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
      1934For
      the quarterly period ended March 31, 2009or£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      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.
      Employerincorporation
      or organization)
            Identification
      No.)





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


(Address
of principal executive offices)





(425)
749-3600


(Registrant’s
telephone number, including area code)





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





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








Indicate
by check mark whether the registrant (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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months
).    Yes   ̈    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£Smaller reporting companyR





Indicate by check mark whether the
registrant is a shell
company (as defined by Rule 12b-2 of the Exchange Act) Yes£NoR





The
number of shares of common stock outstanding as of April 30, 2009 was
16,192,135.







1











eMagin
Corporation


Form
10-Q


For
the Quarter ended March 31, 2009





Table
of Contents


PagePART
      I   FINANCIAL INFORMATIONItem
      1
              Condensed
      Consolidated Financial StatementsCondensed
      Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December
      31, 2008
              3Condensed
      Consolidated Statements of Operations for the Three Months ended March 31,
      2009 and 2008 (unaudited)
              4Condensed
      Consolidated Statements of Changes in Shareholders’ Equity for the Three
      Months ended March 31, 2009 (unaudited)
              5Condensed
      Consolidated Statements of Cash Flows for the Three Months ended March 31,
      2009 and 2008 (unaudited)
              6Notes
      to Condensed Consolidated Financial Statements (unaudited)
              7Item
      2
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              14Item
      3
              Quantitative
      and Qualitative Disclosures About Market Risk
              17Item
      4T
              Controls
      and
      Procedures
              17PART
      II OTHER INFORMATIONItem
      1
              Legal
      Proceedings
              18Item
      1A
              Risk
      Factors
              18Item
      2
              Unregistered
      Sales of Equity Securities and Use of
      Proceeds
              18Item
      3
              Defaults
      Upon Senior
      Securities
              18Item
      4
              Submission
      of Matters to a Vote of Security
      Holders
              18Item
      5
              Other
      Information
              18Item
      6
              Exhibits
              18SIGNATURES
              19CERTIFICATIONS








2












ITEM
1.  Condensed Consolidated Financial Statements





eMAGIN
CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands, except share data)


March
      31, 2009
                                        (unaudited)
                                      
                                      
                                      December
      31, 2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                                      
                                      $
                                      2,329
                                      
                                      
                                      $
                                      2,404Investments
      – held to maturity
                                      
                                      
                                      97
                                      
                                      
                                      
                                      97Accounts
      receivable, net
                                      
                                      
                                      2,950
                                      
                                      
                                      
                                      3,643Inventory
                                      
                                      
                                      2,214
                                      
                                      
                                      
                                      2,374Prepaid
      expenses and other current assets
                                      
                                      
                                      1,233
                                      
                                      
                                      
                                      796Total
      current assets
                                      
                                      
                                      8,823
                                      
                                      
                                      
                                      9,314Equipment,
      furniture and leasehold improvements, net
                                      
                                      
                                      391
                                      
                                      
                                      
                                      381Intangible
      assets, net
                                      
                                      
                                      46
                                      
                                      
                                      
                                      47Deferred
      financing costs, net
                                      
                                      
                                      212
                                      
                                      
                                      
                                      362Total
      assets
                                      
                                      $
                                      9,472
                                      
                                      
                                      $
                                      10,104LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                                      
                                      $
                                      569
                                      
                                      
                                      $
                                      1,026Accrued
      compensation
                                      
                                      
                                      631
                                      
                                      
                                      
                                      837Other
      accrued expenses
                                      
                                      
                                      1,152
                                      
                                      
                                      
                                      804Advance
      payments
                                      
                                      
                                      649
                                      
                                      
                                      
                                      694Deferred
      revenue
                                      
                                      
                                      120
                                      
                                      
                                      
                                      164Debt
                                      
                                      
                                      682
                                      
                                      
                                      
                                      1,691Other
      current liabilities
                                      
                                      
                                      917
                                      
                                      
                                      
                                      798Total
      current liabilities
                                      
                                      
                                      4,720
                                      
                                      
                                      
                                      6,014Commitments
      and contingenciesRedeemable
      common stock:  522,500 redeemable shares
                                      
                                      
                                      429
                                      
                                      
                                      
                                      429Shareholders’
      equity:Preferred
      stock, $.001 par value: authorized 10,000,000 shares:
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Series B Convertible Preferred stock, (liquidation preference of
      $5,739,000) stated value $1,000 per share, $.001 par
      value:  10,000 shares designated and 5,739
issued
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Common
      stock, $.001 par value: authorized 200,000,000 shares, issued and
      outstanding, 15,429,863 shares as of March 31, 2009 and 15,213,959 as of
      December 31, 2008, net of redeemable common stock
                                      
                                      
                                      15
                                      
                                      
                                      
                                      15Additional
      paid-in capital
                                      
                                      
                                      205,086
                                      
                                      
                                      
                                      204,818Accumulated
      deficit
                                      
                                      
                                      (200,778
                                      )
                                      
                                      
                                      (201,172
                                      )Total
      shareholders’ equity
                                      
                                      
                                      4,323
                                      
                                      
                                      
                                      3,661Total
      liabilities and shareholders’ equity
                                      
                                      $
                                      9,472
                                      
                                      
                                      $
                                      10,104




See notes
to Condensed Consolidated Financial Statements.










3








eMAGIN
CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(In
thousands, except share and per share data)


(unaudited)





Three
      Months Ended
                  March
      31,2009
                
                
                2008Revenue:Product
      revenue
                
                $
                4,356
                
                
                $
                2,462Contract
      revenue
                
                
                788
                
                
                
                203Total
      revenue, net
                
                
                5,144
                
                
                
                2,665Cost
      of goods sold:Product
      revenue
                
                
                2,257
                
                
                
                2,181Contract
      revenue
                
                
                428
                
                
                
                132Total cost of goods sold
                
                
                2,685
                
                
                
                2,313Gross
      profit
                
                
                2,459
                
                
                
                352Operating
      expenses:Research
      and development
                
                
                362
                
                
                
                674Selling,
      general and administrative
                
                
                1,529
                
                
                
                1,807Total
      operating expenses
                
                
                1,891
                
                
                
                2,481Income
      (loss) from operations
                
                
                568
                
                
                
                (2,129
                )Other
      income (expense):Interest
      expense, net
                
                
                (175
                )
                
                
                (631
                )Other
      income, net
                
                
                1
                
                
                
                86Total
      other expense
                
                
                (174
                )
                
                
                (545
                )Provision
      for income taxes
                
                
                —
                
                
                
                —Net
      income (loss)
                
                $
                394
                
                
                $
                (2,674
                )Income
      (loss) per share, basic
                
                $
                0.02
                
                
                $
                (0.21
                )Income
      (loss) per share, diluted
                
                $
                0.02
                
                
                $
                (0.21
                )Weighted
      average number of shares outstanding:Basic
                
                
                15,860,517
                
                
                
                12,620,900Diluted
                
                
                23,899,255
                
                
                
                12,620,900







See notes
to Condensed Consolidated Financial Statements.





4












eMAGIN
CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY


(In
thousands)





Preferred
      Stock
                    
                    
                    Common
      Stock
                    
                    
                    Additional
                      Paid-in
                    
                    
                    Accumulated
                    
                    
                    Total
      Shareholders’Shares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit
                    
                    
                    EquityBalance,
      December 31, 2008
                    
                    
                    6
                    
                    
                    $
                    —
                    
                    
                    
                    15,214
                    
                    
                    $
                    15
                    
                    
                    $
                    204,818
                    
                    
                    $
                    (201,172
                    )
                    
                    $
                    3,661Issuance
      of common stock for services
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    216
                    
                    
                    
                    —
                    
                    
                    
                    115
                    
                    
                    
                    —
                    
                    
                    
                    115Stock-based
      compensation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    153
                    
                    
                    
                    —
                    
                    
                    
                    153Net
      income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    394
                    
                    
                    
                    394Balance,
      March 31, 2009
                    
                    
                    6
                    
                    
                    $
                    —
                    
                    
                    
                    15,430
                    
                    
                    $
                    15
                    
                    
                    $
                    205,086
                    
                    
                    $
                    (200,778
                    )
                    
                    $
                    4,323



















See notes
to Condensed Consolidated Financial Statements.








5












eMAGIN
CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(In
thousands)





Three
      months EndedMarch
      31,2009
                    
                    
                    2008(unaudited)Cash
      flows from operating activities:Net
      income (loss)
                    
                    $
                    394
                    
                    
                    $
                    (2,674
                    )Adjustments
      to reconcile net income (loss) to net cash provided by (used
      in) operating activities:Depreciation
      and amortization
                    
                    
                    23
                    
                    
                    
                    68Amortization
      of deferred financing and waiver fees
                    
                    
                    150
                    
                    
                    
                    448Reduction
      of provision for sales returns and doubtful accounts
                    
                    
                    (114
                    )
                    
                    
                    (47
                    )Stock-based
      compensation
                    
                    
                    153
                    
                    
                    
                    356Issuance
      of common stock for services
                    
                    
                    76
                    
                    
                    
                    —Amortization
      of discount on notes payable
                    
                    
                    —
                    
                    
                    
                    25Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    807
                    
                    
                    
                    329Inventory
                    
                    
                    160
                    
                    
                    
                    (11
                    )Prepaid
      expenses and other current assets
                    
                    
                    (398
                    )
                    
                    
                    426Deferred
      revenue
                    
                    
                    (44
                    )
                    
                    
                    (79
                    )Accounts
      payable, accrued compensation, other accrued expenses, and advance
      payments
                    
                    
                    (359
                    ))
                    
                    
                    830Other
      current liabilities
                    
                    
                    119
                    
                    
                    
                    (244
                    )Net
      cash provided by (used in) operating activities
                    
                    
                    967
                    
                    
                    
                    (573
                    )Cash
      flows from investing activities:Purchase
      of equipment
                    
                    
                    (33
                    )
                    
                    
                    (231
                    )Net
      cash used in investing activities
                    
                    
                    (33
                    )
                    
                    
                    (231
                    )Cash
      flows from financing activities:Proceeds
      from line of credit
                    
                    
                    —
                    
                    
                    
                    700Payments
      related to deferred financing costs
                    
                    
                    —
                    
                    
                    
                    (9
                    )Payments
      of debt
                    
                    
                    (1,009
                    )
                    
                    
                    (256
                    )Net
      cash (used in) provided by financing activities
                    
                    
                    (1,009
                    )
                    
                    
                    435Net
      decrease in cash and cash equivalents
                    
                    
                    (75
                    )
                    
                    
                    (369
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    2,404
                    
                    
                    
                    713Cash
      and cash equivalents, end of period
                    
                    $
                    2,329
                    
                    
                    $
                    344Cash
      paid for interest
                    
                    $
                    38
                    
                    
                    $
                    158Cash
      paid for taxes
                    
                    $
                    21
                    
                    
                    $
                    10Common
      stock issued for services charged to prepaid expenses
                    
                    $
                    39
                    
                    
                    $
                    —





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 Accounting
Policies





The
Business





eMagin
Corporation (the “Company”) designs, develops, manufactures, and markets OLED
(organic light emitting diode) on silicon microdisplays, virtual imaging
products which utilize OLED microdisplays. The Company’s products are sold
mainly in North America, Asia, and Europe.





Basis
of Presentation





In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements of eMagin Corporation and its subsidiary reflect 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 instructions, 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,
2008.  The results of operations for the period ended March 31, 2009
are not necessarily indicative of the results to be expected for the full
year.





Reclassifications





Certain
items in the prior period’s condensed consolidated financial statements have
been reclassified to conform to the current period’s presentation.





Use
of Estimates





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





Revenue
and Cost Recognition





Revenue is recognized when
persuasive evidence of an arrangement exists, delivery has
occurred, selling price is fixed or determinable and collection is
reasonably assured.  The Company records a reserve for estimated sales
returns, which is reflected as a reduction of revenue at the time of revenue
recognition.  The Company defers revenue recognition on products sold
directly to the consumer with a maximum thirty day right of
return.  Revenue is recognized upon the expiration of the right of
return.





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





Research
and Development Costs





Research
and development costs are expensed as incurred.






7





Note
2:  Recently Issued Accounting Pronouncements





In
March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161, Disclosures about Derivative Instruments and Hedging Activities,
an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires
entities to provide greater transparency about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under Statement 133 and its related
interpretations and (c) how derivative instruments and related hedged items
affect an entity’s financial position, results of operations, and cash flows.
SFAS 161 is effective prospectively for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application permitted. The adoption of SFAS 161 did not have a material impact
on the Company’s condensed consolidated financial statements.





In June
2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity's Own Stock " ("EITF
07-5"). EITF 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years, and must be applied to all
instruments outstanding on the date of adoption.  The adoption of EITF
07-5 did not have a material impact on the Company’s condensed consolidated
financial statements.





In
April 2009, the FASB issued FASB Staff Position SFAS 107-1 and APB 28-1,
“Interim Disclosures about Fair Value of Financial Instruments,” which requires disclosures
about fair value of financial instruments in interim financial information for
periods ending after June 15, 2009. The Company believes the adoption of
this Staff Position will not have a material impact on our condensed
consolidated financial statements.





Note
3:  Receivables




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





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, historical experience, the
customer's current ability to pay its obligations, and the condition
of the general economy and the industry as a whole.   The Company will
record a specific reserve for individual accounts when the Company becomes aware
of a customer's inability to meet its financial obligations, such as in the case
of bankruptcy filings or deterioration in the customer's operating results or
financial position.  If circumstances related to customers change, the
Company would further adjust estimates of the recoverability of
receivables.





Receivables
consisted of the following (in thousands):





March
      31,
                                  2009
                                  (unaudited)
                                
                                
                                December
      31, 2008Accounts
      receivable
                                
                                $
                                3,692
                                
                                
                                $
                                4,500Less
      allowance for doubtful accounts
                                
                                
                                (742
                                )
                                
                                
                                (857
                                )Net
      receivables
                                
                                $
                                2,950
                                
                                
                                $
                                3,643






8








Note
4:  Net Income (Loss) per Common Share





In
accordance with SFAS No. 128, net income (loss) per common share amounts ("basic
EPS") is computed by dividing net income (loss) by the weighted
average number of common shares outstanding and excluding any
potential dilution.  Net income (loss) per common share assuming
dilution ("diluted EPS") is computed by reflecting potential
dilution from the exercise of stock options,
warrants, convertible preferred stock and redeemable stock.




The
following table presents a reconciliation of the numerator and denominator of
the basic and diluted EPS calculations (in thousands, except share and per share
data):





Three
      Months Ended
                  March
      31,2009
                
                
                2008Numerator:Net
      income (loss)
                
                $
                394
                
                
                $
                (2,674
                )Denominator:Weighted
      average shares outstanding for basic earning per share
                
                
                15,860,517
                
                
                
                12,620,900Effective
      of dilutive shares:Dilution
      from stock options and warrants
                
                
                120,540
                
                
                
                —Redeemable
      stock
                
                
                266,198
                
                
                
                —Convertible
      preferred stock
                
                
                7,652,000
                
                
                
                —Dilutive
      potential common shares
                
                
                8,038,738
                
                
                
                —Weighted
      –average shares outstanding for diluted earnings per share
                
                
                23,899,255
                
                
                
                12,620,900





For the
three months ended March 31, 2009 and 2008, the Company has excluded
options, warrants, convertible notes outstanding, and convertible preferred
stock to acquire 20,427,204 and 10,359,106 shares of our common stock,
respectively, since their effect would be anti-dilutive.





The
Company excludes options and warrants with exercise prices that are greater than
the average market price from the calculation of diluted EPS whose effect would
be anti-dilutive.  For the three months ended March 31, 2009, the
Company excluded 12,775,204 options and warrants from its diluted EPS
calculation as their effect would be anti-dilutive.





The
Company issued 522,500 shares of common stock which are
redeemable.  As all of the 522,500 shares are “in the money”,
266,198 incremental shares are included as dilutive shares.





The
convertible preferred stock is convertible at the option of the holders into
common stock.  The convertible preferred stock does not pay interest
or dividends.  The convertible preferred stock is included in the
calculation of diluted earnings per share as all shares are assumed
converted.





Note
5:  Inventory





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


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





March
      31,
                  2009
                  (unaudited)
                
                
                December
      31,
                  2008Raw
      materials
                
                $
                1,085
                
                
                $
                1,109Work
      in process
                
                
                163
                
                
                
                280Finished
      goods
                
                
                966
                
                
                
                985Total
      inventory
                
                $
                2,214
                
                
                $
                2,374






9







Note
6:  Prepaid Expenses and Other Current Assets:





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




March
      31,
                  2009
                  (unaudited)
                
                
                December
      31, 2008Vendor
      prepayments
                
                $
                466
                
                
                $
                180Other
      prepaid expenses *
                
                
                767
                
                
                
                383Other
      assets
                
                
                —
                
                
                
                233Total
      prepaid expenses and other current assets
                
                $
                1,233
                
                
                $
                796


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





Note
7:  Debt





Debt is
as follows (in thousands):




March
      31, 2009
                  (unaudited)
                
                
                December
      31,
                  2008Line
      of credit, net of deferred debt issuance costs
                
                $
                632
                
                
                $
                1,631Other
      debt
                
                
                50
                
                
                
                60Total
      debt, net
                
                $
                682
                
                
                $
                1,691





The total
debt will mature on or before December 31, 2009.  In the three months
ended March 31, 2009, approximately $150 thousand of deferred debt issuance
costs were amortized to interest expense.  For the three months ended
March 31, 2009, interest expense includes interest paid or accrued of $25
thousand on outstanding debt.





The
Company renewed its loan agreement with Moriah Capital, L.P. in August 2008 and
the maturity date on its line of credit is August 7, 2009.  As of
March 31, 2009, the Company was in compliance with the financial covenants of
the loan agreement.








Note
8:  Stock-based Compensation





The
Company accounts for the measurement and recognition of compensation expense for
all share-based payment awards made to employees and directors under Statement
of Financial Accounting Standards No. 123 (revised 2004),Share-Based
Payment , (SFAS 123(R)). Under SFAS 123(R), the fair value of stock
awards is estimated at the date of grant using the Black-Scholes option
valuation model.  Stock-based compensation expense is reduced for
estimated forfeitures and is amortized over the vesting period using the
straight-line method.





The
following table summarizes the allocation of non-cash stock-based compensation
to our expense categories for the three month periods ended March 31, 2009 and
2008 (in thousands):





Three
      Months Ended March 31,2009
                
                
                2008Cost
      of revenue
                
                $
                24
                
                
                $
                52Research
      and development
                
                
                58
                
                
                
                82Selling,
      general and administrative
                
                
                71
                
                
                
                222Total
      stock compensation expense
                
                $
                153
                
                
                $
                356




At March
31, 2009, total unrecognized compensation costs related to stock options was
approximately $0.5 million, net of estimated forfeitures.  Total
unrecognized compensation cost will be adjusted for future changes in estimated
forfeitures and is expected to be recognized over a weighted average period of
approximately 1.2 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.






10







During
the three month period ended March 31, 2009, there were no stock options granted
to employees and directors.  During the three month period ended March
31, 2008, the Company granted 160,000 stock options to employees and
directors.  The following key assumptions were used in the
Black-Scholes option pricing model to determine the fair value of stock options
granted:




For
      the Three Months Ended March 31, 2008Dividend
      yield
                    
                    
                    0
                    %Risk
      free interest rates
                    
                    
                    2.46
      – 2.82
                    %Expected  volatility
                    
                    
                    90.9
      – 92.3
                    %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.




The 2008
Incentive Stock Plan (“the 2008 Plan”) adopted and approved by the Board of
Directors on November 5, 2008 provides for  shares of common stock and
options to purchase shares of common stock to employees, officers, directors and
consultants.  The 2008 Plan has an aggregate of 2,000,000 shares.
 As of March 31, 2009, no options were granted from this plan.





A summary
of the Company’s stock option activity for the three months ended March 31, 2009
is presented in the following tables:




Number
      of Shares
                  
                  
                  Weighted
      Average Exercise Price
                  
                  
                  Weighted
      Average Remaining Contractual Life (In Years)
                  
                  
                  Aggregate
      Intrinsic ValueOutstanding
      at January 1, 2009
                  
                  
                  1,615,673
                  
                  
                  $
                  1.63Options
      granted
                  
                  
                  —Options
      exercised
                  
                  
                  —Options
      forfeited
                  
                  
                  (290
                  )
                  
                  
                  2.60Options
      cancelled
                  
                  
                  —Outstanding
      at March 31, 2009
                  
                  
                  1,615,383
                  
                  
                  $
                  1.63
                  
                  
                  
                  6.18
                  
                  
                  $
                  2,640Vested
      or expected to vest at March 31, 2009 (1)
                  
                  
                  1,569,799
                  
                  
                  $
                  1.50
                  
                  
                  
                  6.18
                  
                  
                  $
                  2,376Exercisable
      at March 31, 2009
                  
                  
                  1,159,546
                  
                  
                  $
                  1.80
                  
                  
                  
                  6.34
                  
                  
                  $
                  —


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




Options
      Outstanding
                                                                
                                                                
                                                                
                                                                Options
      ExercisableNumber
                                                                  Outstanding
                                                                
                                                                
                                                                
                                                                Weighted
      Average Remaining Contractual Life (In Years)
                                                                
                                                                
                                                                
                                                                Weighted
      Average Exercise Price
                                                                
                                                                
                                                                
                                                                Number
                                                                  Exercisable
                                                                
                                                                
                                                                
                                                                Weighted
      Average Exercisable Price$
                                                                0.34
      - $0.97
                                                                
                                                                
                                                                
                                                                759,553
                                                                
                                                                
                                                                
                                                                7.14
                                                                
                                                                
                                                                $
                                                                0.80
                                                                
                                                                
                                                                
                                                                406,620
                                                                
                                                                
                                                                $
                                                                0.79$
                                                                1.00
      - $1.44
                                                                
                                                                
                                                                
                                                                388,577
                                                                
                                                                
                                                                
                                                                8.46
                                                                
                                                                
                                                                
                                                                1.38
                                                                
                                                                
                                                                
                                                                358,397
                                                                
                                                                
                                                                
                                                                1.41$
                                                                2.60
      - $2.70
                                                                
                                                                
                                                                
                                                                430,053
                                                                
                                                                
                                                                
                                                                2.74
                                                                
                                                                
                                                                
                                                                2.61
                                                                
                                                                
                                                                
                                                                362,059
                                                                
                                                                
                                                                
                                                                2.61$
                                                                3.50
      - $5.80
                                                                
                                                                
                                                                
                                                                8,000
                                                                
                                                                
                                                                
                                                                3.31
                                                                
                                                                
                                                                
                                                                5.51
                                                                
                                                                
                                                                
                                                                8,000
                                                                
                                                                
                                                                
                                                                5.51$
                                                                6.60
      - $22.50
                                                                
                                                                
                                                                
                                                                29,200
                                                                
                                                                
                                                                
                                                                2.32
                                                                
                                                                
                                                                
                                                                10.91
                                                                
                                                                
                                                                
                                                                24,500
                                                                
                                                                
                                                                
                                                                10.901,615,383
                                                                
                                                                
                                                                
                                                                6.18
                                                                
                                                                
                                                                $
                                                                1.63
                                                                
                                                                
                                                                
                                                                1,159,546
                                                                
                                                                
                                                                $
                                                                1.80


The
aggregate intrinsic value in the table above represents the difference between
the exercise price of the underlying options and the quoted price of the
Company’s common stock.  There were 8,000 options in-the-money at
March 31, 2009.   The Company’s closing stock price was $0.67 as
of March 31, 2009. The Company issues new shares of common stock upon exercise
of stock options.






11






Note
9:  Shareholders’ Equity





Preferred
Stock - Series B Convertible Preferred Stock (“the Preferred Stock – Series
B”)





The
Company has designated 10,000 shares of the Company’s preferred stock as
Preferred Stock – Series B at a stated value of $1,000 per share.  The
Preferred Stock – Series B is convertible into common stock at a conversion
price of $0.75 per share.  The Preferred Stock – Series B does not pay
interest.  The holders of the Preferred Stock – Series B are not
entitled to receive dividends unless the Company’s Board of Directors declare a
dividend for holders of the Company’s common stock and then the dividend shall
be equal to the amount that such holder would have been entitled to
receive if the holder converted its Preferred Stock – Series B into shares
of the Company’s common stock. Each share of Preferred Stock – Series B has
voting rights equal to (i) the number of shares of Common Stock issuable upon
conversion of such shares of Preferred Stock – Series B 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) when
the Preferred Stock – Series B votes together with the Company’s Common Stock or
any other class or series of stock of the Company and (ii) one vote per share of
Preferred Stock when such vote is not covered by the immediately preceding
clause.  In the event of a liquidation, dissolution, or winding up of the
Company, the Preferred Stock – Series B is entitled to receive liquidation
preference before the Common Stock.  The Company may at its option
redeem the Preferred Stock – Series B by providing the required notice to the
holders of the Preferred Stock – Series B and paying an amount equal to
$1,000 multiplied by the number of shares for all of such holder’s shares of
outstanding Preferred Stock – Series B to be redeemed.  As of March
31, 2009, there were 5,739 shares of Preferred Stock – Series B issued and
outstanding.





Common
Stock





For the
three months ended March 31, 2009 and 2008, there were no stock options or
warrants exercised.





For the
three months ended March 31, 2009, the Company issued approximately 216,000
shares of common stock for payment of approximately $115 thousand for services
rendered and to be rendered in the future.  For the three months ended
March 31, 2008, the Company did not issue any shares of common stock for payment
of services rendered or to be rendered in the future.  The Company
recorded the fair value of the services rendered and to be rendered in the
future in prepaid expenses and selling, general and administrative expenses in
the accompanying unaudited condensed consolidated statement of operations for
the three months ended March 31, 2009.





Note
10:  Income Taxes





The
Company adopted the provisions of Financial Standards Accounting Board
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), an
interpretation of FASB Statement No. 109 (“SFAS 109”), on January 1, 2007. As a
result of the implementation of FIN 48, we did not recognize any adjustment in
the liability for unrecognized income tax benefits. The tax years 2005-2008
remain open to examination by the major taxing jurisdictions to which we are
subject. In the event that the Company is assessed interest or penalties at some
point in the future, they will be classified in the financial statements as
general and administrative expense.




Note
11:  Commitments and Contingencies





Royalty
Payments





The Company, in accordance with
a royalty agreement with Eastman Kodak, 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
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 was delayed until December 1st for the years 2007 and
2008.  The Company recorded approximately $84 thousand for the three
months ended March 31, 2008 as income from the license of intangible assets and
included this amount as other income in the condensed consolidated statements of
operations.





Effective
January 1, 2009, the Company royalty payments are back to 100%.  The
minimum royalty payment of $125 thousand was paid in January 2009.





Royalty
expense was approximately $308 thousand and $168 thousand, respectively, for the
three months ended March 31, 2009 and 2008.







12






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 office space
in Bellevue, Washington which will expire August 31, 2009.  The
Company is currently reviewing potential office spaces for lease.  The
Company is currently in negotiations to extend the lease on its space in
Hopewell Junction, New York which expires May 31, 2009.  Rent expense
was approximately $332 thousand for the three months ended March 31, 2009 and
2008.





Note
12:  Legal Proceedings





A
former employee (“Plaintiff”) of the Company commenced legal action in the
United States District Court for the Southern District of New York, on or about
October 12, 2007, alleging that the plaintiff was subject to gender based
discrimination and retaliation in violation of Title VII of the Civil Rights Act
of 1964 (Case No.
07-CV-8827 (KMK).  The plaintiff sought unspecified
compensatory damages, punitive damages and attorneys’ fees.   The
Company and the plaintiff have settled this action in April
2009.  This settlement did not have a material effect on the Company’s
results from operations.





Note
13:  Subsequent Events





On May 8,
2009 (the “Effective Date”), the Company and Paul Campbell entered in an
Employment Agreement (the “Employment Agreement”).  Pursuant to the
Employment Agreement, Mr. Campbell, who is currently serving as the Company’s
interim Chief Financial Officer, will serve as the Company’s Chief Financial
Officer, Senior Vice President and Treasurer.  The Employment
Agreement terminates 36 months from the Effective Date.  Pursuant to
the Employment Agreement, Mr. Campbell’s salary is $282,000 per
annum.  The Company’s board may also award a bonus to Mr.
Campbell.  Pursuant to the Employment Agreement, the Company shall
issue Mr. Campbell options to purchase up to 340,000 shares of the Company’s
common stock, which are exercisable at $1.09 per share, the market price on the
date of grant.  The options vest as follows:  one third of
the options vest as of the Effective Date, one third of the options vest on the
first anniversary of the Employment Agreement and one third of the options vest
on the second anniversary of the Employment Agreement.





In
connection with the employment of Paul Campbell, the Company is entering into an
agreement with Tatum LLC (“Tatum”).  Pursuant to the agreement with
Tatum, the Company will pay Tatum a signing fee of $97,700 and shall pay Tatum
$1,000 per month for as long as Mr. Campbell is employed by
eMagin.  In addition, the Company will grant Tatum 60,000 options
with the same vesting and exercise price as Mr. Campbell's and will
pay Tatum 15% of any cash bonus that is paid to Mr.
Campbell.









13







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





Statement
of Forward-Looking Information





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





Except
for the historical information contained herein, some of the statements in this
Report contain forward-looking statements that involve risks and uncertainties.
These statements are found in the sections entitled "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operation,"
and "Risk Factors." They include statements concerning: our business
strategy; expectations of market and customer response; liquidity and capital
expenditures; future sources of revenues; expansion of our proposed product
line; and trends in industry activity generally. In some cases, you can identify
forward-looking statements by words such as "may," "will," "should," "expect,"
"plan," "could," "anticipate," "intend," "believe," "estimate," "predict,"
"potential," "goal," or "continue" or similar terminology. These statements are
only predictions and involve known and unknown risks, uncertainties and other
factors, including, but not limited to, the risks outlined under "Risk Factors,"
that may cause our 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
and manufacture miniature displays, which we refer to as
OLED-on-silicon-microdisplays, and microdisplay modules for virtual imaging,
primarily for incorporation into the products of other manufacturers.
Microdisplays are typically smaller than many postage stamps, but when viewed
through a magnifier they can contain all of the information appearing on a
high-resolution personal computer screen. Our microdisplays use organic light
emitting diodes, or OLEDs, which emit light themselves when a current is passed
through the device. Our technology permits OLEDs to be coated onto silicon chips
to produce high resolution OLED-on-silicon microdisplays.





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





We hold a
license from Eastman Kodak for use of their OLED related technology and we have
developed a strong portfolio of our own patents, manufacturing know-how and
technology to create high performance OLED-on-silicon microdisplays and related
optical systems. We believe our technology and intellectual property portfolio
gives us a leadership position in OLED and OLED-on-silicon microdisplay
technology. We believe that we are the only company to demonstrate publicly and
market full-color small molecule OLED-on-silicon microdisplays.





Company
History





As of
January 1, 2003, we were no longer classified as a development stage company. We
transitioned to manufacturing our product and have significantly increased our
marketing, sales, and research and development efforts, and expanded our
operating infrastructure. Currently, most of our operating expenses are labor
related and semi-fixed. If we are unable to generate significant revenues, our
net losses in any given period could be greater than expected.





CRITICAL
ACCOUNTING POLICIES





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





Revenue
and Cost Recognition





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






14







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





Use
of Estimates





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





Fair
Value of Financial Instruments





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





Stock-based
Compensation





eMagin
maintains several stock equity incentive plans.  The 2005 Employee
Stock Purchase Plan (the “ESPP”) provides our employees with the opportunity to
purchase common stock through payroll deductions.  Employees purchase
stock semi-annually at a price that is 85% of the fair market value at certain
plan-defined dates.  As of March 31, 2009, the number of shares of
common stock available for issuance was 300,000.  As of March 31,
2009, 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 in
common stock available for issuance by 3% of the diluted shares outstanding on
January 1 of each year for a period of 9 years which commenced January 1,
2005.





The 2008
Incentive Stock Plan (“the 2008 Plan”) adopted and approved by the Board of
Directors on November 5, 2008 provides for the issuance of shares of common
stock and options to purchase shares of common stock to employees, officers,
directors and consultants.  The 2008 Plan has an aggregate of
2,000,000 shares.  For the three months ended March 31, 2009, there were
215,904 shares of common stock issued to consultants.  As of March 31,
2009, no options were granted from this plan.





The
Company accounts for the measurement and recognition of compensation expense for
all share-based payment awards made to employees and directors under Statement
of Financial Accounting Standards No. 123 (revised 2004),Share-Based
Payment  , (SFAS 123(R)). Under SFAS 123(R), 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. See Note 9 to the condensed consolidated financial
statements – Stock Compensation for a further discussion on stock-based
compensation.




NEW
ACCOUNTING PRONOUNCEMENTS





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






15





RESULTS
OF OPERATIONS





THREE
MONTHS ENDED MARCH 31, 2009 COMPARED TO THREE MONTHS ENDED MARCH 31,
2008





Revenues




Revenues
for the three months ended March 31, 2009 were approximately $5.1 million,
as compared to approximately $2.7 million for the three months ended March 31,
2008, an increase of approximately 93%.  For the three months
ended March 31, 2009, product revenue increased approximately $1.9 million or
77% as compared to the three months ended March 31, 2008.  The
increase was due to higher customer demand for the Company’s OLED displays in
the first quarter of 2009 as compared to the first quarter of 2008 when the
Company experienced a shortage of displays for sale as a result of a temporary
production issue. For the three months ended March 31, 2009, contract revenue
increased approximately $0.6 million or 288% as compared to the first quarter of
2008.  The projects in the first quarter of 2009 were larger projects
and in the middle of their project life as compared to the first quarter of 2008
where the projects were smaller and either in the beginning or completion stage
resulting in lower revenues.





Cost
of Goods Sold





Cost of
goods sold includes direct and indirect costs associated with production of our
products. Cost of goods sold for the three months ended March 31, 2009 was
approximately $2.7 million as compared to approximately $2.3 million for the
three months ended March 31, 2008, an increase of approximately $0.4
million.





Cost of
goods sold as a percentage of revenues improved from 87% for the three months
ended March 31, 2008 to 52% for the three months ended March 31, 2009. Cost of
goods is comprised primarily of material and labor cost. The labor portion of
cost of goods is mostly fixed. Increased display production output volume and
improved manufacturing yield resulted in a lower cost of goods sold
percentage.





The
gross profit was approximately $2.5 million for the three months ended March 31,
2009 as compared to approximately $0.4 million for the three months ended March
31, 2008.  The gross margin was 48% for the year ended March 31, 2009
as compared to the gross margin of 13% for the year ended March 31,
2008.  The gross margin improvement was attributed primarily to
improved manufacturing yield and the increased volume of microdisplays
produced.





Operating
Expenses





Research and
Development.  Research and development expenses include salaries,
development materials and other costs specifically allocated to the development
of new microdisplay products, OLED materials and subsystems.  Research
and development expenses for the three months ended March 31, 2009
were approximately $0.4 million as compared to $0.7 million for the three
months ended March 31, 2008, a decrease of approximately $0.3 million.  The
decrease was due to the streamlining of the research and development effort in
the subsystems area which resulted in expense reductions and to the allocation
of research and development expenses related to contracts to cost of goods
sold.





Selling, General and
Administrative.  Selling,
general and administrative expenses consist principally of salaries and
fees for professional services, legal fees incurred in connection with
patent filings and related matters, as well as other marketing and
administrative expenses.  Selling, general and
administrative expenses for the three months ended March 31, 2009 were
approximately $1.5 million as compared to approximately $1.8
million for the three months ended March 31, 2008.  The decrease of
approximately $0.3 for the three months ended March 31, 2009 was primarily
related to a reduction of professional fees, personnel costs, and other cost
reductions.




Other Income (Expense), net.
Other income (expense), net consists primarily of interest income earned on
investments, interest expense related to the secured debt, and income from the
licensing of intangible assets.





For the
three months ended March 31, 2009, interest expense was approximately $175
thousand as compared to $631 thousand for the three months ended March 31,
2008.   For the three months ended March 31, 2009, the interest
expense associated with debt was $25 thousand and the amortization of the
deferred costs associated with the debt was $150 thousand.  The
breakdown of the interest expense for the three month period in 2008 is as
follows:  interest expense associated with debt of approximately $158
thousand; the amortization of the deferred costs and waiver fees associated with
the debt of approximately $448 thousand; and the amortization of the debt
discount associated with the debt of approximately $25
thousand.   The decrease in interest expense for the three months
ended March 31, 2009 as compared to the three months ended March 31, 2008 was
primarily a result of the Company carrying a lower balance on its line of
credit, the repayment and conversion of its 8% Senior Secured Convertible Notes
in December 2008, and lower deferred debt issuance costs.





Other
income for the three months ended March 31, 2009 was approximately $1 thousand
as compared to $86 thousand for the three months ended March 31,
2008.  The other income for the three months ended March 31, 2009 was
interest income of approximately $1 thousand and the other income for the three
months ended March 31, 2008 was interest income of approximately $2 thousand and
$84 thousand was income from a gain on the license of intangible
assets.  See Note 12:  Commitments and Contingencies –
Royalty Payments for additional information.






16







Liquidity
and Capital Resources





As of
March 31, 2009, we had approximately $2.4 million of cash and investments as
compared to $2.5 million as of December 31, 2008.  The change in cash
and investments was primarily due to cash provided by operations of
approximately $1.0 million offset by cash used for financing and investing
activities of approximately $1.1 million.





Cash flow
provided by operating activities during the three months ended March 31, 2009
was approximately $1.0 million, attributable to our net income of approximately
$0.4 million, non-cash expenses of $0.3 million and approximately $0.3 million
from the change in operating assets and liabilities.  Cash flow used
in operating activities during the three months ended March 31, 2008 was
approximately $0.6 million attributable to our net loss of $2.7 million offset
by non-cash expenses of $0.9 million and working capital items of $1.2
million.





Cash used
in investing activities during the three months ended March 31, 2009 and 2008
was approximately $33 thousand and $231 thousand, respectively, to purchase of
equipment.





Cash used by financing activities
during the three months ended March 31, 2009 was approximately $1.0 million to
pay down the line of credit.Cash provided by financing activities
during the three months ended March 31, 2008 was approximately $0.4
million and was comprised
of approximately $0.7 million from the line of credit and offset by payments on
debt of $0.3 million.





As we
have reported, our business continues to experience revenue growth. This trend,
if it continues, may result in higher accounts receivable levels and may require
increased production and/or higher inventory levels.  In addition, in
August 2009, we will be obligated to repay any outstanding amounts on our line
of credit if we are unable to renew or find a suitable alternative line of
credit.  As of March 31, 2009, we have drawn approximately $632
thousand of the $3 million available on the line.  We anticipate that
our cash requirements to fund these requirements as well as other operating or
investing cash requirements over the next twelve months will be less than our
current cash on hand and the cash we anticipate generating from
operations.  We anticipate that we will not require additional funds
over the next twelve months other than perhaps discretionary capital
spending.  If unanticipated events arise during the next twelve months and
we require additional funding and we are unable to obtain sufficient funds we
may further reduce the size of our organization and/or be forced to reduce
and/or curtail our production and operations, all of which could have a material
adverse impact on our business prospects.




Off-Balance
Sheet Arrangements




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





ITEM
3.  Quantitative and Qualitative Disclosures About Market
Risk





Not applicable.





ITEM
4T.  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 the end of the period covered by
this Report, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were not 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 the end of the period covered by this Report, there were material
weaknesses in both the design and effectiveness of our internal control over
financial reporting.  Management has assessed these deficiencies and
has determined that there were two general categories of material weaknesses in
eMagin’s internal control over financial reporting.  As a result of
our assessment that material weaknesses (described below) in our internal
control over financial reporting existed as of March 31, 2009, management has
concluded that our internal control over financial reporting was not effective
as of March 31, 2009.  A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of our
annual or interim financial statements will not be prevented or detected on a
timely basis.





In
management’s opinion, our assessment as of March 31, 2009 regarding the
existence of material weaknesses in our internal control over financial
reporting relates to (1) the lack of controls or ineffectively designed
controls other than information technology controls and (2) the failure in
design and operating effectiveness of information technology controls over
financial reporting,  Management and our audit committee have assigned a
high priority to the short-term and long-term improvement of our internal
control over financial reporting.






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The
material weaknesses we have identified include:





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





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




(b)  Changes in Internal
Controls.  During the quarter ended March 31, 2009, 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.


PART
II - OTHER INFORMATION





ITEM
1.  Legal Proceedings





A
former employee (“Plaintiff”) of the Company commenced legal action in the
United States District Court for the Southern District of New York, on or about
October 12, 2007, alleging that the plaintiff was subject to gender based
discrimination and retaliation in violation of Title VII of the Civil Rights Act
of 1964 (Case No.
07-CV-8827 (KMK).  The plaintiff sought unspecified
compensatory damages, punitive damages and attorneys’ fees.   The
Company and the plaintiff have settled this action. This settlement did not and
will not have a material effect on the Company's results of
operations.




ITEM
1A.  Risk Factors





In
addition to other information set forth in this Report, you should carefully
consider the risk factors previously disclosed in “Item 1A to Part 1” of our
Annual Report on Form 10-K for the year ended December 31,
2008.  There were no material changes from the risk factors during the
three months ended March 31, 2009.





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





None.





ITEM
3.  Defaults Upon Senior Securities





None.





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





None.





ITEM
5.  Other Information





None.





ITEM
6.  Exhibits




31.1
              Certification
      by Chief Executive Officer pursuant to Sarbanes Oxley Section 302
      (1)31.2
              Certification
      by Chief Financial Officer pursuant to Sarbanes Oxley Section 302
      (1)32.1
              Certification
      by Chief Executive Officer pursuant to 18 U.S.C. Section 1350
      (1)32.2
              Certification
      by Chief Financial Officer pursuant to 18 U.S.C. Section 1350
      (1)


(1)  Filed
herewith.








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SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized on this 14th day of May 2009.




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




By:
                /s/ Paul
      CampbellPaul
      CampbellChief
      Financial OfficerPrincipal
      Accounting and Financial Officer














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