 million of debt or equity financing
      or
      (ii) the occurrence of a Repurchase Event per the note.





10


On
      July
      23, 2007, the Company entered into Amendment Agreements (the “Agreements”) with
      the holders of the Notes and agreed to issue each Holder an amended and restated
      Note (the “Amended Notes”) equal to the principal amount outstanding as of July
      23, 2007.  The due date for the outstanding Notes has been amended to
      December 21, 2008.  The minimum balance requirement was removed, the
      penalty interest of 1% per month was cancelled and the deferred interest
      forgiven.  See Note 13:  Subsequent Events for additional
      information.





**Note
      8:  Stock-based Compensation**





Stock
      based compensation is accounted for in accordance with the provisions of SFAS
      No. 123R.  Under SFAS 123R, the fair value of stock awards is
      estimated at the date of grant using the Black-Scholes option valuation
      model.  Stock-based compensation expense is reduced for estimated
      forfeitures and is amortized over the vesting period using the straight-line
      method.





The
      following table summarizes the allocation of non-cash stock-based compensation
      to our expense categories for the three and six month periods ended June 30,
      2007 and 2006 (in thousands):





**Three
                Months Ended June 30,**
            
            
            **Six
                Months Ended June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Cost
                of revenue
            
            $
            61
            
            
            $
            123
            
            
            $
            130
            
            
            $
            258Research
                and development
            
            
            97
            
            
            
            131
            
            
            
            200
            
            
            
            259Selling,
                general and administrative
            
            
            227
            
            
            
            536
            
            
            
            569
            
            
            
            1,064Total
                stock compensation expense
            
            $
            385
            
            
            $
            790
            
            
            $
            899
            
            
            $
            1,581





At
      June
      30, 2007, total unrecognized non-cash compensation cost related to stock options
      was approximately $2.2 million, net of forfeitures.  Total
      unrecognized compensation cost will be adjusted for future changes in estimated
      forfeitures and is expected to be recognized over a weighted average period
      of
      approximately 2.7 years.





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





There
      were no stock options granted during the three and six month period ended June
      30, 2007.  For the six month period ended June 30, 2006, the following
      key assumptions were used in the Black-Scholes option pricing model to determine
      the fair value of stock options granted:


**For
                the Six Months Ended June 30, 2006**Dividend
                yield
            
            
            0
            %Risk
                free interest rates
            
            
            5.1
            %Expected  volatility
            
            
            123
            %Expected
                term (in years)
            
            
            5





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





11








**Note
      9:  Shareholders’ Equity**





On
      March
      28, 2007, the Company entered into a Note Purchase Agreement for the sale of
      a
      $500 thousand Note and warrants to purchase approximately 1.0 million shares
      of
      common stock, par value $.001 per share.  The investor purchased the
      Note with a conversion price of $0.35 per share that may convert into
      approximately 1.4 million shares of common stock, and issued warrants
      exercisable at $0.48 per share for approximately 1.0 million shares of common
      stock expiring in July 2011.  If the Notes are not converted, 50% of
      the principal amount will be due on July 23, 2007 and the remaining 50% will
      be
      due on January 21, 2008.  6% interest is payable in quarterly
      installments on outstanding notes with the first installment to be paid June
      1,
      2007.  On April 9, 2007, the Company closed the transaction and
      received approximately $460 thousand, net of offering costs of approximately
      $40
      thousand which are amortized over the life of the Note.  On July 23,
      2007, the investor converted $250,000 of the principal amount of the Note due
      on
      July 23, 2007 and $2,166.50 of accrued and unpaid interest totaling $252,166.50
      and received 720,476 shares of Common Stock at the conversion price of
      $0.35.  See Note 13:  Subsequent Events for additional
      information.





The
      Company recorded a debt discount, a reduction of the carrying amount of the
      Note, of $500 thousand.  The debt discount is limited to the proceeds
      of the Note. The discount is being amortized to interest expense using the
      straight-line method as it approximates the effective interest method over
      the
      term of the Note.





Under
      EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to and
      Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”), the fair value of
      the warrants associated with the Note, $605 thousand, has been recorded as
      a
      liability since the warrant agreement requires a potential net-cash settlement
      in the first year of the warrant agreement if the registration statement is
      not
      effective. The liability will be adjusted to fair value at each reporting
      period.  The change in the fair value of the warrants will be recorded
      in the Consolidated Statement of Operations as other income
      (expense).  For the three and six months ended June 30, 2007, the
      Company recorded approximately $182 thousand and $643 thousand of gain from
      the
      change in the fair value of the derivative liabilities.





As
      a
      result of the issuance of the Note, the outstanding 116,573 Series A Common
      Stock Purchase Warrants, that were issued to certain accredited and/or
      institutional investors pursuant to the Securities Purchase Agreement dated
      January 9, 2004, were re-priced from $2.60 to $0.35 and the outstanding 650,000
      Series F Common Stock Purchase Warrants, that were issued to certain accredited
      and/or institutional investors pursuant to the Securities Purchase Agreement
      dated October 25, 2004, were re-priced from $8.60 to $7.12.  The
      repricing of the warrants has no effect on the financial
      statements.





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





In
      December 2006, EITF 00-19-2 was issued which specified that the contingent
      obligation to make future payments under a registration payment arrangement
      should be separately recognized and measured in accordance with SFAS 5,
“Accounting for Contingencies”, which states that a liability is recorded if the
      obligation is probable and can be reasonably estimated.  SFAS 133 was
      amended to exclude registration payment arrangements from its
      scope.  As of June 30, 2007, the Company has recorded no liability
      associated with the registration payment arrangements as the obligation was
      not
      considered probable.







12


For
      the
      three and six months ended June 30, 2007, there were no stock options exercised
      and the Company received approximately $3 thousand in proceeds for warrants
      exercised as compared to the three and six months ended June 30, 2006, where
      there were no stock options and warrants exercised.  For the three and
      six months ended June 30, 2007, the Company also issued approximately 206
      thousand and 914 thousand shares of common stock, respectively, for the payment
      of approximately $138 thousand and $758 thousand, respectively, for services
      rendered and to be rendered in the future.  For the three and six
      months ended June 30, 2006, the Company issued approximately 373 thousand and
      450 thousand shares of common stock, respectively, for the payment of
      approximately $142 thousand and $192 thousand, respectively, for services
      rendered and to be rendered in the future.  As such, the Company
      recorded the fair value of the services rendered in prepaid
      expenses and selling, general and administrative expenses in the
      accompanying unaudited condensed consolidated statement of operations
      for the three and six months ended June 30, 2007 and 2006,
      respectively.





**Note
      10:  Income Taxes**





The
      Company adopted the provisions of FIN 48 on January 1, 2007. The Company
      continues to fully reserve its tax benefits which are offset by a valuation
      allowance due to the uncertainty that the deferred tax assets will be realized.
      We will continue to evaluate the realizability of our domestic net deferred
      tax
      assets and may record additional benefits in future earnings if we determine
      the
      realization of these assets is more likely than not.  As at
      January 1, 2007 and June 30, 2007, the Company did not have any
      unrecognized tax positions.




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





The
      Company is in the process of preparing its Section 382 study to determine the
      extent to which its utilization of its net operating loss carryovers may be
      limited by the change in ownership rules of the Internal Revenue Code, and
      has
      not determined the impact that such study will have on its NOL
      carryforward.





The
      implementation of FIN 48 has not resulted in any adjustment to the Company’s
      beginning tax position or tax position for the six month period ended June
      30,
      2007.





**Note
      11:  Commitments and Contingencies**





***Royalty
      Payments***





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





Effective
      May 30, 2007, Kodak and eMagin entered into an intellectual property agreement
      where eMagin has assigned Kodak the rights, title, and interest to a Company
      owned patent currently not being used by the Company and in consideration,
      Kodak
      has waived the royalties due under existing licensing agreements for the first
      six months of 2007, and reduced the royalty payments by 50% for the second
      half
      of 2007 and for the entire calendar year of 2008. In addition, the minimum
      royalty payment is delayed until December 1st for the
      years 2007
      and 2008.  The Company recorded approximately $560 thousand for the
      three and six months ended June 30, 2007 as a gain on license of intangible
      assets.





Royalty
      expense was approximately $304 thousand and $560 thousand, respectively, for
      the
      three and six months ended June 30, 2007 and approximately $106 thousand and
      $191 thousand, respectively, for the three and six months ended June 30, 2006,
      respectively.






13




***Contractual
      Obligations***





The Company leases
      office facilities and office, lab and factory equipment under operating leases
      expiring through 2009.  Certain leases provide for payments of monthly
      operating expenses. The Company currently has lease commitments for space in
      Hopewell Junction, New York and Bellevue, Washington.  Rent expense
      was approximately $332 thousand and $664 thousand for the three and six months
      ended June 30, 2007 and approximately $332 thousand and $679 thousand for the
      three and six months ended June 30, 2006, respectively.





**Note
      12:  Legal Proceedings**





None.





**Note
      13:  Subsequent
      Events**





On
      July
      23, 2007, an investor elected to convert $252,166.50 of the Note representing
      $250,000 of the principal amount of the Note due on July 21, 2007 and $2,166.50
      of accrued and unpaid interest. The investor received 720,476 shares of
      Common Stock at the conversion price of $0.35.





On
      July
      23, 2007, the Company entered into Agreements with the note holders and agreed
      to issue each holder an Amended Note in the principal amount equal to the
      principal amount outstanding as of July 23, 2007 which was in total
      approximately $6.0 million. The major changes to the Amended Notes include
      the
      following:





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


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


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


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


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


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


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





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





On
      August
      7, 2007, the Company entered****into a loan agreement with
      Moriah Capital, L.P. (“Moriah)****and established a revolving
      line of credit (the “Loan”) of $2.5 million.  The Company is permitted
      to borrow an amount not to exceed 90% of its eligible accounts receivable and
      50% of its eligible inventory capped at $0.6 million.  As part of the
      transaction, the Company will issue 162,500 shares of unregistered common stock
      and paid a servicing fee of $82,500 to Moriah.  In conjunction with
      entering into this loan and issuing unregistered common stock, the Company
      granted Moriah registration rights.  The Loan can be converted to
      shares of the Company’s common stock pursuant to the terms of the Loan
      Conversion agreement.  The Loan matures on August 8, 2008 however the
      Company has the option of extending it an additional year.






14




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





**Statement
      of Forward-Looking Information**





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





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





**Overview**





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





Our
      first
      commercial product, the SVGA+ (Super Video Graphics Array of 800x600 plus 52
      added columns of data) OLED microdisplay, was initially offered for sampling
      in
      2001, and our first SVGA-3D (Super Video Graphics Array plus built-in
      stereovision capability) OLED microdisplay was shipped in early
      2002.  We are in the process of completing development of 2 additional
      OLED microdisplays, namely the SVGA 3DS (SVGA 3D shrink, a smaller format SVGA
      display with a new cell architecture with embedded features) and an SXGA (1280
      x
      1024).





In
      January 2005, we announced the world's first personal display system to combine
      OLED technology with head-tracking and 3D stereovision, the Z800 3DVisor(tm),
      which was first shipped in mid-2005.  This product received a CES
      Design and Innovations Award for the electronic gaming category and also
      received the coveted Best of Innovation Awards for the entire display
      category.  The product was also recognized as a Digital Living Class
      of 2005 Innovators.





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





**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.






15





**CRITICAL
      ACCOUNTING POLICIES**





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





**Revenue
      Recognition**





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





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





**Use
      of Estimates**





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





**Fair
      Value of Financial Instruments**





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





**Stock-based
      Compensation**





We
      maintain several stock equity incentive plans.  The 2005 Employee
      Stock Purchase Plan (the “ESPP”) provides our employees with the opportunity to
      purchase common stock through payroll deductions. Employees purchase stock
      semi-annually at a price that is 85% of the fair market value at certain
      plan-defined dates. As of June 30, 2007, the plan had not been
      implemented.





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






16





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





**NEW
      ACCOUNTING PRONOUNCEMENTS**





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





**RESULTS
      OF OPERATIONS**





**THREE
      AND SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE AND SIX MONTHS ENDED JUNE
      30, 2006**





**Revenues**




Revenues
      for the three and six months ended June 30, 2007 were approximately $4.2
      million and $7.8 million, respectively, as compared to approximately $1.7 and
      $3.3 million for the three and six months ended June 30, 2006, an increase
      of
      approximately 153% and 137%, respectively.  Higher revenue for the
      three and six month periods was primarily due to increased microdisplay demand
      and increased availability of finished displays due to manufacturing
      improvements.





**Cost
      of Goods Sold**





Cost
      of
      goods sold includes direct and indirect costs associated with
      production.  Cost of goods sold for the three months ended June 30, 2007
      and 2006 was approximately $3.0 million for both quarters and for the six months
      ended June 30, 2007 and 2006 was approximately $6.1 million and $6.0
      million, respectively, a slight increase of $0.1 million.  The
      gross margin for the three and six months ended June 30, 2007 was
      approximately $1.3 million and $1.8 million, respectively, as compared to a
      gross loss of approximately ($1.3) million and ($2.7) million, respectively,
      for
      the three and six months ended June 30, 2006. As a percentage of revenue this
      translates to a gross margin of 30% and 23% for the three and six months ended
      June 30, 2007 as compared to a gross loss of (77%) and  (81%) for the
      three and six months ended June 30, 2006.  The gross margin
      improvement was attributed to fuller utilization of our fixed production
      overhead due to higher unit volume.  We expect that gross margins will
      continue to improve in 2007 as a result of continued leverage of our production
      overhead if unit volume and revenue continue to increase.





**Operating
      Expenses**





*Research
      and Development*.  Research and development expenses included salaries,
      development materials and other costs specifically allocated to the development
      of new microdisplay products, OLED materials and subsystems.  Research
      and development expenses for the three and six months ended June 30,
      2007 were approximately $0.9 million and $1.7 million, respectively, as compared
      to $1.3 million and $2.5 million, respectively, for the three and six months
      ended June 30, 2006, a decrease of approximately $0.5 million and $0.9 million,
      respectively.  The decrease was due to a reduction of research and
      development expenditures and personnel costs for the three and six months ended
      June 30, 2007 as compared to the three and six months ended June 30,
      2006.





*Selling,
      General and Administrative*.  Selling, general and administrative
      expenses consist principally of salaries and fees for professional
      services, legal fees incurred in connection with patent filings
      and related matters, as well as other marketing and administrative
      expenses.  Selling, general and administrative expenses for the
      three and six months ended June 30, 2007 were approximately $1.5 million and
      $3.8 million, respectively, as compared to approximately $2.2 million and
      $4.8 million, respectively, for the three and six months ended June 30,
      2006.  The decrease of approximately $0.7 and $1.0 million, respectively,
      for the three and six months ended June 30, 2007 was primarily related to a
      reduction of marketing, tradeshow and personnel costs as compared to the three
      and six months ended June 30, 2006.






17





*Other
      Income (Expense), net*. Other income (expense), net consists primarily of
      interest income earned on investments, interest expense related to the secured
      debentures, gain from the change in the derivative liability, and other income
      from the licensing of intangible assets.  For the three and six months
      ended June 30, 2007, interest income was approximately $8 and $23 thousand
      compared to approximately $5 and $59 thousand for the three and six
      months ended June 30, 2006.   The decrease in interest
      income was primarily a result of lower cash balances available for
      investment.  For the three and six months ended June 30, 2007,
      interest expense was approximately $1.3 million and $2.2 million, respectively,
      as compared to $0 for the three and six months ended June 30,
      2006.   The increase in the interest expense for the three and
      six months periods was a result of interest associated with our notes payable
      of
      approximately $305 thousand and $457 thousand, respectively, the amortization
      of
      the deferred costs associated with the notes payable of approximately $133
      thousand and $266 thousand, respectively, and the amortization of the debt
      discount of approximately $878 thousand and $1.5 million.  For the
      three and six months ended June 30, 2007, the change in the derivative liability
      was a gain of approximately $182 thousand and $642 thousand, respectively,
      as
      compared to $0 for the three and six months ended June 30,
      2006.  Other income for the three and six months ended June 30, 2007
      was approximately $568 thousand and $590 thousand, respectively, as compared
      to
      approximately $5 thousand and $59 thousand, respectively.  The
      increase in other income for the three and six month periods ended June 30,
      2007
      was a gain on the license of intangible assets.  See Note
      11:  Commitments and Contingencies – Royalty Payments for additional
      information.





**Liquidity
      and Capital Resources**





As
      of
      June 30, 2007, we had approximately $0.9 million of cash and investments as
      compared to $1.6 million as of December 31, 2006.  The decrease of
      approximately $0.7 million was due primarily to cash used for operating
      activities.





Cash
      flow
      used in operating activities during the six months ended June 30, 2007 was
      approximately $1.2 million as compared to cash used of approximately $6.3
      million during the six months ended June 30, 2006.  The decrease was
      attributable to a reduction in net losses.





Cash
      used
      in investing activities during the six months ended June 30, 2007 was
      approximately $4 thousand as compared to approximately $200 thousand during
      the
      six months ended June 30, 2006. The reduction of cash used in investing
      activities was primarily due to lower purchases of equipment.





Cash
      provided by financing activities during the six months ended June 30, 2007
      was
      approximately $430 thousand and was comprised of approximately $3 thousand
      of
      proceeds from exercise of warrants, $460 thousand in net proceeds from debt
      issuance and offset by payments on debt of $33 thousand.  The cash
      used in financing activities during the six months ended June 30, 2006 was
      $15
      thousand which were payments on long-term debt and capital leases.





Our
      condensed consolidated financial statements as of June 30, 2007 have been
      prepared under the assumption that we will continue as a going concern for
      the
      year ending December 31, 2007. Our independent registered public accounting
      firm
      had issued a report dated March 27, 2007 in connection with the audit of the
      financial statements for the year ended December 31, 2006, that included an
      explanatory paragraph expressing substantial doubt as to our ability to continue
      as a going concern without additional capital becoming available. Our ability
      to
      continue as a going concern ultimately is dependent on our ability to generate
      a
      profit which is likely dependant upon our ability to obtain additional
      equity or debt financing, attain further operating efficiencies and, ultimately,
      to achieve profitable operations. The financial statements do not include any
      adjustments that might result from the outcome of this
      uncertainty.





As
      we have reported, our
      business experienced significant revenue growth during the first six months
      of
      2007. This trend, if it continues, may result in higher accounts receivable
      levels and may require increased production and/or higher inventory levels
      both
      of which require additional working capital.   We anticipate that
      our cash requirements to fund operating or investing cash requirements over
      the
      next twelve months will be greater than our current cash on
      hand.





To
      address these liquidity issues we have finalized an agreement with our note
      holders that defers the note re-payments until December 21, 2008.  See
      Note 13:  Subsequent Events for additional information.  We
      have entered into an intellectual property agreement with Kodak and assigned
      Kodak the rights, title and interest to a Company owned patent not being used
      by
      the Company and in consideration, Kodak has waived the royalties due under
      existing licensing agreements for the first six months of 2007, and reduced
      the
      royalty payments by 50% for the second half of 2007 and for the entire year
      of
      2008.   In addition, the minimum royalty payment is delayed until
      December 1st
      for the years 2007 and 2008.  We have entered into an asset based loan
      agreement establishing a $2.5 million revolving line of credit allowed for
      in our notes payable agreement.  However, we still may need to raise
      additional funds in the next twelve months.






18




**Off-Balance
      Sheet Arrangements**




We
      do not
      have any off balance sheet arrangements that are reasonably likely to have
      a
      current or future effect on our financial condition, revenues, results of
      operations, liquidity or capital expenditures.





**ITEM
      3.  Quantitative and Qualitative Disclosures About Market
      Risk**





***Market
      Rate Risk***





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





***Interest
      Rate Risk***





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





***Foreign
      Currency Exchange Rate Risk***





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





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





**ITEM
      4.  Controls and Procedures**





a)  *Evaluation
      of Disclosure Controls and Procedures.* Based on an evaluation of our
      disclosure controls and procedures (as defined in Rules 13a-15(e) and
      15d-15(e) of the Securities Exchange Act of 1934, as amended) required by
      paragraph (b) of Rule 13a-15 or Rule 15d-15, as of June 30, 2007,
      our Chief Executive Officer and Chief Financial Officer have concluded that
      our
      disclosure controls and procedures were effective in ensuring that information
      required to be disclosed by us in the reports that we file or submit under
      the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in the Commission’s rules and forms. Our Chief Executive
      Officer and Chief Financial Officer also concluded that, as of June 30, 2007,
      our disclosure controls and procedures were effective in ensuring that
      information required to be disclosed by us in the reports that we file or submit
      under the Exchange Act is accumulated and communicated to our management,
      including our Chief Executive Officer and Chief Financial Officer, to allow
      timely decisions regarding required disclosure.





(b)  *Changes
      in Internal Controls.*  During the quarter ended June 30, 2007,
      there were no changes in our internal control over financial reporting
      identified in connection with the evaluation required by paragraph (d) of Rule
      13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely
      to
      materially affect, our internal control over financial reporting.





19


**PART
      II - OTHER INFORMATION**





**ITEM
      1.  Legal Proceedings**





None.





**ITEM
      1A.  Risk Factors**





You
      should carefully consider the following risk factors and the other information
      included herein as well as the information included in other reports and filings
      made with the SEC before investing in our common stock. If any of the following
      risks actually occurs, our business, financial condition or results of
      operations could be harmed. The trading price of our common stock could decline
      due to any of these risks, and you may lose part or all of your
      investment.





**RISKS
      RELATED TO OUR FINANCIAL RESULTS**





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





Our
      accumulated losses are approximately $185 million as of June 30,
      2007.  We have not yet achieved profitability and we can give no
      assurances that we will achieve profitability within the foreseeable future
      as
      we fund operating and capital expenditures in areas such as establishment and
      expansion of markets, sales and marketing, operating equipment and research
      and
      development. We cannot assure investors that we will ever achieve or sustain
      profitability or that our operating losses will not increase in the
      future.





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





As
      we
      have reported, our business is currently experiencing significant revenue growth
      during the first six months ended June 30, 2007. We anticipate that our cash
      requirements to fund these requirements as well as other operating or investing
      cash requirements over the next twelve months may be greater than our current
      cash on hand and borrowing availability under our revolving credit
      facility.  In the event that cash flow from operations is less than
      anticipated and we are unable to secure additional funding to cover our
      expenses, in order to preserve cash, we would be required to reduce expenditures
      and effect reductions in our corporate infrastructure, either of which could
      have a material adverse effect on our ability to continue our current level
      of
      operations. No assurance can be given that additional financing will be
      available, or if available, will be on acceptable terms.





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




Our
      condensed consolidated financial statements as of June 30, 2007 have been
      prepared under the assumption that we will continue as a going concern for
      the
      year ending December 31, 2007. Our independent registered public accounting
      firm
      had issued a report dated March 27, 2007 in connection with the audit of the
      financial statements for the year ended December 31, 2006, that included an
      explanatory paragraph expressing substantial doubt as to our ability to continue
      as a going concern without additional capital becoming available. Our ability
      to
      continue as a going concern ultimately is dependent on our ability to generate
      a
      profit which is likely dependant upon our ability to obtain additional
      equity or debt financing, attain further operating efficiencies and, ultimately,
      to achieve profitable operations. The financial statements do not include any
      adjustments that might result from the outcome of this
      uncertainty.




***RISKS
      RELATED TO MANUFACTURING***







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





If
      we are
      unable to produce our products in sufficient quantity, we will be unable to
      maintain and attract new customers. In addition, we cannot assure you that
      once
      we commence volume production we will attain yields at high throughput that
      will
      result in profitable gross margins or that we will not experience manufacturing
      problems which could result in delays in delivery of orders or product
      introductions.





20








***We
      are dependent on a single manufacturing line.***





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





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





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





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





We
      do not
      manufacture the silicon integrated circuits on which we incorporate our OLED
      technology. Instead, we expect to provide the design layouts to semiconductor
      contract manufacturers who will manufacture the integrated circuits on silicon
      wafers. We also expect to depend on suppliers of a variety of other components
      and services, including circuit boards, graphic integrated circuits, passive
      components, materials and chemicals, and equipment support. Our inability to
      obtain sufficient quantities of high quality silicon integrated circuits or
      other necessary components, materials or services on a timely basis could result
      in manufacturing delays, increased costs and ultimately in reduced or delayed
      sales or lost orders which could materially and adversely affect our operating
      results.





**RISKS
      RELATED TO OUR INTELLECTUAL PROPERTY**





***We
      rely on our license agreement with Eastman Kodak for the development of our
      products.***





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





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





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





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




21


**RISKS
      RELATED TO THE MICRODISPLAY INDUSTRY**







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





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





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





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





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


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


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


·
            successful
                expansion of our manufacturing
                capabilities;


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


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


·
            the
                market acceptance of our customers' products;
                and


·
            product
                or technology introductions by our
                competitors.





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





***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.








22





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





Our
      competitors are investing substantial resources in the development and
      manufacture of microdisplay systems using alternative technologies such as
      reflective liquid crystal displays (LCDs), LCD-on-Silicon ("LCOS")
      microdisplays, active matrix electroluminescence and scanning image systems,
      and
      transmissive active matrix LCDs. Our competitive position could be damaged
      if
      one or more of our competitors’ products get to the market sooner than our
      products. We cannot assure you that our product will get to market ahead of
      our
      competitors or that we will be able to compete successfully against current
      and
      future competition.  The failure to do so would have a materially
      adverse effect upon our business, operating results and financial
      condition.





***Our
      competitors have many advantages over us.***





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





***Our
      products are subject to lengthy OEM development
      periods.***





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





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





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





**RISKS
      RELATED TO OUR BUSINESS**





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





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






23





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





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








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





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





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





Our
      business has primarily operated on the basis of short-term purchase
      orders.  We are now receiving longer term purchase agreements, such as
      those which comprise our approximately $6.1 million backlog, and procurement
      contracts, but we cannot guarantee that we will continue to do so. Our current
      purchase agreements can be cancelled or revised without penalty, depending
      on
      the circumstances. We plan production on the basis of internally generated
      forecasts of demand, which makes it difficult to accurately forecast revenues.
      If we fail to accurately forecast operating results, our business may suffer
      and
      the value of your investment in eMagin may decline.





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





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





***Our
      business depends to some extent on international
      transactions.***





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





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





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





24


***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 eMagin is
      successful.***





Sales
      of
      significant amounts of common stock in the public market, or the perception
      that
      such sales may occur, could materially affect the market price of our common
      stock. These sales might also make it more difficult for us to sell equity
      or
      equity-related securities in the future at a time and price that we deem
      appropriate. As of June 30, 2007, we have outstanding (i) options to purchase
      789,277 shares, (ii) warrants to purchase 4,508,650 shares of common stock
      and
      (iii) notes to convert to 3,647,805 shares.





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





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





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





On
      March
      28, 2007, the Company entered into a Note Purchase Agreement for the sale of
      $500 thousand of senior secured debentures (the “Note”) and warrants to purchase
      approximately 1.0 million shares of common stock, par value $.001 per
      share.  The investor purchased the Note with a conversion price of
      $0.35 per share that may convert into approximately 1.4 million shares of common
      stock and issued warrants exercisable at $0.48 per share for approximately
      1.0
      million shares of common stock expiring in July 2011.  On April 9,
      2007, the Company closed the transaction and received approximately $460
      thousand, net of offering costs of approximately $40 thousand which are
      amortized over the life of the Note. On July 23, 2007, the investor converted
      $250,000 of the principal amount of the Note due on July 23, 2007 and $2,166.50
      of accrued and unpaid interest totaling $252,166.50 and received 720,476 shares
      of Common Stock at the conversion price of $0.35.





On
      August
      7, 2007, the Company entered****into a loan agreement with
      Moriah Capital, L.P. (“Moriah)****and established a revolving
      line of credit (the “Loan”) of $2.5 million.  As part of the
      transaction, the Company will issue 162,500 shares of common stock,
      par value of $.001 per share, with an aggregate market value of
      $195,000.





**ITEM
      3.  Defaults Upon Senior Securities**





The
      delisting from the AMEX on March 12, 2007 triggered a
      compliance condition on the notes payable and as a result the Company was
      required to pay the note holders an additional 1% per month penalty interest
      in
      addition to the .5% monthly interest rate on the outstanding principal of the
      notes payable. The Company received a waiver from the note holders that allowed
      the Company to accrue the interest and delay the interest payment until the
      earliest of the Company (i) completing $2 million of debt or equity financing
      or
      (ii) the occurrence of a Repurchase Event per the note.






25





On
      May
      10, 2007, the requirement to maintain cash and cash equivalents balances of
      $200
      thousand was extended through July 21, 2007 and any previous claim that may
      have
      otherwise been made regarding the potential breach by the Company of the minimum
      cash balance requirement was waived.





On
      July
      23, 2007, the Company entered into Agreements with the holders of the Notes
      and
      agreed to issue each Holder an Amended Note equal to the principal amount
      outstanding as of July 23, 2007. As a result of the Agreement, the minimum
      balance requirement was removed and the penalty interest of 1% per month was
      cancelled and the deferred interest forgiven.  See Note
      13:  Subsequent Events for additional information.





**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
              302*31.2
            
            Certification
              by Chief Financial Officer pursuant to Sarbanes Oxley Section
              302*32.1
            
            Certification
              by Chief Executive Officer pursuant to 18 U.S.C. Section
              1350*32.2
            
            Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
              1350*


*Filed
      herewith.






26


**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 14th day of August 2007.






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




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









27