UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-Q/10-Q /A

Amendment No. 1 to Form 10-Q


(Mark One)
R
RQUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2006
2010
 or
 
or£
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from  to

Commission file number 001-15751

eMAGIN CORPORATION
(Exact name of registrant as specified in its charter)charter)

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

10500 NE 8th Street,3006 Northup Way, Suite 1400,103, Bellevue, Washington 98004
(Address of principal executive offices)

(425) 749-3600284-5200
(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.  YesR       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 Large accelerated filer£              Accelerated filer £             Non-accelerated filer £        Smaller reporting company R
 Accelerated filer £
 Non-accelerated filer R

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

The number of shares of common stock outstanding as of October 31, 20062010 was 10,180,841.


20,310,569.
EXPLANATORY NOTE

All common share amounts and per share amounts in the accompanying financial statements and in this Quarterly Report on Form 10-Q/A for the three and nine months ended September 30, 2006 reflect the one-for-ten reverse stock split of the issued and outstanding shares of common stock of the Company, effective on November 3, 2006 (See Notes 1 and 8 to the accompanying Condensed Consolidated Financial Statements).
This amended Quarterly Report on Form 10-Q/A is being filed for the sole purpose of restating its financial statements as reported by the Company on March 28, 2007, on Form 8-K as to non-reliance on previously issued financial statements for the three and nine months ended September 30, 2006. The restatement is to correct an error in the valuation of the derivative liability and debt discount associated with the warrants issued on July 21, 2006 when the Company entered in several Note Purchase Agreements (“the Notes”). The Black-Scholes calculation used to determine the fair values of the derivative liability and debt discount initially used the 18 month life of the Notes as the term. The fair value of the warrants has been amended to the warrant life of 5 years and a corresponding risk free interest rate which has resulted in a higher valuation of the derivative liability and debt discount. The restated statements reflect the increase of approximately $1.3 million of additional derivative liability and approximately $1.2 million of unamortized debt discount. In addition, interest expense increased approximately $155,000 and the gain on warrant derivative liability increased approximately $80,000, resulting in an increase of net other expense of approximately $75,000. The Company has also corrected the presentation of the short-term and long-term portions of the Notes.
The Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Statement of Changes in Shareholders’ Equity, Condensed Consolidated Statements of Cash Flows, and Selected Notes to the Condensed Consolidated Financial Statements are labeled as “restated” as applicable. In all other material respects this Amended Quarterly Report on Form 10-Q/A is unchanged from the Quarterly Report on Form 10-Q previously filed on November 20, 2006.

In addition, we are revising Item 4, Controls and Procedures, to disclose that the Company’s management believes that its controls and procedures were not effective as of the end of the period covered by this report due to the restatements to the Company’s financial statements as set forth above.
The following tables present the impact of the corrections:
Statement of Operations Data
(In thousands, except per share data)
(Unaudited)
 
      
  
Three Months Ended September 30, 2006
 
Nine Months Ended September 30, 2006
 
  
Originally filed
 
Restated
 
Originally filed
 
Restated
 
          
Interest expense $(354)$(509)$(354)$(509)
              
Net loss $(3,694)$(3,769)$(13,692)$(13,767)
              
Loss per share, basic and diluted $(0.37)$(0.37)$(1.36)$(1.37)
 
 

Unaudited Balance Sheet Data
(In thousands)
 
  
September 30, 2006
 
  
Originally filed
 
Restated
 
      
Current portion of debt $2,963 $1,241 
        
Derivative liability - warrants $2,107 $3,423 
        
Long-term debt $1,311 $1,792 
        
Accumulated deficit $(179,251)$(179,326)
        
Total shareholders’ deficit $(540)$(615)

 
21




eMagin Corporation
Form 10-Q /A
Form 10-Q/A
For the Quarter ended September 30, 20062010

Table of Contents
   
  
Page
PART I   FINANCIAL INFORMATION
 
Item 1Condensed Consolidated Financial Statements 
   
 
Condensed Consolidated Balance Sheets as of September 30, 2006 (unaudited and restated)2010 (Restated) (unaudited) and  December 31, 20052009
4
   
 
Condensed Consolidated Statements of Operations for the Three and Nine Months ended  September 30, 2006 (restated) 2010 (Restated) and 2005 (unaudited )2009 (unaudited)
5
   
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Capital Deficit) for the Nine Months ended September 30, 2006
(unaudited and restated)2010 (Restated) (unaudited)
6
   
 
Condensed Consolidated Statements of Cash Flows for the Nine Months ended  September 30, 2006 (restated) 2010 (Restated) and 20052009 (unaudited)
7
   
 Notes to Condensed Consolidated Financial Statements (unaudited and restated)(unaudited)8
   
Item 2Management’s Discussion and Analysis of Financial Condition and Results of Operations1718
   
Item 3Quantitative and Qualitative Disclosures About Market Risk2122
   
Item 4Controls and Procedures22
  
PART II   OTHER INFORMATION
 
Item 1Legal Proceedings23
   
Item 1ARisk Factors23
   
Item 2Unregistered Sales of Equity Securities and Use of Proceeds2923
   
Item 3Defaults Upon Senior Securities2923
   
Item 4Submission of Matters to a Vote of Security Holders2923
   
Item 5Other Information2923
   
Item 6Exhibits2923
  
SIGNATURES
24
  
CERTIFICATIONS
 


2
EXPLANATORY NOTE
This Amendment No. 1 hereby amends our Quarterly Report on Form 10-Q (“Form 10-Q/A”) for the period ended September 30, 2010, which was originally filed with the Securities and Exchange Commission on November 12, 2010 (the “Original 10-Q”). This Amendment is being filed mainly to include restated financial statements as described in Note 15, Restatement, of the Notes to the Condensed Consolidated Financial Statements.  The condensed consolidated financial statements are being restated to correct accounting errors as follows:
●  Adoption of certain provisions of Accounting Standards Codification (“ASC”) 815 – “Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASC 815”).  ASC 815 became effective January 1, 2009.  The anti-dilution features in certain outstanding warrants (“Warrants”) of the Company require these Warrants to be accounted for as liabilities and measured at fair value.  The restated condensed consolidated financial statements reflect the reclassification of the Warrants from shareholders’ equity to warrant liability, the cumulative effect adjustment to the opening balance of accumulated deficit and record changes in the fair value of the warrant liability in the consolidated statements of operations.
●  Adoption of the two-class method for Earnings Per Share (“EPS”) calculation under ASC 260, “Earnings Per Share” (“ASC 260”).  The two-class method is an earnings allocation method under which EPS is calculated for each class of common stock and participating security.  Under the two-class method, securities that participate in dividends, such as the Company’s Series B Convertible Preferred stock, are considered ‘participating securities.” The restated financial statements reflect the restated basic and diluted earnings per share, if applicable and weighted average shares outstanding calculations.
The following sections of this Form 10-Q/A have been amended to reflect the restatement:
Part I – Item 1 – Financial Statements and Notes to the Condensed Consolidated Financial Statements
Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Result of Operations
Part I – Item 4 – Controls and Procedures
For the convenience of the reader, this Form 10-Q/A sets forth the Company’s Original 10-Q in its entirety, as amended by, and to reflect the restatement, as described above.  Except as discussed above, the Company has not modified or updated disclosures presented in this Amendment.  Accordingly, this Amendment does not reflect events occurring after the Original 10-Q or modify or update those disclosures affected by subsequent events, except as specifically referenced herein. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the Original Filing.
This Form 10-Q/A has been signed as of a current date and all certifications of the Company’s Chief Executive Officer/Principal Executive Officer and Chief Financial Officer/Chief Accounting Officer and Principal Financial Officer are given as of a current date.  Accordingly, this Form 10-Q/A should be read in conjunction with the Company’s filings with the Securities and Exchange Commission subsequent to the filing of the Original 10-Q, including any amendments to those filings.
3


ITEM 1.  Condensed Consolidated Financial Statements

eMAGIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

 
September 30,
        
 
2006
(unaudited)
 
December 31, 2005
  
September 30, 2010
(Restated)
See Note 15
(unaudited)
 December 31, 2009 
 
(Restated)
        
ASSETS
          
          
Current assets:          
Cash and cash equivalents $1,407 $6,727  $6,714  $5,295 
Investments - held to maturity  124  120 
Short-term investments – held to maturity  
2,600
   100 
Accounts receivable, net  1,119  762   5,231   4,563 
Inventory  2,940  3,839   1,671   2,179 
Prepaid expenses and other current assets  1,053  1,045   599   687 
Total current assets  6,643  12,493   16,815   12,824 
Long-term investments – held to maturity 1,000 — 
Equipment, furniture and leasehold improvements, net  802  1,299   3,232   1,021 
Intangible assets, net  56  57   41   43 
Other assets  390  233   92   92 
Deferred costs  549  — 
Total assets $8,440 $14,082  $21,180  $13,980 
               
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
       
LIABILITIES AND SHAREHOLDERS’ EQUITY        
               
Current liabilities:               
Accounts payable $272 $562  $988  $1,122 
Accrued compensation  791  1,010   1,807   956 
Other accrued expenses  1,361  1,894   977   791 
Advance payments  125   211 
Deferred revenue  116  96   154   238 
Current portion of capitalized lease obligations  10  16 
Current portion of debt  1,241  — 
Derivative liability - warrants  3,423  — 
Warrant liability    3,728    34 
Other current liabilities  49  47   734   891 
Total current liabilities  7,263  3,625   8,513    4,243 
       
Capitalized lease obligations  —  6 
Long-term debt  1,792  50 
Warrant liability    2,757   
6,844
 
Total liabilities  9,055  3,681     11,270    11,087 
              
Commitments and contingencies       
Commitments and contingencies (Note 12)       
              
Shareholders’ (deficit) equity:       
Preferred stock, $.001 par value: authorized 10,000,000 shares; no shares issued and outstanding  —  — 
Common stock, $.001 par value: authorized 200,000,000 shares, issued and outstanding, 10,136,789 shares as of September 30, 2006 and 9,997,247 shares as of December 31, 2005  10  10 
Shareholders’ equity:     
Preferred stock, $.001 par value: authorized 10,000,000 shares:     
Series B Convertible Preferred stock, (liquidation preference of $5,679,000 at September 30, 2010) stated value $1,000 per share, $.001 par value: 10,000 shares designated and 5,679 issued and outstanding as of September 30, 2010 and 5,739 as of December 31, 2009  —   — 
Common stock, $.001 par value: authorized 200,000,000 shares, issued and outstanding, 19,938,992 shares as of September 30, 2010 and 16,967,244 as of December 31, 2009  20   17 
Additional paid-in capital  178,701  175,950   
205,372
   
193,358
 
Accumulated deficit  (179,326) (165,559)  
( 195,482
)   
( 190,482
)
Total shareholders’ (deficit) equity  (615) 10,401 
Total liabilities and shareholders’ (deficit) equity $8,440 $14,082 
       
Total shareholders’ equity  
9,910
   
2,893
 
Total liabilities and shareholders’ equity $21,180  $13,980 

See notes to Condensed Consolidated Financial Statements.



 
4



eMAGIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2006
 
2005
 
2006
 
2005
  
2010
(Restated)
 See Note 15
 2009 
2010
(Restated)
 See Note 15
 2009 
Revenue: 
(Restated)
   
(Restated)
            
                  
Product revenue $2,242 $1,131 $5,487 $2,437  $6,936  $5,260 $17,826 $14,560 
Contract revenue  50  —  120  36   1,320   847  4,669  2,543 
                       
Total revenue, net  2,292  1,131  5,607  2,473   8,256   6,107  22,495  17,103 
                       
Cost of goods sold  2,940  2,686  8,934  7,031 
Cost of goods sold:          
                       
Gross loss  (648) (1,555) (3,327) (4,558)
Product revenue 2,105  1,996 6,590 5,817 
Contract revenue  683   611  2,380  1,528 
          
Total cost of goods sold  2,788   2,607  8,970  7,345 
          
Gross profit  5,468   3,500  13,525  9,758 
                       
Operating expenses:                       
                       
Research and development  965  1,022  3,507  3,038  511  463 1,888 1,376 
Selling, general and administrative  1,838  1,220  6,674  4,315   2,054   1,772  6,873  5,083 
Total operating expenses  2,803  2,242  10,181  7,353   2,565   2,235  8,761  6,459 
                       
Loss from operations  (3,451) (3,797) (13,508) (11,911)
Income from operations 2,903  1,265 4,764 3,299 
                       
Other (expense) income:             
Other income (expense):          
Interest expense (21) (76) (79)  (417)
Other income, net  2   1              10  41 
Change in fair value of warrant liability  723   (3,315)  (9,620)  (6,379)
Total other income ( expense ) , net
  
704
   
(3,390
)  
(9,689
)  
(6,755
)
Income (loss) before provision for income taxes
 
3,607
 
(2,125
) 
(4,925
) 
(3,456
)
Provision for income taxes  56  —  75  — 
                      
Interest expense  (509) (1) (509) (3)
Gain on warrant derivative liability  177  —  177  — 
Other income, net  14  35  73  184 
Total other (expense) income  (318) 34  (259) 181 
             
Net loss $(3,769)$(3,763)$(13,767)$(11,730)
Net income (loss)
 $
3,551
 $
(2,125
) $
(5,000
) $
(3,456
)
                      
                      
Loss per share, basic and diluted $(0.37)$(0.45)$(1.37)$(1.42)
Income per share, basic $
0. 13
 $
(0.13
) $
( 0. 27
) $
(0.21
)
Income per share, diluted $0.08 $(0.13) $(0.27) $
(0.21
)
                      
Weighted average number of shares outstanding:                      
                      
Basic and diluted  10,077,260  8,303,647  10,030,988  8,232,010 
             
Basic  19,883,029  16,513,101  18,781,185  16,133,646 
Diluted  24,244,477  16,513,101  18,781,185  16,133,646 

 

See notes to Condensed Consolidated Financial Statements.

5



eMAGIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands)thousands, except for share data)
(Restated)(unaudited)

  Preferred Stock  Common Stock   Additional      Total 
  Shares  Amount  Shares  Amount  
 Paid-in
Capital
(Restated)
See Note 15
  
Accumulated
Deficit
(Restated)
See Note 15
  
 Shareholders’
Equity
(Restated)
See Note 15
 
Balance, December 31, 2009  5,739  $—   16,967,244  $17  $
193,358
  $
(190,482
) $
2,893
 
                             
Fair value of warrants reclassified from liability to equity upon exercise                    10,013    
10,013
     
Cashless exercise of common stock warrants          2,601,591   2   (2)       — 
Conversion of Series B Preferred Stock to common stock  (60)   —   80,000    —   —       — 
Issuance of common stock for services          15,363   —   55       55 
Exercise of common stock warrants          100,000   1   249       250 
Exercise of common stock options          174,794   —   322       322 
Stock-based compensation                  1,377       1,377 
Net loss
                      
5,000
   
5,000
 
Balance, September 30, 2010  5,679  $—   19,938,992  $20  $
205,372
  $
( 195,482
) $
9,910
 
                             
                             
See notes to Condensed Consolidated Financial Statements.


    
Additional
   
Total
 
  
Common Stock
 
Paid-In
 
Accumulated
 
Shareholders’
 
  
Shares
 
Amount
 
Capital
 
Deficit
 
Equity
 
            
Balance, December 31, 2005  9,997 $10 $175,950 $(165,559)$10,401 
Stock-based compensation  
—
  
—
  2,270  
—
  2,270 
Debt conversion to equity  27  
—
  70  
—
  70 
Exercise of options  5  
—
  10  
—
  10 
Issuance of common stock for services  108  
—
  401  
—
  401 
Net loss  
—
  
—
  
—
  (13,767) (13,767)
Balance, September 30, 2006, (unaudited)  10,137 $10 $178,701 $(179,326)$(615)

6

 
 
(1) The number of shares outstanding per shares amounts, common stock and additional paid-in capital for all periods has been adjusted to reflect a one-for-ten reverse stock spliteMAGIN CORPORATION
      effective in November 2006.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)



  Nine Months Ended 
  September 30, 
  
2010
(Restated)
See Note 15
  2009 
  (unaudited) 
Cash flows from operating activities:      
Net loss
 $
(5,000
) $
(3,456
)
Adjustments to reconcile net loss to net cash provided by operating activities:
        
Depreciation and amortization  52   65 
Amortization of deferred financing and waiver fees  —   362 
(Reduction of) provision for sales returns and doubtful accounts  (260)  (423)
Stock-based compensation  1,377   926 
Amortization of common stock issued for services  61   178 
Change in fair value of warrant liability    9,620    6,379 
Changes in operating assets and liabilities:        
Accounts receivable  (468)  (45) 
Inventory  508   309 
Prepaid expenses and other current assets  72   (54)
Deferred revenue  (84)  56 
Accounts payable, accrued compensation, other accrued expenses, and advance payments  827   (725)
Other current liabilities  (97)  (121)
Net cash provided by operating activities  6,608   3,451 
Cash flows from investing activities:        
Purchase of equipment  (2,261)  (492)
Purchase of investments – held to maturity  (3,500)  — 
      Net cash used in investing activities  (5,761)  (492)
Cash flows from financing activities:        
Payments of debt  —   (1,654)
Proceeds from exercise of stock options and warrants  572   — 
Net cash provided by (used in) financing activities  572   (1,654) 
Net increase in cash and cash equivalents  1,419   1,305 
Cash and cash equivalents, beginning of period  5,295   2,404 
Cash and cash equivalents, end of period $6,714  $3,709 
         
Cash paid for interest $76  $67 
Cash paid for taxes $125  $46 
         
Supplemental information of non-cash operating and financing activities:        
Common stock issued for services charged to prepaid expenses $—  $126 
Issuance of 2,601,591 shares of common stock for cashless exercise of 3,778,811 warrants in 2010 $—  $— 
Conversion of 60 shares of Series B Convertible Preferred Stock into 80,000 shares of common stock in 2010 $—  $— 
  

See notes to Condensed Consolidated Financial Statements.


6
 


eMAGIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

  
Nine Months Ended
 
  
September 30,
 
  
2006(Restated)
 
2005 
 
  
(unaudited)
 
Cash flows from operating activities:     
Net loss $(13,767)$(11,730)
Adjustments to reconcile net loss to net cash used in operating activities:       
Depreciation and amortization  792  630 
Reduction in provision for sales returns and doubtful accounts  (18) (419)
Stock-based compensation  2,270  — 
Issuance of common stock for services, net  375  397 
Amortization of discount on notes payable  382  — 
Gain on warrant derivative liability  (177) — 
Changes in operating assets and liabilities:       
Accounts receivable  (339) 179 
Inventory  899  (1,574)
Prepaid expenses and other current assets  (8) (382)
Deferred revenue  20  --- 
Accounts payable, accrued compensation, and other accrued expenses  (899) 586 
Other current liabilities  101  68 
Net cash used in operating activities  (10,369) (12,245)
Cash flows from investing activities:       
Purchase of equipment  (204) (665)
Purchase of investments - held to maturity  (4) — 
Purchase of intangibles and other assets  (2) (46)
Net cash used by investing activities  (210) (711)
Cash flows from financing activities:       
Proceeds from exercise of stock options and warrants  10  1,594 
Net proceeds from issuance of debt  5,379  — 
Payments of long-term debt and capital leases  (130) (10)
Net cash provided by financing activities  5,259  1,584 
Net (decrease) in cash and cash equivalents  (5,320) (11,372)
Cash and cash equivalents beginning of period  6,727  13,457 
Cash and cash equivalents end of period $1,407 $2,085 
        
Cash paid for interest $127 $8 
Cash paid for taxes $35 $--- 
        
Supplemental non-cash information:
During the nine months ended September 30, 2006, the Company
·entered into several Note Purchase Agreements with investors and issued warrants that are exercisable at $3.60 per share into approximately 1.6 million shares of
 common stock valued at $3.4 million;
·issued warrants that are exercisable at $2.60 per share into approximately 190,000 shares of common stock valued at approximately $158,000.
·issued 10,000 shares of common stock in lieu of cash payment of $26,000 as compensation for services performed and recorded as deferred costs; and
·issued approximately 27,000 shares for the conversion of Notes totaling $70,000.

See notes to Condensed Consolidated Financial Statements.

7
eMAGIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1:  Description of the Business and Summary of Significant AccountAccounting Policies

The Business

eMagin Corporation is a developer and manufacturer of optical systems and microdisplays for use in the electronics industry. eMagin also(the “Company”) designs, develops, manufactures, and markets microdisplay systemsOLED (organic light emitting diode) on silicon microdisplays and optics technology for commercial, industrialvirtual imaging products which utilize OLED microdisplays. The Company’s products are sold mainly in North America, Asia, and military applications.Europe.

Basis of Presentation (Restated)

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of eMagin Corporation and its subsidiary reflectsreflect all adjustments, including normal recurring accruals, necessary for a fair presentation.  Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to instruction,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, 2005.

Certain prior-period balances have been reclassified to conform to the current period presentation. These reclassifications had no impact on revenue, net loss, assets or liabilities in either period presented.2009.  The results of operations for the period ended September 30, 20062010 are not necessarily indicative of the results to be expected for the full year.
 
On November 3, 2006,
In this Amended 10-Q, the Company effected a one-for-ten (1-for-10) reverse stock split ofrestated its previously issued and outstanding common stock - see Note 8. All common share amounts and per share amounts in the accompanying financial statements and this Form 10-Q have been adjusted to reflect the 1-for-10 reverse stock split. The Company has adjusted its shareholders’ equity accounts by reducing its stated capital and increasing its additional paid-in capital by approximately $91,000 as of September 30, 2006 and December 31, 2005, to reflect the reduction in outstanding shares as a result of the reverse stock split.

The condensed consolidated financial statements have been prepared assuming thatas of and for the Company will continue as a going concern.  The Company has had recurring losses from operations which it believes will continue through 2006three and 2007.  The Company’s cash requirements over the next 12nine months are greater than our current cash on hand. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern without continuing to obtain additional funding.  The Company does not have commitments for such financing and no assurance can be given that additional financing will be available, or if available, will be on acceptable terms. If the Company is unable to obtain sufficient funds during the next 6 months, the Company will further reduce the size of its organization and/or curtail operations which will have a material adverse impact on our business prospects. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Restatement

This Amended Quarterly Report on Form 10-Q/A is being filedended September 30, 2010 to correct an errorerrors in the valuation of the derivative liability and debt discount associated with theaccounting for certain warrants issued on July 21, 2006 when the Company entered in several Note Purchase Agreements (“the Notes”). The Black-Scholes calculation used to determine the fair values of the derivative liability and debt discount initially used the 18 month life of the Notes as the term. The fair value of the warrants has been amended to the warrant life of 5 years and a corresponding risk-free interest rate which has resulted in a higher valuation of the derivative liability and debt discount. The restated statements reflect the increase of approximately $1.3 million of additional derivative liability and approximately $1.2 million of unamortized debt discount. In addition, interest expense increased approximately $155,000 and the gain on warrant derivative liability increased approximately $80,000, resultingcalculation of EPS as discussed in an increase of net other expense of approximately $75,000. The Company has also corrected the presentation of the short-term and long-term portions of the Notes. In all other material respects this Amended Quarterly Report on Form 10-Q/A is unchanged from the Quarterly Report on Form 10-Q previously filed on November 20, 2006.

In addition, we are revising Item 4, Controls and Procedures, to disclose that the Company’s management believes that its controls and procedures were not effective as of the end of the period covered by this report due to the restatements to the Company’s financial statements as set forth above.Note 15, “Restatement”.
 
The following tables present the impact of the corrections:
Statement of Operations Data
(In thousands, except per share data)
(Unaudited)
 
      
  
Three Months Ended September 30, 2006
 
Nine Months Ended September 30, 2006
 
  
Originally filed
 
Restated
 
Originally filed
 
Restated
 
          
Interest expense $(354)$(509)$(354)$(509)
              
Net loss $(3,694)$(3,769)$(13,692)$(13,767)
              
Loss per share, basic and diluted $(0.37)$(0.37)$(1.36)$(1.37)


Unaudited Balance Sheet Data
(In thousands)
 
  
September 30, 2006
 
  
Originally filed
 
Restated
 
      
Current portion of debt $2,963 $1,241 
        
Derivative liability - warrants $2,107 $3,423 
        
Long-term debt $1,311 $1,792 
        
Accumulated deficit $(179,251)$(179,326)
        
Total shareholders’ deficit $(540)$(615)
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.

8
Revenue and Cost Recognition

Revenue is recognized when products are shipped to customers, net of allowances for anticipated returns. The Company’s revenue-earning activities generally involve delivering products and revenues are considered to be earned when the Company has completed the process by which it is entitled to such revenues. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collection is reasonably assured.   Product revenue is generally recognized when products are shipped to customers. The Company defers revenue recognition on products sold directly to the consumer with a fifteenmaximum 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 (contract revenues) under both firm fixed-price contracts and cost-type contracts, including some cost-plus-fee contracts.  Revenues relating to firm fixed-price contracts and cost-type contracts are generally recognized on the percentage-of-completion method of accounting as costs are incurred (cost-to-cost basis). Revenues on cost-plus-fee contracts include costs incurred plus a portion of estimated fees or profits based on the relationship of costs incurred to total estimated costs.  Contract costs include all direct material and labor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. These rates are subject to audit by the other party. 

Stock-based CompensationProduct warranty

The Company maintains several stock equity incentive plans.offers a one-year product replacement warranty. In general, the standard policy is to repair or replace the defective products. The 2005 Employee Stock Purchase Plan (the “ESPP”) providesCompany accrues for estimated returns of defective products at the Company’s employees withtime revenue is recognized based on historical activity as well as for specific known product issues. The determination of these accruals requires the opportunityCompany to purchase common stock through payroll deductions. Employees purchase stock semi-annually atmake estimates of the frequency and extent of warranty activity and estimate future costs to replace the products under warranty. If the actual warranty activity and/or repair and replacement costs differ significantly from these estimates, adjustments to cost of revenue may be required in future periods.

Research and Development Costs

Research and development costs are expensed as incurred.


8
Note 2:  Recently Issued Accounting Pronouncements

In April 2010, the FASB amended the authoritative guidance on the milestone method of revenue recognition.  The amendment defines a milestone and determines when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions.  Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. This new guidance permits prospective adoption for milestones achieved in fiscal years and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted.  As the Company plans to implement the guidance prospectively, the effect of this guidance will be limited to future transactions. The Company does not expect adoption of this standard to have a material impact on its financial position or results of operations as it has no material research and development arrangements which are accounted for under the milestone method.

Note 3:  Fair Value Measurement Measurement - Restated

Authoritative accounting guidance defines fair value, establishes a framework for measuring fair value and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques. Fair value is the price that is 85%would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date. The fair value hierarchy ranks the quality and reliability of the information used to determine fair marketvalues. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1 – valued based on quoted prices at certain plan-defined dates. the measurement date for identical assets or liabilities trading in active markets.
Level 2 – quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability.
Level 3 – valuations derived from valuation techniques in which one or more significant inputs are not readily observable.
Recurring Fair Value Estimates
As of September 30, 2006,2010, the numbercertificates of sharesdeposits comprising of common stock available for issuance was 150,000. Asshort-term and long-term investments – held to maturity of $3.6 million are classified as Level 1.
The Company’s recurring fair value measurements of the warrant liability at September 30, 2006, the plan had not been implemented.2010 were as follows (in thousands):

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
     Fair Value Measurement Using 
  
Fair Value as of
September 30, 2010
  Level 1  Level 2  Level 3 
             
Warrant liability, current $3,728  $—  $—  $3,728 
Warrant liability, long-term  2,757   —   —   2,757 
Total Warrant liability $6,485  $—  $—  $6,485 
Note:  Classification is granted at the market value of the Company’s common stock at the date of the grant and a non-ISO is granted at a price not to be less than 85% of the market value of the common stock at the date of grant. These options have a term of up to 10 years and vest over a schedule determined by the Board of Directors, generally five years. The amended 2003 Plan provides for an annual increase of 3% of the diluted shares outstanding on January 1 of each year for a period of nine (9) years which commenced January 1, 2005.

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

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


 
9

See
Recurring Level 3 Activity, Reconciliation and Basis for Valuation
The table below provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3) (in thousands).
Balance as of January 1, 2010 $6,878 
Change in fair value of warrants  9,978 
Fair value of warrants exercised  (10,013)
Fair value of warrants expired  (358)
Balance as of September 30, 2010 $6,485 
For the three months ended September 30, 2010, the change in the fair value of the warrant liability of $0.7 million was recorded as other income and for the nine months ended September 30, 2010, the net change in the fair value of the warrant liability of $9.6 million, was recorded as other expense in the accompanying unaudited condensed consolidated statements of operations.
The Company estimates the fair value of the warrant liability utilizing the Monte Carlo Simulation method.  The use of this method assumes multiple probabilities.  The following additional assumptions were used in the Monte Carlo Simulation model to determine the fair value of the warrant liability:
  September 30, 2010  December 31, 2009 
Risk-free interest rate  0.27% - 0.64%  0.06% - 2.69%
Expected volatility  73.3% - 97.3%  62.8% - 90.6%
Expected life ( in years)  0.75 – 3.25   0.25 – 4.0 
Expected dividend yield  0%  0%
Note 7 for further information regarding the Company’s stock-based compensation assumptions and expenses, including the impact of adoption on the Company’s condensed Consolidated Financial Statements and pro forma disclosures for prior periods as if we had recorded stock-based compensation expense.4:  Receivables

Note 2: Receivables

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

The Company determines the allowance for doubtful accounts by considering a number of factors, including the length of time the trade accounts receivable are past due, eMagin's previous loss history,historical experience, the customer's current ability to pay its obligation,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):

 
September 30,
2006
(unaudited)
 
December 31, 2005
  
September 30,
2010
 (unaudited)
 December 31, 2009 
Accounts receivable $1,588 $1,249  $5,615  $5,147 
Less allowance for doubtful accounts  (469) (487)  (384)  (584)
Net receivables  $1,119 $762  $5,231  $4,563 
10

Note 3: Research and Development Costs

Research and development costs are expensed as incurred.

Note 4:5:  Net LossIncome (Loss) per Common Share - Restated

In accordance with SFAS No. 128, net lossBasic earnings (loss) per common share amounts ("basic EPS"(“Basic EPS”) wasis computed by dividing net lossincome (loss) by the weighted average number of common shares outstanding and excluding any potential dilution.  Net lossduring the reporting period.  Diluted earnings (loss) per common share assuming dilution ("diluted EPS"(“Diluted EPS”) wasis computed by reflecting potential dilution fromdividing the exercisenet income (loss) by the weighted average number of common shares outstanding during the reporting period while also giving effect to all potentially dilutive common shares that were outstanding during the reporting period.
In accordance with ASC 260, entities that have issued securities other than common stock optionsthat participate in dividends with the common stock (“participating securities”) are required to apply the two-class method to compute basic EPS.  The two-class method is an earnings allocation method under which EPS is calculated for each class of common stock and warrants.  Commonparticipating security as if all such earnings had been distributed during the period.  On December 22, 2008, the Company issued Convertible Preferred Stock – Series B which participates in dividends with the Company’s common stock equivalentand is therefore considered to be a participating security.   However, the participating convertible preferred stock is not required to absorb any net loss. Thus, the Company calculates EPS using the two-class method.  The Company does not intend to pay dividends on its common or preferred stock.
The Company uses the more dilutive method of calculating the diluted earnings per share, either the two class method or “if-converted” method.  Under the “if-converted” method, the convertible preferred stock is assumed to have been converted into common shares are excluded fromat the beginning of the period.
The following table sets forth the computation if their effect is antidilutive. As of basic and diluted earnings per share (in thousands, except share and per share data):

  
Three Months Ended
September 30, 2010
  
Three Months Ended
September 30, 2009
 
  Income  Shares  Per Share Amount  Income  Shares  Per Share Amount 
Basic EPS                  
Net Income (Loss) $3,551        $(2,125)      
Income (loss) allocated to participating securities $979        $—       
Income (loss) allocated to common shares $2,572   19,883,029  $0.13  $(2,125)  16,513,101  $(0.13)
Diluted EPS                        
Less:  Change in fair value of warrant liability allocated to common shares  524           —         
Diluted potential common shares      4,361,448           —     
Income (loss) allocated to common shares $2,048   24,244,477  $0.08  $(2,125)  16,513,101  $(0.13)
                         

  
Nine Months Ended
September 30, 2010
  
Nine Months Ended
September 30, 2009
 
  Income  Shares  Per Share Amount  Income  Shares  Per Share Amount 
Basic EPS                  
Net Loss $(5,000)       $(3,456)      
Loss allocated to participating securities $—        $—       
Loss allocated to common shares $(5,000)  18,781,185  $(0.27) $(3,456)  16,133,646  $(0.21)
Diluted EPS                        
Diluted potential common shares      —           —     
Loss allocated to common shares $(5,000)  18,781,185  $(0.27) $(3,456)  16,133,646   (0.21)
                         
For the three months ended September 30, 2006 and 2005, there were2010, the Company has excluded stock options and warrants outstanding to acquire 4,893,921 and 3,519,393 shares1,271,817 of ourthe Company’s common stock respectively. These shares were excluded from the computation of diluted loss per share becausesince their effect would be antidilutive.anti-dilutive.  For the nine months ended September 30, 2010, the Company has excluded options, warrants and convertible preferred stock to acquire 16,020,727 of its common stock since their effect would be anti-dilutive.

For the three and nine months ended September 30, 2009, the Company has excluded options, warrants and convertible preferred stock to acquire 19,742,737 of its common stock since their effect would be anti-dilutive.
Note 5: Inventories6:  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 valueCompany’s suppliers, and the estimated utility of its inventory and reducesthe inventory. If the Company review indicates a reduction in utility below carrying value, the inventory valueis reduced to its net realizable value based upon current market prices and contracts for future sales. a new cost basis.

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

  
September 30, 2006 
(unaudited)
 
December 31, 2005
 
Raw materials  $1,396 $2,353 
Work in process  266  107 
Finished goods   1,278  1,379 
Total Inventory $2,940 $3,839 


10

Note 6: Debt (Restated)

Debt is as follows (in thousands):
  
September 30, 2006 
(unaudited)
(Restated)
 
December 31, 2005
 
Current portion of capitalized lease obligations $10 $16 
Current portion of debt  1,241    
Long-term capitalized lease obligations  
—
  6 
Long-term debt  3,130  
—
 
Less: Unamortized discount on notes payable - long term  1,338  
—
 
Long-term debt, net  1,792  50 
Total debt $3,043 $72 

On July 21, 2006, the Company entered into several Note Purchase Agreements for the sale of approximately $5.99 million of senior secured debentures (the “Notes”) together with warrants to purchase approximately 1.8 million shares of common stock, par value $.0001 per share. 50% of the aggregate principal amount matures on July 21, 2007 and the remaining 50% matures on January 21, 2008. The Notes pay 6% interest quarterly beginning September 1, 2006. Approximately $37,000 of interest was paid to investors on September 1, 2006.

The Company accounted for the net proceeds from the issuance of the Notes as two separate components: a detachable warrant component and a debt component.  The Company determined the relative fair value of warrants to be $3.4 million which was recorded as debt discount, a reduction of the carrying value of the Notes. The following assumptions were used to determine the fair value of the warrants:

Dividend yield0%
Risk free interest rates4.99%
Expected volatility122%
Expected term (in years)5.0 years
The discount is being amortized to interest expense over the term of the Note. For the three and nine months ended September 30, 2006, debt discount of $382,000 was amortized to interest expense - see Note 8: Shareholders’ Equity for additional information on the Notes.
  
September 30,
2010
 (unaudited)
  December 31, 2009 
Raw materials  $752  $806 
Work in process  436   709 
Finished goods   483   664 
Total inventory $1,671  $2,179 
 
Note 7: Stock-based Compensation

On January 1, 2006, the Company adopted the provisions of SFAS No. 123R, which requires the Company to recognize expense related to the fair value of the Company’s share-based compensation issued to employees and directors. Prior to January 1, 2006, the Company accounted for share-based compensation under the recognition and measurement provisions of APB No. 25 and related interpretations, as permitted by SFAS No. 123. We adopted SFAS No. 123R using the modified prospective transition method. Accordingly, periods prior to adoption have not been restated. Compensation cost recognized for the three and nine months ended September 30, 2006 includes a) compensation cost for all share-based compensation granted prior to, but not vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No.123 and b) compensation cost for all share-based compensation granted beginning January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No.123R. The compensation cost was recognized using the straight-line attribution method.


 
11
Note 7:  Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands): 
  
September 30,
2010
 (unaudited)
  December 31, 2009 
Vendor prepayments $32  $266 
Other prepaid expenses *  567   421 
Total prepaid expenses and other current assets $599  $687 
*No individual amounts greater than 5% of current assets.

Note 8:  Debt

Effective September 1, 2010, the Company renewed its credit facility with Access Business Finance, LLC (“Access”) under which the Company may borrow up to a maximum of $3 million based on a borrowing base equivalent of 75% of eligible accounts receivable.  The interest on the line of credit is equal to the Prime Rate plus 4.00% but may not be less than 7.25% with a minimum monthly interest payment of $5,000.  The term of the agreement with Access is for one year and automatically renews for successive one year terms unless, at least 60 days prior to the end of the current term, the Company gives Access prior written notice of its intent not to renew or if Access, at least ten days prior to the end of the current term, gives the Company written notice of its intent not to renew. The Company’s obligations under the agreement are secured by its assets.    The Company paid $30,000 in annual loan fees to Access which were charged to prepaid expenses and amortized over the one year term.  As of September 30, 2010, $2,500 had been amortized to interest expense.  As of September 30, 2010, the Company had not borrowed on its line of credit.
Note 9:  Stock-based Compensation

The Company uses the fair value method of accounting for share-based compensation arrangements. The fair value of stock options is estimated at the date of grant using the Black-Scholes option valuation model.  Stock-based compensation expense is reduced for estimated forfeitures and is amortized over the vesting period using the straight-line method.

The following table summarizes the allocation of non-cash stock-based compensation to our expense categories for the three and nine month periods ended September 30, 20062010 and 2009 (in thousands):

 
Three Months Ended
September 30, 2006
 
Nine Months Ended
September 30, 2006
  Three Months Ended September 30, Nine Months Ended September 30, 
      2010 2009 2010 2009 
Cost of revenue $112 $370  $28 $25  $155 $111 
Research and development  119  378   23  39   151  165 
Selling, general and administrative  459  1,522   376  317   1,071  650 
Total stock compensation expense $690 $2,270  $427 $381  $1,377 $926 

For the three and nine months ended September 30, 2006, stock compensation was approximately $0.7 million and $2.3 million, respectively. At September 30, 2006,2010, total unrecognized non-cash compensation costs related to stock options was approximately $4.8$0.4 million, net of estimated forfeitures.  Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of approximately 5.41.3 years.

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

   There were no options granted to consultants in the three and nine months ended September 30, 2010.  For the nine months ended September 30, 2009, there were 60,000 options granted to consultants.   In determiningMay 2009, there were 60,000 options granted to consultants, of which the unvested options were remeasured to the current fair market value at September 30, 2010.  The following assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted duringgranted:  dividend yield – 0%; risk free interest rates – 0.64% to 1.70%; expected volatility – 68.4% to 84.1%; and expected term – 3 years.
12

During the three and nine month periods ended September 30, 20062010, there were 236,200 and 2005,853,085 stock options, respectively, granted to employees and directors.  During the nine month period ended September 30, 2009, there were 411,600 and 1,278,841 stock options granted to employees and directors.  The following key assumptions were used in the Black-Scholes option pricing model:

model to determine the fair value of stock options granted: 
 
 
For the Nine Months Ended September 30, 
  For the Nine Months Ended September 30, 
 
2006 
 
2005 
  2010 2009 
Dividend yield  0% 0% 0% 0 %
Risk free interest rates  4.59% 4.39% 1.31 to 2.57% 2.02 to 2.51 %
Expected volatility  126% 52% 80.6 to 86.9% 80.3 to 86.4 %
Expected term (in years)  5 years  10 years  3.5 to 5.5   4.0 to 5.5 

We have not declared or paid any dividends and do not currently expect to do so in the near future.  The risk-free interest rate used in the Black-Scholes 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 following table showsFor the proforma effect on our net loss and net loss per share had compensation expense been determined based on the fair value at the award grant date in accordance with SFAS No. 123 for the three and nine months month period ended September 30, 2005 (in thousands, except2010, 10,500 options were granted to employees from the 2008 Plan with a fair value of approximately $12 thousand and 842,585 options were granted to employees and directors from the 2003 Plan with a fair value of approximately $1.4 million.  The weighted average fair value per share data):

12


  
Three Months Ended
September 30, 2005
 
Nine Months Ended
September 30, 2005
 
      
Net loss, as reported $(3,763)$(11,730)
Deduct:  Stock-based employee compensation expense determined under fair value method  (465) (2,809)
Pro forma net loss $(4,228)$(14,539)
Net loss per share:       
Basic and diluted, as reported $(0.45)$(1.42)
Basic and diluted, pro forma  
 $(0.51)$(1.77)
for options granted in the first nine months of 2010 was $1.67.

A summary of the Company’s stock option activity for the nine months ended September 30, 20062010 is presented in the following tables:
  
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life
(In Years)
 
Aggregate Intrinsic Value
 
Outstanding at January 1, 2006  1,805,264 $10.90       
Options granted  185,744  4.30       
Options exercised  (5,000) 2.10    $2,000 
Options forfeited  (365,420) 8.74       
Options cancelled  (467,148) 11.97       
Outstanding at September 30, 2006  1,153,440 $2.88  3.96 $47,681 
Vested or expected to vest at September 30, 2006 (1)  1,072,699 $2.88  3.96 $47,681 
Exercisable at September 30, 2006  684,342 $2.78  2.81 $47,681 

  
Options Outstanding
 
Options Exercisable
 
  
Number Outstanding
 
Weighted Average Remaining Contractual Life (In Years)
 
Weighted Average Exercise Price
 
Number Exercisable
 
Weighted Average Exercisable Price
 
$2.10 - $2.70  1,140,034  4.21 $2.25  581,269 $2.50 
$3.40 - $5.80  109,424  1.49  3.76  94,924  3.45 
$6.60 - $22.5  29,982  4.71  10.82  8,149  14.81 
   1,153,440  3.96 $2.88  684,342 $2.78 
                 
  Number of Shares  Weighted Average Exercise Price  Weighted Average Remaining Contractual Life (In Years)  Aggregate Intrinsic Value 
Outstanding at December 31, 2009  2,817,574  $1.33       
Options granted  853,085   2.59       
Options exercised  (174,794)  1.84       
Options forfeited  —           
Options cancelled  (71,919)  3.11       
Outstanding at September 30, 2010  3,432,946  $1.58   6.18  $5,806,112 
Vested or expected to vest at September 30, 2010 (1)  3,388,476  $1.72   6.18  $5,149,400 
Exercisable at September 30, 2010  2,917,243  $1.52   6.25  $5,149,400 
(1) The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total outstandingunvested options.
                 
   Options Outstanding  Options Exercisable 
   Number Outstanding  
Weighted Average
Remaining Contractual Life
(In Years)
  Weighted Average Exercise Price  Number Exercisable  Weighted Average Exercisable Price 
$0.34 - $0.98   1,160,340   5.67  $0.82   1,146,212  $0.82 
$1.00 - $1.51   1,185,938   6.42   1.20   1,030,400   1.22 
$1.80 - $1.94   411,341   6.32   1.94   194,519   1.94 
$2.60 - $3.92   639,327   6.74   3.05   519,912   3.04 
$5.80 - $22.50   27,000   1.51   11.00   26,200   10.97 
     3,432,946   6.18  $1.58   2,917,243  $1.52 

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock for the 125,202stock.  There were 3,206,745 options that were in-the-money at September 30, 2006.2010.   The Company’s closing stock price was $2.50$3.19 as of September 30, 2006.2010. The Company issues new shares of common stock upon exercise of stock options.


 
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On July 21, 2006, certain employeesNote 10:  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 Series B Convertible Preferred Stock (“the Preferred -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 declares a dividend for holders of the Company’s common stock and Directorsthen 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 agreed to forfeit approximately 467,000 shares underlying existing stock options in return for the re-pricing of approximately 869,000 existing options at $2.60and (ii) one vote per share havingof Preferred Stock when such vote is not covered by the immediately preceding clause.  In the event of a weighted average original exercise priceliquidation, dissolution, or winding up of $11.97. Option grants that have not been re-priced will remain unchanged. The unvested options which were re-priced will continuethe Company, the Preferred Stock – Series B is entitled to vest on original vesting schedules, but in no event prior to January 19, 2007. Previously vested options which were re-priced will now vest on January 19, 2007. Re-priced grants will be forfeited ifreceive liquidation preference before the individual leaves voluntarily.Common Stock.  The Company has accountedmay 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.  

For the re-pricing and cancellation transactions as a modification under SFAS No. 123R. The Company will recognize the additional compensation charges over the fournine months ended January 19, 2007 for previously vested options and over the remaining vesting period for unvested options.

Note 8: Shareholders’ Equity (Restated)
At the Company’s 2006 Annual Meeting of Shareholders in October 2006, the Company’s shareholders approved an amendment to the Company’s certificate of incorporation to effect a reverse stock split of the issued and outstanding common stock on a ratio of 1-for-10. On November 3, 2006, the reverse stock split became effective. The Company has adjusted its shareholders’ equity accounts by reducing its stated capital and increasing its additional paid-in capital by approximately $91,000 as of September, 30, 2006 and December 31, 2005, to reflect the reduction in outstanding shares as a result of the reverse stock split.

On July 21, 2006, the Company entered into several Note Purchase Agreements for the sale of approximately $5.99 million of senior secured debentures (the “Notes”) and warrants to purchase approximately 1.8 million2010, there were 60 shares of common stock, par value $.001 per share. The investors purchased $5.99 million principal amount of Notes with conversion prices of $2.60 per sharePreferred Stock  - Series B that may convertwere converted into approximately 2.3 million shares of common stock and 5 year warrants exercisable at $3.60 per share into approximately 1.6 million80,000 shares of common stock.  IfAs of September 30, 2010, there were 5,679 shares of Preferred Stock – Series B issued and outstanding.

Common Stock

For the Notes are not converted, 50% of the principal amount will be due on July 21, 2007 and the remaining 50% will be due on January 21, 2008. Commencing September 1, 2006, 6% interest is payable in quarterly installments on outstanding notes. On September 1, 2006, the Company paid approximately $37,000 to investors for the first installment of quarterly interest. In the quarterthree months ended September 30, 2006, two note holders partially converted their promissory note valued at approximately $70,000 and were issued an aggregate of approximately 27,000 shares. The2010, the Company received approximately $5.4 million, net of deferred costs of approximately $0.6 million which are amortized over the life of the Notes.
The Company accounted$201 thousand for 101,230 stock options exercised and for the net proceeds from the issuance of the Notes as two separate components: a detachable warrant component and a debt component.  The Company determined the relative fair value of the warrants to be approximately $3.4 million which was recorded as debt discount, a reduction of the carrying value of the Notes. The following assumptions were used to determine the fair value of the warrants:

Dividend yield0%
Risk free interest rates4.99%
Expected volatility122%
Expected term (in years)5.0 years
The discount is being amortized to interest expense over the term of the Note.nine months ended September 30, 2010, $322 thousand for 174,794 stock options exercised.  For the three and nine months ended September 30, 2006, debt discount of approximately $382,000 was amortized to interest expense. 

An additional $0.5 million will be invested through the exercise of a warrant to purchase approximately 192,000 shares of common2009, there were no stock at $2.60 per share on or prior to December 14, 2006, or at the election of the Company, by the purchase of additional Notes and warrants. The Company determined the relative fair value of the warrants to be approximately $158,000 which was recorded as an other asset. The following assumptions were used to determine the fair value of the warrant:
Dividend yield0%
Risk free interest rates5.25%
Expected volatility122%
Expected term (in years)0.4 years


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Under EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock”, the fair value of the warrants, $3.6 million, have been recorded as a liability since the warrant agreement requires a potential net-cash settlement in the first year of the warrant agreement if the registration statement is not effective. As of September 30, 2006, the registration statement is effective. The liability will be adjusted to fair value at each reporting period. The change in the fair value of the warrants will be recorded in the Consolidated Statement of Operations as other income (expense).options exercised.  For the three andmonths ended September 30, 2010, there were no warrants exercised.  For the nine months ended September 30, 2006, the Company recorded approximately $177,000 of gain from the change2010, there were 3,778,811 warrants exercised on a cashless basis resulting in the fair value of the derivative liability.

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

A registration rights agreement was entered into in connection with the Notes which requires the Company to file a registration statement for the resale of the common stock underlying the Notes and the warrants. The Company must use its best efforts to have the registration statement declared effective by the end of a specified grace period and also maintain the effectiveness of the registration statement until all2,601,591 shares of common stock underlying the Notes and the warrants have been sold or may be sold without volume restrictions pursuant to Rule 144(k) of the Securities Act. If the Company fails to have the registration statement declared effective within the grace period or fails to maintain the effectiveness as set forth in the preceding sentence, the Company is required to pay each investor cash payments equal to 1.0% of the aggregate purchase price monthly until the failure is cured. If the Company fails to pay the liquidated damages, interest at 16.0% will accrue until the liquidated damages are paid in full. The registration statement was filed and declared effective by the Securities and Exchange Commission within the specified grace period. As of September 30, 2006, the registration statement remains effective.

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

issued. For the three and nine months ended September 30, 2006,2010, the Company received approximately $10,000$250 thousand for the exercise of 5,000 options and there were no100,000 warrants exercised.  For the three and nine months ended September 30, 2005,2009, there were 2.9 million warrants exercised on a cashless basis resulting in 726,910 shares of common stock issued.

For the Company received approximately $30,000three months ended September 30, 2010, no shares of common stock were issued for payment of services rendered and $35,000, respectively, for the exercisenine months ended September 30, 2010, 15,363 shares of 9,600 and 10,400 options, respectively.common stock were issued for payment of $55 thousand for services rendered.  For the three and nine months ended September 30, 2005,2009, the Company received approximately $1.6 million for the exercise of approximately 300,000 warrants.

For the three and nine months ended September 30, 2006, the Company also issued approximately 63,000issued 42,857 and 108,000498,533 shares of common stock, respectively, in lieu of cash payments in the amountfor payment of approximately $209,000$45 thousand and $401,000,$304 thousand, respectively, as compensation for services rendered and to be rendered in the future.  ForThe Company recorded the fair value of the services rendered in selling, general and administrative expenses in the accompanying unaudited condensed consolidated financial statements for the nine months ended September 30, 2010 and the three and nine months ended September 30, 2005, the Company also issued approximately 12,000 and 41,000 shares of common stock, respectively, in lieu of cash payments in the amount of approximately $121,000 and $378,000, respectively, as compensation for services rendered and to be rendered in the future. 2009.

Note 9: Commitments and Contingencies11:  Income Taxes

Royalty PaymentsThe Company’s tax provision was $56,000 and $75,000, respectively, for the three and nine months ended September 30, 2010 which represents alternative minimum tax expense.

The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in accordancethe Company’s financial statements or tax returns.  The effect on deferred tax assets and liabilities of changes in tax rates will be recognized as income or expense in the period that the change occurs.  A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized.  Changes in circumstances, assumptions and clarification of uncertain tax regimes may require changes to any valuation allowances associated with the Company’s deferred tax assets.  Historically, the Company has incurred significant losses, however recently the Company has had a royaltynumber of consecutive quarters of net income.  Notwithstanding this positive trend, management does not believe that it is more likely than not that the benefits of the net operating losses carryforwards and other deferred tax assets will be realized. Accordingly, the Company has recognized the benefits of the deferred tax assets only to the extent of current taxable income.

Due to the Company’s operating loss carryforwards, all tax years remain open to examination by the major taxing jurisdictions to which the Company is subject. In the event that the Company is assessed interest or penalties at some point in the future, it will be classified in the financial statements as tax expense.
14


Note 12:  Commitments and Contingencies

Royalty Payments

The Company signed a license agreement on March 29, 1999 with Eastman Kodak is(“Kodak’), under which it was obligated to make minimum annual royalty payments of $125,000 which commenced on January 1, 2001.payments. Under this agreement, the Company must pay to Eastman Kodak a minimum royalty plus 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.  The Company was notified that Kodak sold substantially all rights and obligations under the Company’s license agreement to Global OLED Technology, owned by LG Electronics, as of December 30, 2009.
In late 2008, the Company began evaluating the status of its manufacturing process and the use of the IP associated with its license agreement.  After this analysis and after making a few changes to its manufacturing process, the Company determined it was no longer using the IP covered under the license agreement.  As the Company has determined it is no longer using the IP covered under the license agreement in its manufacturing process, the Company believes that it is no longer required to pay the minimum annual royalty payment of $125,000 and as such has not paid or accrued this amount in 2010.  Going forward, the Company will continue to recognize the reduced royalty liability on sales of product produced prior to the manufacturing process change. There can be no assurance that the licensor will not challenge the Company’s position.


15

The Company paid $125,000 for the minimum amount due for 2006 and 2005. The amount was recorded in prepaid expenses and will be amortized asAs of September 30, 2010, the Company recordshad approximately $49 thousand of inventory manufactured using the IP which if sold would result in royalty expense as defined in the agreement. Royalty expense wasdue of approximately $149,000 and $340,000, respectively, for$13 thousand.  For the three and nine months ended September 30, 20062010, the Company recorded approximately $1 thousand and $9 thousand, respectively, as royalty expense in its consolidated statements of operations and the associated liability on its consolidated balance sheets as the Company believes this is the amount due under the agreement which is based on applying the royalty formula to only the sold displays produced prior to the manufacturing process changes.  Royalty expense was approximately $65,000 and $130,000, respectively,$250 thousand for the three and nine months ended September 30, 2005.2009.

Contractual Obligations

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

The Company’s manufacturing facilities are leased from IBM in Hopewell Junction, New York.  eMagin leases approximately 37,000 square feet to house its equipment for OLED microdisplay fabrication and for research and development, an assembly area and administrative offices. The lease expires May 31, 2014 and contains an option of extending the lease for five years.   The corporate headquarters are located in Bellevue, Washington where eMagin leases approximately 5,100 square feet.   The lease expires on August 31, 2014.  Rent expense was approximately $332,000$283 thousand and $1.0 million$850 thousand, respectively, for the three and nine months ended September 30, 2006,2010 and $336 thousand and $1.1 million, respectively, and approximately $267,000 and $742,000 for the three and nine months ended September 30, 2005, respectively.2009.

Note 10:13:  Legal Proceedings

On December 6, 2005, New York State Urban Development Corporation commenced actionMarch 17, 2010, Gary Jones, a former executive at the Company, filed a complaint for damages in the SupremeSuperior Court of the State of New York,Washington for King County of New York(the "Complaint") against the Company assertingand the Company's Chief Financial Officer. The Complaint alleges unspecified damages for failure to pay contractual payments and wages under Washington law (“the Washington Wage Claim”) and includes, among other claims, breach of contract, breach of the duty of good faith and seekingfair dealing, promissory estoppel and misrepresentation.

On May 21, 2010, the court granted eMagin's motion to recoverdismiss regarding the claim for misrepresentation and the Washington Wage Claim.  The Chief Financial Officer's motion to dismiss was also granted relating to the following claims against him: the Washington Wage Claims, breach of contract, breach of promises of specific treatment in specific circumstances, breach of the duty of good faith and fair dealing, and promissory estoppel.  With respect to the undismissed claims, the litigation is ongoing.  The Company denies the allegations raised in the Complaint and intends to vigorously defend itself.  There can be no assurance of the outcome of this matter.

Note 14:  Employment Agreements
Pursuant to the Employment Agreement between the Company and Susan Jones (as previously amended and extended, the “Employment Agreement”), the term of Ms. Jones’ contract with the Company ended May 12, 2010 and her employment with the Company ceased at that time. Under the terms of the Employment Agreement between Susan Jones and the Company, Ms. Jones was entitled to a $150,000 grantpayment of eighteen months salary totaling approximately $473 thousand which payment was made as of June 30, 2010, incentive payments of 1% of revenue paid quarterly for a period of eighteen months, continuation of health insurance for twenty four months and a moving allowance for personal effects of $7.5 thousand. In addition, 12,696 unvested options immediately vested and became exercisable upon termination.  As a result, the Company took a one time non-cash compensation charge of $28 thousand in the second quarter of 2010.

The Company accounted for the incentive payments under guidance that benefits provided in accordance with an agreement be recorded as a liability when it is probable that the employee is entitled to the benefits and the amount can be reasonably estimated.  The Company based on goals set forthestimated that $440 thousand is a reasonable estimate of the eighteen months of incentive payments and approximately $21 thousand is a reasonable estimate for the continuation of health insurance for twenty four months.  In the second quarter of 2010, the Company recorded a liability of approximately $469 thousand which included the incentive payments, health insurance coverage, and the moving allowance in the agreement for recruitmentcondensed consolidated balance sheets and the associated expense as a sales, general and administrative expense in the condensed consolidated statements of employees. On July 13, 2006,operations.  At September 30, 2010, the Company agreed to a settlement withreviewed the New York State Urban Development Corporation to repay $112,200. The settlement requires that repayments be made on a monthly basis in the amount of $3,116.67 per month commencing August 1, 2006estimates and ending on July 1, 2009.assessed there was no material change.
 
Note 11: Subsequent Events15:  Restatement

AtIn this Amended 10-Q, eMagin restated its previously issued condensed consolidated financial statements as of and for the Company’s 2006 Annual Meetingthree and nine months ended September 30, 2010 to correct errors in the accounting for certain warrants and the calculation of Shareholders held on October 20, 2006,EPS.  The Company determined that certain warrants (“Warrants”) issued contain anti-dilution provisions which should have been accounted for as derivatives in accordance with the Company’s shareholders approvedprovisions of ASC 815.  Authoritative guidance, effective January 1, 2009, provides an amendmentapproach for companies to evaluate whether an equity-linked financial instrument or embedded feature in the instrument is indexed to its own stock for the purpose of evaluating the scope exception in ASC 815.  Since the Company has issued Warrants which contain anti-dilution features for the holder, they are not considered indexed to the Company’s Certificateown stock, and therefore, do not qualify for the scope exception in ASC 815 and must be accounted for as derivatives.  Accordingly, beginning January 1, 2009, the Company should have reclassified the Warrants as liabilities and recorded the Warrants at estimated fair value at each reporting date, computed using the Monte Carlo Simulation approach.  Thereafter, changes in the warrant liability from period to period should have been recorded in the condensed consolidated statements of Incorporation tooperations.  Effective January 1, 2009, the Company should have recorded a cumulative effect a reverse stock splitadjustment based on the grant date fair value of the Company’s outstanding common stock at an exchange ratio of one-for-ten. On November 3, 2006,Warrants and the reverse stock split became effective. Each holder of ten shareschange in fair value of the Company’s common stock will becomewarrant liability from the holder of one shareissuance date through January 1, 2009.

On January 1, 2009, the Company computed fair value using the Monte Carlo Simulation approach.   The fair value as of the Company’s common stock. In addition, all outstanding options,issuance date was $15.1 million and as of January 1, 2009 was $2.1 million. Accordingly as of January 1, 2009, the Company recorded a warrant liability of $2.1 million, reduction in additional paid-in capital of $15.1 million and a reduction in accumulated deficit of $13.0 million.   As of September 30, 2010, the Company computed the fair value of the warrant liability as $6.5 million, a decrease of $0.4 million since January 1, 2010.  The change in the warrant liability of $0.4 million was comprised of the change in the fair value of the warrants of $10.0 million offset by the fair value of the expired warrants of $0.4 million and convertible notes will be adjustedthe fair value of the exercised warrants of $10.0 million.  For the nine months ended September 30, 2010, the Company recorded other expense in accordance with their termsthe Condensed Consolidated Statements of Operations of $9.6 million, the change in fair value of the warrant liability net of the fair value of expired warrants.  The Condensed Consolidated Statement of Changes in Shareholders’ Equity, Condensed Consolidated Statements of Cash Flows, and pursuantNotes to the ratio ofCondensed Consolidated Financial Statements have been restated where applicable to reflect the reverse split. All fractional shares shall be rounded up to the next whole number of shares.adjustments.

The accompanying quarterly financial statements have been restated to report the following Warrants as derivative liabilities measured at estimated fair value, calculated using the Monte Carlo Simulation approach:

         Fair Value of Warrants as of (in thousands): 
Warrant Issuance Dates Number of Warrants Outstanding as of September 30, 2010  Exercise Price Warrant Expiration Dates January 1, 2010  March 31, 2010  June 30, 2010  September 30, 2010 
                    
October 25, 2004  —  $2.50 April 25, 2010 $34  $705  $—  $— 
July 23, 2007  528,049  $1.03 July 21, 2011  2,222   4,888   1,339   1,140 
July 23, 2007  1,000,000  $0.48 July 21, 2011  1,293   3,028   2,932   2,588 
April 2, 2008  72,116  $1.13 April 2, 2013  1,041   1,579   217   175 
December 22, 2008  1,000,000  $1.03 December 22, 2013  2,288   5,339   2,720   2,582 
         Total Fair Value $6,878  $15,539  $7,208  $6,485 
 
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The table below is a reconciliation of the beginning and ending balances for the warrant liability:

  Number of Warrants Warrant Issuance Dates 
Fair Value of Warrants
(in thousands)
 
Balance as of January 1, 2010     $6,878 
Change in fair value of warrants      9,497 
Fair value of warrants exercised  429,331 July 23, 2007  (489)
Fair value of warrants exercised  240,386 April 2, 2008  (347)
Balance as of March 31, 2010      $15,539 
Change in fair value of warrants       1,204 
Fair value of warrants expired  330,477 October 25, 2004  (358)
Fair value of warrants exercised  319,524 October 25, 2004  (475)
Fair value of warrants exercised  1,533,332 July 23, 2007  (4,189)
Fair value of warrants exercised  480,771 April 2, 2008  (1,501)
Fair value of warrants exercised  875,467 December 22, 2008  (3,012)
Balance as of June 30, 2010      $7,208 
Change in fair value of warrants       (723)
Balance as of September 30, 2010      $6,485 

Additionally, under ASC 260, “Earnings Per Share”, entities that have issued securities other than common stock that participate in dividends with the common stock (“participating securities”) are required to apply the two-class method to compute basic EPS.  The two-class method is an earnings allocation method under which EPS is calculated for each class of common stock and participating security as if all such earnings had been distributed during the period.  However, the participating convertible preferred stock is not required to absorb any net loss. The Company has Convertible Preferred Stock - Series B which participates in dividends with the Company’s common stock and therefore the Company should have calculated EPS using the two-class method. The restated condensed consolidated financial statements reflect EPS calculated using the two-class method.

The following tables summarize the effects of the restatement on the specific items presented in the Company’s historical condensed consolidated financial statements previously included in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010:

Condensed Consolidated Balance Sheet September 30, 2010  September 30, 2010 
(in thousands) (As previously reported)  (As restated) 
       
Warrant liability $—  $3,728 
Total current liabilities  4,785   8,513 
Warrant liability  —   2,757 
Total liabilities $4,785  $11,270 
         
Shareholders’ equity:        
Additional paid-in capital $208,665  $205,372 
Accumulated deficit  (192,290)  (195,482)
Total shareholders’ equity $16,395  $9,910 
Condensed Consolidated Statements of Operations 
Three Months Ended
September 30, 2010
  
Nine Months Ended
September 30, 2010
 
(in thousands except share and per share data) (As previously reported)  (As restated)  (As previously reported)  (As restated) 
             
Change in fair value of warrant liability $—  $723  $—  $(9,620)
Total other income (expense) $(19) $704  $(69) $(9,689)
Net income (loss) $2,828  $3,551  $4,620  $(5,000)
Income (loss) per share, basic $0.14  $0.13  $0.25  $(0.27)
Income (loss) per share, diluted $0.09  $0.08  $0.15  $(0.27)
                 
Weighted average number of shares outstanding:              �� 
  Basic  19,883,029   19,883,029   18,781,185   18,781,185 
  Diluted  31,816,477   24,244,477   30,680,340   18,781,185 


Condensed Consolidated Statements of Cash Flows 
Nine Months Ended
September 30, 2010
 
(in thousands) (As previously reported)  (As restated) 
       
Net income (loss) $4,620  $(5,000)
Change in fair value of warrant liability  —   (9,620)
Net cash provided by operating activities $6,608  $6,608 
         

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

In this Amendment No. 1 we have restated our previously issued management’s discussion and analysis of financial condition and results of operations, condensed consolidated financial statements and related disclosures for the quarter ended September 30, 2010 for the following:

●  To correct errors in the accounting for certain warrants.  Specifically, we previously classified as equity instruments warrants that should have been classified as derivative liability instruments based on the terms of the warrants and the applicable accounting guidance.

●  To correct an error in the calculation of earnings per share (“EPS”).  We issued Preferred Stock – Series B which participates in dividends with our common stock: as a result, we should have used the two-class method for calculating EPS.
Overview

We design develop,and manufacture miniature displays, which we refer to as OLED-on-silicon-microdisplays, and marketmicrodisplay modules for virtual imaging, primarily for incorporation into the products which utilize OLEDs, or organic light emitting diodes, OLED-on-silicon microdisplays and related information technology solutions. We integrate OLED technology with silicon chips to produce high-resolution microdisplaysof other manufacturers. Microdisplays are typically smaller than one-inch diagonally which,many postage stamps, but when viewed through a magnifier create virtual images that appear comparable in sizethey 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 that of a computer monitor or a large-screen television. Our products enable our original equipment manufacturer, or OEM, customersbe coated onto silicon chips to develop and market improved or new electronic products. We believe that virtual imaging will become an important way for increasingly mobile people to have quick access to high-resolution data, work, and experience new more immersive forms of communications and entertainment.

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

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

We licensebelieve that our core OLED technology from Eastman KodakOLED-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 wewider 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 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 licensing agreement with Eastman Kodak, coupled with our ownand 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 selldemonstrate publicly and market full-color active matrix small molecule OLED-on-silicon microdisplays.

Company History

From inception throughAs of January 1, 2003, we were no longer classified as a developmentaldevelopment stage company. We have transitioned to manufacturing our productsproduct and intend tohave significantly increaseincreased our marketing, sales, and research and development efforts, and expandexpanded our operating infrastructure. MostCurrently, most of our operating expenses are fixed in the near term. If we are unable to generate significant revenues, our net losses in any given period could be greater than expected.labor related and semi-fixed.

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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 selling 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. Revenue is recognized at shipment and we record a reserve for estimated sales returns, which is reflected as a reduction of revenue at the time of revenue recognition. We defer revenue on productsProducts sold directly to the consumer withconsumers have a fifteenthirty day right of return.  Revenue on consumer products is recognized upon the expiration ofdeferred until the right of return.return has expired.

Revenues from research and development activities relating to firm fixed-price contracts and cost-type 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.

Product Warranty

We offer a one-year product replacement warranty. In general, our standard policy is to repair or replace the defective products. We accrue for estimated returns of defective products at the time revenue is recognized based on historical activity as well as for specific known product issues. The determination of these accruals requires us to make estimates of the frequency and extent of warranty activity and estimate future costs to replace the products under warranty. If the actual warranty activity and/or repair and replacement costs differ significantly from these estimates, adjustments to cost of revenue may be required in future periods.
Use of Estimates

In accordanceThe preparation of financial statements in conformity with generally accepted accounting principles generally accepted in the United States requires management utilizesto 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 stock-based compensation expense and other factors. Management believes it has exercised reasonable judgment in deriving these estimates. Consequently, a change in conditions could affect these estimates.

Fair Value of Financial Instruments- Restated

The Company's
eMagin’s cash, cash equivalents, investments, accounts receivable, short-term investments, and accounts payable are stated at cost which approximates fair value due to the short-term nature of these instruments.  In addition, the long-term investments are stated at cost which approximates fair value.   eMagin measures the fair value of our warrants based on the Monte Carlo Simulation approach.
Stock-based Compensation

Stock-based Compensation

We maintaineMagin 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 September 30, 2006,2010, the number of shares of common stock available for issuance was 150,000.300,000.  As of September 30, 2006,2010, the plan had not been implemented.


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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 ofin 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.  For the three and nine months ended September 30, 2010, there were 236,200 and 842,585 options, respectively, granted from this plan.

On January 1, 2006, weThe 2008 Incentive Stock Plan (“the 2008 Plan”) adopted and approved by the provisionsBoard of Financial Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based Payment”,Directors on November 5, 2008 provides for the issuance of shares of common stock and (“SFAS No. 123R”), which requires usoptions to recognizepurchase shares of common stock to employees, officers, directors and consultants.  The 2008 Plan has an aggregate of 2,000,000 shares.  For the nine months ended September 30, 2010, 10,500 options were granted from this plan.

We account for the measurement and recognition of compensation expense relatedfor all share-based payment awards made to employees and directors by estimating the fair value of our share-based compensation issued to employees and directors. Prior to the January 1, 2006, we accounted for share-based compensation under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"), “Accounting for Stock Issued to Employees”, and related interpretations, as permitted by FASB Statement No. 123, "Accounting for Stock-Based Compensation" (“SFAS No. 123”). In accordance with APB No. 25, no compensation cost was required to be recognized for options granted that had an exercise price equal to the market value of the underlying common stock onawards at the date of grant.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 of the Condensed Consolidated Financial Statements – Stock Compensation for a further discussion on stock-based compensation.
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NEW ACCOUNTING PRONOUNCEMENTS

We adopted SFAS No. 123R usingSee Note 2 of the modified prospective transition methodCondensed Consolidated Financial Statements in Item 1 for a description of recent accounting pronouncements, including the expected dates of adoption and consequently have not retroactively adjustedestimated effects on results for prior periods. Under this transition method, compensation cost associated with stock options includes: a) compensation cost for all share-based compensation granted prior to, but not vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No.123operations and b) compensation cost for all share-based compensation granted beginning January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No.123R. We use the straight-line method for recognizing compensation expense. Compensation expense for awards under SFAS 123R includes an estimate for forfeitures.financial condition.

NEW ACCOUNTING PRONOUNCEMENT
RESULTS OF OPERATIONS

The Financial Accounting Standards Board (“FASB”) has issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”), regarding accounting for, and disclosure of, uncertain tax positions. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not anticipate that the adoption of this statement will have a material effect on our financial position or results of operation.

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”.  SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements.  SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  We will be evaluating the effect that the adoption of SFAS 157 may have on our financial position and results of operations.
RESULTS OF OPERATIONS

THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 20062010 COMPARED TO THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 20052009

Revenues
 
Revenues for the three and nine months ended September 30, 20062010 were approximately $2.3$8.3 million and $5.6$22.5 million, respectively, as compared to approximately $1.1$6.1 million and $2.5$17.1 million, respectively,  for the three and nine months ended September 30, 2005,2009, an increase of approximately 103%36% and 127%32%, respectively.  Higher revenue for

For the three and nine month periodsmonths ended September 30, 2010, product revenue increased approximately $1.7 million or 32% and $3.3 million or 23%, respectively, as compared to the three and nine months ended September 30, 2009 which was primarily duea result of an increase in customer demand for our OLED microdisplays.   For the three and nine months ended September 30, 2010, contract revenue increased approximately $0.5 million or 56% and $2.1 million or 84%, respectively, as compared to increased microdisplay demandthe three and increased availabilitynine months ended September 30, 2009 which was a result of finished displays duean increase in the number of active projects in the first nine months of 2010 as compared to manufacturing improvements.the first nine months of 2009.


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Cost of Goods Sold

Cost of goods sold is comprised of costs of product revenue and contract revenue.  Cost of product revenue includes materials, labor and manufacturing overhead related to our products.  Cost of contract revenue includes direct and allocated indirect costs associated with production.performing on contracts.  Cost of goods sold for the three and nine months ended September 30, 20062010 was approximately $2.9$2.8 million and $8.9$9.0 million, respectively, as compared to approximately $2.7$2.6 million and $7.0$7.3 million for the three and nine months ended September 30, 2009, an increase of approximately $0.2 million  and $1.7 million, respectively,  for the three and nine months ended September, 30, 2005, an increase2010.

Cost of approximately $0.2 milliongoods sold as a percentage of revenues was 34% and $1.9 million, respectively.  The gross loss for the three and nine months ended September 30, 2006 was approximately ($0.6) million and ($3.3) million, respectively, as compared to approximately ($1.6) million and $(4.6) million, respectively, for the three and nine months ended September 30, 2005. This translates to a gross loss of (28%) and (59%)40%, respectively, for the three and nine months ended September 30, 20062010 as compared to a43% for both the three and nine months ended September 30, 2009.

The following table outlines product, contract and total gross loss of (137%)profit and (184%), respectively,related gross margins for both the three and nine months ended September 30, 2010 and 2009 (dollars in thousands):
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2010  2009  2010  2009 
  (unaudited)  (unaudited) 
Product revenue gross profit $4,831  $3,264  $11,236  $8,743 
Product revenue gross margin  70%  62%   63%  60% 
Contract revenue gross profit $637  $236  $2,289  $1,015 
Contract revenue gross margin  48%  28%   49%   40% 
Total gross profit $5,468  $3,500  $13,525  $9,758 
Total gross margin  66%  57%   60%   57% 

The gross profit for the three and nine months ended September 30, 2005. The increase in cost of goods sold2010 was approximately $5.5 million and $13.5 million as compared to approximately $3.5 million and $9.8 million for the three and nine months 2006ended September 30, 2009, an increase of $2.0 million and $3.7 million, respectively.  Gross margin was attributed to higher materials usage to support increased production as well as approximately $112,000 and $370,00066 % for the three months ended September 2010 up from 57% for the three months ended September 30, 2009.  Gross margin was 60 % for the nine months ended September 2010 up from 57% for the nine months ended September 30, 2009.

The product gross profit for the three and nine month periods, respectively,months ended September 30, 2010 was approximately $4.8 million and $11.2 million as compared to approximately $3.3 million and $8.7 million for the three and nine months ended September, 2009, an increase of non cash stock compensation expense reflected$1.5 million and $2.5 million, respectively.  Product gross margin was 70% for the three months ended September 30, 2010 up from 62% for the three months ended September 30, 2009.  Product gross margin was 63% for the nine months ended September 30, 2010 up from 60% for the nine months ended September 30, 2009.  The increase in accordanceproduct gross profit and gross margin was due to higher sales volumes and improved product mix resulting in a higher average selling price in conjunction with SFAS No. 123R in 2006.lower display costs which were a result of the of increased production volume and improved manufacturing utilization.  The higher average selling price was a result of the mix of products sold which included custom displays with a higher sales price.
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The contract gross profit for the three and nine months ended September 30, 2010 was approximately $0.6 million and $2.3 million as compared to $0.2 million and $1.0 million for the three and nine months ended September 30, 2009, an increase of $0.4 million and $1.3 million, respectively.  Contract gross margin was 48% for the three months ended September 30, 2010 up from 28% for the three months ended September 30, 2009.  Contract gross margin was 49% for the nine months ended September 30, 2010 up from 40% for the nine months ended September 30, 2009.    The contract gross margin is dependent upon the mix of costs, internal versus external third party costs, with external third party costs causing a lower gross margin and reducing the contract gross profit.
Operating Expenses

Operating Expenses

Research and Development.  Research and development expenses includedinclude salaries, development materials and other costs specifically allocated to the development of new microdisplay products, OLED materials and subsystems.  Research and development expenses for the three and nine months ended September 30, 20062010 and 2009 were both approximately $1.0 million and $3.5 million, respectively, a decrease of approximately $57,000 and an increase of $469,000, as compared to approximately $1.0 million and $3.0 million, respectively, for the three and nine months ended September 30, 2005.  The decrease in the quarter was due to reductions in research$0.5 million.  Research and development expenditures and personnel costs and offset in part by the stock-based compensation of $119,000 reflected in accordance with SFAS No. 123R in 2006. The increase inexpenses for the nine months ended September 30, 20062010 were approximately $1.9 million as compared to $1.4 million for the nine months ended September 30, 2009, an increase of approximately $0.5 million.  The increase for the nine months ended September 30, 2010 was primarily duerelated to the stock-based compensationan increase in internal research and development of $0.4 million and personnel expense of $378,000 and slightly higher headcount for the first 6 months of the year. Options were not expensed during 2005.$0.1 million.

Selling, General and Administrative.  Selling, general and administrative expenses consist principally of salaries, including severance, and fees for professional services, legal fees incurred in connection with patent filings and related matters,litigation, as well as other marketing and administrative expenses.  Selling, general and administrative expenses for the three and nine months ended September 30, 20062010 were approximately $2.1 million and $6.9 million as compared to approximately $1.8 million and $6.7 million, respectively, as compared to approximately $1.2 million and $4.3 million, respectively, for the three and nine months ended September 30, 2005.  The increase of approximately $0.6 million for the quarter ended September 30, 2006 was primarily related to the stock-based compensation expense of approximately $458,000. The increase of approximately $2.4$5.1 million for the nine months ended September 30, 20062009.  The increase of approximately $0.3 million for the three months ended September 30, 2010 was primarily duerelated to stock-based compensationincreased personnel costs including non-cash compensation.  The increase of approximately $1.8 million for the nine months ended September 30, 2010 was primarily related to severance expense of approximately $1.5$1.0 million, personnel costs including non-cash compensation of $0.8 million, and an increaselegal fees of $0.4 million offset by a decrease in advertisingprofessional services of $0.2 million and trade showrecruiting expenses related to the marketing of our Z800 3DVisor.  $0.2 million.

Other Income (Expense), net.  Other income (expense), net consists primarily of interest income earned on investments, interest expense related to the secured debentures,debt, income from the licensing of intangible assets and gain fromincome and expense applicable to the change in fair value of the derivativewarrant liability.
For the three and nine months ended September 30, 2006,2010, interest incomeexpense was $14,000approximately $21 thousand and $73,000,$79 thousand, respectively, as compared to $34,000approximately $76 thousand and $157,000,$417 thousand, respectively, for the three and nine months ended September 30, 2005. The decrease in interest income was primarily a result of lower cash balances available for investment.2009.   For the three and nine months ended September 30, 2006,2010, the majority of the interest expense was $509,000associated with debt.   The breakdown of the interest expense for the three and nine month period in 2009 is as follows: interest expense associated with debt of approximately $7 thousand and $48 thousand, respectively, and the amortization of the deferred costs associated with the debt was $62 thousand and $362 thousand, respectively.   The decrease in interest expense for the three and nine months ended September 30, 2010 as compared to $1,000the three and $3,000,nine months ended September 30, 2009 was primarily a result of the Company not having any outstanding debt.

Other income for the three and nine months ended September 30, 2010 was approximately $2 thousand and $10 thousand as compared to $1 thousand and $41 thousand for the three and nine months ended September 30, 2009.  The other income for the three and nine months ended September 30, 2010 was interest income of approximately $2 thousand and $4 thousand, respectively, and $0 and $6 thousand, respectively,  from equipment salvage.  The other income for the three and nine months ended September 30, 2009 was interest income of approximately $1 thousand and $3 thousand, respectively, and $0 and $38 thousand, respectively, for a settlement of a liability. 
Change in Fair Value of Warrant Liability.  In accordance with ASC 815, adopted January 1, 2009, certain warrants previously classified within equity were reclassified as liabilities.  As a result of this reclassification, the accounting guidance requires revaluation of this liability every reporting period.  The fair value of the liability at September 30, 2010 and 2009 was measured by using the Monte Carlo Simulation model.  The revaluation resulted in income of approximately $0.7 million for the three months ended September 30, 2010 and a charge of approximately $9.6 million for the nine months ended September 30, 2010 as compared to a charge of approximately $3.3 million and approximately $6.4 million for the three and nine months ended September 30, 2009, respectively. This revaluation resulted in non-cash changes to other income (expense) and had no impact on our cash balances, operations, or operating income.
Net Income (Loss)

For the three months ended September 30, 2010, net income was approximately $ 3.6 million and for the nine months ended September 30, 2010, the net loss was approximately $5.0 million as compared to the net loss of approximately $2.1 million and approximately $3.5 million, respectively, for the three and nine months ended September 30, 2005. The increase in2009.  Net loss for the interest expense was a result of interest associated with our notes payable of $37,000, the amortization of the deferred costs associated with the notes payable of $88,000, and the amortization of the debt discount of $382,000. For the three and nine months ended September 30, 2006, income from2010 would have been approximately $4.0 million excluding the change in the derivative liability was $177,000 as compared to $0 for the three and nine months ended September 30, 2005.$1.0 million one time severance charge.

Liquidity and Capital Resources

As of September 30, 2006,2010, we had approximately $1.4$10.3 million of cash, cash equivalents, and investments in certificates of deposit (“CDs”).  As of September 30, 2010, we had approximately $6.7 million of cash and cash equivalents as compared to $6.7$5.3 million as of December 31, 2005.2009.  The decreasechange in cash of $1.4 million was primarily due to cash provided by operations of approximately $5.3$6.6 million was due primarily to $10.4and financing activities of approximately $0.6 million ofoffset by cash used for operatinginvesting activities offset by $5.3 million of cash provided by financing activities.approximately $5.8 million.

Cash flow used inprovided by operating activities during the nine months of 2006ended September 30, 2010 was approximately $10.4$6.6 million, as comparedattributable to cash usedour net loss of approximately $12.2$5.0 million offset by non-cash expenses of approximately $10.8 million and approximately $0.8 million from the change in operating assets and liabilities.   Cash flow provided by operating activities during the nine months of 2005. This decreaseended September 30, 2009 was approximately $3.5 million, attributable to our net loss of approximately $1.8$3.5 million, was primarily attributable to an increased inventorychange in operating assets and prepaidliabilities of approximately $0.6 million offset by non-cash expenses during the first nine months of 2005 and notapproximately $7.6 million. 

 
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repeated in 2006 as well as a reduction of approximately $400,000 in net losses before stock option expenses. In June of 2006, we took steps to reduce our use of cash for operating activities by approximately $4 million annually by reducing our headcount by 28 employees and lowering discretionary spending.

Cash used in investing activities during the nine months ended September 30, 20062010 was approximately $0.2$5.8 million as compared to approximately $0.7purchase equipment of $2.3 million and purchase certificates of deposit (“CDs”) of $3.5 million. Cash used in investing activities during the nine months ended September 30, 2005. The reduction of cash used in investing activities2009 was primarily dueapproximately $0.5 million to lower purchases ofpurchase equipment.

Cash provided fromby financing activities during the nine months ended September 30, 20062010 was approximately $5.3$0.6 million as compared approximately $1.6 millionfrom the exercise of stock options and warrants.  Cash used by financing activities during the nine months ended September 30, 2005. We received2009 was approximately $5.4$1.7 million net, fromto pay down the saleline of senior secured debentures for the nine months ended September 30, 2006 and approximately $1.6 million of proceeds from the exercise of employee stock options and warrants during the same period in 2005.credit.

Our condensed consolidated financial statements as of September 30, 2006 have been prepared under the assumption that we will continue as a going concern for the year ending December 31, 2006. Our independent registered public accounting firm have issued their report dated March 15, 2006 that included an explanatory paragraph expressing substantial doubt in our abilitybusiness continues to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern ultimately is dependent on our ability to generate a profit which is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As we have reported our business is currently experiencing significantexperience revenue growth during the first nine months of 2006.growth. This trend, if it continues, may result in higher accounts receivable levels and may require increased production and/or higher inventory levels.  We anticipate thatbelieve our current liquidity position, where we have approximately $10.3 million of cash, requirementscash equivalents, and investments – held to fund these requirementsmaturity on hand as well as other operating or investingof September 30, 2010, together with our available line of credit and the prospects for continued generation of cash requirementsfrom operations are adequate for our business needs over the next 6 months will be greater than our current cash on hand. While we received approximately $5.4 million, net, from the sale of senior secured debentures pursuant to the Note Purchase agreements that we entered into on July 21, 2006, and such agreements provide for the investors to purchase an additional $0.5 million prior to December 14, 2006, nevertheless wetwelve months. We anticipate that we will stillnot require additional funds over the next 6 months. We do not currently have commitments for thesetwelve months other than perhaps discretionary capital spending.  If unanticipated events arise during the next twelve months, we may need additional funds.  If additional funds are required and no assurance can be given that additional financing will be available, or if available, will be on acceptable terms. If we are unable to obtain sufficient funds during the next 12 months we will furthermay have to reduce the size of our organization and mayand/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.

In addition to the foregoing, as previously reported, we have retained CIBC World Markets Corporation and Larkspur Capital Corporation to assist us in investigating and evaluating various strategic alternatives, ranging from investment to acquisition, in response to inquiries that we have received.
Off-Balance Sheet Arrangements

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

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

Market Rate RiskNot applicable.

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

Interest Rate Risk

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

Foreign Currency Exchange Rate Risk

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

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

ITEM 4.  Controls and Procedures

a) (a)  Evaluation of Disclosure Controls and Procedures. Based on an evaluation

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) ofRule 13a-15 under the Securities Exchange Act of 1934 as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15,(the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Restatement of Condensed Consolidated Financial Statements

On August 10, 2011, the Audit Committee of the Board of Directors (“Audit Committee”) in consultation with the Company’s management concluded that the financial statements included in the Company’s Annual Reports issued on Form 10-K for the years ended December 31, 2009 and 2010 and quarterly reports issued on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2006,2009; March 31, June 30, and September 30, 2010; and March 31, 2011 did not use the proper method to calculate earnings per share and as a result, should not be relied upon.  On August 15, 2011, after consulting with the Audit Committee on August 10, 2011 and with the Company’s auditors and former auditors, management concluded that the Company did not properly account for certain common stock warrants as liabilities and as a result, the financial statements, as mentioned above, should not be relied upon.  The Audit Committee authorized and directed Company’s management to restate its consolidated financial statements for the above mentioned periods.  As a result of a deficiency in our Chief Executive Officerinternal control over financial reporting relating to the accounting for common stock warrants, as of the end of the period covered by this report our management has reassessed the effectiveness of our disclosure controls and Chief Financial Officer have concludedprocedures and has determined that our disclosure controls and procedures were not effectiveeffective.

Remediation Plan

Since the determination regarding this deficiency, we have devoted significant effort and resources to remediation and improvement of our internal control over financial reporting.  While we had processes in ensuring that information requiredplace to be disclosed byidentify and apply developments in accounting standards, we enhanced these processes to better evaluate our research of the nuances of complex accounting standards.  Our enhancements included retaining a third party consultant, who is a technical accounting professional, to assist us in the reports thatinterpretation and application of new and complex accounting guidance.  Additionally, we file or submit underhave improved training of accounting personnel and communication among our internal staff, our legal team and our consultant.  Management will continue to review and make necessary changes to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.overall design of our internal control environment.

We determined that the incorrect term was used in the Black-Scholes calculation in valuing the derivative liability and debt discount associated with the warrants issued in July 2006. Initially, the Notes’ life of 18 months was used as the term in the Black-Scholes calculation and the correct term was the warrant life of 5 years. As set forth in this report, the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Statement of Changes in Shareholders’ Equity, Condensed Consolidated Statements of Cash Flows, and Selected Notes to the Condensed Consolidated Financial Statements have been “restated”, where applicable, to record the increase in valuation of the derivative liability and debt discount and the associated increase in the gain on warrant derivative liability and interest expense.
(b) Changes in Internal Controls.During the quarter ended September 30, 2006,

Except as stated above, there were no changes in our internal controlcontrols over financial reporting identified in connection withduring the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15fiscal quarter ended September 30, 2010 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.reporting

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

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

ITEM 1A. Risk Factors

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

RISKS RELATED TO OUR FINANCIAL RESULTS

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

Accumulated losses excluding non-cash transactions as of September 30, 2006 were $77 million and acquisition related non-cash transactions were $102 million, which resulted in an accumulated net loss of $179 million. We have not yet achieved profitability and we can give no assurances that we will achieve profitability within the foreseeable future as we fund
 
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operating and capital expenditures in areas such as establishment and expansion of markets, sales and marketing, operating equipment and research and development. We cannot assure investors that we will ever achieve or sustain profitability or that our operating losses will not increase
PART II - OTHER INFORMATION

ITEM 1.  Legal Proceedings

On March 17, 2010, Gary Jones, a former executive at the Company filed a complaint for damages in the future.Superior Court of the State of Washington for King County (the "Complaint") against the Company and the Company's Chief Financial Officer. The Complaint alleges unspecified damages for failure to pay contractual payments and wages under Washington law (“the Washington Wage Claim”) and includes, among other claims, breach of contract, breach of the duty of good faith and fair dealing, promissory estoppel and misrepresentation.

We may not be ableOn May 21, 2010, the court granted eMagin's motion to execute our business plandismiss regarding the claim for misrepresentation and may not generate cash from operations.

As we have reported, our business is currently experiencing significant revenue growth during the first nine months of 2006. We anticipate that our cash requirementsWashington Wage Claim.  The Chief Financial Officer's motion to fund these requirements as well as other operating or investing cash requirements over the next 6 months will be greater than our current cash on hand. While we received approximately $5.4 million, net, from the sale of senior secured debentures pursuantdismiss was also granted relating to the Note Purchase agreements that we entered into on July 21, 2006,following claims against him: the Washington Wage Claims, breach of contract, breach of promises of specific treatment in specific circumstances, breach of the duty of good faith and such agreements provide forfair dealing, and promissory estoppel. With respect to the investorsundismissed claims, the litigation is ongoing.  The Company denies the allegations raised in the Complaint and intends to purchase an additional $0.5 million prior to December 14, 2006, we will nevertheless still require additional funds. We do not currently have any financing commitments andvigorously defend itself.  There can be no assurance can be given that additional financing will be available, or if available, will be on acceptable terms. If we are unable to obtain sufficient funds during the next 6 months we will further reduce the size of our organization and may be forced to reduce and/or curtail our production and operations, all of which could have a material adverse impact on our business prospects.

Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
Our consolidated financial statements as of September 30, 2006 have been prepared under the assumption that we will continue as a going concern for the year ending December 31, 2006. Our independent registered public accounting firm have issued their report dated March 15, 2006 that included an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern ultimately is dependent on our ability to generate a profit which is likely dependant upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

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

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

We are dependent on a single manufacturing line.

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

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

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

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

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

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

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

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

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

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

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

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

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

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The microdisplay systems business is intensely competitive.

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

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

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

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

·  successful expansion of our manufacturing capabilities;

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

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

·  the market acceptance of our customers' products; and

·  product or technology introductions by our competitors.

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

The display industry is cyclical.

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

Competing products may get to market sooner than ours.

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

Our competitors have many advantages over us.

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

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Our products are subject to lengthy OEM development periods.

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

Our products will likely experience rapidly declining unit prices.ITEM 1A.  Risk Factors

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

RISKS RELATED TO OUR BUSINESS

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

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

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

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

Our business depends on new products and technologies.

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

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

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

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

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

Our business depends to some extent on international transactions.

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

Our business may expose us to product liability claims.

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

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

We are subject to various governmental regulations related to toxic, volatile, experimental and other hazardous chemicals used in our design and manufacturing process. Our failure to comply with these regulations could result in the imposition of fines or in the suspension or cessation of our operations. Compliance with these regulations could require us to acquire costly equipment or to incur other significant expenses. We develop, evaluate and utilize new chemical compounds in the manufacture of our products. While we attempt to ensure that our employees are protected from exposure to hazardous materials, we cannot assure you that potentially harmful exposure will not occur or that we will not be liable to employees as a result.
RISKS RELATED TO OUR STOCK
The substantial number of shares that are or will be eligible for sale could cause our common stock price to decline even if the company is successful.

Sales of significant amounts of common stock in the public market, or the perception that such sales may occur, could materially affect the market price of our common stock. These sales might also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. As of September 30, 2006, we have outstanding (i) options to purchase 1,153,440 shares and (ii) warrants to purchase 3,740,481 shares of common stock.

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

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

Our common stock may be delisted from the American Stock Exchange (the “Exchange”), which may have a material adverse impact on the pricing and trading of our common stock, and which would be deemed an event of default under our 6% senior secured convertiblenotes.

To maintain the listing of our common stock on the Exchange, we are required to meet certain continued listing requirements, including, but not limited to, the requirement that we maintain a minimum amount in shareholder’s equity. On October 9, 2006, we received notice from the Exchange stating that we do not meet certain of the Exchange’s continued listing standards asinformation set forth in this Report, you should carefully consider the risk factors previously disclosed in “Item 1A to Part 10 of the Exchange Company Guide (the “Company Guide”) and that we have become subject to the continued listing evaluation and follow-up procedures and requirements of Section 1009 of the Company Guide.

Pursuant to a review by the Exchange1” of our 10-QAnnual Report on Form 10-K /A for the three and sixyear ended December 31, 2009.  There were no material changes from the risk factors during the nine months ended JuneSeptember 30, 2006, the Exchange has determined that we are not in compliance with Sections 1003(a)(ii) and 1003(a)(iii) of the Company Guide, respectively, which state, in relevant part, that the Exchange will normally consider suspending dealings in, or removing from the list, securities of a company which (a) has stockholders' equity of less than $4,000,000 if such company has sustained losses from continuing operations and/or net losses in three of its four most recent fiscal years; or (b) has stockholders' equity of less than $6,000,000 if such company has sustained losses from continuing operations and/or net losses in its five most recent fiscal years, respectively.2010.

We submitted a plan on November 6, 2006 advising the Exchange of actions that we will take, which may bring us into compliance with Sections 1003 (a)(ii) and 1003(a)(iii) of the Company Guide within a maximum of 18 months of receipt of the notice letter. The plan included specific milestones, quarterly financial projections, and details relating to any strategic initiatives we plan to complete. The Exchange will evaluate the plan, including supporting documentation which we submitted, and will make a determination as to whether we have made a reasonable demonstration in the plan of an ability to regain compliance with Sections 1003 (a)(ii) and 1003(a)(iii) of the Company Guide within a maximum of 18 months of receipt of the notice letter, in which case the plan will be accepted. If the plan is accepted, we may be able to continue listing during the plan of up to 18 months, during which time we will be subject to periodic review to determine if it is making progress consistent with the plan. As of the date hereof, we have not received a response from the Exchange with respect to our plan.

If our common stock were delisted from the Exchange, we would trade on the Over-the-Counter Bulletin Board and the market price for shares or our common stock could decline. In addition, it may become more difficult for us to raise funds through the sale of our common stock or securities convertible into our common stock. Further, if our common stock were delisted from the Exchange, we would be in default of our 6% Senior Secured Convertible Notes in the principal amount of $5,970,000 and unless a waiver was granted, we would be required to repay such principal amount, including a default interest rate of 12% on the outstanding principal balance. If we were required to repay the secured convertible notes, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the notes when required, the note holders could commence legal action against us to recover the amounts due. Any such action would require us to curtail or cease operations.

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

ForPursuant to various cashless warrant exercises, the threeCompany issued 2,601,591 shares of common stock in the nine months ended September 30, 2006,2010. In addition, the Company received proceeds of $250 thousand from a warrant exercise and issued 71,700 options exercisable into100,000 shares of common stock at a price equal to $2.70 per share to employees as compensation for services performed on behalf ofin the Company.

*All ofnine months ended September 30, 2010. In connection with the above issuances and sales were deemed to be exempt underforegoing, the Company relied upon the exemption from securities registration afforded by Rule 506 of Regulation D and Section (2) ofas promulgated by the SEC under the Securities Act of 1933, as amended.amended (the “Securities Act”) and/or Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of eMagin or executive officers of eMagin, and transfer was restricted by eMagin in accordance with the requirement of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.

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ITEM 3.  Defaults Upon Senior Securities
None.

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

None.

ITEM 5. Other Information4.  (Removed and Reserved)

None.

ITEM 5.  Other Information

None.
ITEM 6.  Exhibits


EXHIBIT NUMBER  
DESCRIPTION
31.1Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302*302 (1)  

31.2Certification by Chief Financial Officer pursuant to Sarbanes Oxley Section 302*302 (1)   

32.1Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350*  1350 (1)

32.2Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350*1350 (1)
(1)  Filed herewith.

*Filed herewith. 


 
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SIGNATURES

In accordance with Section 13 or 15(d)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 2nd7th day of April, 2007.October 2011.
 
eMAGIN CORPORATION
   
 eMAGIN CORPORATION



By:/s/ K.C. ParkAndrew G. Sculley
 
K.C. Park		Andrew G. Sculley
 
Interim
Chief Executive Officer
( Principal Executive Officer )

   
 

 		 
 
By:  /s/ John Atherly
 
John AtherlyBy:		/s/ Paul Campbell
 
Paul Campbell
Chief Financial Officer
( Chief Accounting Officer and Principal Accounting and Financial OfficerOfficer)


 

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