| (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.) |

----

|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|-----------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Page   |
| PART I   FINANCIAL INFORMATION |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Item 1                                        | Condensed Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                          | Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and  December 31, 2009                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 3      |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                          | Condensed Consolidated Statements of Operations for the Three and Nine Months ended  September 30, 2010 and 2009 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 4      |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                          | Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months ended September 30, 2010 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 5      |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                          | Condensed Consolidated Statements of Cash Flows for the Nine Months ended  September 30, 2010 and 2009 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 6      |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                          | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 7      |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 2                                        | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 14     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 3                                        | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 18     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 4                                        | Controls and Procedures                                                                                                                                                                     | 18     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| PART II   OTHER INFORMATION         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Item 1                                        | Legal Proceedings                                                                                                                    | 19     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 1A                                       | Risk Factors                                                                                                                         | 19     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 2                                        | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 19     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 3                                        | Defaults Upon Senior Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 19     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 4                                        | Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                                                                                                           | 19     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 5                                        | Other Information                                                                                                                    | 19     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Item 6                                        | Exhibits                                                                                                                             | 19     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| SIGNATURES                                    | 20                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| CERTIFICATIONS                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

----

|                                                                                                                                                                                                                                                                               |   |                          |     |    |              |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|----------|---------|-------------------|--------|
|                                                                                                                                                                                                                                                                               |   | September 30, 2010(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 |   |
| Other current liabilities                                                                                                                                                                                                                                                          |   |                          | 734      |    |              |   | 891 |   |
| Total current liabilities                                                                                                                                                                                                                                                          |   |                          | 4,785    |    |              |   | 4,209 |   |
|                                                                                                                                                                                                                                                                               |   |                          |     |    |              |   |   |   |
| 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                                                                                                                                                                                                                                                         |   |                          | 208,665  |    |              |   | 206,664 |   |
| Accumulated deficit                                                                                                                                                                                                                                                                |   |                          | (192,290 | )  |              |   | (196,910 | ) |
| Total shareholders’ equity                                                                                                                                                                                                                                                   |   |                          | 16,395   |    |              |   | 9,771 |   |
| Total liabilities and shareholders’ equity                                                                                                                                                                                                                                   |   | $                             | 21,180   |    |              | $      | 13,980 |   |

----

|                                             |   | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |   |
|--------------------------------------------------|--------|---------------------------------|------------|--------|--------------------------------|--------|
|                                             |   | 2010                            |       |   | 2009                           |   |   | 2010 |   |   | 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 |   |
|     Total other expense, net |   |                            | (19        | )      |                           |   | (75 | ) |   |   | (69) |   |   |   | (376 | ) |
| Income before provision for income taxes         |   |                            | 2,884      |   |                           |   | 1,190 |   |   |   | 4,695 |   |   |   | 2,923 |   |
| Provision for income taxes                       |   |                            | 56         |   |                           |   | — |   |   |   | 75 |   |   |   | — |   |
|                                             |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                       |   | $                               | 2,828      |   |                           | $      | 1,190 |   |   | $ | 4,620 |   |   | $ | 2,923 |   |
|                                             |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Income per share, basic                          |   | $                               | 0.14       |   |                           | $      | 0.07 |   |   | $ | 0.25 |   |   | $ | 0.18 |   |
| Income per share, diluted                        |   | $                               | 0.09       |   |                           | $      | 0.04 |   |   | $ | 0.15 |   |   | $ | 0.12 |   |
|                                             |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares outstanding:   |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                            |   |                            | 19,883,029 |   |                           |   | 16,513,101 |   |   |   | 18,781,185 |   |   |   | 16,133,646 |   |
| Diluted                                          |   |                            | 31,816,477 |   |                           |   | 26,592,267 |   |   |   | 30,680,340 |   |   |   | 24,471,486 |   |

----

|                                                   |   | Preferred Stock |   |    | Common Stock |   |    |  Additional |   |   |         |   |   |  Total           |    |
|--------------------------------------------------------|--------|-----------------|--------|---------|--------------|--------|---------|------------------|--------|--------|--------------|--------|--------|-----------------------|---------|
|                                                   |   | Shares          |   |    | Amount       |   |    | Shares           |   |   | Amount       |   |   |  Paid-in Capital |    |   | Accumulated Deficit |   |   |  Shareholders’ Equity |   |
| Balance, December 31, 2009                             |   |            | 5,739  |    |         | $      | — |             |   |   | 16,967,244   |   |   | $                     | 17      |   |   | $ | 206,664 |   |   | $ | (196,910 | ) |   | $ | 9,771 |   |
|                                                   |   |            |   |    |         |   |    |             |   |   |         |   |   |                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 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 income                                             |   |            |   |    |         |   |    |             |   |   |         |   |   |                  |    |   |   |   |   |   |   |   | 4,620 |   |   |   | 4,620 |   |
| Balance, September 30, 2010                            |   |            | 5,679  |    |         | $      | — |             |   |   | 19,938,992   |   |   | $                     | 20      |   |   | $ | 208,665 |   |   | $ | (192,290 | ) |   | $ | 16,395 |   |
|                                                   |   |            |   |    |         |   |    |             |   |   |         |   |   |                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                   |   |            |   |    |         |   |    |             |   |   |         |   |   |                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

|                                                                                                       |   | Nine Months Ended |    |
|------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                       |   | September 30,     |    |
|                                                                                                       |   | 2010              |    |   | 2009 |   |
|                                                                                                       |   | (unaudited)       |    |
| Cash flows from operating activities:                                                                      |   |              |    |   |   |   |
| Net income                                                                                                 |   | $                 | 4,620   |   |   | $ | 2,923 |   |
| Adjustments to reconcile net income 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 |   |
| 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 |   | $                 | — |   |   | $ | — |   |
|                                                                                                       |   |

----

----

|                                 |   | 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, |       |   | Nine Months EndedSeptember 30, |   |
|--------------------------------------------------------------------|--------|---------------------------------|------------|--------|--------------------------------|--------|
|                                                               |   | 2010                            |       |   | 2009                           |   |   | 2010 |   |   | 2009 |   |
| Numerator:                                                         |   |                            |       |   |                           |   |   |   |   |   |   |   |
|                                                               |   |                            |       |   |                           |   |   |   |   |   |   |   |
| Net income                                                         |   | $                               | 2,828      |   |                           | $      | 1,190 |   |   | $ | 4,620 |   |   | $ | 2,923 |   |
|                                                               |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Denominator:                                                       |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding for basic earnings per share   |   |                            | 19,883,029 |   |                           |   | 16,513,101 |   |   |   | 18,781,185 |   |   |   | 16,133,646 |   |
| Effective of dilutive shares:                                      |   |                            |       |   |                           |   |   |   |   |   |   |   |   |   |   |   |
|   Dilution from stock options and warrants               |   |                            | 4,361,448  |   |                           |   | 2,427,166 |   |   |   | 4,327,155 |   |   |   | 685,840 |   |
|   Convertible preferred stock                            |   |                            | 7,572,000  |   |                           |   | 7,652,000 |   |   |   | 7,572,000 |   |   |   | 7,652,000 |   |
| Dilutive potential common shares                                   |   |                            | 11,933,448 |   |                           |   | 10,079,166 |   |   |   | 11,899,155 |   |   |   | 8,337,840 |   |
| Weighted average shares outstanding for diluted earnings per share |   |                            | 31,816,477 |   |                           |   | 26,592,267 |   |   |   | 30,680,340 |   |   |   | 24,471,486 |   |

|                 |   | 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 |   |

----

----

----

----

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|                          |   | 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 | %  |

----

----

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| 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                    |   |
|   |               | Principal Accounting and Financial Officer |   |