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

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

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|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|-----------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Page   |
| PART I   FINANCIAL INFORMATION |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Item 1                                        | Condensed Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                          | Condensed Consolidated Balance Sheets as of September 30, 2010  (Restated) (unaudited) and  December 31, 2009                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 4      |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                          | Condensed Consolidated Statements of Operations for the Three and Nine Months ended  September 30, 2010  (Restated) and 2009 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 5      |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                          | Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months ended September 30, 2010  (Restated) (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 6      |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                          | Condensed Consolidated Statements of Cash Flows for the Nine Months ended  September 30, 2010  (Restated) and 2009 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 7      |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                          | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 8      |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 2                                        | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 18     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 3                                        | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 22     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 4                                        | Controls and Procedures                                                                                                                                                                     | 22     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| PART II   OTHER INFORMATION         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Item 1                                        | Legal Proceedings                                                                                                                    | 23     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 1A                                       | Risk Factors                                                                                                                         | 23     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 2                                        | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 23     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 3                                        | Defaults Upon Senior Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 23     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 4                                        | Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                                                                                                           | 23     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 5                                        | Other Information                                                                                                                    | 23     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 6                                        | Exhibits                                                                                                                             | 23     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| SIGNATURES                                    | 24                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| CERTIFICATIONS                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

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| ●   | Adoption of certain provisions of Accounting Standards Codification (“ASC”) 815 – “Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASC 815”).  ASC 815 became effective January 1, 2009.  The anti-dilution features in certain outstanding warrants (“Warrants”) of the Company require these Warrants to be accounted for as liabilities and measured at fair value.  The restated condensed consolidated financial statements reflect the reclassification of the Warrants from shareholders’ equity to warrant liability, the cumulative effect adjustment to the opening balance of accumulated deficit and record changes in the fair value of the warrant liability in the consolidated statements of operations. |
|---------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ●   | Adoption of the two-class method for Earnings Per Share (“EPS”) calculation under ASC 260, “Earnings Per Share” (“ASC 260”).  The two-class method is an earnings allocation method under which EPS is calculated for each class of common stock and participating security.  Under the two-class method, securities that participate in dividends, such as the Company’s Series B Convertible Preferred stock, are considered ‘participating securities.” The restated financial statements reflect the restated basic and diluted earnings per share, if applicable and weighted average shares outstanding calculations. |
|---------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                                                                                                                                                                                                                                                                               |   |                                               |          |    |              |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|---------------|---------|-------------------|--------|
|                                                                                                                                                                                                                                                                               |   | September 30, 2010(Restated)See Note 15(unaudited) |          |    | December 31, 2009 |   |
|                                                                                                                                                                                                                                                                               |   |                                               |          |    |              |   |
| ASSETS                                                                                                                                                                                                                                                                             |   |                                               |          |    |              |   |
|                                                                                                                                                                                                                                                                               |   |                                               |          |    |              |   |
| Current assets:                                                                                                                                                                                                                                                                    |   |                                               |          |    |              |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                          |   | $                                                  | 6,714         |    |              | $      | 5,295 |   |
| Short-term investments – held to maturity                                                                                                                                                                                                                                    |   |                                               | 2,600         |    |              |   | 100 |   |
| Accounts receivable, net                                                                                                                                                                                                                                                           |   |                                               | 5,231         |    |              |   | 4,563 |   |
| Inventory                                                                                                                                                                                                                                                                          |   |                                               | 1,671         |    |              |   | 2,179 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                          |   |                                               | 599           |    |              |   | 687 |   |
| Total current assets                                                                                                                                                                                                                                                               |   |                                               | 16,815        |    |              |   | 12,824 |   |
| Long-term investments – held to maturity                                                                                                                                                                                                                                     |   |                                               | 1,000         |    |              |   | — |   |
| Equipment, furniture and leasehold improvements, net                                                                                                                                                                                                                               |   |                                               | 3,232         |    |              |   | 1,021 |   |
| Intangible assets, net                                                                                                                                                                                                                                                             |   |                                               | 41            |    |              |   | 43 |   |
| Other assets                                                                                                                                                                                                                                                                       |   |                                               | 92            |    |              |   | 92 |   |
| Total assets                                                                                                                                                                                                                                                                       |   | $                                                  | 21,180        |    |              | $      | 13,980 |   |
|                                                                                                                                                                                                                                                                               |   |                                               |          |    |              |   |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                                                                                         |   |                                               |          |    |              |   |   |   |
|                                                                                                                                                                                                                                                                               |   |                                               |          |    |              |   |   |   |
| Current liabilities:                                                                                                                                                                                                                                                               |   |                                               |          |    |              |   |   |   |
| Accounts payable                                                                                                                                                                                                                                                                   |   | $                                                  | 988           |    |              | $      | 1,122 |   |
| Accrued compensation                                                                                                                                                                                                                                                               |   |                                               | 1,807         |    |              |   | 956 |   |
| Other accrued expenses                                                                                                                                                                                                                                                             |   |                                               | 977           |    |              |   | 791 |   |
| Advance payments                                                                                                                                                                                                                                                                   |   |                                               | 125           |    |              |   | 211 |   |
| Deferred revenue                                                                                                                                                                                                                                                                   |   |                                               | 154           |    |              |   | 238 |   |
| Warrant liability                                                                                                                                                                                                                                                                  |   |                                               |   3,728  |    |              |   |  34 |   |
| Other current liabilities                                                                                                                                                                                                                                                          |   |                                               | 734           |    |              |   | 891 |   |
| Total current liabilities                                                                                                                                                                                                                                                          |   |                                               | 8,513         |    |              |   |  4,243 |   |
| Warrant liability                                                                                                                                                                                                                                                                  |   |                                               |   2,757  |    |              |   | 6,844 |   |
| Total liabilities                                                                                                                                                                                                                                                                  |   |                                               |   11,270 |    |              |   |  11,087 |   |
|                                                                                                                                                                                                                                                                               |   |                                               |          |    |              |   |   |   |
| Commitments and contingencies  (Note 12)                                                                                                                                                                                                                                 |   |                                               |          |    |              |   |   |   |
|                                                                                                                                                                                                                                                                               |   |                                               |          |    |              |   |   |   |
| Shareholders’ equity:                                                                                                                                                                                                                                                        |   |                                               |          |    |              |   |   |   |
| Preferred stock, $.001 par value: authorized 10,000,000 shares:                                                                                                                                                                                                                    |   |                                               |          |    |              |   |   |   |
| Series B Convertible Preferred stock, (liquidation preference of $5,679,000 at September 30, 2010) stated value $1,000 per share, $.001 par value:  10,000 shares designated and 5,679 issued and outstanding as of September 30, 2010 and 5,739 as of December 31, 2009 |   |                                               | —       |    |              |   | — |   |
| Common stock, $.001 par value: authorized 200,000,000 shares, issued and outstanding, 19,938,992 shares as of September 30, 2010 and 16,967,244 as of December 31, 2009                                                                                                            |   |                                               | 20            |    |              |   | 17 |   |
| Additional paid-in capital                                                                                                                                                                                                                                                         |   |                                               | 205,372       |    |              |   | 193,358 |   |
| Accumulated deficit                                                                                                                                                                                                                                                                |   |                                               | ( 195,482     | )  |              |   | ( 190,482 | ) |
| Total shareholders’ equity                                                                                                                                                                                                                                                   |   |                                               | 9,910         |    |              |   | 2,893 |   |
| Total liabilities and shareholders’ equity                                                                                                                                                                                                                                   |   | $                                                  | 21,180        |    |              | $      | 13,980 |   |

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|                                                          |   | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |   |
|---------------------------------------------------------------|--------|---------------------------------|------------|--------|--------------------------------|--------|
|                                                          |   | 2010(Restated) See Note 15 |       |   | 2009                           |   |   | 2010(Restated) See Note 15 |   |   | 2009 |   |
| Revenue:                                                      |   |                            |       |   |                           |   |   |   |   |   |   |   |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |
| Product revenue                                               |   | $                               | 6,936      |   |                           | $      | 5,260 |   |   | $ | 17,826 |   |   | $ | 14,560 |   |
| Contract revenue                                              |   |                            | 1,320      |   |                           |   | 847 |   |   |   | 4,669 |   |   |   | 2,543 |   |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
|     Total revenue, net                    |   |                            | 8,256      |   |                           |   | 6,107 |   |   |   | 22,495 |   |   |   | 17,103 |   |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Cost of goods sold:                                           |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Product revenue                                               |   |                            | 2,105      |   |                           |   | 1,996 |   |   |   | 6,590 |   |   |   | 5,817 |   |
| Contract revenue                                              |   |                            | 683        |   |                           |   | 611 |   |   |   | 2,380 |   |   |   | 1,528 |   |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
|     Total cost of goods sold              |   |                            | 2,788      |   |                           |   | 2,607 |   |   |   | 8,970 |   |   |   | 7,345 |   |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                  |   |                            | 5,468      |   |                           |   | 3,500 |   |   |   | 13,525 |   |   |   | 9,758 |   |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                           |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Research and development                                      |   |                            | 511        |   |                           |   | 463 |   |   |   | 1,888 |   |   |   | 1,376 |   |
| Selling, general and administrative                           |   |                            | 2,054      |   |                           |   | 1,772 |   |   |   | 6,873 |   |   |   | 5,083 |   |
|     Total operating expenses              |   |                            | 2,565      |   |                           |   | 2,235 |   |   |   | 8,761 |   |   |   | 6,459 |   |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Income from operations                                        |   |                            | 2,903      |   |                           |   | 1,265 |   |   |   | 4,764 |   |   |   | 3,299 |   |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Other income (expense):                                       |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                              |   |                            | (21        | )      |                           |   | (76 | ) |   |   | (79) |   |   |   | (417 | ) |
| Other income, net                                             |   |                            | 2          |   |                           |   | 1 |   |   |   |             10 |   |   |   | 41 |   |
|   Change in fair value of warrant liability              |   |                            | 723        |   |                           |   | (3,315 | ) |   |   | (9,620 | ) |   |   | (6,379 | ) |
|     Total other  income ( expense ) , net |   |                            | 704        |   |                           |   | (3,390 | ) |   |   | (9,689 | ) |   |   | (6,755 | ) |
| Income  (loss) before provision for income taxes              |   |                            | 3,607      |   |                           |   | (2,125 | ) |   |   | (4,925 | ) |   |   | (3,456 | ) |
| Provision for income taxes                                    |   |                            | 56         |   |                           |   | — |   |   |   | 75 |   |   |   | — |   |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                             |   | $                               | 3,551      |   |                           | $      | (2,125 | ) |   | $ | (5,000 | ) |   | $ | (3,456 | ) |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Income per share, basic                                       |   | $                               | 0. 13      |   |                           | $      | (0.13 | ) |   | $ | ( 0. 27 | ) |   | $ | (0.21 | ) |
| Income per share, diluted                                     |   | $                               | 0.08       |   |                           | $      | (0.13 | ) |   | $ | (0.27 | ) |   | $ | (0.21 | ) |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares outstanding:                |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
|                                                          |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                         |   |                            | 19,883,029 |   |                           |   | 16,513,101 |   |   |   | 18,781,185 |   |   |   | 16,133,646 |   |
| Diluted                                                       |   |                            | 24,244,477 |   |                           |   | 16,513,101 |   |   |   | 18,781,185 |   |   |   | 16,133,646 |   |

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

----

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

----

----

|                         |   |                               |   |   | Fair Value Measurement Using |   |
|------------------------------|--------|------------------------------------|--------|--------|------------------------------|--------|
|                         |   | Fair Value as ofSeptember 30, 2010 |   |   | Level 1                      |   |   | Level 2 |   |   | Level 3 |   |
|                         |   |                               |   |   |                         |   |   |   |   |   |   |   |
| Warrant liability, current   |   | $                                  | 3,728  |   |                         | $      | — |   |   | $ | — |   |   | $ | 3,728 |   |
| Warrant liability, long-term |   |                               | 2,757  |   |                         |   | — |   |   |   | — |   |   |   | 2,757 |   |
| Total Warrant liability      |   | $                                  | 6,485  |   |                         | $      | — |   |   | $ | — |   |   | $ | 6,485 |   |

----

| Balance as of January 1, 2010    |   | $      | 6,878   |   |
|----------------------------------|--------|--------|---------|--------|
| Change in fair value of warrants |   |   | 9,978   |   |
| Fair value of warrants exercised |   |   | (10,013 | )      |
| Fair value of warrants expired   |   |   | (358    | )      |
| Balance as of September 30, 2010 |   | $      | 6,485   |   |

|                      |   | September 30, 2010 |              |   | December 31, 2009 |   |
|---------------------------|--------|--------------------|-------------------|--------|-------------------|--------|
| Risk-free interest rate   |   |               | 0.27% - 0.64      | %      |              |   | 0.06% - 2.69 | % |
| Expected volatility       |   |               | 73.3% - 97.3      | %      |              |   | 62.8% - 90.6 | % |
| Expected life ( in years) |   |               | 0.75 – 3.25 |   |              |   | 0.25 – 4.0 |   |
| Expected dividend yield   |   |               | 0                 | %      |              |   | 0 | % |

|                                 |   | September 30,2010 (unaudited) |   |   | December 31, 2009 |   |
|--------------------------------------|--------|------------------------------------|--------|--------|-------------------|--------|
| Accounts receivable                  |   | $                                  | 5,615  |   |              | $      | 5,147 |   |
| Less allowance for doubtful accounts |   |                               | (384   | )      |              |   | (584 | ) |
| Net receivables                 |   | $                                  | 5,231  |   |              | $      | 4,563 |   |

----

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

|                                       |   | Nine Months EndedSeptember 30, 2010 |    |   | Nine Months EndedSeptember 30, 2009 |   |
|--------------------------------------------|--------|-------------------------------------|---------|--------|-------------------------------------|--------|
|                                       |   | Income                              |    |   | Shares                              |   |   | Per Share Amount |   |   | Income |   |   | Shares |   |   | Per Share Amount |   |
| Basic EPS                                  |   |                                |    |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Loss                                   |   | $                                   | (5,000  | )      |                                |   |   |   |   |   |   | $ | (3,456 | ) |   |   |   |   |   |   |
| Loss allocated to participating securities |   | $                                   | — |   |                                |   |   |   |   |   |   | $ | — |   |   |   |   |   |   |   |
| Loss allocated to common shares            |   | $                                   | (5,000  | )      |                                |   | 18,781,185 |   |   | $ | (0.27 | ) |   | $ | (3,456 | ) |   |   | 16,133,646 |   |   | $ | (0.21 | ) |
| Diluted EPS                                |   |                                |    |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted potential common shares            |   |                                |    |   |                                |   | — |   |   |   |   |   |   |   |   |   |   |   | — |   |   |   |   |   |
| Loss allocated to common shares            |   | $                                   | (5,000  | )      |                                |   | 18,781,185 |   |   | $ | (0.27 | ) |   | $ | (3,456 | ) |   |   | 16,133,646 |   |   |   | (0.21 | ) |
|                                       |   |                                |    |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|                 |   | September 30,2010 (unaudited) |   |   | December 31, 2009 |   |
|----------------------|--------|------------------------------------|--------|--------|-------------------|--------|
| Raw materials   |   | $                                  | 752    |   |              | $      | 806 |   |
| Work in process      |   |                               | 436    |   |              |   | 709 |   |
| Finished goods  |   |                               | 483    |   |              |   | 664 |   |
| Total inventory      |   | $                                  | 1,671  |   |              | $      | 2,179 |   |

----

|                                            |   | September 30,2010 (unaudited) |   |   | December 31, 2009 |   |
|-------------------------------------------------|--------|------------------------------------|--------|--------|-------------------|--------|
| Vendor prepayments                              |   | $                                  | 32     |   |              | $      | 266 |   |
| Other prepaid expenses *                        |   |                               | 567    |   |              |   | 421 |   |
| Total prepaid expenses and other current assets |   | $                                  | 599    |   |              | $      | 687 |   |

|                                |   | Three Months Ended September 30, |   |   | Nine Months Ended September 30, |   |
|-------------------------------------|--------|----------------------------------|--------|--------|---------------------------------|--------|
|                                |   | 2010                             |   |   | 2009                            |   |   | 2010 |   |   | 2009 |   |
| Cost of revenue                     |   | $                                | 28     |   |                            | $      | 25 |   |   | $ | 155 |   |   | $ | 111 |   |
| Research and development            |   |                             | 23     |   |                            |   | 39 |   |   |   | 151 |   |   |   | 165 |   |
| Selling, general and administrative |   |                             | 376    |   |                            |   | 317 |   |   |   | 1,071 |   |   |   | 650 |   |
| Total stock compensation expense    |   | $                                | 427    |   |                            | $      | 381 |   |   | $ | 1,377 |   |   | $ | 926 |   |

----

|                           |   | For the Nine Months Ended September 30, |   |
|--------------------------------|--------|-----------------------------------------|--------|
|                           |   | 2010                                    |   |   | 2009 |   |
| Dividend yield                 |   |                                    | 0      | % |   |   | 0 |  % |
| Risk free interest rates       |   | 1.31 to 2.57                            | %      |   | 2.02 to 2.51 |  % |
| Expected  volatility |   | 80.6 to 86.9                            | %      |   | 80.3 to 86.4 |  % |
| Expected term (in years)       |   | 3.5 to 5.5                              |   |   |   | 4.0 to 5.5 |   |

|                                                 |   | Number of Shares |      |   | Weighted Average Exercise Price |   |   | Weighted Average Remaining Contractual Life (In Years) |   |   | Aggregate Intrinsic Value |   |
|------------------------------------------------------|--------|------------------|-----------|--------|---------------------------------|--------|--------|--------------------------------------------------------|--------|--------|---------------------------|--------|
| Outstanding at December 31, 2009                     |   |             | 2,817,574 |   |                            | $      | 1.33   |                                                   |   |   |                      |   |   |   |
| Options granted                                      |   |             | 853,085   |   |                            |   | 2.59   |                                                   |   |   |                      |   |   |   |
| Options exercised                                    |   |             | (174,794  | )      |                            |   | 1.84   |                                                   |   |   |                      |   |   |   |
| Options forfeited                                    |   |             | —   |   |                            |   |   |                                                   |   |   |                      |   |   |   |
| Options cancelled                                    |   |             | (71,919   | )      |                            |   | 3.11   |                                                   |   |   |                      |   |   |   |
| Outstanding at September 30, 2010                    |   |             | 3,432,946 |   |                            | $      | 1.58   |                                                   |   |   | 6.18                      |   |   | $ | 5,806,112 |   |
| Vested or expected to vest at September 30, 2010 (1) |   |             | 3,388,476 |   |                            | $      | 1.72   |                                                   |   |   | 6.18                      |   |   | $ | 5,149,400 |   |
| Exercisable at September 30, 2010                    |   |             | 2,917,243 |   |                            | $      | 1.52   |                                                   |   |   | 6.25                      |   |   | $ | 5,149,400 |   |

|   |          |   |                |   |      |                                                 |   |   |                            |   |   |               |   |   |                               |   |
|--------|---------------|--------|---------------------|--------|-----------|------------------------------------------------------|--------|--------|---------------------------------|--------|--------|--------------------|--------|--------|------------------------------------|--------|
|   |          |   | Options Outstanding |   |      | Options Exercisable                                  |   |
|   |          |   | Number Outstanding  |   |      | Weighted AverageRemaining Contractual Life(In Years) |   |   | Weighted Average Exercise Price |   |   | Number Exercisable |   |   | Weighted Average Exercisable Price |   |
| $      | 0.34 - $0.98  |   |                |   | 1,160,340 |                                                 |   |   | 5.67                            |   |   | $                  | 0.82   |   |                               |   | 1,146,212 |   |   | $ | 0.82 |   |
| $      | 1.00 - $1.51  |   |                |   | 1,185,938 |                                                 |   |   | 6.42                            |   |   |               | 1.20   |   |                               |   | 1,030,400 |   |   |   | 1.22 |   |
| $      | 1.80 - $1.94  |   |                |   | 411,341   |                                                 |   |   | 6.32                            |   |   |               | 1.94   |   |                               |   | 194,519 |   |   |   | 1.94 |   |
| $      | 2.60 - $3.92  |   |                |   | 639,327   |                                                 |   |   | 6.74                            |   |   |               | 3.05   |   |                               |   | 519,912 |   |   |   | 3.04 |   |
| $      | 5.80 - $22.50 |   |                |   | 27,000    |                                                 |   |   | 1.51                            |   |   |               | 11.00  |   |                               |   | 26,200 |   |   |   | 10.97 |   |
|   |          |   |                |   | 3,432,946 |                                                 |   |   | 6.18                            |   |   | $                  | 1.58   |   |                               |   | 2,917,243 |   |   | $ | 1.52 |   |

----

----

----

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

----

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

| Condensed Consolidated Balance Sheet |   | September 30, 2010       |     |   | September 30, 2010 |   |
|--------------------------------------|--------|--------------------------|----------|--------|--------------------|--------|
| (in thousands)                       |   | (As previously reported) |     |   | (As restated)      |   |
|                                 |   |                     |     |   |               |   |
| Warrant liability                    |   | $                        | —  |   |               | $      | 3,728 |   |
| Total current liabilities            |   |                     | 4,785    |   |               |   | 8,513 |   |
| Warrant liability                    |   |                     | —  |   |               |   | 2,757 |   |
| Total liabilities                    |   | $                        | 4,785    |   |               | $      | 11,270 |   |
|                                 |   |                     |     |   |               |   |   |   |
| Shareholders’ equity:          |   |                     |     |   |               |   |   |   |
| Additional paid-in capital           |   | $                        | 208,665  |   |               | $      | 205,372 |   |
| Accumulated deficit                  |   |                     | (192,290 | )      |               |   | (195,482 | ) |
| Total shareholders’ equity     |   | $                        | 16,395   |   |               | $      | 9,910 |   |

| Condensed Consolidated Statements of Operations |   | Three Months EndedSeptember 30, 2010 |       |   | Nine Months EndedSeptember 30, 2010 |   |
|-------------------------------------------------|--------|--------------------------------------|------------|--------|-------------------------------------|--------|
| (in thousands except share and per share data)  |   | (As previously reported)             |       |   | (As restated)                       |   |   | (As previously reported) |   |   | (As restated) |   |
|                                            |   |                                 |       |   |                                |   |   |   |   |   |   |   |
| Change in fair value of warrant liability       |   | $                                    | —    |   |                                | $      | 723 |   |   | $ | — |   |   | $ | (9,620 | ) |
| Total other income (expense)                    |   | $                                    | (19        | )      |                                | $      | 704 |   |   | $ | (69 | ) |   | $ | (9,689 | ) |
| Net income (loss)                               |   | $                                    | 2,828      |   |                                | $      | 3,551 |   |   | $ | 4,620 |   |   | $ | (5,000 | ) |
| Income (loss) per share, basic                  |   | $                                    | 0.14       |   |                                | $      | 0.13 |   |   | $ | 0.25 |   |   | $ | (0.27 | ) |
| Income (loss) per share, diluted                |   | $                                    | 0.09       |   |                                | $      | 0.08 |   |   | $ | 0.15 |   |   | $ | (0.27 | ) |
|                                            |   |                                 |       |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares outstanding:  |   |                                 |       |   |                                |   |   |   |   |   |   |   |   |   |   |   |
|   Basic                               |   |                                 | 19,883,029 |   |                                |   | 19,883,029 |   |   |   | 18,781,185 |   |   |   | 18,781,185 |   |
|   Diluted                             |   |                                 | 31,816,477 |   |                                |   | 24,244,477 |   |   |   | 30,680,340 |   |   |   | 18,781,185 |   |

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

----

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

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

----

----

|                          |   | Three months endedSeptember 30, |   |   | Nine months endedSeptember 30, |   |
|-------------------------------|--------|------------------------------------------------|--------|--------|------------------------------------------|--------|
|                          |   | 2010                                           |   |   | 2009                                     |   |   | 2010 |   |   | 2009 |   |
|                          |   | (unaudited)                                    |   |   | (unaudited)                              |   |
| Product revenue gross profit  |   | $                                              | 4,831  |   |                                     | $      | 3,264 |   |   | $ | 11,236 |   |   | $ | 8,743 |   |
| Product revenue gross margin  |   |                                           | 70     | %      |                                     |   | 62 | %  |   |   | 63 | % |   |   | 60 | %  |
| Contract revenue gross profit |   | $                                              | 637    |   |                                     | $      | 236 |   |   | $ | 2,289 |   |   | $ | 1,015 |   |
| Contract revenue gross margin |   |                                           | 48     | %      |                                     |   | 28 | %  |   |   | 49 | %  |   |   | 40 | %  |
| Total gross profit            |   | $                                              | 5,468  |   |                                     | $      | 3,500 |   |   | $ | 13,525 |   |   | $ | 9,758 |   |
| Total gross margin            |   |                                           | 66     | %      |                                     |   | 57 | %  |   |   | 60 | %  |   |   | 57 | %  |

----

----

----

| 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)                       |

----

|   | 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                                     |   |
|   |               | ( Chief Accounting Officer and Principal Financial Officer) |   |