10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

R QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the quarterly period ended March 31, 2012

 or

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from  to

Commission file number 001-15751

eMAGIN CORPORATION

(Exact name of registrant as specified in its charter)

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

3006 Northup Way, Suite 103, Bellevue, Washington 98004

(Address of principal executive offices)

(425) 284-5200

(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.  Yes  R       No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months ).    Yes  R     No   ¨

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

Large accelerated filer £              Accelerated filer R             Non-accelerated filer £        Smaller reporting company £

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

The number of shares of common stock outstanding as of April 30, 2012 was 23,537,978.

1

eMagin Corporation

Form 10-Q

For the Quarter ended March 31, 2012

Table of Contents

		Page
PART I   FINANCIAL INFORMATION
Item 1	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011	3
	Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2012 and 2011 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2012 and 2011 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3	Quantitative and Qualitative Disclosures About Market Risk	15
Item 4	Controls and Procedures	15
PART II   OTHER INFORMATION
Item 1	Legal Proceedings	16
Item 1A	Risk Factors	16
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3	Defaults Upon Senior Securities	16
Item 4	Mine Safety Disclosures	16
Item 5	Other Information	16
Item 6	Exhibits	16
SIGNATURES		17
CERTIFICATIONS

2

ITEM 1.  Condensed Consolidated Financial Statements

eMAGIN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	March 31, 2012 (unaudited)			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	5,832		$	7,571
Investments		7,245			5,745
Accounts receivable, net		4,644			5,576
Inventories, net		2,800			2,760
Prepaid expenses and other current assets		1,255			1,008
Total current assets		21,776			22,660
Long-term investments		1,000			1,000
Equipment, furniture and leasehold improvements, net		6,521			5,980
Other assets		127			127
Deferred tax asset		8,165			8,165
Total assets	$	37,589		$	37,932
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	883		$	961
Accrued expenses		1,886			2,246
Other current liabilities		383			614
Total current liabilities		3,152			3,821
Commitments and contingencies  (Note 8)
Shareholders’ equity:
Preferred stock, $.001 par value: authorized 10,000,000 shares:
Series B Convertible Preferred stock, (liquidation preference of $5,659,000) stated value $1,000 per share, $.001 par value:   10,000 shares designated and 5,659 issued and outstanding as of March 31, 2012 and December 31, 2011		—			—
Common stock, $.001 par value: authorized 200,000,000 shares, issued and outstanding, 23,537,978 shares as of March 31, 2012 and 23,513,978 as of December 31, 2011		24			24
Additional paid-in capital		221,616			220,838
Accumulated deficit		(187,108	)		(186,656	)
Treasury stock, 25,000 shares as of March 31, 2012 and December 31, 2011		(95	)		(95	)
Total shareholders’ equity		34,437			34,111
Total liabilities and shareholders’ equity	$	37,589		$	37,932

See notes to Condensed Consolidated Financial Statements.

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eMAGIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(unaudited)

	Three Months Ended March 31,
	2012			2011
Revenue:
Product	$	5,830		$	4,310
Contract		307			1,131
Total revenue, net		6,137			5,441
Cost of goods sold:
Product		3,302			2,609
Contract		154			586
Total cost of goods sold		3,456			3,195
Gross profit		2,681			2,246
Operating expenses:
Research and development		1,140			532
Selling, general and administrative		2,263			2,141
Total operating expenses		3,403			2,673
Loss from operations		(722	)		(427	)
Other income (expense):
Interest expense, net		(3	)		(29	)
Other income, net		7			16
Change in fair value of warrant liability		—			(3,057	)
Total other income (expense), net		4			(3,070	)
Loss before benefit from income taxes		(718	)		(3,497	)
Benefit from income taxes		(266	)		(158	)
Net loss	$	(452	)	$	(3,339	)
Loss per common share, basic	$	(0.02	)	$	(0.16	)
Loss per common share, diluted	$	(0.02	)	$	(0.16	)
Weighted average number of common shares outstanding:
Basic		23,507,172			21,522,716
Diluted		23,507,172			21,522,716

See notes to Condensed Consolidated Financial Statements.

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eMAGIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

	Three Months Ended
	March 31,
	2012			2011
Cash flows from operating activities:
Net loss	$	(452	)		$	(3,339	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		57				34
Reduction of provision for doubtful accounts		—				(204	)
Deferred tax benefit		—				(150	)
Stock-based compensation		749				856
Change in fair value of warrant liability		—				3,057
Changes in operating assets and liabilities:
Accounts receivable		932				656
Inventories, net		(40	)			(244	)
Prepaid expenses and other current assets		(247	)			73
Accounts payable, accrued expenses and other current liabilities		(669	)			58
Net cash provided by operating activities		330				797
Cash flows from investing activities:
Purchase of equipment		(598	)			(284	)
Purchase of investments		(1,500	)			(650	)
Net cash used in investing activities		(2,098	)			(934	)
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants		29				104
Net cash provided by financing activities		29				104
Net decrease in cash and cash equivalents		(1,739	)			(33	)
Cash and cash equivalents, beginning of period		7,571				7,796
Cash and cash equivalents, end of period	$	5,832			$	7,763
Cash paid for interest, net of amount capitalized of $4 thousand in 2012	$	—			$	15
Cash paid for taxes	$	—			$	—
Non-cash financing activities:
Issuance of 310,897 shares of common stock for cashless exercise of 380,511 warrants in 2011	$	—			$	—

See notes to Condensed Consolidated Financial Statements.

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eMAGIN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

Note 1:  Summary of Significant Accounting Policies

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

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of eMagin Corporation and its subsidiary reflect all adjustments, including normal recurring accruals, necessary for a fair presentation.  All significant intercompany balances and transactions have been eliminated in consolidation.  Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the Securities and Exchange Commission.  The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited condensed consolidated financial statements are read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  The results of operations for the period ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year.  The consolidated condensed financial statements of December 31, 2011 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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 related to, among others, allowance for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, deferred tax asset valuation allowances, litigation and other loss contingencies. 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.

Recently Issued Accounting Pronouncements

In May 2011, the FASB issued an accounting standard update related to fair value measurements and disclosures to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with United States GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the intent about the application of existing fair value measurement requirements, while other amendments change a principle or requirement for measuring fair value or for disclosing information about fair value measurements. Specifically, the guidance requires additional disclosures for fair value measurements that are based on significant unobservable inputs. On January 1, 2012, the Company adopted this guidance on a prospective basis and there was no impact on the Company's condensed consolidated financial statements.

Net Loss per Common Share

Basic loss per share is computed using the weighted average number of common shares outstanding during the period, and excludes any dilutive effects of common stock equivalent shares, such as stock options, warrants, and convertible preferred stock. Diluted loss per share is computed using the weighted average number of common shares outstanding and potentially dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.

The Company’s Series B Convertible Preferred stock (“Preferred Stock – Series B”) is considered a participating security as the preferred stock participates in dividends with the common stock, which requires the use of the two-class method when computing basic and diluted earnings per share.  The Preferred Stock – Series B is not required to absorb any net loss.

For all periods presented, the Company has reported a net loss and as a result, basic and diluted net loss per common share are the same.  Therefore, in calculating net loss per share amounts, shares underlying the following potentially dilutive common stock equivalents were excluded from the calculation of diluted net income per common share because their effect was anti-dilutive for each of the periods presented.

6

	Three Months Ended March 31,
	2012		2011
Options		4,628,749		4,418,374
Warrants		1,000,000		2,205,001
Convertible preferred stock		7,545,333		7,572,000
Total		13,174,082		14,195,375

Note 2:  Accounts Receivable

The majority of the Company’s commercial accounts receivable are due from Original Equipment Manufacturers ("OEM’s”). Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required.

Accounts receivable consisted of the following (in thousands):

	March 31, 2012  (unaudited)			December 31, 2011
Accounts receivable	$	4,912		$	5,844
Less allowance for doubtful accounts		(268	)		(268	)
Accounts receivable, net	$	4,644		$	5,576

Note 3:  Inventories, Net

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

	March 31, 2012  (unaudited)			December 31, 2011
Raw materials	$	1,268		$	1,092
Work in process		526			985
Finished goods		1,015			689
		2,809			2,766
Less inventory reserve		(9	)		(6	)
Total inventories, net	$	2,800		$	2,760

Note 4:  Line of credit

At March 31, 2012, the Company had available a 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 terms of the line of credit are:  the minimum monthly interest payment is $1,000; the interest rate is Prime plus 5% but not less than 8.25%; and the early termination fee is $6,000.  The renewal date is September 1, 2012.  The Company’s obligations under the agreement are secured by its assets.    As of March 31, 2012, the Company had not borrowed on its line of credit.

Note 5:  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 of attribution.

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The following table summarizes the allocation of non-cash stock-based compensation to our expense categories for the three month periods ended March 31, 2012 and 2011 (in thousands):

	Three Months Ended March 31, (unaudited)
	2012		2011
Cost of goods sold	$	64	$	25
Research and development		141		19
Selling, general and administrative		544		812
Total stock-based compensation expense	$	749	$	856

At March 31, 2012, total unrecognized compensation costs related to stock options was approximately $4.0 million, net of estimated forfeitures and is expected to be recognized over a weighted average period of approximately 2.3 years.  

The key assumptions used in the Black-Scholes option pricing model to determine the fair value of stock options granted and the weighted average grant date fair value per share are as follows:

	Three Months Ended March 31, (unaudited)
	2012			2011
Dividend yield		0	%		0	%
Risk free interest rates		0.51 to 0.87	%		1.04 to 2.37	%
Expected  volatility		71.8 to 81.2	%		67.1 to 85.7	%
Expected term (in years)		3.5 to 5.5			3.5 to 5.5
Weighted average grant date fair value per share	$	2.25		$	3.92

The Company has not declared or paid any dividends and does not 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.

A summary of the Company’s stock option activity for the three months ended March 31, 2012 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 December 31, 2011		4,242,251		$	3.93
Options granted		410,500			3.88
Options exercised		(24,000	)		1.20
Options forfeited		—			—
Options cancelled		—			—
Outstanding at March 31, 2012		4,628,751		$	3.94		5.93	$	3,676,255
Vested or expected to vest at March 31, 2012 (1)		4,555,187		$	3.91		5.94	$	3,673,636
Exercisable at March 31, 2012		3,157,477		$	3.03		6.14	$	3,623,865

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

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock.   During the three months ended March 31, 2012, the aggregate intrinsic value of options exercised was $62 thousand. The Company issues new shares of common stock upon exercise of stock options.

8

Note 6:  Shareholders’ Equity

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

As of March 31, 2012, there were 5,659 shares of Preferred Stock – Series B issued and outstanding.

Common Stock

For the three months ended March 31, 2012, the Company received approximately $29 thousand for 24,000 stock options exercised.   For the three months ended March 31, 2011, the Company received approximately $22 thousand for 23,250 stock options exercised.  For the three months ended March 31, 2011, there were 380,511 warrants exercised on a cashless basis resulting in 310,897 shares of common stock issued.   In addition, the Company received proceeds of approximately $81 thousand from the exercise of warrants and issued 72,116 shares of common stock in the three months ended March 31, 2011.

Note 7:  Income Taxes

The Company’s effective tax rates for the three months ended March 31, 2012 and 2011 was 37.1% and 36%, respectively.  The differences between the effective tax rate of 37.1% and the U.S. federal statutory rate of 34% for the three months ended March 31, 2012 were primarily due to the impact of state income taxes and alternative minimum tax.  For the three months ended March 31, 2011, the difference between the effective tax rate of 36% and the U.S. federal statutory rate of 34% was alternative minimum tax.

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.

Note 8:  Commitments and Contingencies

Royalty Payments

The Company signed a license agreement on March 29, 1999 with Eastman Kodak (“Kodak’), under which it is obligated to make royalty payments. Under this agreement, the Company must pay to 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 (“GOT”) as of December 30, 2009.

In late 2008, the Company began evaluating the status of its manufacturing process and the use of the intellectual property (“IP”) associated with its license agreement.  After this analysis and after making a few changes to its manufacturing process, by the end of 2008 the Company had stopped using the IP covered under the license agreement.  The last royalty payment under the license agreement was made in November 2009.  The Company determined that it is no longer required to pay the minimum royalty payment and as such has not paid or accrued this amount.  

In April 2011, the Company received a request for royalty payments from a representative of GOT. The Company responded stating that the licenses were no longer in force and that the request for royalties was untimely.  Although GOT does not agree, both parties have expressed an interest in resolving the disagreement amicably.  Communications to date have been preliminary regarding its resolution.  The Company estimates that the range of loss contingency is between $0 and $250 thousand.

Operating Leases

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

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 with the option of extending the lease for five years.   The corporate headquarters are located in Bellevue, Washington where eMagin leases approximately 6,300 square feet.   The lease expires on August 31, 2014. In addition, the Company leases approximately 2,400 square feet of office space for design and product development in Santa Clara, California and the lease expires on October 31, 2012.

9

For the three months ended March 31, 2012 and 2011, rent expense was approximately $302 thousand and $289 thousand, respectively.

Equipment Purchase Commitments

The Company has committed to equipment purchases of $1.7 million at March 31, 2012.

Note 9:  Concentrations

For the three months ended March 31, 2012, approximately 52% of the company’s net revenues were derived from customers in the United States and approximately 48% of the Company’s net revenues were derived from international customers.   For the three months ended March 31, 2011, approximately 74% of the company’s net revenues were derived from customers in the United States and approximately 26% of the Company’s net revenues were derived from international customers.  

The following is a schedule of revenue by geographic location (in thousands):

	Three Months Ended March 31, (unaudited)
	2012		2011
North America	$	3,375	$	4,095
Europe, Middle East and Africa		2,042		814
Asia		720		532
Total	$	6,137	$	5,441

The Company purchases principally all of its silicon wafers from a single supplier located in Taiwan.

Note 10:  Subsequent Events

On May 8, 2012, the Company entered into a new employment agreement with Paul Campbell under which he will continue serving as the Company’s Chief Financial Officer and Treasurer.  The agreement will expire on December 31, 2013.   Mr. Campbell will be paid an annual salary of $318,000 and receive stock options valued at $82,400 on May 8, 2012.  The agreement provides that he will receive equity in the form of stock options or restricted stock valued at $123,600 on December 31, 2012.

Pursuant to the employment agreement, Mr. Campbell’s employment may be terminated by the Company with or without cause and he may terminate his employment for Good Reason (as defined in the agreement), among other reasons.  If Mr. Campbell’s employment is terminated without cause or if he terminates it for Good Reason, then Mr. Campbell, at the Company’s sole discretion, shall be entitled to the lesser of (i) the total amount of his base salary that remains unpaid under the employment agreement, which shall be paid monthly or (ii) monthly salary payments for twelve (12) months, based on his monthly rate of base salary at the date of such termination. Mr. Campbell shall also be entitled to receive (i) payment for accrued and unpaid vacation pay and (ii) all bonuses that have accrued during the term, but have not been paid. Additionally, any non-vested options held by Mr. Campbell shall vest immediately. If the agreement is terminated with cause or if Mr. Campbell terminates it without Good Reason then Mr. Campbell shall cease to accrue salary, personal time off, benefits and other compensation on the date of such termination.  If Mr. Campbell’s employment is terminated or his position significantly changed or salary decreased as a result of the acquisition of the Company, Mr. Campbell shall be entitled to severance equal to the amount he would have been due if he had been terminated without cause.

The foregoing descriptions of the employment agreement does not purport to be complete and is qualified in their entirety by reference to this agreement which is attached as an exhibit to this 10-Q and is incorporated into this Item by reference.

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

Overview

We design and manufacture miniature displays, which we refer to as OLED-on-silicon-microdisplays, and microdisplay modules for virtual imaging, primarily for incorporation into the products of other manufacturers. Microdisplays are typically smaller than many postage stamps, but when viewed through a magnifier they can contain all of the information appearing on a high-resolution personal computer screen. Our microdisplays use organic light emitting diodes, or OLEDs, which emit light themselves when a current is passed through the device. Our technology permits OLEDs to be coated onto silicon chips to produce high resolution OLED-on-silicon microdisplays.

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

We have developed a strong intellectual property portfolio that includes patents, manufacturing know-how and unique proprietary technologies to create high performance OLED-on-silicon microdisplays and related optical systems. We believe our technology, intellectual property portfolio and position in the marketplace, gives us a leadership position in OLED and OLED-on-silicon microdisplay technology.  We are one of only a few companies in the world to market and produce significant quantities of high resolution full-color small molecule OLED-on-silicon microdisplays.

At March 31, 2012, we had a total of 94 full-time and part-time employees, equivalent to the headcount at December 31, 2011.

A detailed discussion of our business may be found in Part I, “Business,” of our 2011 Annual Report on Form 10-K for the year ended December 31, 2011.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, relate to revenue and cost recognition, product warranty, use of estimates, fair value of financial instruments, stock-based compensation and accounting for income taxes.

NEW ACCOUNTING PRONOUNCEMENTS

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

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RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2012 COMPARED TO THREE MONTHS ENDED MARCH 31, 2011

Revenues

Revenues for the three months ended March 31, 2012 were approximately $6.1 million, as compared to approximately $5.4 million for the three months ended March 31, 2011, an increase of approximately 13%.  Revenue was higher for the three month period as there was an increase in volume of units sold offset by a decrease in contract revenue.

Product revenue is comprised of sales of displays, Z800 systems, and other hardware.  For the three months ended March 31, 2012, product revenue increased approximately $1.5 million or 35% as compared to the three months ended March 31, 2011.  The increase was driven by an increase in volume of displays sold coupled with a slightly higher average sales price per display than the first quarter of 2011 and an increase in display production which allowed more units to be sold.

Contract revenue is comprised of revenue from research and development or non-recurring engineering (“NRE”) contracts.  For the three months ended March 31, 2012, contract revenue decreased approximately $0.8 million or 73% as compared to the first quarter of 2011.   We had fewer active contracts in the first quarter of 2012 as compared to the first quarter of 2011.  There were 5 active contracts during the first quarter 2012 compared to 8 in the first quarter 2011.  The dollar value, the amount of activity and the timing of the milestones generally combined for more revenue generation in first quarter 2011.  We expect contract revenue to increase in the coming quarters from the amount generated in Q1 12 due to new contracts and more activity on the existing contracts.

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 performance of contracts.  Cost of goods sold for the three months ended March 31, 2012 was approximately $3.5 million as compared to approximately $3.2 million for the three months ended March 31, 2011, an increase of approximately $0.3 million.  Cost of goods sold as a percentage of revenues was 56% for the three months ended March 31, 2012 as compared to 59% for the three months ended March 31, 2011.  The improvement in the cost of goods sold percentage of revenues was primarily due to the increased production of displays and to the increase in average sales price.

The following table outlines product, contract and total gross profit and related gross margins for the three months ended March 31, 2012 and 2011 (dollars in thousands):

	Three months ended March 31,
	2012			2011
	(unaudited)
Product revenue gross profit	$	2,528		$	1,701
Product revenue gross margin		43	%		39	%
Contract revenue gross profit	$	153		$	545
Contract revenue gross margin		50	%		48	%
Total gross profit	$	2,681		$	2,246
Total gross margin		44	%		41	%

The gross profit for the three months ended March 31, 2012 was approximately $2.7 million as compared to approximately $2.2 million for the three months ended March 31, 2011, an increase of $0.5 million.  Gross margin was 44% for the three months ended March 31, 2012 up from 41% for the three months ended March 31, 2011.

The product gross profit for the three months ended March 31, 2012 was approximately $2.5 million as compared to approximately $1.7 million for the three months ended March 31, 2011, an increase of $0.8 million.  Product gross margin was 43% for the three months ended March 31, 2012 up from 39% for the three months ended March 31, 2011.   The gross margin was favorably impacted by the higher revenue volume and higher average selling price per display and offset by an increase in cost of goods sold which primarily related to an increase in labor costs.    In the latter half of March 2011, we added additional production shifts as compared to the quarter ended March 31, 2012 where the additional production shifts operated the entire quarter.

Changes in product gross margin are primarily a function of units produced and average price per unit.  An increase in units produced lowers the cost per unit, thereby increasing the margin.  Even though the margin for the first quarter of 2012 exceeded that of the first quarter of 2011, we believe the 43% product revenue gross margin will increase in the coming quarters due to increased production volume and lower costs of production.

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The contract gross profit for the three months ended March 31, 2012 was approximately $0.2 million as compared to approximately $0.5 million for the three months ended March 31, 2011, a decrease of $0.3 million.  Contract gross margin was 50% for the three months ended March 31, 2012 up from 48% for the three months ended March 31, 2011.   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

Research and Development.  Research and development expenses include salaries, development materials and other costs specifically allocated to the development of new microdisplay products, OLED materials and subsystems.  They do not, however, include research and development costs associated with the fulfillment of research and development contracts as these are contract cost of goods sold even though they are often also costs associated with development of new products.  Research and development expenses for the three months ended March 31, 2012 were approximately $1.1 million as compared to $0.5 million for the three months ended March 31, 2011, an increase of approximately $0.6 million related to internal research and development of new products.

Selling, General and Administrative.  Selling, general and administrative expenses consist principally of salaries and fees for professional services, legal fees incurred in connection with patent filings and related matters, as well as other marketing and administrative expenses.  Selling, general and administrative expenses for the three months ended March 31, 2012 were approximately $2.3 million as compared to approximately $2.1 million for the three months ended March 31, 2011, a slight increase of $0.2 million related to personnel costs. 

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

For the three months ended March 31, 2012, interest expense was approximately $3 thousand as compared to $29 thousand for the three months ended March 31, 2011. These amounts are fees to keep our line of credit open.  We have no debt upon which we are incurring interest expense.  For the three months ended March 31, 2012, interest expense associated with debt was $11 thousand offset by the capitalization of interest of $8 thousand. For the three months ended March 31, 2011, the interest expense associated with debt was $22 thousand and the accrued interest on liquidated damages was $7 thousand.    

Other income for the three months ended March 31, 2012 was approximately $7 thousand as compared to $16 thousand for the three months ended March 31, 2011.  The other income for the three months ended March 31, 2012 was interest income of approximately $6 thousand and $1 thousand from equipment salvage.  The other income for the three months ended March 31, 2011was interest income of approximately $4 thousand and $12 thousand from equipment salvage.  

Liquidity and Capital Resources

As of March 31, 2012, we had approximately $14.1 million of cash, cash equivalents, and investments in certificates of deposit (“CDs”) as compared to $14.3 million at December 31, 2011.  Of the $14.1 million in cash, approximately $8.2 million was invested in CDs.

Cash flow provided by operating activities during the three months ended March 31, 2012 was approximately $0.3 million, approximately $0.8 million was from net non-cash expenses offset by the net loss of $0.5 million. Cash flow provided by operating activities during the three months ended March 31, 2011 was approximately $0.8 million, approximately $0.5 million was from the change in operating assets and liabilities and net non-cash expenses of $3.6 million offset by the net loss of $3.3 million.  

Cash used in investing activities during the three months ended March 31, 2012 was approximately $2.1 million of which $1.5 million purchased CDs and approximately $0.6 million for equipment purchases primarily for upgrading our production line.  Cash used in investing activities during the three months ended March 31, 2011 was approximately $0.9 million of which $0.6 million purchased CDs and approximately $0.3 million for equipment purchases primarily for upgrading our production line.

Cash provided by financing activities during the three months ended March 31, 2012 was approximately was $29 thousand, representing proceeds from the exercise of stock options. Cash provided by financing activities during the three months ended March 31, 2011 was approximately was $104 thousand, representing proceeds from the exercise of stock options and warrants.

Credit Facility

At March 31, 2012, we had a credit facility with Access Business Finance, LLC (“Access”) that provides for up to a maximum amount of $3 million based on a borrowing base equivalent of 75% of eligible accounts receivable.  The interest on the credit facility is equal to the Prime Rate plus 5% but may not be less than 8.25% with a minimum monthly interest payment of $1 thousand.  The credit facility will automatically renew on September 1, 2012 for a one year term unless written notice is provided.  We did not draw on our credit facility during the quarter ended March 31, 2012, there is no outstanding balance, and there have been no draws on the line of credit since its inception in September 2010.

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The credit facility contains the customary representations and warranties as well as affirmative and negative covenants.  We were in compliance with all debt covenants as of March 31, 2012.

We expect our business to experience revenue growth which may result in higher accounts receivable levels and may require increased production and/or higher inventory levels.  We anticipate that our cash needs to fund these requirements as well as other operating or investing cash requirements over the next twelve months will be less than our current cash on hand, investments and the cash we anticipate generating from operations.  We anticipate that we will not require additional funds over the next twelve months other than perhaps for discretionary capital spending.  If unanticipated events arise during the next twelve months, we believe we can raise sufficient funds. However, if we are unable to obtain sufficient funds, we may have to reduce the size of our organization and/or be forced to reduce and/or curtail our production and operations, all of which could have a material adverse impact on our business prospects.

Off-Balance Sheet Arrangements

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

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ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

Market rate risk

We are exposed to market risk related to changes in interest rates.

Interest rate risk

We hold our cash in cash and cash equivalents and certificates of deposits.   We do not hold derivative financial instruments or equity securities.   At March 31, 2012, we have not withdrawn any funds under our revolving line of credit and therefore do not have any related interest rate risk. A change in interest rates would not have had a material effect on our consolidated financial position, results of operations, or cash flows in the three months ended March 31, 2012.

Foreign currency exchange rate risk

We do not have any material foreign currency exchange rate risk.

ITEM 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

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 Rule 13a-15 under the Securities Exchange Act of 1934 (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.

Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Limitations on the Effectiveness of Internal Controls.

Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.

Changes in Internal Controls.

There were no changes in our internal controls over financial reporting during the fiscal quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1.  Legal Proceedings

None.

ITEM 1A.  Risk Factors

In addition to other information set forth in this Report, you should carefully consider the risk factors previously disclosed in “Item 1A to Part 1” of our Annual Report on Form 10-K for the year ended December 31, 2011.  There were no material changes from the risk factors during the three months ended March 31, 2012.

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

None.

ITEM 3.  Defaults Upon Senior Securities

None.

ITEM 4.  Mine Safety Disclosures

None.

ITEM 5.  Other Information

None.

ITEM 6.  Exhibits

10.1	Executive Employment Agreement between Paul C. Campbell and the Company dated May 8, 2012 (1)
31.1	Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302 (1)
31.2	Certification by Chief Financial Officer pursuant to Sarbanes Oxley Section 302 (1)
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (1)
32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (1)

EX-101.INS	XBRL Instance Document (1)
EX-101.SCH	XBRL Taxonomy Extension Schema Document (1)
EX-101.CAL	XBRL Taxonomy Extension Calculation Linkbase (1)
EX-101.DEF	XBRL Taxonomy Extension Definition Linkbase (1)
EX-101.LAB	XBRL Taxonomy Extension Labels Linkbase (1)
EX-101.PRE	XBRL Taxonomy Extension Presentation Linkbase (1)

(1)  Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 10th day of May 2012.

eMAGIN CORPORATION
By:	/s/ Andrew G. Sculley
	Andrew G. Sculley
	Chief Executive Officer
	Principal Executive Officer

By:	/s/ Paul Campbell
	Paul Campbell
	Chief Financial Officer
	Principal Accounting and Financial Officer

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EX-10.1

Exhibit 10.1

Exhibit A

EXECUTIVE EMPLOYMENT AGREEMENT

Executive Name:	Paul C. Campbell
Title(s):	Chief Financial Officer
Effective Date:	May 8, 2012

For good consideration, the Company employs Paul C. Campbell on the following terms and conditions (the “Agreement”) as of the above date between EMAGIN CORPORATION, a Delaware corporation (the “Company”), and the above named executive (“Executive”).

1. EMPLOYMENT AGREEMENT

1.1. Employment, Duties, and Responsibilities. The Company hereby employs Executive as its Chief Financial Officer and Treasurer and Executive accepts such employment on the terms contained in this Agreement. Within limitations established by the Bylaws of the Company, Executive shall have each and all of the duties, responsibilities and authorities that are consistent with his title. The Company shall retain full direction and control of the manner, means and methods by which Executive performs the services for which he is employed hereunder and of the place or places at which such services shall be rendered. Executive shall report to the Company’s Chief Executive Officer and shall have additional report to the Company’s Board of Directors.

1.2. Term. This Agreement shall commence as of the date hereof and shall continue hereafter, unless terminated pursuant to Section 3, until December 31, 2013.

1.3. Time and Effort. Executive shall use his best efforts to carry out the duties and responsibilities that are consistent with his title and devote the substantial portion of his entire business time, attention, and energy exclusively to the business and affairs of the Company. During Executive’s employment, Executive shall not engage in any business activities outside those of the Company to the extent that such activities would interfere with or prejudice Executive’s obligations to the Company. Executive may serve as a member of the Board of Directors of other organizations that do not compete with the Company, and may participate in other professional, civic, governmental organizations and activities that do not materially affect his ability to carry out his duties.

1.4. Service to the Board of Directors. The executive will provide information and services to the Chief Executive Officer, the Board of Directors and its Committees as needed to support the Company’s business.  The termination of Executive’s employment with the Company for any reason, and regardless of whether such termination is initiated by Executive or by Company, shall be considered a contemporaneous resignation by the Executive from all positions at the Company.

2. COMPENSATION

2.1. Base Salary. As compensation for performing services for the Company, Executive shall be entitled to an annual salary of $318,000, payable in bi-weekly installments consistent with the Company’s payroll practices. The annual base salary will be reviewed annually by the Compensation Committee.

2.2. Bonus.The Board of Directors or Compensation Committee of the Board of Directors may provide Executive with a bonus from time to time at their discretion.

2.3. Time Off. Executive shall accrue personal time off for sick leave, personal reasons, and holidays according to applicable company policy, except that Executive shall accrue personal time off for vacation in accordance with the Executive’s accrual rate of 30 days per each calendar year, with a maximum of 45 days of unused vacation rolled over to the subsequent year in addition to each calendar’s year accrual. The limits for accrual and rollover of personal time, other than vacation policy specified herein, shall be pursuant to Company policy, as may be modified company-wide from time to time.  

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2.4. Benefit Plans. During Executive’s employment, Executive shall be entitled to participate, to the extent of Executive’s eligibility, in employee fringe benefits made available by the Company to its employees. Nothing in this Agreement shall preclude the Company from terminating or amending any employee benefit plan or program as a whole from time to time. 

2.5. Business Expenses. Upon submission of itemized expense statements in the manner specified by the Company’s Travel and Expense Policy, Executive shall be entitled to reimbursement for reasonable travel, relocation, and other reasonable business expenses incurred by the Executive in the performance of his duties under this Agreement, or as agreed to by the Chief Executive Officer.

2.6. Stock Options and Grants. Executive shall receive stock options valued at $82,400 on the Effective Date (based on the Black Scholes valuation method), which shall have a term of five years and shall vest on December 31, 2012.  In addition, on December 31, 2012,  Executive shall receive stock options and/or restricted stock valued at $123,600 consistent with the Company’s revised equity incentive program for executives, as determined by the Compensation Committee,  with vesting on December 31, 2013 and such other terms as determined by the Committee. All other terms and conditions of such awards shall be governed by the terms and conditions of the applicable equity plan and the applicable award agreements, and as determined by the Compensation Committee.  Executive shall be eligible to participate in the Company’s equity and stock purchase plans, as determined in the sole discretion of the Compensation Committee.  The Board or Compensation Committee may provide additional awards of stock options or stock grants from time to time or on an incentive plan as they deem appropriate.

3. TERMINATION OF EMPLOYMENT

3.1. Voluntary. If Executive voluntarily terminates Executive’s employment with the Company, other than for Good Reason as defined in Section 3.5 herein, Executive shall cease to accrue salary, personal time off, benefits and other compensation on the date of such voluntary termination. Accrued benefits, if any, will be payable in accordance with applicable benefit plan provisions.

3.2. With Cause. Notwithstanding anything herein to the contrary, the Company may terminate Executive’s employment hereunder for Cause for any one of the following reasons: (a) failure to devote substantially all of Executive’s full professional time, attention, energies, and abilities to Executive’s employment duties for the Company, which failure is not cured within two weeks after the Company gives Executive written notice of the failure; (b) inducement of any customer, consultant, employee, or supplier of the Company to unreasonably breach any contract with the Company or cease its business relationship with the Company; (c) willful, deliberate, and persistent failure by Executive to reasonably perform the duties and obligations of Executive’s employment which are not remedied in a 90 day period of time after receipt of written notice from the Company; (d) an act or acts of dishonesty undertaken by Executive resulting in substantial personal gain by the Executive at the expense of the Company; (e) Executive’s material breach of a fiduciary or contractual duty to the Company; (f) conviction of a felony, or (g) commission of an act that results in material long term harm to the goodwill or reputation of the Company. To be deemed terminated for Cause, the Company shall have given Executive written notice stating the alleged Cause and shall have provided Executive an opportunity to present evidence to the Board of Directors, at the Company’s offices on a date and time mutually convenient to the Board of Directors, no sooner than one and not later than two weeks after the foregoing notice, to refute the claim of Cause. Executive shall cease to accrue salary, personal time off, benefits and other compensation on the date of “with cause” termination by the Company. Accrued benefits, if any, will be payable in accordance with applicable benefit plan provisions of the Company.

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3.3. Without Cause. The Company may terminate the employment of Executive at any time without notice and without cause (as defined in Section 3.2).  In such event, Executive shall, at the Company’s sole discretion, be entitled to the lesser of (i) the total amount of the Executive’s base salary that remains unpaid under this Agreement, which shall be paid monthly or (ii)  monthly salary payments for twelve (12) months, based on Executive’s monthly rate of base salary at the date of such termination, provided, however in lieu of the aforementioned monthly payments, the Company may in its sole  discretion pay such payments in a lump-sum.  Executive shall also be entitled to receive (i) payment for accrued and unpaid vacation pay and (ii) all bonuses that have accrued during the term of the Agreement, but not been paid. If the Executive is terminated without Cause, any non-vested Options granted pursuant to Section 2.6 of this Agreement shall vest immediately. Furthermore, shares of any of the Executive’s stock subject to any lockups will be immediately released from such restrictions and registered by the company within 30 days of termination without cause. Upon termination, Executive cease to accrue salary and other benefits, other than the Company’s normal insurance policies for terminated employees.

Upon the termination of Executive’s employment with the Company for any reason, Executive shall within one calendar week of such termination return to the Company all electronic equipment, media, and supplies provided by the Company to the Executive.  Further, within one calendar week of Executive’s termination of employment with the Company,  Executive shall also return to the Company, all Company files used by the Executive and shall not retain any copies of such files. 

3.4. Effect of Termination without “Cause” on Employee Stock Options. The Company hereby irrevocably offers to amend any stock options granted to Executive to permit the full exercise thereof following termination of Executive’s employment without Cause (as defined in Section 3.3) or because of death or disability. The Company hereby also irrevocably offers to amend any stock options granted to Executive to permit the immediate full vesting and exercise thereof at any time after termination of Executive’s employment without Cause or because of death or Disability to the same extent as if Executive’s employment had not terminated. Executive or Executive’s personal representative may accept either or both of such offers at any time before such options otherwise expire by giving written notice to the Company. To the extent that any options held by Executive are not incentive stock options within the meaning of Section 422 of the Internal Revenue Code, Executive hereby accepts both such offers.

3.5. Termination for Good Reason. If Executive terminates his employment with the Company for Good Reason (as hereinafter defined), such termination will be considered to be effectively the same as termination without cause;  he shall be entitled to the severance and vesting benefits set forth in Section 3.3. For purposes of this Agreement, “Good Reason” shall mean any of the following unless such change was initiated by or voluntarily agreed to by Executive: (a) any significant change in the Executive’s title, or position, or duties and responsibilities not voluntarily made; (b) any involuntary decrease in base salary (other than any which may be assessed on a percentage basis to the Company as a whole); or (c) any material breach by the Company of this Agreement.

3.6. Change of Control. If the Executive’s employment is terminated or his position significantly changed or salary decreased as a result of the acquisition of the Company by merger, sale of all or substantially all of the Company’s assets, or other reorganization which results in the stockholders of the Company immediately prior to such transaction owing less than 50% of the aggregate voting power of the Company’s securities immediately after such transaction (other than as a result of the issuance of equity securities by the Company in connection with a capital raise which results in the pro rata dilution of the equity interests of all holders of common stock immediately prior to such issuance), Executive shall be entitled to the severance and vesting benefits set forth in Section 3.3.

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3.7. Disability. The Company may terminate this Agreement without liability if Executive shall be permanently prevented from properly performing his essential duties with reasonable accommodation by reason of illness or other physical or mental incapacity for a period of more than 60 consecutive days. Upon such termination, Executive shall be entitled to all accrued but unpaid base salary, accrued bonus (if any), and accrued but unused paid time off. In the event Executive’s employment terminates under this Section 3.7, Executive may pursue long term disability benefits, if eligible, under any plan which the Company has provided for Executive.

3.8. Death. In the event of the death of Executive, the Company’s obligations hereunder shall automatically cease and terminate; provided, however, that within 15 days of the Company’s notice of such death, the Company shall pay to Executive’s heirs or personal representatives Executive’s base salary and accrued but unused vacation pay to the date of death. All other amounts due Executive, including bonuses, shall be paid to Executive’s estate in accordance with the full term of this Agreement.

4. Non Competition, Non Solicitation, Bankruptcy, Clawback

4.1. Non Competition. The Executive hereby covenants and agrees that during the term of this Agreement and for a period of one year following the end of the employment term, the Executive will not, without the prior written consent of the Company, indirectly or directly, on his own behalf or in the service or on behalf of others, whether or not for compensation, engage in any business activity, or have any interest in any person, firm, corporation or business, through a subsidiary or parent entity or other entity (whether as a shareholder, agent, joint venture, security holder, trustee, partner, consultant, creditor lending credit or money for the purpose of establishing or operating any such business, partner or otherwise) with any Competing Business of the Company in the Covered Area. For purposes of this Section 4.1   “Competing Business” means any company engaging in the design, development, manufacturing, or marketing of virtual imaging products or micro displays and related information technology solutions. For purposes of  this Section 4.1 “Covered Area” means all geographical areas of the United States and other Foreign jurisdictions where the Company has offices, manufactures or may contemplate offices or manufacturing of related products and/or sells its products directly or in-directly through distributors and/or other sales agents.

 4.2. Non Solicitation. The Executive further agrees that the Executive will not divert any business of the Company and/or its affiliates or any customers or suppliers of the Company and/or the Company’s and/or its affiliates’ business to any other person, entity or competitor, or induce or attempt to induce, directly or indirectly, any person to leave his or her employment with the Company.

 4.3. Bankruptcy.  In the event that the Company voluntarily or involuntary files for bankruptcy under the Bankruptcy Code, the Executive shall use his best efforts in keeping the Company solvent and in assisting the Company emerge from bankruptcy as a reorganized entity, unless the Company is liquidated.

 4.4. Remedies.  The Executive acknowledges and agrees that his obligations provided herein are necessary and reasonable in order to protect the Company and its affiliates and their respective business and the Executive expressly agrees that monetary damages would be inadequate to compensate the Company and/or its affiliates for any breach by the Executive of his covenants and agreements set forth herein. Accordingly, the Executive agrees and acknowledges that any such violation or threatened violation of this Section 4 will cause irreparable injury to the Company and that in addition to any other remedies that may be available, in law, in equity or otherwise, the Company and its affiliates shall be entitled to obtain injunctive relief against the threatened breach of this Section 4 or the continuation of any such breach by the Executive without the necessity of proving actual damages.

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5. General Provisions

5.1. Modification: No Waiver. No modification, amendment or discharge of this Agreement shall be valid unless the same is in writing and signed by all parties hereto. Failure of any party at any time to enforce any provisions of this Agreement or any rights or to exercise any elections hall in no way be considered to be a waiver of such provisions, rights or elections and shall in no way affect the validity of this Agreement. The exercise by any party of any of its rights or any of this elections under this Agreement shall not preclude or prejudice such party from exercising the same or any other right it may have under this Agreement irrespective of any previous action taken.

5.2. Notices. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when hand delivered or mailed by registered or certified mail as follows (provided that notice of change of address shall be deemed given only when received):

If to the Company, to:

eMagin Corporation

3006 Northup Way

Suite 103

Bellevue, WA 98004

If to Executive, to:

Paul C. Campbell

_____________

_______________

Or to such other names or addresses as the Company or Executive, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this Section.

5.3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflicts of laws principles thereof or to the actual domicile of the parties.

5.4. Further Assurances. Each party to this Agreement shall execute all instruments and documents and take all actions as may be reasonably required to effectuate this Agreement.

5.5. Severability. Should any one or more of the provisions of this Agreement or of any agreement entered into pursuant to this Agreement be determined to be illegal or unenforceable, then such illegal or unenforceable provision shall be modified by the proper court or arbitrator to the extent necessary and possible to make such provision enforceable, and such modified provision and all other provisions of this Agreement and of each other agreement entered into pursuant to this Agreement shall be given effect separately from the provisions or portion thereof determined to be illegal or unenforceable and shall not be affected thereby.

5.6. Successors and Assigns. Executive may not assign this Agreement without the prior written consent of the Company. The Company may assign its rights without the written consent of the executive, so long as the Company or its assignee complies with the other material terms of this Agreement. The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company, and the Executive's rights under this Agreement shall inure to the benefit of and be binding upon his heirs and executors. The Company's subsidiaries and controlled affiliates shall be express third party beneficiaries of this Agreement.

5.7. Entire Agreement. This Agreement supersedes all prior agreements and understandings between the parties, oral or written. No modification, termination or attempted waiver shall be valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced.

5.8. Counterparts; Facsimile. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original, and all of which taken together shall constitute one and the same instrument. This Agreement may be executed by facsimile with original signatures to follow.

IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first written above.

[signature page follows]

5

eMagin Corporation
By:
	Andrew G. Sculley
	President and Chief Executive Officer
By:
	Paul C. Campbell

6

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Andrew G. Sculley, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of eMagin Corporation.

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.     

Dated: May 10, 2012	By:	/s/ Andrew G. Sculley
		Andrew G. Sculley
		Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Paul Campbell, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of eMagin Corporation.

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.     

Dated: May 10, 2012	By:	/s/ Paul Campbell
		Paul Campbell
		Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of eMagin Corporation (the “Company”) on Form 10-Q for the quarter ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew G. Sculley, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section  350 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. section 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Dated: May 10, 2012	By:	/s/ Andrew G. Sculley
		Andrew G. Sculley
		Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of eMagin Corporation (the “Company”) on Form 10-Q for the quarter ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul Campbell, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. section 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Dated: May 10, 2012	By:	/s/ Paul Campbell
		Paul Campbell
		Chief Financial Officer

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Inventories, Net

3 Months Ended

Mar. 31, 2012

Inventories, Net [Abstract]

Inventories, Net

Note 3:  Inventories, Net

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

	March 31, 2012  (unaudited)			December 31, 2011
Raw materials	$	1,268		$	1,092
Work in process		526			985
Finished goods		1,015			689
		2,809			2,766
Less inventory reserve		(9	)		(6	)
Total inventories, net	$	2,800		$	2,760

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Accounts Receivable

3 Months Ended

Mar. 31, 2012

Accounts Receivable [Abstract]

Accounts Receivable

Note 2:Accounts Receivable

The majority of the Company’s commercial accounts receivable are due from Original Equipment Manufacturers ("OEM’s”). Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required.

Accounts receivable consisted of the following (in thousands):

	March 31, 2012  (unaudited)			December 31, 2011
Accounts receivable	$	4,912		$	5,844
Less allowance for doubtful accounts		(268	)		(268	)
Accounts receivable, net	$	4,644		$	5,576

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
ASSETS
Cash and cash equivalents	$ 5,832	$ 7,571
Investments	7,245	5,745
Accounts receivable, net	4,644	5,576
Inventories, net	2,800	2,760
Prepaid expenses and other current assets	1,255	1,008
Total current assets	21,776	22,660
Long-term investments	1,000	1,000
Equipment, furniture and leasehold improvements, net	6,521	5,980
Other assets	127	127
Deferred tax asset	8,165	8,165
Total assets	37,589	37,932
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable	883	961
Accrued expenses	1,886	2,246
Other current liabilities	383	614
Total current liabilities	3,152	3,821
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred stock, $.001 par value: authorized 10,000,000 shares: Series B Convertible Preferred stock, (liquidation preference of $5,659,000) stated value $1,000 per share, $.001 par value: 10,000 shares designated and 5,659 issued and outstanding as of March 31, 2012 and December 31, 2011
Common stock, $.001 par value: authorized 200,000,000 shares, issued and outstanding, 23,537,978 shares as of March 31, 2012 and 23,513,978 as of December 31, 2011	24	24
Additional paid in capital	221,616	220,838
Accumulated deficit	(187,108)	(186,656)
Treasury stock, 25,000 shares as of March 31, 2012 and December 31, 2011	(95)	(95)
Total shareholders' equity	34,437	34,111
Total liabilities and shareholders' equity	$ 37,589	$ 37,932

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Condensed Consolidated Statements Of Cash Flows (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Condensed Consolidated Statements Of Cash Flows [Abstract]
Issuance of shares, common stock, warrants		310,897
Cashless exercise of warrants		380,511
Interest capitalized	$ 4

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Summary Of Significant Accounting Policies

3 Months Ended

Mar. 31, 2012

Summary Of Significant Accounting Policies [Abstract]

Summary Of Significant Accounting Policies

Note 1:  Summary of Significant Accounting Policies

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

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of eMagin Corporation and its subsidiary reflect all adjustments, including normal recurring accruals, necessary for a fair presentation.  All significant intercompany balances and transactions have been eliminated in consolidation.Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the Securities and Exchange Commission.  The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited condensed consolidated financial statements are read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  The results of operations for the period ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year.The consolidated condensed financial statements of December 31, 2011 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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 related to, among others, allowance for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, deferred tax asset valuation allowances, litigation and other loss contingencies. 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.

Recently Issued Accounting Pronouncements

In May 2011, the FASB issued an accounting standard update related to fair value measurements and disclosures to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with United States GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the intent about the application of existing fair value measurement requirements, while other amendments change a principle or requirement for measuring fair value or for disclosing information about fair value measurements. Specifically, the guidance requires additional disclosures for fair value measurements that are based on significant unobservable inputs. On January 1, 2012, the Company adopted this guidance on a prospective basis and there was no impact on the Company's condensed consolidated financial statements.

Net Loss per Common Share

Basic loss per share is computed using the weighted average number of common shares outstanding during the period, and excludes any dilutive effects of common stock equivalent shares, such as stock options, warrants, and convertible preferred stock. Diluted loss per share is computed using the weighted average number of common shares outstanding and potentially dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.

The Company’s Series B Convertible Preferred stock (“Preferred Stock – Series B”) is considered a participating security as the preferred stock participates in dividends with the common stock, which requires the use of the two-class method when computing basic and diluted earnings per share.The Preferred Stock – Series B is not required to absorb any net loss.

For all periods presented, the Company has reported a net loss and as a result, basic and diluted net loss per common share are the same.Therefore, in calculating net loss per share amounts, shares underlying the following potentially dilutive common stock equivalents were excluded from the calculation of diluted net income per common share because their effect was anti-dilutive for each of the periods presented.

	Three Months Ended March 31,
	2012		2011
Options		4,628,749		4,418,374
Warrants		1,000,000		2,205,001
Convertible preferred stock		7,545,333		7,572,000
Total		13,174,082		14,195,375

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $)	Mar. 31, 2012	Dec. 31, 2011
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	10,000,000	10,000,000
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	23,537,978	23,513,978
Common stock, shares outstanding	23,537,978	23,513,978
Treasury stock, shares	25,000	25,000
Series B Convertible Preferred Stock [Member]
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	10,000	10,000
Preferred stock - Series B, liquidation preference	$ 5,659,000	$ 5,659,000
Preferred stock - Series B, stated value	$ 1,000	$ 1,000
Preferred stock, shares issued	5,659	5,659
Preferred stock, shares outstanding	5,659	5,659

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Document And Entity Information	3 Months Ended
	Mar. 31, 2012	Apr. 30, 2012
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2012
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2012
Entity Registrant Name	EMAGIN CORP
Entity Central Index Key	0001046995
Entity Filer Category	Accelerated Filer
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		23,537,978

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Condensed Consolidated Statements Of Operations (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Revenue:
Product	$ 5,830	$ 4,310
Contract	307	1,131
Total revenue, net	6,137	5,441
Cost of goods sold:
Product	3,302	2,609
Contract	154	586
Total cost of goods sold	3,456	3,195
Gross profit	2,681	2,246
Operating expenses:
Research and development	1,140	532
Selling, general and administrative	2,263	2,141
Total operating expenses	3,403	2,673
Loss from operations	(722)	(427)
Other income (expense):
Interest expense, net	(3)	(29)
Other income, net	7	16
Change in the fair value of warrant liability		(3,057)
Total other income (expense), net	4	(3,070)
Loss before benefit from income taxes	(718)	(3,497)
Benefit from income taxes	(266)	(158)
Net loss	$ (452)	$ (3,339)
Loss per common share, basic	$ (0.02)	$ (0.16)
Loss per common share, diluted	$ (0.02)	$ (0.16)
Weighted average number of shares outstanding:
Basic	23,507,172	21,522,716
Diluted	23,507,172	21,522,716

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Shareholders' Equity

3 Months Ended

Mar. 31, 2012

Shareholders' Equity [Abstract]

Shareholders' Equity

Note 6:  Shareholders’ Equity

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

As of March 31, 2012, there were 5,659 shares of Preferred Stock – Series B issued and outstanding.

Common Stock

For the three months ended March 31, 2012, the Company received approximately $29 thousand for 24,000 stock options exercised.For the three months ended March 31, 2011, the Company received approximately $22 thousand for 23,250 stock options exercised.  For the three months ended March 31, 2011, there were 380,511 warrants exercised on a cashless basis resulting in 310,897 shares of common stock issued.In addition, the Company received proceeds of approximately $81 thousand from the exercise of warrants and issued 72,116 shares of common stock in the three months ended March 31, 2011.

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Stock-Based Compensation

3 Months Ended

Mar. 31, 2012

Stock-Based Compensation [Abstract]

Stock-Based Compensation

Note 5:  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 of attribution.

The following table summarizes the allocation of non-cash stock-based compensation to our expense categories for the three month periods ended March 31, 2012 and 2011 (in thousands):

	Three Months Ended March 31, (unaudited)
	2012		2011
Cost of goods sold	$	64	$	25
Research and development		141		19
Selling, general and administrative		544		812
Total stock-based compensation expense	$	749	$	856

At March 31, 2012, total unrecognized compensation costs related to stock options was approximately $4.0 million, net of estimated forfeitures and is expected to be recognized over a weighted average period of approximately 2.3 years.  

The key assumptions used in the Black-Scholes option pricing model to determine the fair value of stock options granted and the weighted average grant date fair value per share are as follows:

	Three Months Ended March 31, (unaudited)
	2012			2011
Dividend yield		0	%		0	%
Risk free interest rates		0.51 to 0.87	%		1.04 to 2.37	%
Expected  volatility		71.8 to 81.2	%		67.1 to 85.7	%
Expected term (in years)		3.5 to 5.5			3.5 to 5.5
Weighted average grant date fair value per share		$2.25			$3.92

The Company has not declared or paid any dividends and does not 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.

A summary of the Company’s stock option activity for the three months ended March 31, 2012 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 December 31, 2011		4,242,251		$	3.93
Options granted		410,500			3.88
Options exercised		(24,000	)		1.20
Options forfeited		—			—
Options cancelled		—			—
Outstanding at March 31, 2012		4,628,751		$	3.94		5.93	$	3,676,255
Vested or expected to vest at March 31, 2012 (1)		4,555,187		$	3.91		5.94	$	3,673,636
Exercisable at March 31, 2012		3,157,477		$	3.03		6.14	$	3,623,865

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

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock.   During the three months ended March 31, 2012, the aggregate intrinsic value of options exercised was $62 thousand. The Company issues new shares of common stock upon exercise of stock options.

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Concentrations

3 Months Ended

Mar. 31, 2012

Concentrations [Abstract]

Concentrations

Note 9:  Concentrations

For the three months ended March 31, 2012, approximately 52% of the company’s net revenues were derived from customers in the United States and approximately 48% of the Company’s net revenues were derived from international customers.  For the three months ended March 31, 2011, approximately 74% of the company’s net revenues were derived from customers in the United States and approximately 26% of the Company’s net revenues were derived from international customers.  

The following is a schedule of revenue by geographic location (in thousands):

	Three Months Ended March 31, (unaudited)
	2012		2011
North America	$	3,375	$	4,095
Europe, Middle East and Africa		2,042		814
Asia		720		532
Total	$	6,137	$	5,441

The Company purchases principally all of its silicon wafers from a single supplier located in Taiwan.

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Income Taxes

3 Months Ended

Mar. 31, 2012

Income Taxes [Abstract]

Income Taxes

Note 7:  Income Taxes

The Company’s effective tax rates for the three months ended March 31, 2012 and 2011 was 37.1% and 36%, respectively.The differences between the effective tax rate of 37.1% and the U.S. federal statutory rate of 34% for the three months ended March 31, 2012 were primarily due to the impact of state income taxes and alternative minimum tax.For the three months ended March 31, 2011, the difference between the effective tax rate of 36% and the U.S. federal statutory rate of 34% was alternative minimum tax.

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.

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Commitments And Contingencies

3 Months Ended

Mar. 31, 2012

Commitments And Contingencies [Abstract]

Commitments And Contingencies

Note 8:  Commitments and Contingencies

Royalty Payments

The Company signed a license agreement on March 29, 1999 with Eastman Kodak (“Kodak’), under which it is obligated to make royalty payments. Under this agreement, the Company must pay to 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 (“GOT”) as of December 30, 2009.

In late 2008, the Company began evaluating the status of its manufacturing process and the use of the intellectual property (“IP”) associated with its license agreement.  After this analysis and after making a few changes to its manufacturing process, by the end of 2008 the Company had stopped using the IP covered under the license agreement.  The last royalty payment under the license agreement was made in November 2009.  The Company determined that it is no longer required to pay the minimum royalty payment and as such has not paid or accrued this amount.  

In April 2011, the Company received a request for royalty payments from a representative of GOT. The Company responded stating that the licenses were no longer in force and that the request for royalties was untimely.  Although GOT does not agree, both parties have expressed an interest in resolving the disagreement amicably.  Communications to date have been preliminary regarding its resolution.  The Company estimates that the range of loss contingency is between $0 and $250 thousand.

Operating Leases

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

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 with the option of extending the lease for five years.   The corporate headquarters are located in Bellevue, Washington where eMagin leases approximately 6,300 square feet.   The lease expires on August 31, 2014. In addition, the Company leases approximately 2,400 square feet of office space for design and product development in Santa Clara, California and the lease expires on October 31, 2012.

For the three months ended March 31, 2012 and 2011, rent expense was approximately $302 thousand and $289 thousand, respectively.

Equipment Purchase Commitments

The Company has committed to equipment purchases of $1.7 million at March 31, 2012.

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Subsequent Events

3 Months Ended

Mar. 31, 2012

Subsequent Events [Abstract]

Subsequent Events

Note 10:  Subsequent Events

On May 8, 2012, the Company entered into a new employment agreement with Paul Campbell under which he will continue serving as the Company’s Chief Financial Officer and Treasurer.  The agreement will expire on December 31, 2013.   Mr. Campbell will be paid an annual salary of $318,000 and receive stock options valued at $82,400 on May 8, 2012.  The agreement provides that he will receive equity in the form of stock options or restricted stock valued at $123,600 on December 31, 2012.

Pursuant to the employment agreement, Mr. Campbell’s employment may be terminated by the Company with or without cause and he may terminate his employment for Good Reason (as defined in the agreement), among other reasons.If Mr. Campbell’s employment is terminated without cause or if he terminates it for Good Reason, then Mr. Campbell, at the Company’s sole discretion, shall be entitled to the lesser of (i) the total amount of his base salary that remains unpaid under the employment agreement, which shall be paid monthly or (ii) monthly salary payments for twelve (12) months, based on his monthly rate of base salary at the date of such termination. Mr. Campbell shall also be entitled to receive (i) payment for accrued and unpaid vacation pay and (ii) all bonuses that have accrued during the term, but have not been paid. Additionally, any non-vested options held by Mr. Campbell shall vest immediately. If the agreement is terminated with cause or if Mr. Campbell terminates it without Good Reason then Mr. Campbell shall cease to accrue salary, personal time off, benefits and other compensation on the date of such termination.  If Mr. Campbell’s employment is terminated or his position significantly changed or salary decreased as a result of the acquisition of the Company, Mr. Campbell shall be entitled to severance equal to the amount he would have been due if he had been terminated without cause.

The foregoing descriptions of the employment agreement does not purport to be complete and is qualified in their entirety by reference to this agreement which is attached as an exhibit to this 10-Q and is incorporated into this Item by reference.

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Condensed Consolidated Statements Of Cash Flows (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Cash flows from operating activities:
Net loss	$ (452)	$ (3,339)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	57	34
Reduction of provision for doubtful accounts		(204)
Deferred tax benefit		(150)
Stock-based compensation	749	856
Change in the fair value of warrant liability		3,057
Changes in operating assets and liabilities:
Accounts receivable	932	656
Inventories, net	(40)	(244)
Prepaid expenses and other current assets	(247)	73
Accounts payable, accrued expenses and other current liabilities	(669)	58
Net cash provided by operating activities	330	797
Cash flows from investing activities:
Purchase of equipment	(598)	(284)
Purchase of investments	(1,500)	(650)
Net cash used in investing activities	(2,098)	(934)
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants	29	104
Net cash provided by financing activities	29	104
Net decrease in cash and cash equivalents	(1,739)	(33)
Cash and cash equivalents, beginning of period	7,571	7,796
Cash and cash equivalents, end of period	5,832	7,763
Cash paid for interest, net of amount capitalized of $4 thousand in 2012		15
Cash paid for taxes
Non-cash financing transactions:
Issuance of 310,897 shares of common stock for cashless exercise of 380,511 warrants in 2011

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Line Of Credit

3 Months Ended

Mar. 31, 2012

Line Of Credit [Abstract]

Line Of Credit

Note 4:  Line of credit

At March 31, 2012, the Company had available a 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 terms of the line of credit are:  the minimum monthly interest payment is $1,000; the interest rate is Prime plus 5% but not less than 8.25%; and the early termination fee is $6,000.  The renewal date is September 1, 2012.  The Company’s obligations under the agreement are secured by its assets.    As of March 31, 2012, the Company had not borrowed on its line of credit.