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

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FORM 10-Q

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[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

OR

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

For the transition period from ________to _________

Commission File Number    0-21221



Microvision, Inc.



|Delaware                                                       | 91-1600822                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

6222 185th Avenue NE
Redmond, Washington      98052

(425) 936-6847

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  YES    x NO     ̈

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

Large accelerated filer      ̈ Accelerated filer    x Non-accelerated filer     ̈

Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) . YES     ̈ NO    x

As of July 10, 2006, 38,146,000 shares of the Company's common stock, $0.001 par value, were outstanding.






|                                                                                                                                                                   | Page
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----
|Part I: Financial Information                                                                                                                                      |     
|Item 1.  Financial Statements:                                                                                                                                     |     
|                                                                                                                                                                   |     
|Consolidated Balance Sheets as of  June 30, 2006 and
December 31, 2005 (unaudited)                                                                                 | 3   
|Consolidated Statements of Operations for the three and six
months ended June 30, 2006 and 2005 (unaudited)                                                        | 4   
|Consolidated Statements of Comprehensive Loss
for the three and six months ended June 30, 2006 and 2005 (unaudited)                                                | 5   
|Consolidated Statement of Mandatorily Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit) for the six months ended June 30, 2006 (unaudited) | 6   
|Consolidated Statements of Cash Flows for the six
months ended June 30, 2006 and 2005 (unaudited)                                                                  | 7   
|Notes to Consolidated Financial Statements
(unaudited)                                                                                                             | 9   
|                                                                                                                                                                   |     
|Item 2.  Management's Discussion and Analysis of Financial
Condition and Results of Operations                                                                     | 18  
|Item 3.  Quantitative and Qualitative Disclosures About Market
Risk                                                                                                | 26  
|Item 4.  Controls and Procedures                                                                                                                                   | 27  
|                                                                                                                                                                   |     
|Part II: Other Information                                                                                                                                         |     
|Item 1A. Risk Factors                                                                                                                                              | 28  
|Item 6.  Exhibits                                                                                                                                                  | 29  
|Signatures                                                                                                                                                         | 30  
|Exhibit Index                                                                                                                                                      | 31  

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Microvision, Inc.

                    Consolidated Balance Sheets

                  (In thousands, except per share data)

                            (Unaudited)

`June 30,      December 31,
                                                                                                                  2006           2005
                                                                                                              -------------  -------------
Assets                                                                                                                                    
Current assets
   Cash and cash equivalents                                                                                 $      21,137  $       6,860
   Investment securities, available-for-sale                                                                           927             --
   Accounts receivable, net of allowances of $313 and $264                                                             812          1,380
   Costs and estimated earnings in excess of billings on uncompleted contracts                                         559          1,204
   Inventory                                                                                                           721            759
   Current restricted investments                                                                                    5,040          1,856
   Other current assets                                                                                              2,230          1,512
                                                                                                              -------------  -------------
   Total current assets                                                                                             31,426         13,571

Investment in Lumera                                                                                                    --          3,582
Property and equipment, net                                                                                          4,061          2,902
Restricted investments                                                                                               1,268          1,000
Restricted investment in Lumera                                                                                         --          2,184
Other assets                                                                                                            58            124
                                                                                                              -------------  -------------
   Total assets                                                                                              $      36,813  $      23,363
                                                                                                              =============  =============
                                                                                                                                          
Liabilities, Mandatorily Redeemable Convertible Preferred Stock and Shareholders' Equity (Deficit)                                        
Current liabilities
   Accounts payable                                                                                          $       1,118  $       2,328
   Accrued liabilities                                                                                               3,870          4,513
   Billings in excess of costs and estimated earnings on uncompleted contracts                                          50             51
   Liability associated with common stock warrants                                                                   1,134          3,452
   Current portion of notes payable                                                                                  6,706          7,896
   Current portion of capital lease obligations                                                                         32             32
   Current portion of long-term debt                                                                                    57             22
                                                                                                              -------------  -------------
   Total current liabilities                                                                                        12,967         18,294
Notes payable, net of current portion                                                                                   --          1,447
Liability associated with embedded derivative feature                                                                  782          1,368
Capital lease obligations, net of current portion                                                                       90            105
Long-term debt, net of current portion                                                                                 488             --
Deferred rent, net of current portion                                                                                1,702          1,492
                                                                                                              -------------  -------------
   Total liabilities                                                                                                16,029         22,706
                                                                                                              -------------  -------------
Commitments and contingencies

Mandatorily redeemable convertible preferred stock, par value $.001; 25,000 shares authorized;
  0 and 5 shares issued and outstanding (Liquidation preference of $0 and $5,000)                                       --          4,166
                                                                                                              -------------  -------------
Shareholders' equity (deficit)
   Common stock, par value $.001; 73,000 shares authorized;
     37,346 and 25,138 shares issued and outstanding                                                                    37             25
   Additional paid-in capital                                                                                      241,288        212,993
   Deferred compensation                                                                                                --            (85)
   Receivables from related parties, net                                                                              (792)          (792)
   Accumulated other comprehensive income                                                                            3,512             --
   Accumulated deficit                                                                                            (223,261)      (215,650)
                                                                                                              -------------  -------------
   Total shareholders' equity (deficit)                                                                             20,784         (3,509)
                                                                                                              -------------  -------------
   Total liabilities, and shareholders' equity (deficit)                                                     $      36,813  $      23,363
                                                                                                              =============  =============`

The accompanying notes are an integral part of these financial statements.

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Microvision, Inc.

                     Consolidated Statement of Operations

                  (In thousands, except per share data)

                            (Unaudited)

`Three Months Ended      Six Months Ended
                                                                                   June 30,                June 30,
                                                                             ----------------------  ----------------------
                                                                                2006        2005        2006        2005
                                                                             ----------  ----------  ----------  ----------
Contract revenue                                                            $    1,335  $    3,682  $    3,116  $    7,064
Product revenue                                                                    571       1,043       1,262       1,643
                                                                             ----------  ----------  ----------  ----------
    Total revenue                                                                1,906       4,725       4,378       8,707
                                                                             ----------  ----------  ----------  ----------
Cost of contract revenue                                                           999       1,668       2,150       3,496
Cost of product revenue                                                          1,681       2,217       2,975       3,367
                                                                             ----------  ----------  ----------  ----------
    Total cost of revenue                                                        2,680       3,885       5,125       6,863
                                                                             ----------  ----------  ----------  ----------
Gross margin                                                                      (774)        840        (747)      1,844
                                                                             ----------  ----------  ----------  ----------
Research and development expense (inclusive of non-cash compensation
    expense of $135 and $0 for the three months and $209 and $0 for the
    six months ended June 30, 2006)                                              2,307       2,037       4,461       3,921
Sales, marketing, general and administrative expense (inclusive of
    non-cash compensation expense of $430 and $125 for the three
    months and $773 and $256 for the six months ended June 30, 2006)             4,675       4,641       9,414       9,307
Gain on disposal of fixed assets                                                    --          --        (198)         --
                                                                             ----------  ----------  ----------  ----------
    Total operating expenses                                                     6,982       6,678      13,677      13,228
                                                                             ----------  ----------  ----------  ----------
Loss from operations                                                            (7,756)     (5,838)    (14,424)    (11,384)
Interest income                                                                    119          68         248         125
Interest expense                                                                (1,636)       (879)     (3,458)     (1,070)
Gain on derivative instruments,net                                               1,187       1,343       3,054       1,058
Other expense                                                                       --         (12)        (11)         (3)
                                                                             ----------  ----------  ----------  ----------
Net loss before equity subsidiary transactions                                  (8,086)     (5,318)    (14,591)    (11,274)

Loss on investment in equity subsidiary                                             --        (934)       (290)     (1,878)
Gain on sale of securities of equity subsidiary                                     --       1,570       7,270       1,570
                                                                             ----------  ----------  ----------  ----------
Net loss                                                                        (8,086)     (4,682)     (7,611)    (11,582)

Less: Stated dividend on mandatorily redeemable convertible preferred stock        (16)        (88)        (59)       (174)
       Accretion to par value of preferred stock                                   (37)       (198)       (138)       (391)
       Inducement for conversion of preferred stock                             (3,076)         --      (3,076)         --
                                                                             ----------  ----------  ----------  ----------
Net loss available for common shareholders                                  $  (11,215) $   (4,968)    (10,884)    (12,147)
                                                                             ==========  ==========  ==========  ==========

Net loss per share - basic and diluted                                      $    (0.38) $    (0.23) $    (0.40) $    (0.57)
                                                                             ==========  ==========  ==========  ==========

Weighted-average shares outstanding - basic and diluted                         29,192      21,481      27,216      21,488
                                                                             ==========  ==========  ==========  ==========`

The accompanying notes are an integral part of these financial statements.

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Microvision, Inc.

                     Consolidated Statement of Comprehensive Loss

                             (In thousands)

                            (Unaudited)

`Three Months Ended      Six Months Ended
                                                                                   June 30,                June 30,
                                                                             ----------------------  ----------------------
                                                                                2006        2005        2006        2005
                                                                             ----------  ----------  ----------  ----------
Net loss                                                                    $   (8,086) $   (4,682) $   (7,611) $  (11,582)

Other comprehensive (loss) gain
Unrealized (loss) gain on investment securities, available-for-sale             (2,425)         --       3,512          --
                                                                             ----------  ----------  ----------  ----------
Comprehensive loss                                                          $  (10,511) $   (4,682) $   (4,099) $  (11,582)
                                                                             ==========  ==========  ==========  ==========`

The accompanying notes are an integral part of these financial statements.

---





Microvision, Inc.
       Consolidated Statement of Mandatorily Redeemable Convertible Preferred Stock and Shareholders' Equity (Deficit)
                      (in thousands, except share amounts)

`Mandatorily                                          Shareholders' Equity
                                                        redeemable       -------------------------------------------------------------------------------------------------------
                                                       convertible                                                         Receivables  Accumulated
                                                      preferred stock        Common Stock       Additional                    from         other                    Shareholders'
                                                    -------------------- --------------------    Paid in       Deferred      related    comprehensive Accumulated      Equity
                                                     Shares     Amount    Shares    Par Value    Capital     Compensation    parties       income       deficit     (Deficit)
                                                    ---------  --------- ---------  ---------  ------------  ------------  -----------  ------------  ------------  ------------
Balance at December 31, 2005                               5      4,166    25,138  $      25  $    212,993  $        (85) $      (792) $         --  $   (215,650) $     (3,509)
Non-cash compensation expense                                                                          897            85                                                    982
Sales of common stock and warrants
  (net of issuance cost)                                                   10,750         11        22,859                                                               22,870
Conversion of preferred stock                             (5)    (5,000)      786          1         4,999                                                                5,000
Unamortized discount and issuance cost
  on preferred stock                                                418                               (418)                                                                (418)
Inducement to preferred shareholders                                                                (2,379)                                                              (2,379)
Issuance of common stock and change in
  warrant value to preferred shareholders                                     565                    1,978                                                                1,978
Beneficial conversion feature of mandatorily
  redeemable convertible preferred stock                            278                               (278)                                                                (278)
Non-cash accretion on mandatorily redeemable
  convertible preferred stock                                       138                               (138)                                                                (138)
Issuance of common stock for payment on senior
  exchangeable convertible notes                                               91         --           300                                                                  300
Issuance of common stock on preferred dividend                                 16         --            58                                                                   58
Dividend on preferred stock                                                                            (59)                                                                 (59)
Warrants to purchase Lumera common stock                                                               476                                                                  476
Other comprehensive income                                                                                                                    3,512                       3,512
Net loss                                                                                                                                                   (7,611)       (7,611)
                                                    ---------  --------- ---------  ---------  ------------  ------------  -----------  ------------  ------------  ------------
Balance at June 30, 2006                                  --  $      --    37,346  $      37  $    241,288  $         --  $      (792) $      3,512  $   (223,261) $     20,784
                                                    =========  ========= =========  =========  ============  ============  ===========  ============  ============  ============`

The accompanying notes are an integral part of these financial statements.

---



Microvision, Inc.

                    Consolidated Statement of Cash Flows

                           (In thousands)

                            (Unaudited)

`Six Months Ended
                                                                                              June 30,
                                                                                        ----------------------
                                                                                           2006        2005
                                                                                        ----------  ----------
Cash flows from operating activities                                                                          
    Net loss                                                                           $   (7,611) $  (11,582)
    Adjustments to reconcile net loss to net cash used in operations:
        Depreciation                                                                          782         849
        Gain on disposal of fixed assets                                                     (198)         --
        Non-cash compensation expense                                                         982         256
        Non-cash interest expense, net                                                      2,825         838
        Gain on derivative instruments                                                     (3,055)     (1,058)
        Loss in equity subsidiary                                                             290       1,878
        Gain on sale of securities of equity subsidiary                                    (7,270)     (1,570)
        Non-cash deferred rent                                                                (91)        (21)
        Allowance for estimated contract losses                                                --         (53)
            Change in:
            Accounts receivable                                                               568       4,119
            Costs and estimated earnings in excess of billings on uncompleted contracts       645        (631)
            Inventory                                                                          38         (73)
            Other current assets                                                             (493)        195
            Other assets                                                                       66         220
            Accounts payable                                                               (1,285)       (522)
            Accrued liabilities                                                            (1,436)       (322)
            Billings in excess of costs and estimated earnings on uncompleted contracts        (1)     (3,268)
                                                                                        ----------  ----------
            Net cash used in operating activities                                         (15,244)    (10,745)
                                                                                        ----------  ----------
Cash flows from investing activities                                                                          
    Sales of investment securities                                                             --       1,248
    Purchases of investment securities                                                         --      (1,248)
    Sales of restricted investment securities                                               1,100       1,238
    Purchases of restricted investment securities                                            (268)     (1,101)
    Decrease in restricted cash                                                               755          --
    Proceeds on sale of long-term investment - Lumera                                      10,292       2,282
    Proceeds on sale of property and equipment                                                200          --
    Purchases of property and equipment                                                    (1,934)       (137)
                                                                                        ----------  ----------
            Net cash provided by investing activities                                      10,145       2,282
                                                                                        ----------  ----------
Cash flows from financing activities                                                                          
    Principal payments under capital leases                                                   (15)        (26)
    Principal payments under long-term debt                                                   (26)        (38)
    Increase in long-term debt                                                                549          --
    Proceeds from issuance of notes and warrants                                               --      10,663
    Payments on notes payable                                                              (5,133)     (1,000)
    Increase in deferred rent                                                                 577          --
    Net proceeds from issuance of common stock and warrants                                23,467           9
    Payment of preferred dividend                                                             (43)        (86)
                                                                                        ----------  ----------
            Net cash provided by financing activities                                      19,376       9,522
                                                                                        ----------  ----------
Net increase in cash and cash equivalents                                                  14,277       1,059
Cash and cash equivalents at beginning of period                                            6,860       1,268
                                                                                        ----------  ----------
Cash and cash equivalents at end of period                                             $   21,137  $    2,327
                                                                                        ==========  ==========
Supplemental disclosure of cash flow information                                                              
    Cash paid for interest                                                             $      546  $      176
                                                                                        ==========  ==========
Supplemental schedule of non-cash investing and financing activities                                          
    Other non-cash additions to property and equipment                                 $       27  $       21
                                                                                        ==========  ==========

    Conversion of convertible debt into common stock                                   $      344  $       --
                                                                                        ==========  ==========

    Conversion of preferred stock into common stock                                    $    4,417  $       --
                                                                                        ==========  ==========

    Inducement for conversion of preferred stock                                       $    3,076  $       --
                                                                                        ==========  ==========

    Embedded derivative feature of preferred stock conversion                          $      401  $       --
                                                                                        ==========  ==========`

The accompanying notes are an integral part of these financial statements.

---

MICROVISION, INC.
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)

1.  MANAGEMENT'S STATEMENT AND PRINCIPLES OF CONSOLIDATION

Management's Statement

The Consolidated Balance Sheet as of June 30, 2006, the Consolidated
Statements of Operations and Comprehensive Loss for the three and six months
ended June 30, 2006 and 2005, the Consolidated Statement of Cash Flows for the
six months ended June 30, 2006 and 2005, and the Consolidated Statement of
Mandatorily Redeemable Convertible Preferred Stock and Stockholders' Equity
(Deficit) for the six months ended June 30, 2006 have been prepared by
Microvision, Inc. (the "Company") and have not been audited.  In the
opinion of management, all adjustments necessary to state fairly the financial
position at June 30, 2006 and the results of operations and cash flows for all
periods presented have been made and consist of normal recurring adjustments.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules of the SEC.  You should
read these condensed financial statements in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2005.  The results of operations for
the six months ended June 30, 2006 are not necessarily indicative of the
operating results that may be attained for the entire fiscal year.

At June 30, 2006, Microvision had $22.1 million in cash and cash equivalents
and investment securities available-for-sale.  The Company believes that $22.1
million will satisfy its budgeted cash requirements for at least one year.
Microvision plans to raise additional cash to continue to fund its operating
plan past that time.  There can be no assurance that additional financing will
be available to Microvision or that, if available, it will be available on terms
acceptable to Microvision on a timely basis. If adequate funds are not available
to satisfy either short-term or long-term capital requirements, Microvision will
be required to limit its operations substantially. This limitation of operations
may include reductions in staff, operating costs and capital expenditures.

Principles of Consolidation

Until July 2004, the consolidated financial statements included the accounts
of Microvision, Inc. ("Microvision") or (the "Company") a
Delaware corporation, and its majority-owned subsidiary Lumera Corporation
("Lumera"), a Delaware corporation. In July 2004, Microvision's
ownership interest in Lumera was reduced to 33% as a result of Lumera completing
an initial public offering of its common stock.  As a result of the reduction in
ownership, Microvision changed to the equity method of accounting for its
investment in Lumera until January 2006.  In January 2006, Microvision sold
2,550,000 shares of its Lumera common stock for $10.3 million.  Microvision
recorded a "Gain on sale of securities of equity subsidiary" of
approximately $7.3 million for the sale.  As a result of the reduction in
ownership, Microvision changed to the cost basis of accounting for available-for-sale
securities for its investment in Lumera in accordance with Financial
Accounting Standards Board No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" ("FAS 115").

2.  NET LOSS PER SHARE

Basic net loss per share ("EPS") is calculated on the basis of
the weighted-average number of common shares outstanding during the reporting
periods.  Diluted net loss per share is calculated on the basis of the weighted-average
number of common shares outstanding and taking into account the dilutive
effect of all potential common stock equivalents outstanding.  Potentially
dilutive common stock equivalents primarily consist of convertible preferred
stock, convertible debt, warrants and employee stock options.  Diluted net loss
per share for the three and six months ended June 30, 2006 and 2005 is equal to
basic net loss per share because the effect of all potential common stock
outstanding during the periods, including options, warrants and common stock
underlying convertible debt and preferred stock is anti-dilutive.

The components of basic and diluted earnings per share were as follows (in
thousands, except loss per share data):

`Three Months Ended           Six Months Ended
                                                                                 June 30,                    June 30,
                                                                          --------------------------  --------------------------
                                                                              2006          2005          2006          2005
                                                                          ------------  ------------  ------------  ------------
Numerator:
Net loss available for common shareholders                               $    (11,215) $     (4,968) $    (10,884) $    (12,147)
                                                                          ============  ============  ============  ============
Denominator:
Basic and diluted weighted-average
   common shares outstanding                                             $     29,192  $     21,481  $     27,216  $     21,488
                                                                          ------------  ------------  ------------  ------------
Basic and diluted net loss per share                                     $      (0.38) $      (0.23) $      (0.40) $      (0.57)
                                                                          ============  ============  ============  ============`



As of June 30, 2006 and 2005, the Company excluded the following convertible
securities from diluted EPS as the effect of including them would have been
anti-dilutive.  The shares shown represent the number of shares of common stock
which would be issued upon conversion.

`June 30,
                                        2006         2005
                                    ------------ ------------
Publicly traded warrants             12,363,000          --
Options and private warrants         11,022,000    7,239,000
Notes payable                         1,933,000    1,462,000
Mandatorily redeemable
  convertible preferred stock               --     1,447,000
                                    ------------ ------------
                                     25,318,000   10,148,000
                                    ============ ============`

3.  INVENTORY

Inventory at June 30, 2006 and December 31, 2005 consisted of the following:

`June 30,     December 31,
                                                                              2006          2005
                                                                          ------------  ------------                            
Raw materials                                                            $    357,000  $    267,000
Work-in-process                                                                 8,000       141,000
Finished goods                                                                356,000       351,000
                                                                          ------------  ------------
                                                                         $    721,000  $    759,000
                                                                          ============  ============`

The inventory at June 30, 2006 and December 31, 2005 consisted of raw
materials, work-in-process, and finished goods for Flic.  Inventory is stated at
the lower of cost or market, with cost determined on a weighted average basis.
Management periodically assesses the need to provide for obsolescence of
inventory and adjusts the carrying value of inventory to its net realizable
value when required.  In addition, Microvision reduces the value of its
inventory to its estimated scrap value when management determines that it is not
probable that the inventory will be consumed through normal production during
the next twelve months.  During the first six months of 2006 and 2005,
Microvision wrote off a total of $452,000 and $1,391,000, respectively.

During the three month period ended June 30, 2006, the Company determined that
it would no longer promote the Nomad product in its current configuration and recorded
expense of $210,000 to reduce the value of Nomad inventory to zero at June 30, 2006.
In addition, the Company recorded $100,000 additional accelerated depreciation expense
related to fixed assets used in Nomad production at June 30, 2006.  Both inventory and
fixed asset balances related to Nomad production were zero as of June 30,
2006.

4.  SEVERANCE ARRANGEMENTS

During the three month period ended March 31, 2006, the Company terminated 18
employees or 11% of its workforce.  During the six months ended June 30, 2006,
the Company recorded expense of $647,000 and paid $638,000 relating to the
severance agreements for these employees.  The Company plans to make the
remaining severance payments during the third quarter of 2006.

5.  SHARE-BASED COMPENSATION

Stock Option Exchange

Subject to the terms of its tender offer filed in April 2006, on May 17,
2006, the Company exchanged 2.2 million options for 2.2 million new options
affecting 105 employees.  The new options have an exercise price of $2.77.  The
new options vested 25% on the grant date and will vest 25% on each subsequent
annual anniversary.  The tender offer did not result in the acceleration of
vesting of any options.  The new options have the same expiration dates as the
options exchanged. The Company also adjusted the exercise price of 386,000
options not subject to the tender offer to $2.77 on the same date affecting 19
employees.

The tender offer was accounted for in accordance with FAS 123(R).  The
Company will recognize the $496,000 incremental fair value of the modified
options over the value of the options prior to modification, as determined on
the modification date, as an additional non-cash expense.  The incremental
expense is recognized ratably over the vesting periods of the options, 25% on
the grant date with the remaining 75% straight-line over the remaining vesting
period.  The incremental fair value of the modified options was estimated using
the Black Scholes option-pricing model with the following assumptions.

`Pre-         Post-
                                                                          modification  modification
                                                                          ------------  ------------                            
Weighted average:
   Exercise price                                                        $       8.84  $       2.77
   Volatility                                                                      73%           65%
   Expected term (years)                                                          6.9           4.2
   Risk free rate                                                                 5.0%          5.0%
   Pre-vest forfeiture rate                                                         5%            5%`

Share-based Compensation Prior to Adopting Statement of Financial
Accounting Standards No. 123, as revised December 2004 ("FAS 123(R)")
on January 1, 2006

Prior to January 1, 2006, the Company accounted for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
("APB 25") and related amendments and interpretations including the
Financial Accounting Standards Board Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation("FIN 44"), and
complied with the disclosure provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation("FAS
123").  The Company accounts for equity instruments issued to non-employees
in accordance with the provisions of FAS 123 and Emerging Issues Task Force
Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services ("EITF 96-18").

If compensation expense for employee and director options had been determined
using the fair values at the grant dates consistent with the methodology
prescribed under SFAS No. 123 in 2005, the Company's consolidated net loss
available to common shareholders and associated net loss per share would have
increased to the pro forma amounts shown below (in thousands):

`Three Months  Six Months
                                                                               Ended June 30,
                                                                          --------------------------
                                                                              2005          2005
                                                                          ------------  ------------

Net loss available for common shareholders, as reported                  $     (4,968) $    (12,147)

Add:  Stock-based employee compensation expense included
  in net loss available for common shareholders,
  as reported, net of minority interest                                            14            35

Deduct: Stock-based employee compensation expense determined under
    fair value based method for all awards, net of minority interest             (425)       (1,000)
                                                                          ------------  ------------

Net loss available for common shareholders, pro forma                    $     (5,379) $    (13,112)
                                                                          ============  ============
Net loss per share (basic and diluted):
  As reported                                                            $      (0.23) $      (0.57)
                                                                          ============  ============

  Pro Forma                                                              $      (0.25) $      (0.61)
                                                                          ============  ============

Basic and diluted weighted-average common shares outstanding                   21,481        21,488
                                                                          ============  ============`

Adoption of FAS 123(R)

The Company adopted Statement of Financial Accounting Standards No. 123, as
revised December 2004 ("FAS 123(R)") effective January 1, 2006. FAS
123(R) requires all employee share-based awards granted after the effective date
to be valued at fair value, and to be expensed over the applicable vesting
period. In addition, companies must begin recognizing compensation expense
related to any awards that are not fully vested as of the adoption date.
Compensation expense for such unvested employee awards will be measured based on
the fair value of the awards as previously calculated and interperiod
attribution method used in developing the pro forma disclosures in accordance
with the provisions of FAS 123. The valuation of and accounting for share-based
awards include a number of complex and subjective estimates. These estimates
include, but are not limited to, the future volatility of our stock price,
future employee stock option exercise behaviors and future employee
terminations.

The Company adopted the Modified Prospective Application ("MPA")
method to account for the transition from Accounting Principles Board Opinion
No. 25 - Accounting for Stock Issued to Employees ("APB 25") and FAS
123 (Proforma) to FAS 123(R).  As prescribed by MPA, the Company will not
restate prior period financial statements. Under guidance contained in APB 25
and FAS 123 (Proforma), the Company had accounted for award forfeitures as they
occur. Under FAS 123(R), the Company estimates the forfeiture rate on the grant
date and adjusts the estimate through the vesting date.  The Company has made a
policy decision to change its share-based compensation expense attribution
method for grants made on or after the adoption date using the straight-line
method.  The expense attribution method under Financial Accounting Standards
Board Interpretation No. 28 ("FIN28") will continue to be applied for
outstanding grants not vested as of the FAS 123(R) adoption date.  Upon adopting
FAS 123(R), the Company reversed $85,000 of unamortized deferred compensation as
of December 31, 2005 against common stock additional paid in capital.

As a result of adopting FAS 123(R), the Company's net income for the six
months ended June 30, 2006 was $565,000 lower than had it continued to account
for share-based employee compensation under APB 25.  In addition, basic and
diluted loss per share were lower by $0.02 per share.

The share-based compensation cost charged against income was as shown below
(in thousands):

`Three Months Ended           Six Months Ended
                                                                                 June 30,                    June 30,
                                                                          --------------------------  --------------------------
                                                                              2006          2005          2006          2005
                                                                          ------------  ------------  ------------  ------------
Share-based compensation cost charged against income                     $        565  $        125  $        982  $        256
                                                                          ============  ============  ============  ============`

Description of Stock Option Plans

The Company currently has two stock option plans ("Option Plans") that have
been approved by the shareholders. Both option plans are administered by the
Board of Directors, or its designated committee ("Plan Administrator"), and
provide for option grants as determined by the Plan Administrator.

The 1996 Stock Option Plan ("1996 Option Plan") has 8.0 million
shares authorized and permits granting nonqualified stock options ("NSOs") and
incentive stock options ("ISOs") to employees, officers and certain non-
employees of the Company. Awards granted under the 1996 Option Plan and to
employees under non-qualified stock option agreements generally have the
following provisions: exercise prices greater than or equal to the Company's
stock price on the date of grant; vesting periods ranging from three years to
four years; expiration 10 years from the date of grant; and optionees who
terminate their service after vesting have limited time to exercise their
options (typically three to twelve months). The Company also has options
outstanding granted to employees under various non-qualified stock option
agreements (these are included in the term "Option Plans"). Shares of
common stock issued upon exercise of options issued under the Option Plan are
new shares previously registered for sale with the SEC. The Company generally
issues option awards under the Option Plans with at-market exercise prices on
the date of grant which vest 25% on each anniversary date provided that the
optionee remains employed by the company.

The Independent Director Stock Option Plan ("Director Option Plan")
has 900,000 shares authorized and permits granting NSOs to independent directors
of the Company.  Under the Independent Director Option Plan, upon initial
election or appointment to the Board of Directors, Directors receive a fully
vested option to purchase 15,000 shares of common stock and a second option to
purchase 15,000 shares of common stock.  Upon reelection to the Board, Directors
receive a subsequent option to purchase 15,000 shares of common stock.  The
second initial option grant and any reelection grant vests the earlier of one
year from date of grant or the day before the next regularly scheduled annual
shareholder meeting.  The above Director grants are awarded with the following
terms: exercise price equal to the Company's stock price on the date of grant;
expiration 10 years from the date of grant, and vested grants remain exercisable
until their expiration dates if a Director leaves the Board.

Options Valuation Methodology and Assumptions

The Company uses the Black-Scholes option valuation model to determine the
fair value of the options and uses the closing price of its common stock as the
fair market value of its stock on that date.

The Company considers historical stock price volatility, volatilities of
similar companies and other factors in determining its estimates of future
volatility.

The Company follows the guidance provided by Staff Accounting Bulletin No.
107 ("SAB 107") for estimating "plain vanilla" option lives.
For other options the Company uses historical lives, including post-termination
exercise behavior, publications, comparable company estimates, and other factors
as the basis for estimating expected lives.

Risk free rates are based on the US Treasury Yield Curve as published by the
US Treasury.

The following table summarizes the weighted average valuation assumptions and
weighted average grant date fair value of options granted, excluding grants
issued under the Company's tender offer which require an incremental valuation
methodology and are disclosed above, during the periods shown below:

`Three Months Ended     Six Months Ended
                                                                   June 30,              June 30,
                                                            --------------------  --------------------
                                                              2006       2005       2006       2005
                                                            ---------  ---------  ---------  ---------
Assumptions (weighted average)
Volatility                                                        73%        70%        73%        71%
Expected term (in years)                                         6.2        5.2        6.2        4.9
Risk-free rate                                                   5.0%       3.9%       5.0%       3.9%
Expected dividends                                                --         --         --         --
Pre-vest forfeiture rate                                           5%       n/a          5%       n/a
Grant date fair value of options granted                   $    2.46  $    3.11  $    2.43  $    3.22`

Options Activity and Positions

The following table summarizes activity and positions with respect to options
for the six months ended June 30, 2006:

`Weighted
                                                                  Average
                                                      Weighted   Remaining
                                                       Average  Contractual   Aggregate
                                                      Exercise      Term      Intrinsic
Options                                  Shares         Price     (years)       Value
---------------------------------------- -----------  --------- ------------  ----------
Outstanding at December 31, 2005          5,320,000  $   11.09
Granted  *                                4,073,000       3.06
Exercised                                        --         --
Forfeited or expired  *                  (3,567,000)     10.11
                                         -----------
Outstanding as of June 30, 2006           5,826,000  $    6.07          7.3  $       --
                                         ===========  ========= ============  ==========

Vested and expected to vest as of
June 30, 2006                             5,486,000  $    6.25          7.2          --
                                         ===========  ========= ============  ==========

Exercisable as of June 30, 2006           2,519,000  $    9.94          6.3  $       --
                                         ===========  ========= ============  ==========`

*  Includes 2.2 million shares exchanged pursuant to stock option exchange
disclosed above

The total intrinsic value of options exercised during the three and six
months ended June 30, 2005 was $5,000 and $6,000, respectively.

As of June 30, 2006, the Company's unamortized share-based compensation was
$4.0 million. The Company plans to amortize this share-based compensation cost
over the next 2.2 years.

In July 2005, the Company granted options to purchase an aggregate of 300,000
shares of common stock at an exercise price of $5.32 to an executive officer.
The exercise price of the options was less than the fair market value of the
shares on the date of grant. According to guidance in Accounting Principles
Bulletin No. 25 ("APB 25"), the Company recorded $144,000 of deferred
compensation and amortized $59,000 to compensation expense related to these
options in 2005. Upon adopting FAS 123(R) on January 1, 2006, the Company
reversed the remaining unamortized deferred compensation of $85,000 to common
stock additional paid in capital.

During the six months ended June 30, 2006, the Board of Directors approved
the immediate vesting of options to purchase 45,000 shares that had been issued
to three independent directors. The directors subsequently resigned from the
Board of Directors.  The Company determined that the accelerated vesting was a
modification of an award with a service vesting condition. The total fair value
of each modified option was measured as the value of the original grant plus the
value of the modified grant on its modification date. On the modification date,
the total value of the modified awards was estimated to be $91,000, of which
$84,000 was previously amortized, and the remaining value of $7,000 was
immediately expensed as compensation cost.

In June 2004, the Company granted its independent directors options to
purchase an aggregate of 90,000 shares of common stock at an exercise price of
$8.35. The exercise price of the options was less than the fair market value of
the shares at the date of grant. According to guidance in APB 25, the Company
recorded $81,000 of deferred compensation related to these options. The deferred
compensation was amortized to non-cash compensation expense over the one-year
service period of the grants. Deferred compensation expense of $35,000, under
APB 25, was recorded in 2005.

6.  LONG-TERM NOTES

Convertible Notes

The following table summarizes the activity related to the Company's
convertible notes in 2006:

`Embedded    Common
                                                                                            derivative  stock and
                                                                        Notes    Warrants    feature      APIC
                                                                      ---------  ---------  ----------  ---------
Balances at December 31, 2005                                        $   9,343  $   3,452  $    1,368  $   5,721
Principal payments on notes                                             (5,434)        --          --        300
Discount accretion for the six months ended June 30, 2006                2,797         --          --         --
Changes in market value for the six months ended June 30, 2006              --     (2,318)     (1,315)        --
                                                                      ---------  ---------  ----------  ---------
Balance of notes at June 30, 2006                                    $   6,706  $   1,134  $       53  $   6,021
                                                                      =========  =========  ==========  =========`

In January 2006, the Company issued 91,000 shares of its common stock in
payment of $300,000 principal on the March 2005 notes.

In March and June 2006, the Company made scheduled cash payments of $5.1
million in principal and $521,000 in accrued interest on its convertible
notes.

Tenant Improvement Loan Agreement

In February 2006, the Company entered into a loan agreement with the lessor
of the Company's corporate headquarters to finance $536,000 in tenant
improvements. The loan carries a fixed interest rate of 9% per annum, is
repayable over the initial term of the lease, which expires in 2013, and is
secured by a letter of credit. The balance of the loan, including interest added
to principal, was $545,000 at June 30, 2006.

7. PREFERRED STOCK CONVERSION

On May 3, 2006, the Company entered into an agreement ("Conversion
Agreement") with the holders of its Series A Convertible Preferred Stock to
convert 5,000 shares of Preferred Stock. As consideration for the conversion,
the Company issued a total of 1,353,066 shares of its common stock, $.001 par
value, of which 565,000 shares were issued as an inducement to convert
("Incentive Shares"). In connection with the conversion, the Company
entered into a Registration Rights Agreement with respect to the Incentive
Shares. If the 45 day trailing volume weighted average price of the Company's
stock is less than $3.62 per share on the 45th trading day after the effective
date of the registration statement, the Company must pay the difference between
the 45 day trailing volume weighted average price and $3.62 per share with
respect to any of the Incentive Shares that were sold by the holder during the
period or held in neutral economic position as of the end of the period.

The Company determined the price protection feature of the incentive shares
included an embedded derivative feature as defined by Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities ("FAS 133").  The value of the derivative
feature at the conversion was estimated to be $401,000 using the Black Scholes
option-pricing model with the following assumptions:  expected volatility of
65%; expected dividend yield of 0%; risk free interest rate of 4.9%; and
contractual life of 0.3 years.  The Company recorded the initial value of the
embedded derivative feature as a non-operating expense included in "Gain on
derivative instruments, net". Due to changes in the Company's stock price,
the value of the derivative feature was adjusted to $729,000 at June 30, 2006
using the Black Scholes option-pricing model with the following assumptions:
expected volatility of 65%; expected dividend yield of 0%; risk free interest
rate of 4.7%; and contractual life of 0.2 years.  The change in the derivative
feature of $328,000 was included in "Gain on derivative instruments, net" at
June 30, 2006.

8.  COMMON STOCK

In June 2006, the Company raised $25.3 million before issuance cost of
$2.5 million through an underwritten public offering of 10.75 million shares of
our common stock and warrants to purchase 12.4 million shares of our common
stock.  The warrants have an exercise price of $2.65 per share, a five year
term, and are not exercisable for one year from the date of issuance.  The
warrants are callable after one year from the date of issuance if the average
closing bid price of our stock is over $5.30 for any 20 consecutive trading
days.

In connection with the offering, the Company issued the underwriter a warrant
to purchase 537,500 shares of Microvision common stock at an exercise price of
$2.76 per share.  The Company also issued the underwriter a warrant to acquire
537,500 warrants, identical to those sold in the offering, at an exercise price
of $0.16 per warrant.  Both warrants will be exercisable for a period of 4 years
beginning on the first anniversary of the date of issuance.

In July 2006, the Company raised an additional $1.7 million through the
issuance of 800,000 shares of Microvision common stock pursuant to MDB Capital
Group, LLC's exercise of its over allotment option in connection with the
underwritten offering described above.

9.  RECEIVABLES FROM RELATED PARTIES

In 2000, the Board of Directors authorized the Company to provide
unsecured lines of credit to each of its then three senior officers. No loans
have been made under either the Executive Option Exercise Note Plan or the
Executive Loan Plan since July 2002, and the Company does not intend to make any
additional loans under these plans.  Two of the officers left the company in
January 2006.  A total of $2,723,000 was issued and remains outstanding under
the Executive Loan Plan. There are currently no outstanding loans under the
Executive Option Exercise Note Plan.  The lines of credit carry interest rates
of 5.4% to 6.2%.  The interest on the lines of credit is forgiven each year if
the senior officer is an employee of the Company at December 31 of that year.

The Company established an allowance for doubtful accounts when it determined
that certain of its senior officers may have had insufficient net worth and
short-term earnings potential to repay their outstanding loans. The balance of
the allowance for doubtful accounts for receivables from senior officers was
$1.9 million at June 30, 2006 and at December 31, 2005. In accordance with the
terms of the notes, $2.4 million in loans to the two officers who left the
Company will be due in January 2007.  Microvision has no plans to forgive any
portion of the principal of the outstanding receivable balance.

10.  ACCOUNTING FOR LUMERA

Investment Securities, Available-for sale

In February 2006, Microvision sold 2,550,000 shares of its Lumera common
stock for $10.3 million. Microvision recorded a "Gain on sale of securities
of equity subsidiary" of approximately $7.3 million. As a result of the
reduction in ownership, Microvision changed to the cost basis of accounting for
its investment in Lumera in accordance with FAS 115.

Subsequent to the sale of its Lumera securities, Microvision owns 2.1 million
shares of Lumera common stock, recorded at fair market value, of which 1.8
million are pledged as collateral for the convertible notes.  The common stock
pledged as collateral are recorded as "Current restricted investments" and the
unrestricted balance is recorded at "Investment securities, available-for-sale".

As of June 30, 2006, the fair market value of the Lumera common stock, both
available-for-sale and currently restricted, was $5,967,000. On June 30, 2006,
the unrealized gain was as shown below:

`Net      Estimated
                                                Unrealized     Fair
                                       Cost        Gain       Value
                                     ---------  ----------  ----------             
Lumera common stock                 $   2,455  $    3,512  $    5,967
                                     =========  ==========  ==========`

Warrants

In connection with the change in accounting method in February 2006, the
Company recorded $476,000 in "Other current assets" for the fair value of
warrants previously received to purchase 170,500 shares of Lumera common stock.
On the transaction date, the warrants were valued using the Black Scholes
option-pricing model with the following assumptions:  expected volatility of
83%; expected dividend yield of 0%; risk free interest rate of 4.55%; and
contractual life of 5.1 years.

At June 30, 2006, the warrants were revalued using the Black Scholes option-
pricing model with the following assumptions; expected volatility of 83%;
expected dividend yield of 0%; risk free interest rate of 4.99%; and contractual
life of 4.7 years.  The fair value of the warrants decreased to $225,000 and the
change in value of $251,000 was recorded as a non-operating loss and is included
in "Gain on derivative instruments, net" in the consolidated statement of
operations.

11.  REPORTING SEGMENTS

Operating segments are defined as components of an enterprise for which
separate financial information is available and evaluated regularly by the chief
operating decision-maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. Microvision has two reportable segments:
the contract revenue derived from the development of custom prototypes and
products, and the product revenue derived from sales of Microvision products.
Our chief operating decision-making group evaluates performance based on
financial information presented on a consolidated basis accompanied by
information about revenues and gross margins by segments.  Both segments share
in research and development and marketing, selling and administrative costs that
are not allocated to the segments.  Except for fixed assets associated with
production, the Company's assets are not allocated to the segments.  Therefore,
segment information is presented only for revenue and cost of revenue.

12.  RECENT ACCOUNTING PRONOUNCEMENTS

In February 2006, the Financial Accounting Standards
Board (''FASB'') issued FASB Statement No. 155, "Accounting for Certain
Hybrid Instruments"("FAS 155").This standard amends
the guidance in FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities".  FAS 155 allows financial
instruments that have embedded derivatives to be accounted for as a whole
(eliminating the need to bifurcate the derivative from its host) if the holder
elects to account for the whole instrument on a fair value basis, and clarifies
other issues regarding accounting for derivative instruments.  FAS 155 is
effective for all financial instruments acquired or issued after the beginning
of an entity's first fiscal year that begins after September 15, 2006.  The
Company is currently assessing the guidance in FAS 155 and the potential impacts
it may have on the Company in relation to any future security issuances.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The information set forth in this report in Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
and Item 3, "Quantitative and Qualitative Disclosure about Market
Risk," includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and is subject to the safe harbor created by
that section.  Such statements may include, but are not limited to, projections
of revenues, income or loss, capital expenditures, plans for product development
and cooperative arrangements, future operations, financing needs or plans of
Microvision, as well as assumptions relating to the foregoing.  The words
"believe," "expect," "will,"
"anticipate," "estimate," "project,"
"plan," and similar expressions identify forward-looking statements,
which speak only as of the date the statement was made.  Factors that could
cause actual results to differ materially from those projected in the our
forward-looking statements include the following: our ability to obtain
financing; success of executive transition; market acceptance of our
technologies and products; our financial and technical resources relative to
those of our competitors; our ability to keep up with rapid technological
change; government regulation of our technologies; our ability to enforce our
intellectual property rights and protect our proprietary technologies; the
ability to obtain additional contract awards and to develop partnership
opportunities; the timing of commercial product launches; the ability to achieve
key technical milestones in key products; and other risk factors identified in
our Annual Report on Form 10-K for the year ended December 31, 2005, as amended,
and as updated in our Quarterly Report on Form 10-Q for the quarter ended March
31, 2006 and below under the caption "Item 1A - Risk Factors."

Overview

We design and market scanned beam display and image capture products. We are
developing a modular integrated photonics module that we expect to be a common
integrated subsystem in future display products. The integrated photonics module
consists of a MEMS scanner, electronics to drive the MEMS scanner, a light
source module, and electronics to drive the video input and output, system
controller and buffer memory component. We believe that the modular integrated
photonics module could be readily modified to meet OEM product requirements for
different display product configurations.  These product configurations may
require modification of the integrated photonics module for a specific OEM
product. The Automotive Head-Up Display, Pico Projector and Color Eyewear are
potential products we are planning to develop based on the integrated photonics
module.

Automotive Head-Up Display

We are continuing to improve upon our prototype head-up displays for
automotive manufacturers and Tier 1 suppliers to automotive companies.  Our
prototypes demonstrate that scanned beam display technology can be used in a
head-up display that projects a day-light or night-time readable image onto the
windscreen of an automobile to provide the vehicle operator with a variety of
information related to the car's operation.  We believe that our technology
provides three distinct advantages over competing technologies for head- up
display applications:

- Form Factor - Our prototype display is less than half the size of current
competitive offerings.  Total package size is a primary consideration in the
design of an instrument panel for an automobile.

- Contrast Ratio - Our prototype has a contrast ratio an order of magnitude
higher than current competitive offerings.  The high contrast ratio allows the
driver to see the display in bright daylight and see through the display at
night.

- Installation Cost - Our prototype can be electronically optimized to the
unique curvature of a particular automobile's windshield.  The current
competitive offerings must be manually adjusted during installation to match the
varying curvature tolerances of different windshields.

Our goal is to enter into an agreement with at least one Tier 1 supplier to
develop and manufacture a head-up display during 2006.  The Tier 1 supplier
would work with us and the automobile manufacturers to integrate our head-up
display into an automotive instrument panel.

The current competitive products are based on liquid crystal display or
vacuum fluorescent display technology which is more mature than the scanned beam
display technology.

Pico Projector

During 2005, we developed a prototype micro projector.  We are targeting
embedding this micro projector into a hand held device that can project full
color images from a portable media source or mobile computer onto a surface
chosen by the user.  Several large consumer electronics companies are developing
and conducting consumer trials of micro projectors based on very small display
panel technologies.  In January 2006, we demonstrated a prototype "pico
projector" at the Consumer Electronics Show in Las Vegas.  Our goal is to enter
into an agreement that would result in development, manufacture and distribution
of a pico projector based on our planned integrated photonic module.  We believe
our scanned beam display technology will provide a smaller form factor than
small projectors based on competing display technologies.

We believe that the pico projector will compete with other projection display
technologies as well as traditional flat panel direct view displays.

Full Color Eyewear

We believe that the integrated photonic module we are developing can be
customized to enable displays that more closely resemble eyewear than other
technologies allow.  We are evaluating the market and technical risk associated
with three distinct color eyewear solutions.

- Highly mobile "Glance-able" display: In this configuration, the user could
glance down occasionally at a worn display.  This device would be suitable for
light business use such as mobile web surfing and reading e-mail.  We believe
that high resolution, high contrast, and small package size could be important
differentiators between our scanned beam display solution and competing
solutions.

- Look-around or see-through display:  In this configuration, the user could
view a full screen display in see-through or occluded mode.  This configuration
would be suitable for light business use and viewing longer pieces of streaming
video for entertainment or business applications.

- Fully occluded immersive display:  In this configuration, the user could
view a very wide screen high resolution 2D and 3D video stream.  This
configuration would be suitable for interactive gaming applications and
simulators.

In any of these configurations, we believe that high resolution, small
package size, lower power consumption, and lower cost could be important
differentiators between our scanned beam display solution and competing
solutions.  We plan to evaluate potential designs for one or more of these
potential configurations during 2006.

We believe that our color eyewear product will compete primarily with LCD,
LCoS, and OLED based solutions.

Competition

The consumer display and automotive HUD markets are highly competitive.  Our
competitors in these markets have substantially greater financial, technical and
other resources than us and may develop further improvements of screen display
technology that could reduce or eliminate the anticipated advantages of our
proposed products.

Nomad

The Nomad Expert Technician System, ("Nomad") is a hands free
wearable computer with a head-worn display that enables technicians and other
mobile workers to overlay relevant information on their task thereby reducing
task time. The Nomad has not gained the commercial acceptance we had planned
when the Nomad was introduced.  We have concluded that although there is a
demand for see-through heads-up display applications in several market segments,
the current product's ergonomics and cost structure are inhibiting its growth
and acceptance in the commercial segments.  As a result we have decided not to
continue to promote the Nomad product in its current configuation.
We expect to apply the knowledge gained from Nomad and current
market and technical research toward developing the full-color eyewear displays
discussed above.

The following is a description of our current and prospective imaging
products.

Flic

We sell the Flic laser bar code scanner, a hand held laser bar code scanner
and the Flic Cordless Scanner, a Bluetooth version of the Flic Scanner. Flic
Scanners feature a proprietary design that provides for lower power consumption
and total operating cost than many other bar code scanners currently available.
We expect the sales volume for Flic Scanner will grow as more companies release
products incorporating the Flic.

The bar code scanning industry is highly competitive. Flic Scanners compete
with existing laser wand and CCD/CMOS imager scanners produced by established
bar code scanner companies. Flic Scanners compete on the basis of price, form
factor, and performance. The bar code industry is dominated by Symbol
Technologies, which sells products that directly compete with the Flic and Flic
Cordless products.

Image Capture

We are using our scanned beam and other proprietary technology to develop
products that capture images and other information.  Such products include bar
code readers and miniature high-resolution "laser cameras".  In December
2004, we entered into an agreement with Ethicon Endo-Surgery Inc. a subsidiary
of Johnson & Johnson to integrate our scanned beam technology into certain
medical products for human medical applications.  We have delivered prototype
units that Ethicon will use for product evaluation and market analysis.

Results of Operations

Contract revenue.

`% of                  % of
                                                contract              contract
                                       2006      revenue     2005      revenue   $ change  % change
                                     ---------  ---------  ---------  ---------  --------- ---------
Three months ended June 30                                                                          
Government revenue                  $     535       40.1  $     695       18.9  $    (160)    (23.0)
Commercial revenue                        800       59.9      2,987       81.1     (2,187)    (73.2)
                                     ---------             ---------             ---------
Total contract revenue              $   1,335             $   3,682             $  (2,347)    (63.7)
                                     =========             =========             =========          
Six months ended June 30                                                                            
Government revenue                  $   2,010       64.5  $   1,952       27.6  $      58       3.0
Commercial revenue                      1,106       35.5      5,112       72.4     (4,006)    (78.4)
                                     ---------             ---------             ---------
Total contract revenue              $   3,116             $   7,064             $  (3,948)    (55.9)
                                     =========             =========             =========`

We earn contract revenue from performance on development contracts with the
United States government and commercial customers.

Our contract revenue in a particular period is dependent upon when we enter
into a contract, the value of the contracts we have entered into, and the
availability of technical resources to perform work on the contracts.  Contract
revenue was lower during the three and six months ended June 30, 2006 than the
same periods in 2005, due to lower beginning commercial contract backlog and the
allocation of resources to internally funded development projects.  During the
first half of 2005, we earned $4.5 million from work performed on the Ethicon
contract compared to $663,000 during the first six months of 2006.  We delivered
the prototype devices as required under the contract during the second quarter
of 2006.  Ethicon has seventeen months to conduct market evaluations before it
decides to continue development.  We do not anticipate earning additional
material revenue from Ethicon in 2006.

As long as most of our revenue is earned from performance on development
contracts, we believe there may be a high degree of variability in revenue from
quarter to quarter.

Our backlog of development contracts at June 30, 2006 was $1.1 million
compared to $5.9 million at June 30, 2005. All development contracts in backlog
are scheduled for completion and delivery during the next twelve months.

Product revenue.

`% of                  % of
                                                 product               product
                                       2006      revenue     2005      revenue   $ change  % change
                                     ---------  ---------  ---------  ---------  --------- ---------
Three months ended June 30                                                                          
Flic revenue                        $     527       92.3  $     373       35.8  $     154      41.3
Nomad revenue                              44        7.7        670       64.2       (626)    (93.4)
                                     ---------             ---------             ---------
Total product revenue               $     571             $   1,043             $    (472)    (45.3)
                                     =========             =========             =========          
Six months ended June 30                                                                            
Flic revenue                        $   1,184       93.8  $     765       46.6  $     419      54.8
Nomad revenue                              78        6.2        878       53.4       (800)    (91.1)
                                     ---------             ---------             ---------
Total product revenue               $   1,262             $   1,643             $    (381)    (23.2)
                                     =========             =========             =========`

We have earned product revenue from sales of Nomad and Flic.  The Nomad has
not gained the commercial acceptance we had planned when it was introduced.  In
June 2006, we decided not to continue to promote the Nomad product
in its current configuation.

Our quarterly revenue may vary substantially due to the timing of product
orders from customers, production constraints and raw material availability.

The backlog of product orders at June 30, 2006 was approximately $381,000,
compared to $900,000 at June 30, 2005 all of which is scheduled for delivery
during the next twelve months.

Cost of contract revenue.

`% of                  % of
                                                contract              contract
                                       2006      revenue     2005      revenue   $ change  % change
                                     ---------  ---------  ---------  ---------  --------- ---------
Three months ended June 30          $     999       74.8  $   1,668       45.3  $    (669)    (40.1)
Six months ended June 30                2,150       69.0      3,496       49.5     (1,346)    (38.5)`

Cost of contract revenue includes both the direct and allocated indirect
costs of performing on development contracts.  Direct costs include labor,
materials and other costs incurred directly in performing on a contract.
Indirect costs include labor and other costs associated with operating our
research and development department and building our technical capabilities and
capacity.  Cost of contract revenue is determined both by the level of direct
costs incurred on development contracts and by the level of indirect costs
incurred in operating and building our technical capabilities and capacity.  The
cost of contract revenue can fluctuate substantially from period to period
depending on the level of both the direct costs incurred in the performance of
projects and the level of indirect costs incurred.

Our research and development department works on both contract revenue
projects and internally funded development projects.  We allocated the research
and development department overhead to cost of contract revenue and research and
development expense based on the proportion of direct labor cost incurred in
cost of contract revenue and research and development, respectively.  As a
result of the lower direct labor cost in cost of contract revenue, partially
offset by the effect of a higher overhead rate for both the three and six months
ended June 30, 2006, approximately 37% and 28%, respectively, less overhead was
allocated to cost of contract revenue than in the same period in 2005.

We expect that cost of contract revenue on an absolute dollar basis may
increase in the future.  This increase will likely result from additional
development contract work that we expect to perform.  The cost of revenue as a
percentage of revenue can fluctuate significantly from period to period,
depending on the contract cost mix and the levels of direct and indirect costs
incurred. However, over longer periods of time we expect modest fluctuations in
the cost of contract revenue, as a percentage of contract revenue.

Cost of product revenue.

Cost of product revenue includes both the direct and allocated indirect costs
of manufacturing Nomads and Flics sold to customers.  Direct costs include
labor, materials and other costs incurred directly in the manufacture of Flic
and Nomad.  Indirect costs include labor and other costs associated with
operating our manufacturing capabilities and capacity.

Our overhead, which includes the costs of procuring, inspecting and storing
material and direct and indirect facility and depreciation costs, is allocated
to inventory, cost of product revenue, cost of contract revenue, and research
and development expense based on the proportion of direct material purchased for
the respective activity.  During the three and six months ending June 30, 2006,
we expensed approximately $565,000 and $838,000, respectively, of manufacturing
overhead associated with production capacity in excess of production
requirements.

Cost of product revenue for the three and six months ended June 30, 2006
includes the write-off of a total of $422,000 and $452,000 of inventory,
respectively, compared to the three and six months ended June 30, 2005 which
were $500,000 and $1,391,000, respectively.  The write-offs were due to changes
in product design, our decision not to further promote the Nomad product, and customer
demand that caused components and accessories to become obsolete or slow-moving.
We value our inventory at the lower of cost or market and reduce the value of
our inventory to its estimated scrap value when we determine that we will
probably not sell the inventory during the next 12 months.

In June 2006, we decided not to continue to promote the Nomad product in its current
configuation and recorded expense of $210,000 to reduce the value of Nomad inventory to
zero at June 30, 2006.  In addition, we recorded $100,000 additional accelerated
depreciation expense related to fixed assets used in Nomad production at June
30, 2006.  Both inventory and fixed asset balances related to Nomad production
were zero as of June 30, 2006.

We expect that cost of product revenue on an absolute dollar basis will
increase in the future.  This increase will likely result from expected sales of
commercial products.  The cost of product revenue as a percentage of product
revenue can fluctuate significantly from period to period, depending on the
product mix, the level of overhead expense and the volume of direct materials
purchased.

Research and development expense.

`2006       2005     $ change   % change
                                     ---------  ---------  ---------  ---------                     
Three months ended June 30          $   2,307  $   2,037  $     270       13.3
Six months ended June 30                4,461      3,921        540       13.8`

Research and development expense consists of:

- Compensation related costs of employees and contractors engaged in internal
research and product development activities,
- Laboratory operations, outsourced development and processing work, and
- Other operating expenses

As part of our turnaround strategy announced in February 2006, we established
a target of reducing cost excluding the impact of adopting FAS123(R) and
severance costs.  The following table eliminates the impacts of adopting
FAS 123(R) and severance costs on research and development expnse.

`Three Months Ended     Six Months Ended
                                          June 30,             June 30,
                                     --------------------  --------------------
                                       2006       2005       2006       2005                        
                                     ---------  ---------  ---------  ---------
Research and development
   expense, as reported             $   2,307  $   2,037  $   4,461  $   3,921
FAS 123(R) options expense               (135)        --       (209)        --
Severance                                  --         --       (283)        --
                                     ---------  ---------  ---------  ---------
Research and development
   expense, as adjusted             $   2,172  $   2,037  $   3,969  $   3,921
                                     =========  =========  =========  =========`

Microvision believes that a substantial level of continuing research and
development expense will be required to develop additional commercial products
using the scanned beam display technology. Accordingly, Microvision anticipates
its level of research and development spending will continue to be substantial.

Sales, marketing, general and administrative expense.

`2006       2005     $ change   % change
                                     ---------  ---------  ---------  ---------                     
Three months ended June 30          $   4,675  $   4,641  $      34        0.7
Six months ended June 30                9,414      9,307        107        1.1`

Sales, marketing, general and administrative expense  includes compensation
and support costs for marketing, sales, management and administrative staff, and
for other general and administrative costs, including legal and accounting
services, consultants and other operating expenses.

Sales, marketing, general and administrative expenses were relatively
constant for the periods shown.  The  non-cash compensation cost arising from
adopting FAS 123(R) and severance costs, which did not occur in 2005, were
offset by decreases in sales and marketing program costs and corporate overhead
costs from 2005.  In addition, we are implementing further cost reductions as a
result of our decision to discontinue Nomad.

As part of our turnaround strategy announced in February 2006, we established
a target of reducing total sales, marketing, general and administrative expense
by 25%, for the full year excluding the impact of adopting FAS123(R) and severance
costs.  The following table eliminates the impacts of adopting FAS 123(R) and
severance costs on sales, marketing, general and administrative expense.

`Three Months Ended     Six Months Ended
                                          June 30,             June 30,
                                     --------------------  --------------------
                                       2006       2005       2006       2005                        
                                     ---------  ---------  ---------  ---------
Sales, marketing, general and
   admininistrative, as reported    $   4,675  $   4,641  $   9,414  $   9,307
FAS 123(R) options expense               (430)        --       (773)        --
Severance                                (154)        --       (364)        --
                                     ---------  ---------  ---------  ---------
Sales, marketing, general and
   admininistrative, as adjusted    $   4,091  $   4,641  $   8,277  $   9,307
                                     =========  =========  =========  =========`

Interest expense.

`2006       2005     $ change   % change
                                     ---------  ---------  ---------  ---------                     
Three months ended June 30          $   1,636  $     879  $     757       86.1
Six months ended June 30                3,458      1,070      2,388      223.2`

The increase in interest expense relates to the amortization of the
discount recorded on the March 2005 and December 2005 convertible notes
(together the "Notes") for the value attributed to the embedded
derivative feature of the Notes and associated warrants, as well as the stated
interest on the Notes. We expect interest expense will be substantially higher
for the rest of 2006 as a result of these transactions.

Gain on derivative instruments, net and Inducement for conversion of preferred stock.

Gain on derivative instruments, net:

`2006       2005     $ change   % change
                                     ---------  ---------  ---------  ---------                     
Three months ended June 30          $   1,187  $   1,343  $    (156)     (11.6)
Six months ended June 30                3,054      1,058      1,996      188.7`

Inducement for conversion of preferred stock:

`2006       2005     $ change   % change
                                     ---------  ---------  ---------  ---------                     
Three months ended June 30          $  (3,076) $      --  $  (3,076)        n/a
Six months ended June 30               (3,076)        --     (3,076)        n/a`

In connection with the issuance of our Notes, we concluded that the note
holders' right to convert all or a portion of the Notes into our common stock is
an embedded derivative instrument as defined by FAS 133, Accounting for
Derivative Instruments and Hedging Activities.  We determine the value of
the derivative feature at each balance sheet date using the Black Scholes
option-pricing model.  At June 30, 2006, we used the following assumptions:
expected volatility of 65%; expected dividend yields of 0%; risk free interest
rates ranging from 4.79% to 5.03%; and contractual life of 2.5 to 8.5 months.
The contractual lives are the same as the principal repayment dates when valuing
the derivative features. Due to changes in our stock price and the remaining
lives, the fair value of the embedded derivative instrument decreased to $53,000
at June 30, 2006. The change in value of $369,000 and $1,315,000 for the three
and six months ended June 30, 2006, respectively, were recorded as
non-operating gains and are included in "Gain on derivative instruments, net" in the
consolidated statement of operations.

We issued warrants to purchase 2,302,000 shares of common stock in connection
with the issuance of the Notes.  The warrants met the definition of a derivative
instrument that must be accounted for as a liability under the provisions of
Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock,because we cannot engage in certain corporate transactions affecting
the common stock unless we make a cash payment to the holders of the warrants.
We record changes in the fair value of the warrants in the statement of
operations each period.  We valued the warrants at June 30, 2006 using the Black
Scholes option-pricing model with the following assumptions:  expected
volatilities of between 63% and 66%; expected dividend yields of 0%; risk free
interest rates ranging from 4.99% to 5.00%; and contractual lives ranging from
2.1 years to 4.4 years.  The changes in value of the warrants of $1,294,000 and
$2,318,000 for the three and six months ended June 30, 2006, respectively, were
recorded as a non-operating gains and are included in "Gain on derivative
instruments, net" in the consolidated statement of operations.

In May 2006, we entered into an agreement with the holders of our Series A
Convertible Preferred Stock to convert 5,000 shares of preferred stock to common
stock.  As consideration for the conversion, we issued a total of 1,353,066
shares of our common stock, of which 565,000 incentive shares were issued as an
inducement to convert. The value of the inducement shares was recorded as
"Inducement for conversion of preferred stock" in the consolidated
statement of operations.  In connection with the conversion, we entered into an
agreement to register the incentive shares and provide price
protection on the incentive shares.  If the 45 day trailing volume weighted
average price of our stock is less than $3.62 per share on the 45th trading day after
the effective date of the registration statement, we must pay the difference between
the 45 day trailing volume weighted average price and $3.62 multiplied by the
number of incentive shares that were sold by the holder during the 45 day period
plus those held in an economically neutral position as of the end of the period.

We determined the price protection feature of the incentive shares included
an embedded derivative feature as defined by FAS 133.  The value of the
derivative feature at conversion was estimated to be $401,000 using the Black
Scholes option-pricing model with the following assumptions:  expected
volatility of 65%; expected dividend yield of 0%; risk free interest rate of
4.9%; and contractual life of 0.3 years.  We recorded the initial value of the
embedded derivative feature as a non-operating expense included in "Inducement
for conversion of preferred stock" in the consolidated statement of operations.
The value of the derivative feature fluctuates with the value of our common
stock and, to a lesser extent, with changes in valuation variables.  Due to
changes in our stock price, we adjusted the value of the derivative feature to
$729,000 at June 30, 2006 using the Black Scholes option-pricing model with the
following assumptions:  expected volatility of 65%; expected dividend yield of
0%; risk free interest rate of 4.7%; and contractual life of 0.2 years.  The
change in the derivative feature of $328,000 was included in "Gain on derivative
instruments, net" at June 30, 2006.  If our common stock price increases in
future periods, we may incur large non-cash charges as a result of the increase
in the value of the derivative.

Loss on investment in equity subsidiary and Gain on sale of
securities of equity subsidiary

Loss on investment inequity subsidiary:

`2006       2005     $ change   % change
                                     ---------  ---------  ---------  ---------                     
Three months ended June 30          $      --  $     934  $    (934)    (100.0)
Six months ended June 30                  290      1,878     (1,588)     (84.6)`

Gain on sale of securities of equity subsidiary:

`2006       2005     $ change   % change
                                     ---------  ---------  ---------  ---------                     
Three months ended June 30          $      --  $   1,570  $  (1,570)    (100.0)
Six months ended June 30                7,270      1,570      5,700      363.1`

In February 2006, we sold 2.6 million shares of our Lumera common stock for
$10.3 million. We recorded a "Gain on sale of securities of equity
subsidiary" of approximately $7.3 million. As a result of the reduction in
ownership, we changed to the cost basis of accounting for our investment in
Lumera in accordance with FAS 115.  We recorded our proportionate share of
Lumera losses prior to the sale in February 2006.  We recorded a charge of
$290,000 for its proportion of Lumera net loss for the period preceding the sale
and change in accounting method.

In connection with the change in accounting method, we recorded $476,000 in
"Other current assets" for the fair value of warrants previously received to
purchase 170,500 shares of Lumera common stock.  On the transaction date, the
warrants were valued using the Black Scholes option-pricing model with the
following assumptions:  expected volatility of 83%; expected dividend yield of
0%; risk free interest rate of 4.55%; and contractual life of 5.1 years.
Changes in the fair value of the warrants are recorded in the statement of
operations each period. As of June 30, 2006, the warrants were valued using the
Black Scholes option-pricing model with the following assumptions:  expected
volatility of 83%; expected dividend yield of 0%; risk free interest rate of
4.99%; and contractual life of 4.7 years. As of June 30, 2006, the fair value of
the warrants decreased to $225,000 and the change in value of $251,000 was
recorded as a non-operating loss and is included in "Gain on derivative
instruments, net" in the consolidated statement of operations.

Liquidity and Capital Resources

We have funded our operations to date primarily through the sale of common
stock, convertible preferred stock, convertible debt, warrants and, to a lesser
extent, from development contract revenues and product sales. We believe that
our current cash and cash equivalents, and investments available-for-sale
balances as of June 30, 2006 totaling $22.1 million will satisfy our budgeted
cash requirements for at least one year.  Cash used in operating activities
totaled $15.2 million during the six months ended June 30, 2006, compared to
$10.7 million during the same period in 2005.  Cash used in operating activities
for each period resulted primarily from the net loss before gains on sale of
securities of equity subsidiary for the six months ended June 30, 2006 and from
net loss for the same period in 2005.

Cash provided by investing activities totaled $10.1 million during the six
months ended June 30, 2006, compared to  $2.3 million during the same period of
2005.

In February 2006, we sold 2.6 million shares of our Lumera common stock
for $10.3 million. We recorded a "Gain on sale of securities of equity
subsidiary" of approximately $7.3 million. As a result of the reduction in
ownership, we changed to the cost basis of accounting for our investment in
Lumera in accordance with FAS 115.  We have 322,000 shares of Lumera stock that
are not pledged as security for our Notes that are included in Investment
securities available-for-sale at June 30, 2006.

In addition, we used cash of $1.9 million for capital expenditures during the
six months ended June 30, 2006, compared to $137,000 during the same period in
2005.  Capital expenditures include leasehold improvements to leased office
space and computer hardware and software, laboratory equipment and furniture and
fixtures to support operations. The increase is due to expenditures for
leasehold improvements to our new facility.



Cash provided by financing activities totaled $19.4 million during the six
months ended June 30, 2006, compared to cash provided by financing activities of
$9.5 million during the same period in 2005.

In June 2006, we raised $25.3 million before issuance cost of $2.5 million
through an underwritten public offering of 10.75 million shares of our common
stock and warrants to purchase 12.4 million shares of common stock.  The
warrants have an exercise price of $2.65 per share, a five year term, and are
not exercisable for one year from the date of issuance.  We can call the
warrants after one year from the date of issuance if the average closing bid
price of our stock is over $5.30 (200% of exercise price) for any 20 consecutive
trading days.

In connection with the offering, the Company issued the underwriter a warrant
to purchase 537,500 shares of Microvision common stock at an exercise price of
$2.76 per share.  The Company also issued the underwriter a warrant to acquire
537,500 warrants, identical to those sold in the offering, at an exercise price
of $0.16 per warrant.  Both warrants will be exercisable for a period of 4 years
beginning on the first anniversary of the date of issuance.

In July 2006, we raised an additional $1.7 million though the issuance of
800,000 shares of our common stock pursuant to MDB Capital Group LLC's exercise
of their over allotment option in connection with the underwritten offering
described above.

Future operating expenditures and capital requirements will depend on
numerous factors, including the following:

- The progress of research and development programs,
- The progress in commercialization activities and arrangements,
- The cost of filing, prosecuting, defending and enforcing any patent claims
and other intellectual property rights,
- Competing technological and market developments, and
- Our ability to establish cooperative development, joint venture and
licensing arrangements.

We will need additional capital to fund our
operations. There can be no assurance that additional financing will be
available to us or that, if available, it will be available on terms acceptable
to us on a timely basis. If adequate funds are not available to satisfy either
short-term or long-term capital requirements, we will be required to limit our
operations substantially.  This limitation of operations may include reduction
in capital expenditures, as well as reductions in staff and operating costs.

ITEM 3.    QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Substantially all of our cash equivalents and investment securities are at
fixed interest rates and, as such, the fair value of these instruments is
affected by changes in market interest rates.  Due to the generally short-term
maturities of these investment securities, we believe that the market risk
arising from its holdings of these financial instruments is not material.

Our investment policy restricts investments to ensure principal preservation
and liquidity.  We invest cash that we expect to use within approximately sixty
days in U.S. Treasury-backed instruments. We invest cash in excess of
approximately sixty days of our requirements in high quality investment
securities.  The investment securities portfolio is limited to U.S. government
and U.S. government agency debt securities and other high-grade securities
generally with maturities of three years or less.

Cash and cash equivalents were $21.1 million as of June 30, 2006.

We own 2,072,000 shares of Lumera common stock, of which 1,750,000 are
pledged as collateral for our Notes.  Based on Lumera's closing stock price on
July 10, 2006 of $3.07 per share, the market value of our investment in Lumera
common stock is $6.4 million, and the market value of the unpledged shares of
Lumera common stock is $989,000.  The market price of Lumera's common stock is
subject to fluctuations based on Lumera's financial performance and overall
market conditions.

Presently, all of our development contract payments are denominated in U.S.
dollars and, consequently, we believe we have no material foreign currency
exchange rate risk.  However, in the future we may enter into development
contracts or product sales in foreign currencies that may subject us to foreign
exchange rate risk.

ITEM 4.	CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by
this report and, based on this evaluation, our principal executive officer and
principal financial officer have concluded that these disclosure controls and
procedures are effective.  There were no changes in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) that occurred
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

PART II

OTHER INFORMATION

ITEM 1A - RISK FACTORS

Except as disclosed below, there have been no material changes to the Risk
Factors disclosed in our Annual Report on Form 10-K for the year ended December
31, 2005.

Risk Factors Relating to the Microvision Business

We have a history of operating losses and expect to incur significant
losses in the future.

We have had substantial losses since our inception. We cannot assure you that
we will ever become or remain profitable.

- As of June 30, 2006, we had an accumulated deficit of $223.3 million.

- We incurred consolidated net losses of $154.3 million from inception through
2003, $33.2 million in 2004, $28.2 million in 2005, and consolidated net loss of
$7.6 million in the six months ended June 30, 2006.

The likelihood of our success must be considered in light of the expenses,
difficulties and delays frequently encountered by companies formed to develop
and market new technologies. In particular, our operations to date have focused
primarily on research and development of the scanned beam technology and
development of demonstration units. We are unable to accurately estimate future
revenues and operating expenses based upon historical performance.

We cannot be certain that we will succeed in obtaining additional development
contracts or that we will be able to obtain substantial customer orders for our
products. In light of these factors, we expect to continue to incur substantial
losses and negative cash flow at least through 2006 and likely thereafter. We
cannot be certain that we will achieve positive cash flow at any time in the
future.

We will require additional capital to fund our operations and to implement
our business plan. If we do not obtain additional capital, we may be required to
curtail our operations substantially. Raising additional capital may dilute the
value of current shareholders' shares.

Based on our current operating plan and budgeted cash requirements, we expect
our cash to fund operations for at least a year.  We will require additional
capital in the future to fund our operations, including to:

- Further develop the scanned beam technology.

- Develop and protect our intellectual property rights, and

- Fund long-term marketing and business development opportunities.

The Company can raise limited additional cash through the sale of its Lumera
common stock in the public market under Rule 144 of the Securities Act of 1933
or through a private placement. As of July 10, 2006, Microvision owns
approximately 322,000 shares of Lumera common stock that have not been pledged
as collateral for the Company's convertible notes issued as of March 11,
2005 and December 1, 2005. Based on the July 10, 2006 closing price of
$3.07, the Lumera shares that have not been pledged as collateral have a market
value of approximately $989,000. The Company may be deemed to be an affiliate of
Lumera. Under Rule 144 of the Securities Act, an affiliate is entitled to sell
within any three-month period a number of shares of Lumera common stock that
does not exceed the greater of 1% of the then outstanding shares of Lumera
common stock or the average weekly trading volume of Lumera common stock on the
NASDAQ National Market during the four calendar weeks preceding the filing of a
notice of the sale on Form 144. The immediate sale of Lumera stock in the public
market could have a negative impact on the Lumera stock price.

Our capital requirements will depend on many factors, including, but not
limited to, the rate at which we can, directly or through arrangements with
original equipment manufacturers, introduce products incorporating the scanned
beam and image capture technologies and the market acceptance and competitive
position of such products. If revenues are less than we anticipate, if the level
and mix of revenues vary from anticipated amounts and allocations or if expenses
exceed the amounts budgeted, we may require additional capital earlier than June
2006 to further the development of our technologies, for expenses associated
with product development, and to respond to competitive pressures or to meet
unanticipated development difficulties. In addition, our operating plan provides
for the development of strategic relationships with systems and equipment
manufacturers that may require additional investments by us.

Additional financing may not be available to us or, if available, may not be
available on terms acceptable to us on a timely basis. Raising additional
capital may involve issuing securities with rights and preferences that are
senior to our common stock and may dilute the value of current shareholders'
shares. If adequate funds are not available to satisfy either short-term or
long-term capital requirements, we may be required to limit our operations
substantially. This limitation of operations may include reductions in staff and
operating costs as well as reductions in capital expenditures and investment in
research and development.

ITEM 6. Exhibits

|31.1 | Chief Executive Officer Certification Pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002      
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.2 | Chief Financial Officer Certification Pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 Of the
Sarbanes-Oxley Act of 2002      
|32.1 | Chief Executive Officer Certification pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|32.2 | Chief Financial Officer Certification pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002

---

SIGNATURES

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

| | MICROVISION, INC.
| | -----------------

|Date:  August 4, 2006 | BY: | /s/  Alexander Y. Tokman                             
|--------------------- | --- | -----------------------------------------------------
|                      |     | Alexander Y. Tokman                                  
|                      |     | Chief Executive Officer
(Principal Executive Officer)



|Date:  August 4, 2006 | BY: | /s/  Jeff Wilson                                     
|--------------------- | --- | -----------------------------------------------------
|                      |     | Jeff Wilson                                          
|                      |     | Chief Financial Officer
(Principal Financial Officer)

---

EXHIBIT INDEX

The following documents are filed.

|Exhibit Number | Description                                                                                                                                                                     
|-------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1           | Chief Executive Officer Certification Pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002      
|31.2           | Chief Financial Officer Certification Pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 Of the
Sarbanes-Oxley Act of 2002      
|32.1           | Chief Executive Officer Certification pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|32.2           | Chief Financial Officer Certification pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002

---