Back to GetFilings.com



U.S. Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2002
[ ] Transition report pursuant section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from____________ to ________________

eMAGIN CORPORATION
(Exact name of small business issuer as specified in its charter)

Commission file number: 000-24757

DELAWARE 56-1764501
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)

2070 Route 52
Hopewell Junction, New York 12533
(Address of principal executive offices)

(845) 892-1900
(Issuer's telephone number)
-------------------

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ X ] No [ ]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Not applicable

APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 15, 2002 the
Registrant had 30,294,980 shares of Common Stock outstanding.


TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one): Yes [ ] No [X]


1


PART I. FINANCIAL INFORMATION

The financial statements set forth below, along with filings for prior quarters,
are currently undergoing review by the Company's recently retained independent
public accountants, Grant Thornton LLP. The Company intends to make additional
or supplemental disclosure, if any, if such disclosure is indicated by such
review.

Index Page Number

Item 1. Consolidated Financial Statements


Consolidated Balance Sheet as of
September 30, 2002 (unaudited)
and December 31, 2001 3

Unaudited Consolidated Statements of
Operations For the Three-Months
ended September 30, 2002 and September 30, 2001 4


Unaudited Consolidated Statements of Operations
For the Nine-Months ended September 30, 2002 and
September 30, 2001 and for the period from inception
(January 23, 1996) to September 30, 2002 5

Unaudited Consolidated Statements of Cash Flows for
the Nine-Months ended September 30, 2002 and
September 30, 2001 and for the period from inception
(January 23, 1996) to September 30, 2002 6

Selected Notes to Unaudited Consolidated Financial Statements 7

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation 9

Item 3. Quantitative and Qualitative Disclosures About Market Risk 21


PART II. OTHER INFORMATION

Item 5. Other Information 22

Item 6. Exhibits and Reports on Form 8-K b 22

SIGNATURE 24

Exhibit 99.1 Certification of CEO 25


2


eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED BALANCE SHEETS




ASSETS Sept 30, 2002 Dec 31, 2001
------------- -------------
(unaudited)
CURRENT ASSETS:

Cash and cash equivalents $97,127 $738,342
Contract receivables 205,642 485,021
Unbilled costs and estimated profits on contracts in progress 101,320 293,273
Inventory 65,600 90,720
Prepaid expenses and other current assets 264,301 388,344
------------- -------------
Total current assets 733,990 1,995,700

Equipment and leasehold improvements, net of accumulated
depreciation of $1,419,437 and $1,122,989, respectively 890,069 1,166,509
Goodwill and purchased intangibles, net of accumulated amortization of $662,898 and
$50,032,701, respectively 994,340 1,657,238

Other long-term assets 89,898 94,367
------------- -------------
Total assets 2,708,297 $4,913,814
============= =============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 5,539,995 $3,731,976
Accrued payroll and benefits 884,828 788,302
Current portion of long-term debt 673,902 693,197
Deferred Revenue 10,071
Other short term debt 2,825,000 1,875,000
Advance payments on contracts to be completed 91,176 289,538
Other current liabilities 13,446 108,805
------------- -------------
Total current liabilities 10,038,418 $7,486,818
------------- -------------

LONG-TERM DEBT 2,622,673 2,305,184

SHAREHOLDERS' EQUITY:
Common Stock, par value $0.001 per share
Shares authorized - 100,000,000
Shares issued and outstanding - 30,294,980 and 25,171,183 30,295 25,171
Additional paid-in capital 120,538,131 114,058,560
Deferred compensation (841,513) (2,277,367)
Deficit accumulated during the development stage (130,807,711) (116,684,552)
------------- -------------
Total shareholders' equity (11,080,798) (4,878,188)
------------- -------------
Total liabilities and shareholders' equity 1,580,293 $4,913,814
============= =============



3







eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)




Three-Months Three-Months
ended ended
September 30, 2002 September 30, 2001
------------------ ------------------

CONTRACT REVENUE:

Contract revenue $18,176 $898,755
Product sales 472,575 277,873
--------------------------------------
Total revenue $490,751 $1,176,628
--------------------------------------

COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$346,449and $846,734 respectively $1,362,118 $2,692,869
Amortization and write-down of purchased intangibles 37,997,868
Acquired in-process research and development - -
Write-down of goodwill and purchased intangibles -
Non-cash charge for stock-based compensation 485,751 719,907
Selling, general and administrative 2,113,070 1,895,761
------------------ ------------------
Total costs and expenses, net $3,960,939 $43,306,405
------------------ ------------------

OTHER (EXPENSE)/ INCOME (578,577) (247,992)
------------------ ------------------


Loss before provision for income taxes (4,048,765) (42,377,769)

PROVISION FOR INCOME TAXES 0 0
------------------ ------------------

Net loss ($4,048,765) ($42,377,769)
================== ==================

Basic and diluted net loss per common share (.13) ($1.69)
================== ==================

Basic and diluted weighted average common
shares outstanding 30,294,980 25,085,145
================== ==================



See selected notes to financial statements.



4



eMagin Corporation
(a development Stage Corporation)
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)




Period From
Nine-Months Nine-Months Inception
Ended Ended (January 23, 1996)
September 30, September 30, to September 30,
2002 2001 2002

CONTRACT REVENUE

Contract revenue $50,284 $4,332,233 $7,613,528
Product revenue 902,045 490,601 1,751,434
---------------------------------------------------
Total Revenue $952,329 $4,822,834 $9,364,962

COST AND EXPENSES
Research and development, net of funding under cost of sharing
arrangements of $356,798, $1,205,107and $3,258,210
respectively $5,076,418 $9,901,465 $27,435,527
Amortization and write-down of goodwill and
purchased intangibles 662,898 49,701,252 71,627,919
Acquired in-process research and development - 12,820,000
Non-Cash charge for stock-based compensation 2,627,837 2,189,361 8,008,668
Selling, general, and administrative expense 5,043,818 5,732,757 17,610,038
---------------------------------------------------
Total costs and Expenses Net $13,410,971 $67,524,835 $137,502,152

---------------------------------------------------
OTHER (EXPENSE)/INCOME (1,672,193) (216,959) (2,670,521)
---------------------------------------------------

Loss before provision for income taxes (14,130,835) (20,541,191) (130,807,711)
---------------------------------------------------

PROVISION FOR INCOME TAXES 0 0 0
---------------------------------------------------

Net Loss ($14,130,835) ($62,918,960) ($130,807,711)
===================================================
.
Basic and diluted net loss per common share ($.49) ($2.51)
==================================


Basic and diluted weighted average common shares
outstanding 29,099,905 25,076,294
==================================




See selected notes to financial statements.


5



eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)


Period from
Nine Months Nine Months inception
ended ended January 23 1996
Sept 30, 2002 Sept 30, 2001 Sept 30, 2002
------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss ($14,130,835) ($62,918,960) ($130,824,571)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 1,005,413 50,161,423 40,948,395
Write-down of goodwill and purchased intangibles - - 32,145,863
Loss on disposal of assets - 44,191 97,713
Non-cash charge for stock based compensation 2,627,837 2,189,361 7,203,508
Non-cash interest related charges 1,037,335 2,259,897
Non-cash related to issuance of warrants 189,508 -
Non-cash charge for services received 307,657 423,808
Non-cash charge due to beneficial conversion - 2,922 -
Acquired in-process research and development - - 12,820,000
Changes in operating assets and liabilities, net of acquisition: -
Contract receivables 279,379 166,684 22,857
Unbilled costs and estimated profits on contracts in progress 191,953 256,063 518,244
Inventory 25,120 (41,600) -
Prepaid expenses and other current assets 124,043 329,504 (74,432)
Other long-term assets 4,469 (89,808) (63,496)
Advanced payment on contracts to be completed (198,362) 275,000 129,756
Deferred Revenue 10,071 (190,490) 10,071
Accounts payable, accrued expenses and accrued payroll 3,181,686 1,761,766 5,713,799
Other current liabilities (101,766) -
------------------------------------------------
Net cash used in operating activities (5,534,234) (7,966,202) (28,668,588)
------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (66,075) (470,910) (1,493,173)
Net proceeds from acquisition 0 0 1,239,162
------------------------------------------------
Net cash used in investing activities (66,075) (470,910) (254,011)
------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance costs 3,710,013 0 24,991,013
Proceeds from exercise of stock options and warrants 887 27,523 28,496
Proceeds from long and short term debt 1,443,478 4,000,000 6,318,478
Payments of long term debt and capital leases (195,284) (193,244) (3,056,603)
------------------------------------------------
Net cash provided by financing activities 4,959,094 3,834,279 28,281,384
------------------------------------------------

NET INCREASE IN CASH AND CASH EQUIVALENT'S (641,215) (4,602,833) (641,215)
CASH AND CASH EQUIVALENTS, beginning of period 738,342 7,367,257 738,342
------------------------------------------------

CASH AND CASH EQUIVALENTS, end of period 97,127 2,764,424 97,127
================================================



See selected notes to financial statements.


6





eMAGIN CORPORATION
Selected Notes to Unaudited Consolidated Financial Statements

THE COMPANY'S FINANCIAL STATEMENTS WERE NOT REVIEWED BY CERTIFIED PUBLIC
ACCOUNTANTS. The financial statements set forth below, along with filings for
prior quarters, are currently undergoing review by the Company's recently
retained independent public accountants, Grant Thornton LLP. The Company intends
to make additional or supplemental disclosure, if any, if such disclosure is
indicated by such review.

Note 1 - BASIS OF PRESENTATION

The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Certain information or footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. The results of operations for the
period ended September 30, 2002 are not necessarily indicative of the results to
be expected for the full year. It has been our practice to have our quarterly
results reviewed by independent public accountants, even when such results are
labeled as Unaudited. As indicated in the legend preceding the financial
statements, review of the results reported herein are currently undergoing
review by our newly retained independent public accountants, Grant Thornton LLC,
but these statements have not yet been reviewed. In the review and transition
from Arthur Anderson to the new independent accounting firm, it is possible that
Grant Thornton may recommend restatement of any of our past or current financial
statements.

Note 2 - NATURE OF BUSINESS

Fashion Dynamics Corporation (FDC) was organized January 23, 1996, under the
laws of the State of Nevada. FDC had no active business operations other than to
acquire an interest in a business. On March 16, 2000, FDC acquired FED
Corporation ("FED") (the Merger). The merged company changed its name to eMagin
Corporation (the "Company" or eMagin) (Note 3). eMagin is a developer and
manufacturer of optical systems and microdisplays for use in the electronics
industry. eMagin's wholly-owned subsidiary, Virtual Vision Inc., develops and
markets microdisplay systems and optics technology for commercial, industrial
and military applications. Following the Merger, the business conducted by the
Company is the business conducted by FED prior to the Merger.

The Company continues to be a development stage company, as defined by Statement
of Financial Accounting Standards ("SFAS") No. 7, Accounting and Reporting by
Development Stage Enterprises", as it continues to devote substantially all of
its efforts to establishing a new business, and it has not fully commenced its
planned principal operations. Revenues earned by the Company in prior years were
primarily related to research and development type contracts which partially
funded the development of the Company's current technology and specialized
military products. The company's principal operations are commercialization of
products using organic light emitting diode (OLED) technology and sales of
display products were the primary source of revenue this quarter. A weak cash
position limited the Company's ability to order supplies and cover receivables,
among other issues, which resulted in a lower rate of shipment volume than would
otherwise have been possible.


7


Note 3 - FED ACQUISITION

On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the
terms of the agreement, FDC issued approximately 10.5 million shares of its
common stock and approximately 3.9 million options and warrants to purchase
common stock to FED shareholders. The total preliminary purchase price of the
transaction was approximately $98.5 million, including $73.4 million of value
relating to the shares issued (at a fair value of $7 per share, the value of the
simultaneous private placement transaction of similar securities), $20.9 million
of value relating to the options and warrants exchanged, $0.3 million of
acquisition costs and $3.8 million of assumed liabilities. The transaction was
accounted for using the purchase method of accounting. Under the purchase method
of accounting, the assets and liabilities were recorded based upon their fair
values at the date of acquisition.

Note 4 - REVENUE AND COST RECOGNITION

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

Note 5 - RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred. To date, activities of
the Company (and its predecessor) have included the performance of research and
development under cooperative agreements with United States Government agencies.
Funding from such research and development contracts is recognized as a
reduction in operating expenses during the period in which the services are
performed and related direct expenses are incurred.

Note 6 - NET LOSS PER COMMON SHARE

In accordance with SFAS No. 128, net loss per common share amounts ("basic EPS")
were computed by dividing net loss by the weighted average number of common
shares outstanding and excluding any potential dilution. Net loss per common
share assuming dilution ("diluted EPS") was computed by reflecting potential
dilution from the exercise of stock options and warrants. Common equivalent
shares have been excluded from the computation of diluted EPS as their effect is
antidilutive.

Note 7 - DEBT

On June 20, 2002, the Company entered into a $0.2 million Secured Note Purchase
Agreement with an Investor. The secured note accrues interest at 11% per annum
and matures on August 30, 2002. The Company also granted warrants, exercisable
for a period of three years, to purchase 300,000 shares of common stock with an
exercise price of $0.4419 per share to the investor.


8


On August 21, 2002, the Company issued two Series B Convertible Debentures in
the amount of $121,739 each. The debentures bear interest at the rate of 8% per
annum and are due August 21, 2004. The Debenture also includes a fixed
conversion rate of $0.18 per share.

A lease agreement for semiconductor manufacturing equipment exists with Finova
Capital that is significantly past due. In this lease agreement, eMagin is
currently obligated to a total amount of $3,582,705.90 plus a per diem charge of
$816.83 for each day the obligation remains unpaid beyond August 8. 2002. A
restructuring agreement has been reached contingent upon a financing, that the
lease payments will be extended into the future and a part of the obligation
will convert to equity, but there is no guarantee that such a financing or a
restructuring of this lease will occur.


Note 8 - STOCKHOLDERS' EQUITY

The authorized common stock of the Company consists of 100,000,000 shares with a
par value of $0.001 per share.

Prior to the Merger on March 16, 2000, net proceeds of approximately $23.3
million was raised through the private placement issuance of approximately 3.5
million shares of common stock. Additionally, approximately 9.4 million shares
of common stock held by FDC's principal shareholders were cancelled at the time
of the Merger.

On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the
terms of the agreement, FDC issued approximately 10.5 million shares of its
common stock to FED shareholders, and issued approximately 3.9 million options
and warrants in exchange for existing FED options and warrants. The total
purchase price of the transaction was approximately $98.5 million, including
$73.4 million of value relating to the shares issued (at a fair value of $7 per
share, the value of the simultaneous private placement transaction of similar
securities), $20.9 million of value relating to the options and warrants
exchanged, based on the difference between the fair value and the exercise price
of said equity instruments and $3.8 million of assumed liabilities. The
transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the fair value of assets
acquired and liabilities assumed.

In April 2002, the Company announced a strategic investment from ROHM Company
LTD. ROHM purchased 1,282,051 shares of eMagin Common Stock at $0.78 per share
as well as warrants to purchase an additional 512,820 shares of Common Stock at
a conversion price of $0.85 per share for an investment of $1,000,000. Such
warrants are exercisable through April 2005.


9


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION

Statement of Forward-Looking Information

This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms, or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those in the
forward-looking statements as a result of various important factors. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, such should not be regarded as a representation by the Company, or
any other person, that such forward-looking statements will be achieved. The
business and operations of the Company are subject to substantial risks, which
increase the uncertainty inherent in the forward-looking statements contained in
this release.

We undertake no duty to update any of the forward-looking statements, whether as
a result of new information, future events or otherwise. Readers are cautioned
not to place undue reliance on the forward-looking statements contained in this
report.

Overview

We design and manufacture miniature display modules, which we refer to as
OLED-on-silicon-microdisplays, primarily for incorporation into the products of
other manufacturers. Microdisplays are typically smaller than a postage stamp,
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 them. 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.

Since our inception in 1996, we derived substantially all of our revenues from
fees paid to us under research and development contracts, primarily with the
U.S. federal government. We have devoted significant resources to the
development and commercial launch of our products. We commenced limited initial
sales of our SVGA+ microdisplay in May 2001 and commenced shipping samples of
our SVGA-3D microdisplay in February 2002. As of November 15, 2002, we had
recognized over $2 million from sales of our products, and have a backlog of
more than $10 million in products ordered for delivery through 2003. We have
more than $20 million in signed letters of intent for display purchases through
mid-2004. These products are being applied or considered for near-eye and
headset applications in products such as entertainment and gaming headsets,
handheld Internet and telecommunication appliances, viewfinders, and wearable
computers to be manufactured by original equipment manufacturer (OEM) customers.
We have also shipped a limited number of prototypes of our eGlass II
Head-wearable Display systems. In addition to marketing OLED-on-silicon
microdisplays as components, we also offer microdisplays as an integrated
package, which we call Microviewer, that includes a compact lens for viewing the
microdisplay and electronic interfaces to convert the signal from our customer's
product into a viewable image on the microdisplay. Through our wholly owned
subsidiary, Virtual Vision, Inc., we are also developing head-wearable displays
that incorporate our Microviewer.

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


10


Company History

eMagin Corporation was originally incorporated as Fashion Dynamics Corporation
on January 23, 1996 under the laws of the State of Nevada. For the three years
prior its acquisition of FED Corporation, Fashion Dynamics Corporation had no
active business operations, and sought to acquire an interest in a business with
long-term growth potential. On March 16, 2000, Fashion Dynamics Corporation
acquired FED Corporation (derived from field emissive device), subsequently
changed its name to eMagin Corporation (derived from "electronic imaging") and
listed its common stock on the American Stock Exchange under the "EMA" trading
symbol.

At our annual meeting of stockholders held on July 16, 2001, the stockholders
approved the reincorporation of eMagin Corporation as a Delaware corporation.
The reincorporation became effective on July 16, 2001 by merging eMagin
Corporation, a Nevada corporation ("eMagin-Nevada"), into its then wholly owned
subsidiary, eMagin Corporation, a Delaware corporation (formerly known as FED
Corporation as described above) ("eMagin-Delaware"). Upon completion of this
merger, eMagin-Nevada ceased to exist as a corporate entity and eMagin-Delaware
succeeded to the assets and liabilities of eMagin-Nevada. Under the merger
agreement for the reincorporation, each outstanding share of eMagin-Nevada
common stock was automatically converted into one share of eMagin-Delaware
common stock at the time the merger became effective. There has been no
interruption in the trading of our common stock as a result of the
reincorporation. The reincorporation also resulted in the implementation of a
new certificate of incorporation and by-laws for the Company, as the existing
certificate of incorporation and by-laws of eMagin-Delaware continues as the
certificate of incorporation and by-laws of the Company and has replaced the
articles of association and by-laws of eMagin-Nevada. No change in the corporate
name, board members, business, management, fiscal year, assets, liabilities,
employee benefit plans or location of principal facilities of eMagin occurred as
a result of the reincorporation.

Our history has been as a developmental stage company. We are now transitioning
to manufacturing and intend to significantly increase our marketing, sales, and
research and development efforts, and expand our operating infrastructure. Most
of our operating expenses are fixed in the near term. If we are unable to
generate significant revenues, our net losses in any given period could be
greater than expected.

Negotiations to reduce debt, payables, and leases have been progressing.
Resolution of these issues will be contingent upon eMagin resolving its current
limited cash situation. There is no assurance that such restructuring will
ultimately be successful.

eMagin's Chief Financial Officer departed from the Company in August , 2002, and
the Company has not yet engaged a replacement. As a result of increased cash
flow in the Fourth Quarter of 2002, eMagin was able to hire an external
accounting company to review the Company's financials and to help work with the
Company's newly engaged external auditors, Grant Thornton, in the financial
review. This effort was not completed by the required filing deadline, but is
now progressing. eMagin anticipates identifying and hiring a new Chief Financial
Officer and Controller.

11



Results of Operations

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2001

THE COMPANY'S FINANCIAL STATEMENTS WERE NOT REVIEWED BY CERTIFIED PUBLIC
ACCOUNTANTS. The financial statements set forth below, along with filings for
prior quarters, are currently undergoing review by the Company's recently
retained independent public accountants, Grant Thornton LLP. The Company intends
to make additional or supplemental disclosure, if any, if such disclosure is
indicated by such review.

Revenues

Revenues for the three months and nine months ended September 30, 2002 were $0.5
million and $1.0 million, respectively, as compared to $1.2 million and
$4.8million respectively, for the three months and nine months ended September
30, 2001. Current year revenues consist primarily of product sales and increased
by $0.2 million and $0.4 million for the three months and nine months ended
September 30, 2002, respectively, as compared to the three months and nine
months ended September 30, 2001. As of November 15, 2002, we had recognized over
$2 million from sales of our products, and have a backlog of more than $10
million in products ordered for delivery through 2003 and more than $20 million
in signed letters of intent for display purchases through mid-2004. Government
R&D contract revenues decreased by $.9 million and $4.3 million for the three
months and nine months ended September 30, 2002, respectively, as compared to
the three months and nine months ended September 30, 2001. Government R&D
contract revenues will remain significantly lower in 2002 as the company focuses
on product revenues rather than performing Government R&D contracts, although
product revenues include sales to government contractors which are funded by
Government development or procurement contracts.

Costs and Expenses

Research and Development. Research and development expenses include salaries,
development materials, equipment lease and depreciation expenses, electronics,
rent, utilities and costs associated with operating the Company's manufacturing
facility. Gross research and development expenses for the three months and nine
months ended September 30, 2002 were $1.7 million and $5.4 million,
respectively. For the same period in 2001, the Company's gross research and
development expenses were $3.6 million and $11.1 million, respectively. The $1.9
million and $5.7 million decrease in gross expenses for the three months and
nine months ended September 30, 2002, as compared to the three months and nine
months ended September 30, 2001 reflects reduction in staffing and reduction in
expenditures related to the company's difficult cash position.

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,
amortization, as well as other marketing and administrative expenses. Selling,
general and administrative expenses, for the three months and nine months ended
September 30, 2002 were $2.1 million and $5.0 million, respectively, as compared
to $1.9 million and $5.7 million for the three months and for the nine months
ended September 30, 2001. The increase of $0.2 million and the decrease of $0.7
million in selling, general and administrative expenses was primarily due to
decreases in personnel costs, patent filings, and legal fees. We expect
marketing, general and administrative expenses to increase in future periods as
we add to our sales staff and make additional investments in marketing
activities.


12


Amortization of Purchased Intangibles. Amortization and write down of purchased
intangibles expense for the three months and nine months ending September 30,
2002 was $0.0 million and $0.7 million respectively as compared to $38 million
and $50 million for the three months and nine months ended September 30, 2001.
The decrease of $38 million and $49 million in these non-cash charges, is the
result of the prior year's write-down of the balance in purchased intangibles
and goodwill and its impact on future years' amortization.

Non-Cash Expense Related To Stock-Based Compensation Amortization, Non-cash
stock-based compensation expense for the three and nine months ending September
30, 2002 were $0.5 million and $2.6 million, respectively, as compared to $0.7
million and $2.2 million for the three months and nine months ended September
30, 2001. The non-cash stock-based compensation expense for the three and nine
months ending September 30, 2002 decreased by $0.2 million and increased $0.4
million. Non-cash stock-based compensation costs are the result of the issuance
of stock options at below fair market values.

Other Income (Expense). Other income (expenses) for the three months and nine
months ending September 30, 2002 was ($0.6) million and ($1.7) million expense.
The decrease of $0.3 million in expense for this non-cash charge was due
primarily to the increase in debt discount from the beneficial conversion of a
bridge loan entered into by the company

Liquidity and Capital Resources

Current Financial Position and Need for Additional Financing

We need immediately to raise additional equity or debt financing in order to
continue as a going concern and need to raise substantial additional equity or
debt financing in the very near future to fund our growth and the
commercialization of our products. In the event that we raise additional funds
through equity financing, substantial equity dilution to investors will result.

We had cash and cash equivalents of $1.7 million as of March 31, 2002, $0.1
million as of June 30, 2002 and $0.1 million as of September 30, 2002. Our
monthly fixed costs have historically been approximately $1.0 million, but have
been reduced during the past quarter and are expected to be reduced further
pending successful restructuring of leases and debt. In addition, $3.2 million
of outstanding indebtedness plus accrued interest is due on November 30, 2002.
We cannot assure you that our lenders will agree to reschedule or renegotiate
the terms of this indebtedness before it becomes due. As of September 30, 2002,
another significant portion of our working capital deficit consisted of
approximately $4.8 million in accounts payable. A substantial portion of this
amount is past due and owed to leasing companies and law firms. We are currently
engaged in discussions regarding rescheduling payment terms and renegotiating
balances due with our major creditors. . If the company resolves its seriously
current weak cash position and following the settlement of certain restructuring
expenses and supply purchases, the company should have improved fixed operating
costs.

Subject to available funding, we currently anticipate that our operating
expenses will be the principal use of our cash as we scale up production. In
particular, we expect that salaries for employees engaged in manufacturing
operations, purchase of inventory and expenses of increased sales and marketing
efforts will be the principle uses of additional cash that we raise during the
remainder of 2002. Until we raise sufficient funding to manufacture our products
and until our inventory procurement and our manufacturing processes are
stabilized, which we expect will take approximately three to six months after
any funding, we may experience difficulties in making timely product shipments
to all of our customers. After our urgent cash needs are addressed, we expect
that our cash requirements over the next 12 months, will be met by a combination
of additional equity or debt financing, and revenues generated by the sales. We
expect to continue to devote substantial resources to manufacturing, marketing
and selling our products.


13


Substantially all of our revenues to date have been derived from research and
development contracts with the U.S. federal government. We received revenues
from government contracts of $50,000 for the nine months ended September 30,
2002, $5.0 million for the year ended December 31, 2001, and $2.6 million for
the year ended December 31, 2000. These figures do not include our government
contracts in which we provided a cost-share. The government may terminate our
contracts at its discretion. We plan to submit proposals for additional
development contract funding; however, funding is subject to legislative
authorization and even if funds are appropriated, they may be withdrawn based on
changes in government priorities.

We have received increased orders for our products during the third quarter of
2002, and we believe that customer interest remains high. The company ended the
third quarter with a backlog of over $10 million in purchase orders and purchase
agreements. We are in discussion for additional orders and we have formal
letters of intent for over $20 million in additional sales during the next 18
months. An improved cash position is required for the company to be able to
deliver on these opportunities. We are in the early phases of production,
although our progress has been impeded by our current cash position. Anticipated
increased shipments in the second and third quarters were delayed, primarily due
to certain supply delays, even though base displays were prepared. These
components were received behind schedule in July, and shipments resumed.
However, our cash position has resulted in reductions in supplies and
manufacturing staff availability.

Our cash requirements depend on numerous factors, including the level of our
product development activities, ability to commercialize our products, market
acceptance of our products and other factors. Subject to successful debt
restructuring, in the long term we expect to devote substantial capital
resources to continue our development programs directed at commercializing our
products in our target markets, hire and train additional staff, expand our
research and development activities, develop and expand our manufacturing
capacity and begin production activities. Through September 30, 2002 we have
incurred accumulated losses of approximately $130.8 million since our inception
and we anticipate incurring significant losses as we fund our growth. Since
inception we have financed our operations through private placements of equity
securities, research and development contracts and borrowings. As of September
30, 2002, we had $0.1 million in cash and cash equivalents and have a working
capital deficit of $10.4 million. In December 2001 and July 2002, we took
certain actions to reduce our workforce due to our difficult working capital
constraints.

Net cash used in operating activities was $5.3 million for the nine months ended
September 30, 2002. Cash used in operating activities resulted primarily from
our net loss partially offset by increases from non-cash charges. Cash used in
operating activities for the nine months ended September 30, 2001 was $3.3
million resulting primarily from operating losses.

Net cash used by investing activities was $0.2 million for the nine months ended
September 30, 2002, all of which was used for capital expenditures. Net cash
used by investing activities for the nine months ended September. 30, 2001 was
$0.2 million, which was used for capital expenditures.

Net cash provided by financing activities was $4.9 million for the nine months
ended September 30, 2002, and consisted primarily of proceeds from sale of
equity and the issuance of debt. Net cash used by financing activities was $.1
million for the nine months ended September 30, 2001 year, and consisted
primarily of cash payments on long-term debt and capital assets


Factors Which May Affect Future Results

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

Risks Related To Our Financial Results

If we cannot operate as a going concern, our stock price will decline and you
may lose your entire investment. Our auditors have included an explanatory
paragraph in their report on our financial statements for the year ended
December 31, 2001 which states that, due to recurring losses from operations
since inception of the Company, there is substantial doubt about our ability to
continue as a going concern. Our financial statements for the nine months ended
September 30, 2002 do not include any adjustments that might result from our
inability to continue as a going concern. These adjustments could include
additional liabilities and the impairment of certain assets. If we had adjusted
our financial statements for these uncertainties, our operating results and
financial condition would have been materially and adversely affected.

If we do not obtain additional cash to operate our business, we may not be able
to execute our business plan and may not achieve profitability. In the event
that cash flow from operations is less than anticipated and/or we are unable to
secure additional funding, in order to preserve cash, we would be required to
further reduce expenditures and effect further reductions in our corporate
infrastructure, either of which could have a material adverse effect on our
ability to continue our current level of operations. Even if we obtain
additional working capital in the near future, to the extent that operating
expenses increase or we need additional funds to make acquisitions, develop new
technologies or acquire strategic assets, the need for additional funding may be
accelerated and there can be no assurances that any such additional funding can
be obtained on terms acceptable to us, if at all. If we are not able to generate
sufficient capital, either from operations or through additional financing, to
fund our current operations, we may not be able to continue as a going concern.
If we are unable to continue as a going concern, we may be forced to
significantly reduce or cease our current operations. This could significantly
reduce the value of our securities, which could result in our de-listing from
the American Stock Exchange and cause investment losses for our shareholders.

We may not maintain The American Stock Exchange (the "Exchange") listing
requirements. To maintain the listing of our common stock on the Exchange, we
are required to meet certain listing requirements, in the case of our common
stock selling for a substantial period of time at a low price per share. In its
review of whether a share price is too low or whether a reverse split is
appropriate, the Exchange will consider all pertinent factors, including market
conditions in general, the number of shares outstanding, plans which may have
been formulated by management, applicable regulations of the state of
incorporation or of any governmental agency having jurisdiction over eMagin, and
the relationship to other Exchange policies regarding continued listing. If the
Exchange were to determine that our share price is too low and that we should
reverse split our shares but we were unable to comply for any reason, our common
stock may be delisted from the Exchange. In addition, the financial statements
set forth in this Quarterly Report on Form 10-Q have not been reviewed by
independent public accountants as required by Item 10-01(d) of Regulation S-X
promulgated under the Securities Exchange Act of 1934, as amended. As result,
this report is not in compliance with the rules and regulations of the
Securities and Exchange Commission. Delisting of our common stock could
materially adversely affect the market price, the market liquidity of our common
stock and our ability to raise necessary capital. Moreover, it would likely be
more difficult to trade in or to obtain accurate quotations as to the market
price of our common stock.


15


We have a history of losses since our inception and expect to incur losses for
the foreseeable future. Accumulated losses excluding non-cash transactions as of
September 30, 2002, were $38.4 million and acquisition related non-cash
transactions were $92 million, which resulted in an accumulated net loss of
$130.8 million, the majority of which was related to the March 2000 merger and
its subsequent write-down of its goodwill. The non-cash losses were dominated by
the amortization and write-down of goodwill and purchased intangibles and
write-down of acquired in process research and development related to the March
2000 acquisition, and also included some non-cash stock-based compensation. We
have not yet achieved profitability and we can give no assurances that we will
achieve profitability within the foreseeable future as we fund operating and
capital expenditures in areas such as establishment and expansion of markets,
sales and marketing, operating equipment and research and development. We cannot
assure investors that we will ever achieve or sustain profitability or that our
operating losses will not increase in the future.

We are presently transitioning from dependence on U.S. government contracts. The
majority of our revenues to date have been derived from research and development
contracts with the U.S. federal government. We may continue to rely on such
contracts for revenue until volume commercial sales commence. The government at
its discretion may terminate our government contracts. We plan to submit
proposals for additional development contract funding; however, funding is
subject to legislative authorization and even if funds are appropriated such
funds may be withdrawn based on changes in government priorities. No assurances
can be given that our existing contracts will continue, that we will be
successful in obtaining new government contracts, or that programs through which
our contracts are funded will continue to be funded beyond the current fiscal
year. Our inability to obtain revenues from govern-ment contracts could have a
material adverse effect on our results of operations.

Risks Related To Our Intellectual Property

We rely on our license agreement with Eastman Kodak for the development of our
products, and the termination of this license, Eastman Kodak's licensing of its
OLED technology to others for microdisplay applications, or the sublicensing by
Eastman Kodak of our OLED technology to third parties, could have a material
adverse impact on our business. Our principal products under development utilize
OLED technology that we license from Eastman Kodak. We rely upon Eastman Kodak
to protect and enforce key patents held by Eastman Kodak, relating to OLED
display technology. Eastman Kodak's patents expire over a range of years from
2002 to 2020. Our license with Eastman Kodak could terminate if we fail to
perform any material term or covenant under the license agreement. Since our
license from Eastman Kodak is non-exclusive, Eastman Kodak could also elect to
become a competitor itself or to license OLED technology for microdisplay
applications to others who have the potential to compete with us. The occurrence
of any of these events could have a material adverse impact on our business.

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


16


Risks Related To the Microdisplay Industry

The commercial success of the microdisplay industry depends on the widespread
market acceptance of microdisplay systems products. The market for microdisplays
is emerging. Our success will depend on consumer acceptance of microdisplays as
well as the success of the commercialization of the microdisplay market. At
present, it is difficult to assess or predict with any assurance the potential
size, timing and viability of market opportunities for our technology in this
market. The viewfinder microdisplay market sector is well established with
entrenched competitors who we must displace.

The microdisplay systems business is intensely competitive. We do business in
intensely competitive markets that are characterized by rapid technological
change, changes in market requirements and competition from both other suppliers
and our potential OEM customers. Such markets are typically characterized by
price erosion. This intense competition could result in pricing pressures, lower
sales, reduced margins, and lower market share. Our ability to compete
successfully will depend on a number of factors, both within and outside our
control. We expect these factors to include the following: our success in
designing, manufacturing and delivering expected new products, including those
implementing new technologies on a timely basis; our ability to address the
needs of our customers and the quality of our customer services; the quality,
performance, reliability, features, ease of use and pricing of our products;
successful expansion of our manufacturing capabilities; our efficiency of
production, and ability to manufacture and ship products on time; the rate at
which original equipment manufacturing customers incorporate our product
solutions into their own products; the market acceptance of our customers'
products; and product or technology introductions by our competitors. Our
competitive position could be damaged if one or more potential OEM customers
decide to manufacture their own microdisplays, using OLED or alternate
technologies. In addition, our customers may be reluctant to rely on a
relatively small company such as eMagin for a critical component. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial condition.

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


17


Competing products may get to market sooner than ours. Our competitors are
investing substantial resources in the development and manu-facture of
microdisplay systems using alternative technologies such as reflective liquid
crystal displays (LCDs), LCD-on-Silicon ("LCOS ") microdisplays, active matrix
electroluminescence and scanning image systems, and transmissive active matrix
LCDs. Color LCOS displays are currently in initial production, and may be in
higher volume production a year or more earlier than our microdisplays, which
could have a significant detrimental effect on our market opportunity.

Our competitors have many advantages over us. As the microdisplay market
develops, we expect to experience intense competition from numerous domestic and
foreign companies including well-established corporations possessing worldwide
manufacturing and production facilities, greater name recognition, larger retail
bases and significantly greater financial, technical, and marketing resources
than us, as well as from emerging companies attempting to obtain a share of the
various markets in which our microdisplay products have the potential to
compete.

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

Our products will likely experience rapidly declining unit prices. In the
markets in which we expect to compete, prices of established products tend to
decline significantly over time. In order to maintain our profit margins over
the long term, we believe that we will need to continuously develop product
enhancements and new technologies that will either slow price declines of our
products or reduce the cost of producing and delivering our products. While we
anticipate many opportunities to reduce production costs over time, there can be
no assurance that these cost reduction plans will be successful. We may also
attempt to offset the anticipated decrease in our average selling price by
introducing new products, increasing our sales volumes or adjusting our product
mix. If we fail to do so, our results of operations would be materially and
adversely affected.

Risks Related To Manufacturing

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


18


The manufacture of OLED-on-silicon is new and OLED microdisplays have not been
produced in significant volumes. We initiated early commercial production during
2002. If we are unable to produce our products in sufficient quantity, we may be
unable to attract customers. In addition, we cannot assure you that once we
commence volume production we will attain yields at high throughput that will
result in profitable gross margins or that we will not experience manufacturing
problems which could result in delays in delivery of orders or product
introductions.

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

Risks Related To Our Business

Our success depends in a large part on the continuing service of key personnel.
Changes in management could have an adverse effect on our business. We are
dependent upon the active participation of several key management personnel
including Gary W. Jones, our Chief Executive Officer. We also need to recruit
additional management in order to expand according to our business plan. The
failure to attract and retain additional management or personnel could have a
material adverse effect on our operating results and financial performance.

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

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

Our microdisplay business may not be successful. The market for microdisplays
may develop later than anticipated by us may therefore limit our sales potential
for the foreseeable future.


19


We generally do not have long-term contracts with our customers. Our business is
operated on the basis of short-term purchase orders and we cannot guarantee that
we will be able to obtain long-term contracts for some time. In the absence of a
backlog of orders that can only be canceled with penalty, we plan production on
the basis of internally generated forecasts of demand, which makes it difficult
to accurately forecast revenues. If we fail to accurately forecast operating
results, out business may suffer and the value of your investment in the Company
may decline.

Our business strategy may fail if we cannot continue to form strategic
relationships with companies that manufacture and use products that could
incorporate our OLED-on-silicon technology. Our prospects will be significantly
affected by our ability to develop strategic alliances with OEMs for
incorporation of our OLED-on-silicon technology into their products. While we
intend to continue to estab-lish strategic relationships with manufacturers of
electronic consumer products, personal computers, chip-makers, lens makers,
equipment makers, material suppliers and/or systems assemblers, there is no
assurance that we will be able to continue to establish and maintain strategic
relationships on commercially acceptable terms, or that the alliances we do
enter in to will realize their objectives. Failure to do so would have a
material adverse effect on our business.

We will need to obtain additional financing, which may not be available on
suitable terms, and as a result our ability to grow or continue existing
operations may be limited. Our future liquidity and capital requirements are
difficult to predict because they depend on numerous factors, including our
success in completing the development of our products, manufacturing and
marketing our products and competing technological and market developments. We
may not be able to generate sufficient cash from our operations to meet
additional working capital requirements, support additional capital expenditures
or take advantage of acquisition opportunities. In addition, substantial
additional capital may be required in the future to fund product development and
product launches. No assurance can be given that additional financing will be
available or that, if available, such financing will be obtainable on terms
favorable to our shareholders or us. To the extent we raise additional capital
by issuing equity or securities convertible into equity, our current
shareholders will suffer dilution in ownership. If needed capital is
unavailable, our ability to continue to operate and grow our business could be
adversely affected. Even if capital is available at acceptable cost, we might
not be able to manage growth effectively.

Our business depends to some extent on international transactions. We purchase
needed materials from companies located abroad and may be adversely affected by
political and currency risk, as well as the additional costs of doing business
with a foreign entity. In addition, many of the OEMs that are the most likely
long term purchasers of our microdisplays are located abroad exposing us to
additional political and currency risk. We may find it necessary to locate
manufacturing facilities abroad to be closer to our customers which could give
expose us to various risks including management of a multi-national
organization, the complexities of complying with foreign law and custom,
political instability and the complexities of taxation in multiple
jurisdictions.

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


20


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

Risks Related To Our Stock

The substantial number of shares that are or will be eligible for sale could
cause our common stock price to decline even if the Company is successful. Sales
of significant amounts of common stock in the public market, or the perception
that such sales may occur, could materially affect the market price of our
common stock. These sales might also make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. As of September 30, 2002, we have outstanding options and
warrants to purchase 17,778,222 shares; some are currently locked-up due to
contractual restrictions. The restrictions on the sale of the remaining shares
will lapse between February 1, 2002 and January 7, 2003.

We do not intend to pay dividends; you will not receive funds without selling
shares; and you may lose the entire amount of your investment. We have not paid
any dividends on our common stock and we do not plan to pay cash dividends in
the foreseeable future. We intend to retain our earnings, if any, for use in our
business. We further cannot assure you that you will receive a return on your
investment when you sell your shares or that you will not lose the entire amount
of your investment.

Our principal stockholders, officers and directors will own a significant voting
interest in our voting stock. Current directors and officers of eMagin
Corporation or their affiliates beneficially own a large percentage of our
outstanding common stock. If these shareholders were to vote together, they
could significantly influence the outcome of items that are submitted to a vote
of the share-holders including the election of our directors.

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

We cannot forecast our future performance. We cannot accurately forecast our
revenues because of our limited commercial operating history and because the
OLED microdisplay market is only beginning to emerge. We may experience
significant fluctuations in our quarterly operating results due to many factors,
which are outside our control. These factors include: fluctuation in demand and
orders for our products; timing or cost of future supply or equipment
deliveries; manufacturing capacity and yields; variations in product and process
development costs; expenses or operational disruptions resulting from
acquisitions; activities of our competitors; adequate working capital; and
general economic conditions. Due to these factors, we cannot anticipate with any
degree of certainty what our revenues, if any, will be in future periods. You
have limited historical financial data and operating results with which to
evaluate our busi-ness and our prospects. As a result, you should consider our
prospects in light of the expense, difficulties and delays frequently
encountered by early stage companies formed to pursue development of new
technologies.

21


Our share price is likely to be highly volatile which may result in substantial
losses for investors. Share price volatility may subject us to securities class
action litigation. Prices and trading volume for technology related stock has
been highly volatile. Accordingly, our stock prices are likely to also be highly
volatile. Shareholders may experience a decrease in the value of their common
stock regardless of our operating performance or prospects. In addition, the
trading price of our common stock could be subject to wide fluctuations in
response to: our perceived prospects; quarter to quarter variations in our
operating results; changes in earnings estimates or recommendations by
securities analysts and market perceptions of our operating results in relation
to those estimates or recommendations; changes in market valuation of companies
in the microdisplay systems industry; announcements of technological innovations
or new products by us or our competitors; economic, political, and issues
associated with our customers, suppliers, partners, accountants, governmental
agencies in the USA and elsewhere, or other parties; sales of shares by other
shareholders; and general conditions in the personal products industries or
stock market conditions. In the past, securities class action litigation has
often been instituted against companies following periods of volatility in their
share price. Those companies, like us, that are involved in rapidly changing
technology markets are particularly subject to this risk. This type of
litigation, if instituted against us, could result in substantial costs and
divert our management's attention and resources, which could cause serious harm
to our business.



22



ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

This Form 10-Q report contains forward-looking statements within the
meaning of the securities laws that are based on current expectations,
estimates, forecasts and projections about the industries in which eMagin
operates, management's beliefs, and assumptions made by management. In addition,
other written or oral statements, which constitute forward-looking statements,
may be made by or on behalf of eMagin. Words such as "expects", "anticipates",
"intends", "plans", "believes", "could", "seeks", "estimates", variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions, which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements, whether as a
result of new information, future events or otherwise. Factors that could cause
or contribute to such differences in outcomes and results, include, but are not
limited to, those discussed below.

Interest Rate Risk

Substantially all of the Company's cash equivalents and investment securities
are at fixed interest rates, and as such, the fair market value of these
instruments is affected by changes in market interest rates. As of September 30,
2002, all of the Company's cash equivalents and investment securities mature
within one year. Accordingly, we believe that the market risk arising from our
holdings of these financial instruments is immaterial. However, in the future,
we may invest in securities with maturities of more than one year, which may
carry greater interest rate risk.

Foreign Currency Exchange Risk

Presently, all of the Company's research and development contract payments are
made in U. S. dollars and, consequently, we believe we have no direct foreign
currency exchange rate risk. However, in the future, we may enter into contracts
in foreign currencies, which may subject the Company to foreign exchange rate
risk. We do not have any derivative instruments and do not presently engage in
hedging transactions.


ITEM 4. CONTROLS AND PROCEDURES

We are in the process of performing an evaluation with the participation of our
management, including our Chief Executive Officer (CEO), of the effectiveness of
the design and operation of our disclosure controls and procedures as part of
our review with new external auditors, Grant Thornton LLP. Although we believe
that our disclosure controls and procedures are effective, as part of our review
it is reasonably likely that we will modify some of our disclosure controls and
procedures to conform to Grant Thornton's methodology. At this time there have
been no significant changes in our internal controls or other factors that could
significantly affect internal controls subsequent to September 30, 2002.



23



PART II--OTHER INFORMATION

Item 5. Other Information

(none)

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits List

EXHIBIT
NUMBER DESCRIPTION
------ -----------
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 issued by the Chief Executive Officer.


(b) Reports on Form 8-K

DATE OF REPORT ITEM REPORTED ON
- -------------- ----------------

The Company filed reports on form 8-K during the quarter ended September 30,
2002. Information regarding the items reported on is as follows:

DATE OF REPORT ITEM REPORTED ON
- -------------- ----------------

August 6, 2002 On Form 8-K, under item 5, eMagin disclosed that
Arthur Andersen LLP ("Arthur Andersen") that it had
terminated its relationship with Arthur Andersen.

August 21, 2002 On Form 8-K, the Company disclosed that it had
issued August 21, 2002, the Company issued two Series B
Convertible Debentures in the amount of $121,739 each. The
debentures bear interest at the rate of 8% per annum and are
due August 21, 2004. The Debenture also includes a fixed
conversion rate of $0.18 per share.

September 3, 2002 On Form 8-K, under item 5, eMagin disclosed an
extension of The Travelers Company Convertible Promissory
Note, the Sackler Secured Note, the Ginola Limited Secured
Note, and the Jack Rivkin Secured Note from August 30, 2002
to October 31, 2002.

September 24, 2002 On Form 8-K/A, eMagin disclosed that it had
engaged Grant Thornton LLP to serve as the Company's
independent auditors.


24





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.

eMAGIN CORPORATION


Dated: November 19, 2002 By: /s/ Gary W. Jones
----------------------
Gary W. Jones
Chief Executive Officer