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

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FORM 10-K

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[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
     for the fiscal year ended December 31, 2006

[   ]    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 Ave NE
Redmond, Washington      98052

(425) 936-6847

Securities registered pursuant to Section 12(b) of the Exchange Act:



|Title of each class                                     | Name of each exchange on which registered
|------------------------------------------------------- | -----------------------------------------
|Common Stock, $.001 par value                           | NASDAQ Global Market                     
|Warrants, exercisable for Common Stock, $.001 par
value | NASDAQ Global Market                     

Securities registered pursuant to Section 12(g) of the Exchange Act:None

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Act. Yes

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section13 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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

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 of the Act). Yes

The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2006 was
approximately $71.8 million (based on the closing price for the registrant's Common Stock on the NASDAQ Global
Market of $1.93 per share).

The number of shares of the registrant's Common Stock outstanding as of March 1, 2007 was 43,193,000.

Documents Incorporated by Reference

Portions of the registrant's definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in
connection with the Registrant's Annual Meeting of Shareholders to be held on June 13, 2007 are incorporated herein by
reference into Part III of this report.




Microvision, Inc.

                        2005 ANNUAL REPORT ON FORM 10-K
                               TABLE OF CONTENTS



|Part I.    |                                                                                                | Page
|---------- | ---------------------------------------------------------------------------------------------- | ----
|Item 1.    | Description of Business                                                                        | **  
|Item 2.    | Properties                                                                                     | **  
|Item 3.    | Legal Proceedings                                                                              | **  
|Item 4.    | Submission of Matters to a Vote of Security Holders                                            | **  
|Part II.   |                                                                                                |     
|Item 5.    | Market for Registrant's Common Stock and Related Stockholder Matters                           | **  
|Item 6.    | Selected Financial Data                                                                        | **  
|Item 7.    | Management's Discussion and Analysis of Financial Condition and Results of Operations          | **  
|Item 7a.   | Quantitative and Qualitative Disclosures About Market Risks                                    | **  
|Item 8.    | Financial Statements and Supplementary Data                                                    | **  
|Item 9.    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           | **  
|Item 9A.   | Controls and Procedures                                                                        | **  
|Item 9B.   | Other Information                                                                              | **  
|Part III.  |                                                                                                |     
|Item 10.   | Directors and Executive Officers                                                               | **  
|Item 11.   | Executive Compensation                                                                         | **  
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | **  
|Item 13.   | Certain Relationships and Related Transactions                                                 | **  
|Item 14.   | Principal Accounting Fees and Services                                                         | **  
|Part IV.   |                                                                                                |     
|Item 15.   | Exhibits, Financial Statement Schedules                                                        | **  
|Signatures |                                                                                                | **  



PART I

Preliminary Note Regarding Forward-Looking Statements

This report contains 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 those
sections.  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
"anticipate," "believe," "estimate,"
"expect," "goal," "may," "plan,"
"project," "will," and similar expressions identify forward-looking
statements.  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; 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
below in Item 1A.

ITEM 1.	BUSINESS

Overview

We are developing miniature display and imaging engines based upon our
integrated photonics module (IPM) architecture.  The IPM utilizes our expertise
in two dimensional Micro-Electrical Mechanical system ("MEMS") light
scanning technologies, lasers, optics and electronics to create a high quality
video or still image from a small form factor device with lower power needs than
conventional display technologies.  Historically, we have entered into
development agreements with commercial and U.S. government customers to develop
advanced prototype and demonstration units based on our light scanning
technologies.

In 2006, we announced our strategy to develop and supply IPM-based miniature
display engines to potential OEM customers who will embed them into a variety of
consumer and automotive products.  The primary objective for consumer
applications is to provide users of mobile devices with a large screen viewing
experience produced by a small embedded projector. Mobile devices may include
cell phones, PDA's, gaming consoles and other consumer electronics products.
These potential products would allow users to watch movies, play videos, display
images, and other data onto a variety of surfaces.   The same display engines
with some modification could be embedded into the dashboard of an automobile or
an airplane to create a heads up display (HUD) that could project point-by-point
navigation, critical operational, safety and other information important to the
driver or pilot.  The IPM-based engine could be further modified to be embedded
into a pair of glasses to provide the mobile user with a see-through or occluded
personal display to view movies, play games or access other content.

The development and procurement of intellectual property rights relating to
our light scanning technologies is a key aspect of our business strategy.  Since
our inception in 1993, we have acquired under license agreements exclusive
rights to various technologies.  We also generate intellectual property as a
result of our ongoing performance on development contracts and our internal
research and development activities.

Technology

As our IPM is a technology platform for our current imaging and display
engines, it includes the components necessary to create a video or still image.
The IPM includes the drive electronics that acquire and process signals from a
data source to control and synchronize the color mix and placement of individual
picture elements (pixels).  Color pixels are generated by combining modulated
red, green and blue light sources.  The intensity of each of the light sources
is varied to generate a complete palette of colors and shades.  The pixels are
arranged by a continuous high frequency scanner motion that rapidly sweeps the
beam of light vertically and horizontally to create the image.  Optical elements
direct the beam of light onto a surface for viewing.  Since the IPM uses a
single beam of light and a small scanning mirror to create an image, we can
create a large image from a small package.

We believe that our light scanning technology offers significant advantages
over traditional display and imaging systems.  Depending on the specific product
application these advantages may include:

- Small and thin package size
- Higher brightness
- Reduced power requirements
- Higher contrast
- Higher resolution
- Lower price

Miniature Projectors

Based on the inquiries we have received from potential customers, we believe
there is an emerging market for a large screen viewing experience embedded
within a personal handheld device.  We believe we can use our scanning
technologies to create a miniature full-color projection display (which we refer
to as "PicoP") that meets the cost, size and power requirements to be
embedded in portable hand-held devices including mobile phones.  The PicoP uses
laser light to create a brilliant, full color, high contrast, uniform display
over the entire field of view. With our PicoP, the image remains in focus at any
distance and even on curved surfaces without the need of a focusing lens.  We
are also planning to develop the PicoP as an accessory device that can be
connected to a video device such a video iPod or computer.  We plan to enter
into agreements with original equipment manufacturers that would result in
production and distribution of the PicoP.

Automotive Head-Up Displays

We believe an automotive HUD will improve driver safety by reducing the
distraction of looking away from the road to read information such as GPS
images, audio controls and other automobile instrumentation.   We are working
with Tier 1 suppliers to develop a unique automotive head-up display based
on the IPM.  We have produced prototype automotive HUDs that demonstrate that
the IPM-based automotive HUD can  project a daylight or night-time readable
image onto the windscreen of an automobile to provide the driver with a variety
of information related to the car's operation.  We believe that the IPM-based
automotive HUD offers three distinct advantages over competing head-up
displays:

- Size - Our prototype display is less than half the size of current
competitive offerings.  This smaller form factor can accommodate a wider variety
of vehicle configurations.

- 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 clearly in any ambient lighting conditions.

- Installation Cost - Our prototype can be electronically customized to the
unique curvature of a particular automobile's windshield, thereby reducing
installation time and cost.  The current competitive offerings must be manually
adjusted to match the curvature of a windshield.

We plan to work with Tier 1 automotive suppliers to market the head up
display to OEM customers.  We are developing the scanning engine subsystem
portion of the HUD which is based upon our IPM.  We expect that a Tier I
supplier would integrate our scanning engine subsystem into a HUD product
package for automobile companies.  During 2006, we continued to improve upon our
prototype head-up displays for Tier 1 suppliers to demonstrate to automotive
companies.

Color Eyewear

We believe the IPM can be modified and integrated with a light-weight optical
design to create a color eyewear platform.  Our color eyewear could be used to
provide personal viewing of information from mobile devices.  We believe that
our color eyewear platform could provide the following advantages over competing
wearable displays:

- See-through performance - See-through eyewear displays enable the wearer to
interact with the real-world and their personal mobile services at the same
time. Unlike competing wearable displays a see-through display does not obstruct
the wearer's vision or reduce their awareness of what is happening around them.

- Daylight readability - The high-brightness capability of color eyewear based
on the IPM enables images to be clearly visible in brightly lit ambient
environments, including direct sunlight. Current LCD based head worn displays
are difficult to see in bright light environments.

- Fashion and ergonomics - We are developing thin and lightweight optics that
can be integrated with the IPM to create color eyewear that matches conventional
eyewear frames in size and weight to provide significantly improved ergonomics
compared to competing wearable displays.

We are working with the US Army and US Air Force to further develop IPM-based
color eyewear for military applications such as helmet mounted displays and full
color see-through eyewear.  We plan to work with OEMs and system integrators to
incorporate our see-through eyewear into integrated solutions for potential
military and commercial customers.

Laser Bar Code Scanners and Advanced Imaging Systems

We currently market our line of hand held laser bar code scanners, branded as
the Flic Scanner, and the Flic Cordless Scanner, a Bluetooth version of the Flic
Scanner. The Flic Scanners feature a proprietary design that provides for lower
power consumption and total operating cost than many other laser bar code
scanners currently available. During 2006 we took several steps to improve the
performance of the Flic business including implementing processes to improve the
quality of the Flic Scanner.

Flic Scanners are manufactured for us by a contract manufacturer located in
Malaysia.  We distribute branded and private-labeled Flic Scanners directly to
end users through value added resellers, original equipment manufacturers and
phone and internet orders.

Working with a development partner, we have also created prototype versions
of a high resolution, miniature laser camera for certain medical applications.
Under the agreement, we developed prototype units that are being used in product
evaluation.  We have delivered the prototype units and our development partner
is evaluating the units to determine a commercialization plan.

We believe that certain components of our technology can also be used to
develop two-dimensional bar code readers that have cost and performance
advantages over existing imaging technologies for certain applications.

Go to Market Strategy

Certain potential applications using the IPM, such as automotive HUD or
the miniature projector, could require integration of our technology with other
related technologies.  In markets requiring high volume production of IPM
components or subsystems that are to be integrated with other components, we may
provide designs for components, subsystems and systems to original equipment
manufacturers under licensing agreements.

We expect that some customers will require unique designs for their displays.
We expect that such relationships will generally involve a period of co-
development during which engineering, manufacturing and marketing professionals
from potential customers and original equipment manufacturers would work with
our technical staff to modify the IPM for their targeted market and application.
We may charge fees to our customers or original equipment manufacturers to fund
the costs of the engineering effort incurred on such development projects.  The
nature of the relationships with such customers or original equipment
manufacturers may vary from partner to partner depending on the proposed
specifications for the IPM, the product to be developed, and the customers' or
original equipment manufacturers' design, manufacturing and distribution
capabilities.  We believe that by limiting our own direct manufacturing
investment for products, we will reduce our capital requirements and risks
inherent in taking the IPM to the consumer market.

Human Factors, Ergonomics and Safety

As part of our research and development activities, we conduct ongoing
research on the cognitive, physiological, ergonomic safety factors that must be
addressed by products incorporating our technology, including such issues as the
maximum permissible laser exposure limits established by American National
Standards Institute ("ANSI") and others.  Researchers from the
University of Washington Human Interface Technology Lab and other independent
institutions have concluded that laser exposure to the eye resulting from use of
the light scanning displays under normal operating conditions would be below the
calculated maximum permissible exposure level set by ANSI.

Competitive Conditions

The information display industry is highly competitive.  Our potential
display products will compete with established manufacturers of miniaturized
cathode ray tube and flat panel display devices.  Our competitors include
companies such as Sony Corporation and Texas Instruments Incorporated, most of
which have much greater financial, technical and other resources than we do.
Many of our competitors are developing alternative miniature display
technologies.  Our competitors may succeed in developing information display
technologies and products that could render our technology or our proposed
products commercially infeasible or technologically obsolete.

The information display industry has been characterized by rapid and
significant technological advances.  Our technology and potential products may
not remain competitive with such advances, and we may not have sufficient funds
to invest in new technologies, products or processes.  Although we believe the
light scanning technology and proposed display products could deliver images of
a quality and resolution substantially better than those of commercially
available miniaturized liquid crystal displays and cathode ray tube based
display products, manufacturers of liquid crystal displays and cathode ray tubes
may develop further improvements of screen display technology that could reduce
or eliminate the anticipated advantages of our proposed products.

We compete with other companies in the display industry and other
technologies for government funding.  In general, our government customers plan
to integrate our technology into larger systems.  Ongoing contracts are awarded
based on our past performance on government contracts, the customer's progress
in integrating our technology into the customer's overall program objectives,
and the status of the customer's overall program.

The image capture industry is also highly competitive.  Our current and
planned bar code products will compete with existing laser and wand type
scanners produced by established bar code companies.  Our current products
compete on the basis of price and performance.  The bar code industry is
dominated by Symbol Technologies, who was recently acquired by Motorola, Inc.
Symbol Technologies sells products that directly compete with our current
and planned bar code products.

Intellectual Property and Proprietary Rights

Since our inception in 1993, we have acquired under license agreements
exclusive rights to various technologies, including, among others, rights
related to the ability to superimpose images on the user's field of view and
with a retinal display, and rights related to the design and fabrication of
micro miniature devices using semiconductor fabrication techniques.  In some
cases, the licensors have retained limited, non-commercial rights with respect
to the technology, including the right to use the technology for non-commercial
research and for instructional purposes. Some licensors have the right to
consent to our sublicensing arrangements and to the prosecution and settlement
by us of our of infringement disputes.

We also generate intellectual property as a result of our ongoing performance
on development contracts and our internal research and development activities.
The inventions covered by our patent applications generally relate to component
miniaturization, specific implementation of various system components and design
elements to facilitate mass production.  We consider protection of these key
enabling technologies and components to be a fundamental aspect of our strategy
to penetrate diverse markets with unique products.  As such, we intend to
continue to develop our portfolio of proprietary and patented technologies at
the system, component and process levels.

Our ability to compete effectively in the display and image capture market
will depend, in part, on our ability and the ability of the licensors to
maintain the proprietary nature of these technologies.

We also rely on unpatented proprietary technology.  To protect our rights in
these areas, we require all employees and, where appropriate, contractors,
consultants, advisors and collaborators, to enter into confidentiality and non-
compete agreements.  There can be no assurance, however, that these agreements
will provide meaningful protection for our trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how or other proprietary information.

We have registered the marks "Flic",
"Flicware", "Flicprint", "MicroHud," and
"Nomad" with the United States Patent and Trademark Office.  We have
filed for registration of various other marks including "Pico" ,
"PicoP" and a "tri-curve" logo in the United States
Patent and Tradmark Office.

Additional Information

We perform research and development to design and develop the integrated
photonics module and modifications to the integrated photonics module that will
be required for specific applications.  Research and development expense for the
fiscal years ended December 31, 2006, 2005 and 2004 was $10.7 million, $6.6
million, and $15.2 million, respectively.  In 2004, research and development
expense would have been $13.6 million excluding the impact of our previously
consolidated subsidiary, Lumera.

Prior to 2004, substantially all of our revenue was generated from
development contracts to develop the light scanning technology to meet customer
specifications.  Our customers have included both the United States government
and commercial enterprises.  In 2006, 51% of revenue was derived from
performance on development contracts with the United States government, 24% from
performance on development contracts with commercial customers and the remainder
from sales of Nomad and Flic units.  In 2005, 35% of revenue was derived from
performance on development contracts with the United States government, 42% from
performance on development contracts with commercial customers and the remainder
from sales of Nomad and Flic units.  In 2005, Ethicon Endo-Surgery Inc.
accounted for 33% of total revenue.  Our contracts with the United States
government can be terminated for convenience by the United States government at
any time. See Management's Discussion and Analysis of Financial Condition and
Results of Operations.

We had a backlog of $7.1 million at December 31, 2006 compared to a backlog
of $3.4 million at December 31, 2005.  The backlog at December 31, 2006, is
composed of $6.8 million in development contracts entered into through December
31, 2006 and $353,000 in orders for Flic.  Microvision plans to complete
all of the backlog contracts by the end of the first quarter of 2008.

Employees

As of February 28, 2007, we had 127 employees.

Further Information

Microvision was founded in 1993 as a Washington corporation and
reincorporated in 2003 under the laws of the State of Delaware.  Our principal
office is located at 6222 185th Avenue NE, Redmond WA 98052 and our
telephone number is 425-936-6847.

Our Internet address is www.microvision.com.  We make available free of
charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.  Investors can access this material by visiting our
website, clicking on "Company," then on "Investor Relations,
" then on "SEC Filings."

ITEM 1A.	RISK FACTORS

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 December 31, 2006, we had an accumulated deficit of $239.6 million.
- We incurred consolidated net losses of $154.2 million from inception through
2003, $33.2 million in 2004, $28.2 million in 2005, and $24.0 million in
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 light scanning 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 2007 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, cash equivalents and expected proceeds from the sale of Lumera common
stock to fund operations through 2007.

- Further develop the light scanning technology,
- Develop and protect our intellectual property rights, and
- Fund long-term marketing and business development opportunities.

We own 1,750,000 shares of Lumera common stock which are pledged as
collateral for the convertible notes.  The final payments on the notes are due
March 15, 2007.  After we repay the notes in full, the pledged shares are
released to us and become eligible for sale.  Based on the March 1, 2007 closing
price of $4.28, the pledged Lumera shares have a market value of approximately
$7.5 million.  The market price of Lumera's common stock is subject to
fluctuations based on Lumera's financial performance, published accomplishments
and overall market conditions.  During the 90 calendar day period ended March 1,
2007, Lumera common stock has traded between $4.06 and $10.35.  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 light
scanning 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 expected 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.

There can be no assurance that such cash will be available to us, or if
available, on terms acceptable to us or 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.

The value of our investment in Lumera may decrease.

Lumera's stock price is subject to fluctuation and may decrease, lowering the
value of our investment.  We own approximately 8.8% of Lumera's common stock.
Since we hold a large percentage of Lumera's common stock, if an active market
does not develop or is not sustained, it may be difficult for us to sell our
shares of Lumera's common stock at an attractive price or at all.  The
likelihood of Lumera's success, and the value of the common stock we hold, must
be considered in light of the risks frequently encountered by early stage
companies, especially those formed to develop and market new technologies.
These risks include Lumera's potential inability to establish product sales and
marketing capabilities to establish and maintain markets for their potential
products; and to continue to develop and upgrade their technologies to keep pace
with changes in technology and the growth of markets using polymer materials.
If Lumera is unsuccessful in meeting these challenges, its stock price, and the
value of our investment, could decrease.

We cannot be certain that the light scanning technology or products
incorporating this technology will achieve market acceptance.  If the light
scanning technology does not achieve market acceptance, our revenues may not
grow.

Our success will depend in part on customer acceptance of the light scanning
technology.  The light scanning technology may not be accepted by manufacturers
who use display technologies in their products, by systems integrators who
incorporate our products into their products or by end users of these products.
To be accepted, the light scanning technology must meet the expectations of our
potential customers in the automotive, defense and consumer markets.  If our
technology fails to achieve market acceptance, we may not be able to continue to
develop the light scanning technology.

It may become more difficult to sell our stock in the public market.

Our common stock is listed for quotation on The NASDAQ Global Market.  To
keep our listing on this market, we must meet NASDAQ's listing maintenance
standards.  If we are unable to continue to meet NASDAQ's listing maintenance
standards, our common stock could be delisted from The NASDAQ Global Market.  If
our common stock were delisted, we likely would seek to list the common stock on
the NASDAQ Capital Market, the American Stock Exchange or on a regional stock
exchange.  Listing on such other market or exchange could reduce the liquidity
for our common stock.  If our common stock were not listed on the Capital Market
or an exchange, trading of our common stock would be conducted in the over-the-
counter market on an electronic bulletin board established for unlisted
securities or directly through market makers in our common stock.  If our common
stock were to trade in the over-the-counter market, an investor would find it
more difficult to dispose of, or to obtain accurate quotations for the price of,
the common stock.  A delisting from The NASDAQ Global Market and failure to
obtain listing on such other market or exchange would subject our securities to
so-called penny stock rules that impose additional sales practice and market-
making requirements on broker-dealers who sell or make a market in such
securities.  Consequently, removal from The NASDAQ Global Market and failure to
obtain listing on another market or exchange could affect the ability or
willingness of broker-dealers to sell or make a market in our common stock and
the ability of purchasers of our common stock to sell their securities in the
secondary market.  In addition, when the market price of our common stock is
less than $5.00 per share, we become subject to penny stock rules even if our
common stock is still listed on The NASDAQ Global Market.  While the penny stock
rules should not affect the quotation of our common stock on The NASDAQ Global
Market, these rules may further limit the market liquidity of our common stock
and the ability of investors to sell our common stock in the secondary market.
During the first and second quarter of 2003, the third quarter of 2004, the
second quarter and fourth quarter of 2005, and all four quarters of 2006, the
market price of our stock traded below $5.00 per share.  On March 1, 2007, the
closing price of our stock was $3.38.

Our lack of the financial and technical resources relative to our
competitors may limit our revenues, potential profits, overall market share or
value.

Our current products and potential future products will compete with
established manufacturers of existing products and companies developing new
technologies.  Many of our competitors have substantially greater financial,
technical and other resources than us.  Because of their greater resources, our
competitors may develop products or technologies that are superior to our own.
The introduction of superior competing products or technologies could result in
reduced revenues, lower margins or loss of market share, any of which could
reduce the value of our business.

We may not be able to keep up with rapid technological change and our
financial results may suffer.

The information display industry has been characterized by rapidly changing
technology, accelerated product obsolescence and continuously evolving industry
standards.  Our success will depend upon our ability to further develop the
light scanning technology and to cost effectively introduce new products and
features in a timely manner to meet evolving customer requirements and compete
with competitors' product advances.

We may not succeed in these efforts because of:

- delays in product development,
- lack of market acceptance for our products, or
- lack of funds to invest in product development and marketing.

The occurrence of any of the above factors could result in decreased
revenues, market share and value.

We could face lawsuits related to our use of the light scanning technology
or other technologies.  Defending these suits would be costly and time
consuming.  An adverse outcome in any such matter could limit our ability to
commercialize our technology and products, reduce our revenues and increase our
operating expenses.

We are aware of several patents held by third parties that relate to certain
aspects of light scanning displays and image capture products.  These patents
could be used as a basis to challenge the validity, limit the scope or limit our
ability to obtain additional or broader patent rights of our patents or patents
we have licensed.  A successful challenge to the validity of our patents or
patents we have licensed could limit our ability to commercialize the light
scanning technology and other technologies and, consequently, materially reduce
our revenues.  Moreover, we cannot be certain that patent holders or other third
parties will not claim infringement by us with respect to current and future
technology.  Because U.S. patent applications are held and examined in secrecy,
it is also possible that presently pending U.S. applications will eventually be
issued with claims that will be infringed by our products or the light scanning
technology.  The defense and prosecution of a patent suit would be costly and
time consuming, even if the outcome were ultimately favorable to us.  An adverse
outcome in the defense of a patent suit could subject us to significant cost, to
require others and us to cease selling products that incorporate light scanning
technology, to cease licensing light scanning technology or to require disputed
rights to be licensed from third parties.  Such licenses, if available, would
increase our operating expenses.  Moreover, if claims of infringement are
asserted against our future co-development partners or customers, those partners
or customers may seek indemnification from us for damages or expenses they
incur.

Our planned future products are dependent on advances in technology by
other companies.

We rely on and will continue to rely on technologies, such as light sources,
MEMS and optical components that are developed and produced by other companies.
The commercial success of certain of our planned future products will depend in
part on advances in these and other technologies by other companies.  We may,
from time to time, contract with and support companies developing key
technologies in order to accelerate the development of them for our specific
uses.  There are no guarantees that such activities will result in useful
technologies or components for us.

Our products may be subject to future health and safety regulations that
could increase our development and production costs.

Products incorporating light scanning technology could become subject to new
health and safety regulations that would reduce our ability to commercialize the
light scanning technology.  Compliance with any such new regulations would
likely increase our cost to develop and produce products using the light
scanning technology and adversely affect our financial results.

If we cannot manufacture products at competitive prices, our financial
results will be adversely affected.

To date, we have produced limited quantities of our Flic products and
demonstration units of the integrated photonics module for research, development
and demonstration purposes.  The cost per unit for these integrated photonics
module units currently exceeds the level at which we could expect to profitably
sell these products.  If we cannot lower our cost of production, we may face
increased demands on our financial resources, possibly requiring additional
equity and/or debt financing to sustain our business operations.

Our future growth will suffer if we do not achieve sufficient market
acceptance of our products to compete effectively.

Our success depends, in part, on our ability to gain acceptance of our
planned products by a large number of consumers.  Achieving market-based
acceptance for our potential products will require marketing efforts and the
expenditure of financial and other resources to create product awareness and
demand by potential consumers.  We may be unable to offer products consistently
or at all that compete effectively with products of others on the basis of price
or performance.  In addition, our efforts to improve the quality and utility of
our existing Flic products may not result in improved sales.  Failure to achieve
broad acceptance of our products by potential consumers and to effectively
compete would have a material adverse effect on our operating results.

Because we plan to continue using foreign contract manufacturers, our
operating results could be harmed by economic, political, regulatory and other
factors in foreign countries.

We currently use a contract manufacturer in Asia to manufacture our Flic
product, and we plan to continue using foreign manufacturers to manufacture some
of our potential products where appropriate.  These international operations are
subject to inherent risks, which may adversely affect us, including:

- political and economic instability;
- high levels of inflation, historically the case in a number of countries in
Asia;
- burdens and costs of compliance with a variety of foreign laws;
- foreign taxes; and
- changes in tariff rates or other trade and monetary policies.

If we experience delays or failures in developing commercially viable
products, we may have lower revenues.

We have developed demonstration units incorporating the light scanning
technology.  However, we must undertake additional research, development and
testing before we are able to develop additional products for commercial sale.
Product development delays by us or our potential product development partners,
or the inability to enter into relationships with these partners, may delay or
prevent us from introducing products for commercial sale.  We intend to rely on
third party developments or to contract with other companies to continue
development of green laser devices we will need for our products.

If we cannot supply products in commercial quantities, we will not achieve
commercial success.

We are developing our capability to manufacture products in commercial
quantities through contract manufacturers.  Our success depends in part on our
ability to provide our components and future products in commercial quantities
at competitive prices.  Accordingly, we will be required to obtain access,
through business partners or contract manufacturers, to manufacturing capacity
and processes for the commercial production of our expected future products.  We
cannot be certain that we will successfully obtain access to sufficient
manufacturing resources.  Future manufacturing limitations of our suppliers or
contract manufacturers could result in a limitation on the number of products
incorporating our technology that we are able to produce.

If our licensors and we are unable to obtain effective intellectual
property protection for our products and technology, we may be unable to compete
with other companies.

Intellectual property protection for our products is important and uncertain.
If we do not obtain effective intellectual property protection for our products,
processes and technology, we may be subject to increased competition.  Our
commercial success will depend in part on our ability and the ability of the
University of Washington and our other licensors to maintain the proprietary
nature of the light scanning and other key technologies by securing valid and
enforceable patents and effectively maintaining unpatented technology as trade
secrets.  We try to protect our proprietary technology by seeking to obtain
United States and foreign patents in our name, or licenses to third-party
patents, related to proprietary technology, inventions, and improvements that
may be important to the development of our business.  However, our patent
position and the patent position of the University of Washington and other
licensors involve complex legal and factual questions.  The standards that the
United States Patent and Trademark Office and its foreign counterparts use to
grant patents are not always applied predictably or uniformly and can change.
Additionally, the scope of patents are subject to interpretation by courts and
their validity can be subject to challenges and defenses, including challenges
and defenses based on the existence of prior art.  Consequently, we cannot be
certain as to the extent to which we will be able to obtain patents for our new
products and technology or the extent to which the patents that we already own
or license from others protect our products and technology.  Reduction in scope
of protection or invalidation of our licensed or owned patents, or our inability
to obtain new patents, may enable other companies to develop products that
compete with ours on the basis of the same or similar technology.

We also rely on the law of trade secrets to protect unpatented know-how and
technology to maintain our competitive position.  We try to protect this know-
how and technology by limiting access to the trade secrets to those of our
employees, contractors and partners with a need to know such information and by
entering into confidentiality agreements with parties that have access to it,
such as our employees, consultants and business partners.  Any of these parties
could breach the agreements and disclose our trade secrets or confidential
information, or our competitors might learn of the information in some other
way.  If any trade secret not protected by a patent were to be disclosed to or
independently developed by a competitor, our competitive position could be
materially harmed.

We could be exposed to significant product liability claims that could be
time-consuming and costly, divert management attention and adversely affect our
ability to obtain and maintain insurance coverage.

We may be subject to product liability claims if any of our product
applications are alleged to be defective or cause harmful effects.  For example,
because our light scanning displays in some applications are designed to scan a
low power beam of colored light into the user's eye, the testing, manufacture,
marketing and sale of these products involve an inherent risk that product
liability claims will be asserted against us.  Product liability claims or other
claims related to our products, regardless of their outcome, could require us to
spend significant time and money in litigation, divert management time and
attention, require us to pay significant damages, harm our reputation or hinder
acceptance of our products.  Any successful product liability claim may prevent
us from obtaining adequate product liability insurance in the future on
commercially desirable or reasonable terms.  An inability to obtain sufficient
insurance coverage at an acceptable cost or otherwise to protect against
potential product liability claims could prevent or inhibit the
commercialization of our products.

We rely heavily on a limited number of development contracts with the U.S.
government, which are subject to immediate termination by the government for
convenience at any time, and the termination of one or more of these contracts
could have a material adverse impact on our operations.

During the full years 2006 and 2005, 51% and 35%, respectively, of our
revenue was derived from performance on a limited number of development
contracts with the U.S. government.  Therefore, any significant disruption or
deterioration of our relationship with the U.S. government would significantly
reduce our revenues.  Our government programs must compete with programs managed
by other contractors for limited amounts and uncertain levels of funding.  The
total amount and levels of funding are susceptible to significant fluctuations
on a year-to-year basis.  Our competitors continuously engage in efforts to
expand their business relationships with the government and are likely to
continue these efforts in the future.  Our contracts with the government are
subject to immediate termination by the government for convenience at any time.
The government may choose to use contractors with competing display technologies
or it may decide to discontinue any of our programs altogether.  In addition,
those development contracts that we do obtain require ongoing compliance with
applicable government regulations.  Termination of our development contracts, a
shift in government spending to other programs in which we are not involved, a
reduction in government spending generally, or our failure to meet applicable
government regulations could have severe consequences for our results of
operations.

Our development agreements have long sales cycles, which make it difficult
to plan our expenses and forecast our revenues.

Our development agreements have lengthy sales cycles that involve numerous
steps including determination of a product application, exploring the technical
feasibility of a proposed product, evaluating the costs of manufacturing a
product and manufacturing or contracting out the manufacturing of the product.
Our long sales cycle, which can last several years, makes it difficult to
predict the quarter in which contract signing and revenue recognition will
occur.  Delays in entering into development agreements could cause significant
variability in our revenues and operating results for any particular quarterly
period.

Our development contracts may not lead to products that will be
profitable.

Our developmental contracts, including without limitation those discussed in
this document are exploratory in nature and are intended to develop new types of
products for new applications.  These efforts may prove unsuccessful and these
relationships may not result in the development of products that will be
profitable.

Our revenues are highly sensitive to developments in the defense
industry.

Our revenues to date have been derived principally from product development
research relating to defense applications of the light scanning technology.  We
believe that development programs and sales of potential products in this market
will represent a significant portion of our future revenues.  Developments that
adversely affect the defense sector, including delays in government funding and
a general economic downturn, could cause our revenues to decline
substantially.

If we lose our rights under our third party technology licenses, our
operations will be adversely affected.

Our business depends in part on technology rights licensed from third
parties.  We could lose our exclusivity or other rights to use the technology
under our licenses if we fail to comply with the terms and performance
requirements of the licenses.    In addition, certain licensors may terminate a
license upon our breach and have the right to consent to sublicense
arrangements.  If we were to lose our rights under any of these licenses, or if
we were unable to obtain required consents to future sublicenses, we would lose
a competitive advantage in the market, and may even lose the ability to
commercialize our products completely.  Either of these results could
substantially decrease our revenues.

We are dependent on third parties in order to develop, manufacture, sell
and market our products.

Our strategy for commercializing the light scanning technology and products
incorporating the light scanning technology includes entering into cooperative
development, manufacturing, sales and marketing arrangements with corporate
partners, original equipment manufacturers and other third parties.  We cannot
be certain that we will be able to negotiate arrangements on acceptable terms,
if at all, or that these arrangements will be successful in yielding
commercially viable products.  If we cannot establish these arrangements, we
would require additional capital to undertake such activities on our own and
would require extensive manufacturing, sales and marketing expertise that we do
not currently possess and that may be difficult to obtain.  In addition, we
could encounter significant delays in introducing the light scanning technology
or find that the development, manufacture or sale of products incorporating the
light scanning technology would not be feasible.  To the extent that we enter
into cooperative development, manufacturing, sales and marketing or other joint
venture arrangements, our revenues will depend upon the performance of third
parties.  We cannot be certain that any such arrangements will be
successful.

Loss of any of our key personnel could have a negative effect on the
operation of our business.

Our success depends on our executive officers and other key personnel and on
the ability to attract and retain qualified new personnel.  Achievement of our
business objectives will require substantial additional expertise in the areas
of sales and marketing, research and product development and manufacturing.
Competition for qualified personnel in these fields is intense, and the
inability to attract and retain additional highly skilled personnel, or the loss
of key personnel, could reduce our revenues and adversely affect our
business.

We are dependent on a small number of customers for our revenue.  Our
quarterly performance may vary substantially and this variance, as well as
general market conditions, may cause our stock price to fluctuate greatly and
potentially expose us to litigation.

Our revenues to date have been generated primarily from a limited number of
development contracts with U.S. government entities and commercial partners.
Our quarterly operating results may vary significantly based on:

- reductions or delays in funding of development programs involving new
information display technologies by the U.S. government or our current or
prospective commercial partners;
- changes in evaluations and recommendations by any securities analysts
following our stock or our industry generally;
- announcements by other companies in our industry;
- changes in business or regulatory conditions;
- announcements or implementation by our competitors of technological
innovations or new products;
- the status of particular development programs and the timing of performance
under specific development agreements;
- economic and stock market conditions; or
- other factors unrelated to our company or industry.

In one or more future quarters, our results of operations may fall below the
expectations of securities analysts and investors and the trading price of our
common stock may decline as a consequence.  In addition, following periods of
volatility in the market price of a company's securities, shareholders often
have instituted securities class action litigation against that company.  If we
become involved in a class action suit, it could divert the attention of
management, and, if adversely determined, could require us to pay substantial
damages.

If we fail to manage expansion effectively, our revenue and expenses could
be adversely affected.

Our ability to successfully offer products and implement our business plan in
a rapidly evolving market requires an effective planning and management process.
We have significantly expanded the scope of our operations.  The growth in
business and relationships with customers and other third parties has placed,
and will continue to place, a significant strain on our management systems and
resources.  We will need to continue to improve our financial and managerial
controls, reporting systems and procedures and will need to continue to train
and manage our work force.

ITEM 1B.	UNRESOLVED STAFF COMMENTS

None

ITEM 2.PROPERTIES

We currently lease approximately 67,000 square feet of combined use office,
laboratory and manufacturing space at our headquarters facility in Redmond,
Washington.  The 90 month lease expires in 2013.

ITEM 3.LEGAL PROCEEDINGS

We are subject to various claims and pending or threatened lawsuits in the
normal course of business.  We are not currently party to any legal proceedings
that we believe the adverse outcome of which would have a material adverse
effect on the Company's financial position, results of operations or cash
flows.

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of shareholders during the fourth
quarter of the year ending December 31, 2006.  At a special meeting of
shareholders of Microvision, Inc. on January 18, 2007, shareholders approved an
amendment to our Certificate of Incorporation to increase the number of
authorized shares of common stock from 73.0 million shares to 125.0 million
shares.  The newly authorized shares or common stock have the same rights as the
previously authorized shares, including the right to cast one vote per share of
common stock.

ITEM 4AEXECUTIVE OFFICERS

Executive officers are appointed by our Board of Directors and hold office
until their successors are elected and duly qualified.  Mr. Tokman also serves
as a director of Microvision.  The following persons serve as executive officers
of Microvision:

Alexander Tokman, age 45, has served as President, Chief Executive Officer
and a director of Microvision since January 2006.  Mr. Tokman served as
Microvision's President and Chief Operating Officer from July 2005 to January
2006.   From April 1995 to July 2005, Mr. Tokman served in various cross-
functional and cross-business leadership positions at GE Healthcare, a
subsidiary of General Electric most recently as a General Manager of its Global
Molecular Imaging and Radiopharmacy unit from May 2003 to June 2005.  From
November 1989 to March 1995 Mr. Tokman served as technical programs lead and a
head of I&RD at Tracor Applied Sciences a subsidiary of then Tracor, Inc.
Mr. Tokman has both a M.S. and B.S. in Electrical Engineering from the
University of Massachusetts, Dartmouth.  He also is a certified Six Sigma &
DFSS Black Belt and Master Black Belt.

Ian D. Brown, age 44, has served as Vice President, Sales and Marketing of
Microvision since February 2006. Prior to joining Microvision, from March 1994
to February 2006, Mr. Brown served in various Sales and Marketing positions with
General Electric Healthcare, Americas. Most recently, from April 2004 to
February 2006, Mr. Brown served as the Sales and Marketing Manager--Nuclear
Medicine. From April 1989 to March 1994 Mr. Brown served as Technical Author--
Nuclear Medicine Operator Documentation with IGE Medical Systems, Radlett, UK.
Mr. Brown holds Ordinary & Higher National Certificates in Medical Physics
& Physiological Measurements from Paddington College, London, Post Graduate
Diploma in Management studies, University of Hertfordshire. He also holds a Six
Sigma Black Belt.

Sid Madhavan, age 40, joined Microvision in April 2006 as Vice President of
Research and Product Development. Madhavan, who worked for GE Healthcare from
1998 to 2006 where he most recently served as an Engineering Subsystem Manager
for a $2.1 billion Molecular Imaging and Computer Tomography business, is a
certified Six Sigma Black Belt and brings over fifteen years of engineering
product development and management experience. Madhavan has a proven track
record for leading the definition and development of several key technology
platform strategies that he translated into product launches and brings a wealth
of cross-functional product development experience, systems and software
expertise, platform development and global team's development skills. Sid
Madhavan received his B.S. degree in Electronics and Communications from Madurai
Kamaraj University in India and his M.S. in Electrical Engineering from Texas
A&M.

Thomas M. Walker, age 42, joined Microvision in May 2002 and serves as Vice
President, General Counsel and Secretary. Prior to joining Microvision, Mr.
Walker served as Senior Vice President, General Counsel and Secretary of
Advanced Radio Telecom Corp., a publicly held technology and services company
where he managed domestic and international legal affairs from April 1996 to
April 2002. Prior to that, Mr. Walker advised publicly and privately held
businesses while practicing in the Los Angeles offices of the law firms of
Pillsbury Winthrop and Buchalter, Nemer Fields and Younger. Mr. Walker holds a
B.A. from Claremont McKenna College and a J.D. from the University of Oregon.

Jeff T. Wilson, age 46, has served as Chief Financial Officer since April
2006, Principal Financial Officer since January 2006 and Principal Accounting
Officer of Microvision since August 1999. Mr. Wilson served as Vice President,
Accounting of Microvision from April 2002 to April 2006 and as Director of
Accounting of Microvision from August 1999 to March 2002. Prior to joining
Microvision, from 1991 to 1999, Mr. Wilson served in various accounting
positions for Siemens Medical Systems, Inc., a developer and manufacturer of
medical imaging equipment. Prior to 1991, Mr. Wilson served as a manager with
the accounting firm Price Waterhouse (currently PricewaterhouseCoopers LLP). Mr.
Wilson is a Certified Public Accountant. Mr. Wilson holds a B.S. in Accounting
from Oklahoma State University.

PART II

ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on The NASDAQ Global Market under the symbol
"MVIS."  As of March 1, 2007, there were approximately 370 holders of
record of 43,193,000 shares of common stock outstanding.  We have never declared
or paid cash dividends on our common stock.  We currently anticipate that we
will retain all future earnings to fund the operations of our business and do
not anticipate paying dividends on the common stock in the foreseeable
future.

Our common stock began trading publicly on August 27, 1996.  The quarterly
high and low sales prices of the Company's common stock for each full quarterly
period in the last two fiscal years and the year to date as reported by The
NASDAQ Global Market are as follows:

`Common Stock
                                                       --------------------
Quarter Ended                                            HIGH        LOW
                                                       ---------  ---------

2005                                                                       
March 31, 2005                                        $    7.70  $    5.03
June 30, 2005                                              6.77       4.15
September 30, 2005                                         6.49       5.04
December 31, 2005                                          6.53       3.02

2006                                                                       
March 31, 2006                                        $    4.25  $    2.41
June 30, 2006                                              4.19       1.88
September 30, 2006                                         2.00       1.16
December 31, 2006                                          3.52       1.35

2007                                                                       
January 1, 2007 to March 1, 2007                      $    4.08  $    2.98`

ITEM 6.	SELECTED FINANCIAL DATA

A summary of selected financial data as of and for the five years ended
December 31, 2006 is set forth below:

`Years Ended December 31,
                                                                 ---------- ----------- ----------- ----------- -----------
                                                                    2006        2005        2004        2003        2002
                                                                 ----------  ----------  ----------  ----------  ----------
                                                                              (in thousands, except per share data)        
Statement of Operations Data:                                                                                              
Revenue                                                         $    7,043  $   14,746  $   11,418  $   14,652  $   15,917
Net loss available for common shareholders                         (27,257)    (30,284)    (33,543)    (26,163)    (27,176)
Basic and diluted net loss per share                                 (0.81)      (1.35)      (1.56)      (1.46)      (1.93)
Weighted average shares outstanding basic and diluted               33,572      22,498      21,493      17,946      14,067 
Balance Sheet Data:                                                                                                        
Cash and cash equivalents                                       $   14,552  $    6,860  $    1,268  $   10,700  $    9,872
Investments available-for-sale                                          --          --          --      11,078       5,304
Working capital                                                     19,160      (4,723)        903      19,781      14,511
Total assets                                                        35,325      23,363      25,538      33,918      32,267
Long-term liabilities                                                2,616       4,412          52       2,204       1,480
Mandatorily redeemable preferred stock                                  --       4,166       7,647          --          --
Total shareholders' equity (deficit)                                21,864      (3,509)      7,190      23,295      17,416`

Statement of Operations and Balance Sheet data for 2002 and 2003 includes
financial information for our previously consolidated subsidiary Lumera.  Lumera
was deconsolidated in July 2004.

ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We began operations in May 1993 to develop and commercialize technology for
displaying images and information.  In 1993, we acquired an exclusive license to
certain Virtual Retinal Display technology from the University of Washington and
entered into a research agreement with the University of Washington to further
develop the Virtual Retinal Display technology.  We have continued to develop
the Virtual Retinal Display technology as part of our broader research and
development efforts relating to the light scanning technology.

We are developing a small module that could be embedded into a mobile device
such as a cell phone or PDA to project a moving or still image onto a variety of
surfaces.  The module could be modified to be embedded into the dash of a car to
create a head-up display for navigation system information or other information
useful to the driver.  We also produce and sell Flic, a hand-held bar code
scanner.  We expect to continue funding prototype and demonstration versions of
products incorporating the light scanning technology at least through 2007.
Future revenues, profits and cash flow and our ability to achieve our strategic
objectives as described herein will depend on a number of factors, including
acceptance of the light scanning technology by various industries and original
equipment manufacturers, market acceptance of products incorporating the light
scanning technology and the technical performance of such products.

We have incurred substantial losses since inception and expect to incur a
substantial loss during the fiscal year ended December 31, 2007.

Key Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States.  The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
liabilities.  On an on-going basis, we evaluate our estimate, including those
related to revenue recognition, contract losses, bad debts, investments and
contingencies and litigation.  We base our estimates on historical experience,
terms of existing contracts, our evaluation of trends in the display and image
capture industries, information provided by our current and prospective
customers and strategic partners, information available from other outside
sources, and on various other assumptions we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  Actual results may differ from these estimates under different
assumptions or conditions.

We believe the following key accounting policies require more significant
judgments and estimates used in the preparation of its consolidated financial
statements:

Revenue Recognition.  We recognize contract revenue as work progresses
on long-term, cost plus fixed fee and fixed price contracts using the
percentage-of-completion method, which relies on estimates of total expected
contract revenue and costs.  We use this revenue recognition methodology because
we can make reliable estimates of the revenue and costs.  Recognized revenues
are subject to revisions as the contract progresses to completion and actual
revenue and cost become certain.  Revisions in revenue estimates are reflected
in the period in which the facts that give rise to the revision become known.
Revisions in these estimates could significantly impact recognized revenue in
any one reporting period.  If the U.S. Government cancels a contract, we would
receive payment for work performed and costs committed to prior to the
cancellation.

Our product sales generally include acceptance provisions.  We recognize
revenue for product shipments upon acceptance of the product by the customer or
expiration of the contractual acceptance period.

Losses on Uncompleted Contracts.  We establish an allowance for
estimated losses if a contract has an estimated cost to complete that is in
excess of the remaining contract value.  The entire estimated loss is recorded
in the period in which the loss is first determined.  We determine the estimated
cost to complete a contract through a detailed review of the work to be
completed, the resources available to complete the work and the technical
difficulty of the remaining work.  If the revised estimated cost to complete the
contract is higher than the total contract revenue, the entire contract loss is
recognized.  The actual cost to complete a contract can vary significantly from
the estimated cost, due to a variety of factors including availability of
technical staff, availability of materials and technical difficulties that arise
during a project.  Most of our development contracts are cost plus fixed fee
type contracts.  Under these types of contracts, we are not required to spend
more than the contract value to complete the contracted work.

Allowance for uncollectible receivables.  We maintain allowances for
uncollectible receivables, including accounts receivable, cost and estimated
earnings in excess of billings on uncompleted contracts and receivables from
related parties.  We review several factors in determining the allowances
including the customer's and related party's past payment history and financial
condition.  If the financial condition of our customers or the related parties
with whom we have receivables were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances could be required.

Inventory.  We value inventory at the lower of cost or market with
cost determined on a weighted average cost basis.  We review several factors in
determining the market value of our inventory including evaluating the
replacement cost of the raw materials and the net realizable value of the
finished goods.  If we do not achieve our targeted sales prices, if market
conditions for our components or products were to decline or if we do not
achieve our sales forecast, additional reductions in the carrying value of the
inventory would be required.

Warrants and Derivatives.  In 2005, we issued convertible notes that
include rights to convert the notes into our common stock.  We also issued
warrants to purchase common stock in connection with the notes.  The conversion
right and the warrants are considered to be derivatives under the guidance
provided by FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities and Emerging Issues Task Force Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock.We use the Black-Scholes option pricing
model to estimate the value of these instruments.  We use this model because it
is widely accepted and provides comparability across a wide range of similar
companies.  To use the Black-Scholes option pricing model we must evaluate a
range of estimates and determine the reasonable estimate of future stock
volatility and interest rates.  Changes in these estimates could result in a
materially different valuation of the instruments.  Other models for valuing
these instruments exist and the use of an alternative model could result in a
materially different valuation of the instruments.

Employee Share-Based Compensation.  We issue share-based compensation
to employees in the form of options exercisable into our common stock.  We
account for employee share-based compensation under the guidance provided by
Financial Accounting Standards Board ("FASB") issued FASB Statement
No. 123(R), Share-Based Payment.  We use the Black-Scholes option pricing
model to estimate the value of these instruments.  We use this model because it
results in reasonable estimated fair values for our standard options, is widely
accepted and provides comparability across a wide range of similar companies.
To use the Black-Scholes options pricing model we must evaluate a range of
variables and determine estimates of future option lives, stock volatility and
interest rates.  In addition, once estimated fair values are developed, we must
estimate prevesting forfeiture rates.  Changes in these estimates could result
in a materially different valuation of the stock-based compensation.  Other
models for valuing stock-based compensation exist and the use of an alternative
model could result in a materially different valuation of the compensation
expense.

The key accounting policies described above are not intended to be a
comprehensive list of all of our accounting policies.  In many cases, the
accounting treatment of a particular transaction is specifically dictated by
generally accepted accounting principles, with no need for us to apply judgment
or make estimates.  There are also areas in which our judgment in selecting any
available alternative would not produce a materially different result to our
consolidated financial statements.  Additional information about our accounting
policies, and other disclosures required by generally accepted accounting
principles, are set forth in the notes to our consolidated financial
statements.

Inflation has not had a material impact on our revenues, or income from
continuing operations over the three most recent fiscal years.

Results of Operations

YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005

Contract Revenue.

`% of                  % of
                                                            contract              contract
                                                   2006      revenue     2005      revenue   $ change   % change
                                                 ---------  ---------  ---------  ---------  ---------  ---------
Government revenue                              $   3,586       68.0  $   5,209       45.7  $  (1,623)     (31.2)
Commercial revenue                                  1,689       32.0      6,177       54.3     (4,488)     (72.7)
                                                 ---------             ---------             ---------
Total contract revenue                          $   5,275             $  11,386             $  (6,111)     (53.7)
                                                 =========             =========             =========`

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 2006 than in 2005, due to lower beginning commercial
contract backlog, the later timing of completing government contract
negotiations, and the allocation of resources to internally funded development
projects.

During 2005, we earned $4.9 million from work performed on a contract with
Ethicon Endo-Surgery, Inc., a subsidiary of Johnson & Johnson, integrating
our technology into certain medical devices compared to $806,000 during 2006.
We delivered the prototype devices as required and completed the work under the
contract in 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 until at least 2008.

In September 2006, we entered into an 18 month $5.95 million contract with
General Dynamics C4 Systems to supply full-color, daylight readable, see-through
helmet-mounted displays as part of the U.S. Army's Mounted Warrior HMD
Improvement Program.  General Dynamics holds prime contracts with the U.S. Army
for other Warrior programs including Land Warrior, Air Warrior and Future Force
Warrior Advanced Technology Demonstration.  The contract specifies the
development and delivery of ten full-color display units for evaluation.

In September 2006, we also entered into a 12 month agreement with Visteon, a
global Tier 1 automotive supplier.  Under the agreement, we will work with
Visteon to design and produce a series of advanced automotive head-up display
samples.  Visteon, working in collaboration with us, is expected to use the
samples to demonstrate the performance of our laser-based light scanning
technology and to refine commercial product requirements of automotive head-up
displays.

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
one period to another.

Our backlog of development contracts at December 31, 2006 was $6.8 million
compared to $2.8 million at December 31, 2005.  Of our current development
contract backlog, $6.3 million is scheduled for completion during 2007.  The
remaining $500,000 is scheduled for completion over the subsequent two months
through February 2008.

Product Revenue.

`% of                  % of
                                                             product               product
                                                   2006      revenue     2005      revenue   $ change   % change
                                                 ---------  ---------  ---------  ---------  ---------  ---------
Flic revenue                                    $   1,589       89.9  $   1,569       46.7  $      20        1.3
Nomad revenue                                         179       10.1      1,791       53.3     (1,612)     (90.0)
                                                 ---------             ---------             ---------
Total product revenue                           $   1,768             $   3,360             $  (1,592)     (47.4)
                                                 =========             =========             =========`

We have earned product revenue from sales of Flic and Nomad.  Flic revenue in
2006 was consistent with 2005. During 2005, we sold 165 Nomad units totaling
$1.2 million to General Dynamics and there was no corresponding sale in 2006.
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.

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 December 31, 2006 was approximately
$353,000, compared to $579,000 at December 31, 2005, all of which is scheduled
for delivery during 2007.

Cost of Contract Revenue.

`% of                  % of
                                                            contract              contract
                                                   2006      revenue     2005      revenue   $ change   % change
                                                 ---------  ---------  ---------  ---------  ---------  ---------
Cost of contract revenue                        $   3,398       64.4  $   6,456       56.7  $  (3,058)     (47.4)`

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 allocate 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 in 2006,
approximately $1,329,000, less overhead was allocated to cost of contract
revenue than 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.

`% of                  % of
                                                             product               product
                                                   2006      revenue     2005      revenue   $ change   % change
                                                 ---------  ---------  ---------  ---------  ---------  ---------
Cost of product revenue                         $   4,768      269.7  $   8,636      257.0  $  (3,868)     (44.8)`

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, 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 2006, we expensed approximately $1,224,000, or $234,000 less
than in 2005, of manufacturing overhead associated with production capacity in
excess of production requirements.

Cost of product revenue for 2006 includes the write-off of a total of
$1,181,000 of inventory, compared to $3,732,000 for 2005.  The write-offs were
due to changes in product design, our decision not to 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. As a result
of our decision not to promote the Nomad product we also recorded $100,000 in
depreciation expense to fully depreciate the fixed assets used in Nomad
production.

We have periodically entered into noncancelable purchase contracts in order
to ensure the availability of materials to support Flic production.  We
periodically assess the need to provide for impairment on these purchase
contracts and record a loss on purchase commitments when required.  In December
2006, we recorded a loss of $310,000 to cost of product revenue as a result of
commitments to purchase materials for the Flic scanner that are in excess of our
estimated future proceeds from the sale of the Flic scanners.

We expect that the cost of product revenue on an absolute dollar basis will
increase in the future as expected sales of commercial products increase.  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
                                                 ---------  ---------  ---------  ---------                      
Research and development                        $  10,715  $   6,587  $   4,128       62.7`

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.

Our research and development department works on both contract revenue
projects and internally funded development projects.  We allocate 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 part of our turnaround strategy announced in February 2006, we established
a target of reducing total overhead cost by approximately 20%, excluding the
impact of adopting FAS123(R) and severance costs.  During the year we directed
more engineering labor to work on internally funded development projects than
planned resulting in higher research and development expense.

The following table eliminates the impacts of adopting FAS 123(R) and
severance costs on research and development expense.

`2006       2005
                                                            ---------  ---------                                 
Research and development expense, as reported              $  10,715  $   6,587
FAS 123(R) options expense                                      (396)        --
Severance                                                       (324)        --
                                                            ---------  ---------
Research and development expense, as adjusted              $   9,995  $   6,587
                                                            =========  =========`

Total costs incurred by our research and development department for cost of
contract revenue and research and development expense activities were higher
during 2006 than 2005.  Research and development expense was higher in 2006 than
2005 due to higher direct labor, subcontractor and material costs.  The higher
proportions of direct labor on internally funded projects relative to revenue
projects in 2006 than in 2005 resulted in more indirect overhead cost absorption
into research and development expense in 2006.

We believe that a substantial level of continuing research and development
expense will be required to develop additional commercial products using the
light scanning technology.  Accordingly, we anticipate our level of research and
development spending will continue to be substantial.

Sales, Marketing, General and Administrative Expense.

`2006       2005     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Sales, marketing, general and administrative    $  17,362  $  20,352  $  (2,990)     (14.7)`

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.

During 2006 we made significant reductions in staff and marketing expenses
related to the discontinuation of the Nomad product, reductions in corporate
staff expenses, professional fees, and increased focus and efficiencies in
operations.  These reductions were offset in part   in non-cash compensation
cost arising from the adoption of FAS 123(R) and severance costs, which did not
occur in 2005..

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

`2006       2005
                                                                       ---------  ---------                      
Sales, marketing, general and admininistrative, as reported           $  17,362  $  20,352
FAS 123(R) options expense                                               (1,429)        --
Severance                                                                  (518)        --
                                                                       ---------  ---------
Sales, marketing, general and admininistrative, as adjusted           $  15,415  $  20,352
                                                                       =========  =========`

In 2000, the Board of Directors authorized the Company to provide unsecured
lines of credit to each of its three senior officers.  No loans have been made
under either Microvision's Executive Option Exercise Note Plan or the Executive
Loan Plan since July 2002, and Microvision does not intend to make any
additional loans under these plans.  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 loans are
due one year from the executive's termination.

Two of the three officers with outstanding loans left the Company in January
2006.  In accordance with the terms, the loans were due in January 2007.
Neither of the officers has repaid their loans.  One of the officers pledged
50,000 shares of Lumera common stock as collateral for the loans.  Based on the
March 1, 2007 closing price of $4.28, the pledged Lumera shares have a market
value of approximately $214,000.  We are pursuing collection of the outstanding
balances.  As a result of our review of the financial position of the former
executives and the potential difficulty in collecting loans from former
employees, we have recorded additional allowances for doubtful accounts for the
receivables from senior officers of $542,000.  The balance of the allowance for
doubtful accounts for receivables from senior officers of $2,473,000 million at
December 31, 2006 is based on a total receivable balance of $2,723,000 less the
estimated value of the collateral.

Interest Income and Expense.

`2006       2005     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Interest income                                 $     719  $     263  $     456      173.4`

`2006       2005     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Interest expense                                $   5,753  $   3,253  $   2,500       76.9`

The increase in interest income in 2006 from 2005 results from higher cash
and cash equivalents investment balances, and higher interest rates earned on
balances during 2006 than in 2005.

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. This was partially offset by the stated
interest on the Notes being lower in 2006 than in 2005 due to a lower average
balance resulting from payments on the Notes.

Gain on Derivative Instruments, Net;

`2006       2005     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Gain on derivative instruments, net             $   1,627  $   5,975  $  (4,348)     (72.8)`

In March 2005, we raised $10 million before issuance costs of $423,000
from the issuance of convertible notes ("March Notes") and warrants to
purchase an aggregate of 462,000 shares of Microvision common stock.  In
December 2005, we raised $10 million before issuance costs of $134,000 from the
issuance of convertible notes ("December Notes"), 838,000 shares of
Microvision common stock and warrants to purchase an aggregate of 1,089,000
shares of Microvision common stock.

The following table summarizes the accounting for our Notes:

`Embedded     Common       Loss on
                                                                                    derivative  stock and   extinguishment
                                                                Notes    Warrants    feature       APIC         of debt        Total
                                                              ---------  ---------  ----------  ----------  ---------------  ---------
March 10, 2005 issuance                                      $   5,395  $   1,650  $    2,955  $       --  $            --  $  10,000
Debt restructuring at July 25, 2005                                         2,295       1,018                       (3,313)        --
Conversion of debt to common stock at October 11, 2005          (1,398)                  (439)      1,837                          --
December 1, 2005 issuance                                        3,667      2,200       1,116       3,017                      10,000
Principal payments on notes                                       (867)                               867                          --
Discount accretion for the year ended December 31, 2005          2,546                                                          2,546
Changes in market value for the year ended December 31, 2005               (2,693)     (3,282)                                 (5,975)
                                                              ---------  ---------  ----------  ----------  ---------------  ---------
Balances at December 31, 2005                                    9,343      3,452       1,368       5,721           (3,313)
Principal payments on notes                                    (11,567)                             1,967                      (9,600)
Discount accretion for the year ended December 31, 2006          4,642                                                          4,642
Changes in market value for the year ended December 31, 2006                 (880)     (1,300)                                 (2,180)
                                                              ---------  ---------  ----------  ----------  ---------------  ---------
Balances at December 31, 2006                                $   2,418  $   2,572  $       68  $    7,688  $        (3,313)
                                                              =========  =========  ==========  ==========  ===============`

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 features at each balance sheet date using the Black-Scholes
option pricing model.  At December 31, 2006, we used the following assumptions:
expected volatilities of 67%; expected dividend yields of 0%; risk free interest
rate of 4.96%; and contractual lives of 2.5 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 short remaining lives, the aggregate
fair value of the embedded derivative instruments decreased to $68,000 at
December 31, 2006.  The change in value of $1,300,000 for 2006 was recorded as a
non-operating gain and is 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 derivative
instruments that must be accounted for as liabilities 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 values of the warrants in the statement of
operations each period.  We valued the warrants at December 31, 2006 using the
Black-Scholes option pricing model with the following assumptions:  expected
volatilities of 67%; expected dividend yields of 0%; risk free interest rates
ranging from 4.72% to 4.90%; and contractual lives ranging from 1.6 years to 3.9
years.  The change in value of the warrants of $880,000 in 2006 was recorded as
a non-operating gain and is included in "Gain on derivative instruments,
net" in the consolidated statement of operations.

In January 2006, we sold 2.6 million shares of Lumera common stock, reduced
our ownership, and changed to the cost basis of accounting for our investment in
Lumera in accordance with FAS 115.  Changes in the fair value of our warrant,
exercisable at $8.80, to purchase 170,500 shares of Lumera common stock
beginning from the January 2006 sale are included in "Gain on derivative
instruments, net" in the consolidated statement of operations each period.
On the transaction date, the warrants were initially 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.  As of December 31, 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 4.7%; and contractual life of 4.2 years.  As of December
31, 2006, the fair value of the warrants increased to $595,000 and the change in
value of $119,000 was recorded as a gain to "Loss on derivative
instruments, net."

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
1,353,000 shares of our common stock, of which 565,000 shares were issued as an
inducement to convert ("Incentive Shares").  In connection with the
conversion, we also agreed to register the Incentive Shares and to provide price
protection on the Incentive Shares.  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.    In August 2006, we determined the final
value and paid the liability of $1,074,000.  The changes in the estimated fair
value of the derivative feature $673,000 was included as a non-operating expense
in "Gain on derivative instruments, net."

Loss on debt extinguishment:

`2006       2005     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Loss on debt extinguishment                     $       0  $  (3,313) $   3,313     (100.0)`

In July 2005, we entered into an agreement to amend the March Notes.  In
connection with the amendment, we issued three year warrants to purchase 750,000
shares of Microvision common stock with an initial exercise price of $6.84 per
share; reduced the conversion price on the March Notes to $5.85 per share and
the price at which we can mandatorily convert the Notes was reduced to $10.24;
and removed the note holders' right to exchange the Notes into Lumera common
stock.  We concluded that the amendment of the March Notes met the criteria of a
debt extinguishment and recorded a charge of $3,313,000 for the change in the
fair value of the debt in July 2005.

Equity in losses of Lumera and Gain on sale of securities of equity
investment

Equity in losses of Lumera:

`2006       2005     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Equity in losses of Lumera                      $    (290) $  (3,242) $   2,952      (91.1)`



Gain on sale of securities of equity investment:

`2006       2005     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Gain on sale of securities of equity investment $   8,738  $   2,700  $   6,038      223.6`

In January 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
investment" 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, $290,000, for the period preceding the sale in January 2006,
compared to the full year in 2005.

As of December 31, 2006, we own 1,750,000 shares, or approximately 8.8% of
Lumera common stock.

Income Taxes.

No provision for income taxes has been recorded because we have experienced
net losses from inception through December 31, 2006.  At December 31, 2006, we
had net operating loss carry-forwards of approximately $198.0 million for
federal income tax reporting purposes.  In addition, we have research and
development tax credits of $2.9 million.  The net operating losses begin
expiring in 2008 if not previously utilized.  In certain circumstances, as
specified in the Internal Revenue Code, a 50% or more ownership change by
certain combinations of our shareholders during any three-year period would
result in a limitation on our ability to utilize a portion of our net operating
loss carry-forwards.  We have determined that such a change of ownership
occurred during 1995 and that the annual utilization of loss carry-forwards
generated through the period of that change will be limited to approximately
$761,000.  An additional change of ownership occurred in 1996 and the annual
limitation for losses generated in 1996 is approximately $1.6 million.

Inducement for Conversion of Preferred Stock

`2006       2005     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Inducement for conversion of preferred stock    $  (3,076) $  (1,184) $  (1,892)     159.8`

In September 2004, we raised $10.0 million before issuance costs of $90,000
from the sale of 10,000 shares of convertible preferred stock and a warrant to
purchase 362,000 shares of common stock.   The preferred stock terms include a
dividend of 3.5% per annum, payable quarterly in cash or registered common
stock, at our election, subject to certain conditions.

The net cash proceeds of $9,910,000 were allocated to the preferred stock and
the warrant based on the relative fair values of the securities.  The warrants
were valued using the Black-Scholes option pricing model with the following
assumptions:  expected volatility, 75%; risk free interest rate, 3.4%, and
contractual life five years.  $1.3 million of the proceeds were allocated to the
warrant and was recorded as an increase to additional paid-in capital.

Subsequent to the relative fair value allocation, the effective conversion
price of the convertible preferred stock was less than the closing price of our
common stock on the date of commitment to purchase the preferred stock,
resulting in the recognition of a beneficial conversion feature in accordance
with Emerging Issues Task Force No 00-27 "Application of Issue No. 98-5 to
Certain Convertible Instruments." This beneficial conversion feature was
measured as $1.2 million, which represents the difference between the fair value
of the common stock and the effective conversion price. This beneficial
conversion feature was recorded to additional paid-in capital and will be
recorded as a deemed dividend to preferred stockholders (accretion) using the
effective interest method, over the stated life of the preferred stock, which is
three years.  During 2005, we recorded $280,000 in dividends on the preferred
stock and $303,000 in accretion of the beneficial conversion feature of the
preferred stock.

In May 2006, we entered into a Conversion Agreement with the holders of our
Series A Convertible Preferred Stock to convert 5,000 shares of Preferred Stock.
As consideration for the conversion, we issued a total of 1,353,066 shares of
our common stock, $.001 par value, of which 565,000 shares were issued as an
inducement to convert ("Incentive Shares").  The value of the
Incentive Shares of $2.0 million together with unamortized discounts of $0.6
million and fees of $0.1 million were recorded as "Inducement for
conversion of preferred stock" in the consolidated statement of operations.

In connection with the conversion, we were required to register the Incentive
Shares.  Under the conversion agreement, we agreed to pay the difference, only
if positive, of $3.62 minus the 45 day trailing volume weighted average price as
of the 45th trading day after the effective date of the required registration
statement with respect to any of the Incentive Shares that were sold by the
holder during the 45 day period or that were held in an economically neutral
position as of the end of the 45 day period.  We determined that 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").  We estimated the initial value of the derivative feature at
conversion to be $401,000 using the Black-Scholes option pricing model with the
following assumptions:  expected volatility 65%, dividend yield of 0%, risk free
interest rate 4.9% and contractual life 0.3 years and recorded it 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 fluctuated with the value of our common
stock and, to a lesser extent, with changes in valuation variables.  In August
2006, the Company determined and recorded the final value and paid the liability
of $1,074,000.  The change in estimated fair value of the derivative feature of
$673,000 was included as a non-operating expense in "Gain on Derivative
instruments, net".  In August 2005, the preferred stock holder agreed to
convert 5,000 shares of our preferred stock into 734,000 shares of common stock.
As an inducement to convert the preferred stock we issued 124,000 shares of our
common stock to the preferred stock holder and adjusted the exercise price from
$8.16 to $6.84 per share for the existing warrants to purchase 362,000 shares of
common stock issued in connection with the original sale of preferred stock.
The total value of the 124,000 common shares issued of $701,000, the change in
the value of the warrants of $62,000 and the amount of unamortized beneficial
conversion feature on the preferred stock of $421,000 was recorded as an
inducement to convert the preferred stock and charged to common shareholders in
2005. The warrants were valued using the Black-Scholes option pricing model with
the following assumption:  expected volatility 65%, risk free interest rate
4.25% and contractual life 4.1 years.

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004

Effect of Lumera on Microvision Results of Operations.

Since 2000, we have held an investment in Lumera.  After the Lumera initial
public offering in July 2004, our ownership dropped to 33%.  As a result of the
change in ownership percentage, Microvision changed the method of accounting for
its investment in Lumera to the equity method and recorded its share of Lumera
income or losses.  Microvision recorded a non-cash change in ownership interest
gain of $13.7 million to stockholders equity as a component of additional paid-in
capital during 2004.  At December 31, 2004 and 2005, Microvision owned 33%
and 28%, respectively, of Lumera's common stock.

Prior to Lumera's initial public offering in July 2004, we were organized
into two segments - Microvision, which is engaged in light scanning and related
technologies, and Lumera, which is engaged in optical systems components
technology.  The segments were determined based on how management viewed and
evaluated our operations.

A portion of each segments' administration expenses arose from shared
services and infrastructure that Microvision had provided to both segments in
order to realize economies of scale and to efficiently use resources.  These
efficiencies include costs of certain legal, accounting, human resources and
other Microvision corporate and infrastructure costs.  These expenses were
allocated to the segments and the allocation was determined on a basis that we
considered to be a reasonable reflection of the utilization of services provided
to, or benefits received by, the segments.

After Lumera's initial public offering in July 2004, Lumera became a
significant unconsolidated equity investment of Microvision. The following table
reflects the results our reportable segments for the year ended December 31,
2004 under our management system.  The performance of each segment was measured
based on several metrics.  Since July 2004, Microvision has operated as one
segment. These results were used, in part, by management, in evaluating the
performance of, and in allocation of resources to, each of the segments (in
thousands):

`Year Ended December 31, 2004
                                                 --------------------------------------------------
                                                 Microvision    Lumera     Elimination     Total
                                                 -----------  -----------  -----------  -----------
Contract Revenue                                $     8,135  $       686  $        --  $     8,821
Product  Revenue                                      2,597           --           --        2,597
Cost of Contract Revenue                              5,106          433           --        5,539
Cost of Product Revenue                               3,868           --           --        3,868
Research and development expense                     13,581        1,129           --       14,710
Marketing, general and administrative expense        17,795        1,433           --       19,228
Non-cash compensation expense                           821        1,297           --        2,118
Interest income                                         270            2           --          272
Interest expense                                         31          120           --          151
Segment loss                                         32,257        3,724       (2,438)      33,543
Depreciation                                          1,711          695           --        2,406
Expenditures for capital assets                         970           70           --        1,040
Segment assets                                       25,538           --           --       25,538`

Contract  Revenue.

`% of                  % of
                                                            contract              contract
                                                   2005      revenue     2004      revenue   $ change   % change
                                                 ---------  ---------  ---------  ---------  ---------  ---------
Government revenue                              $   5,209       45.7  $   4,841       54.9  $     368        7.6
Commercial revenue                                  6,177       54.3      3,980       45.1      2,197       55.2
                                                 ---------             ---------             ---------
Total contract revenue                          $  11,386             $   8,821             $   2,565       29.1
                                                 =========             =========             =========`

In June 2005, we entered into a12 month $4.4 million contract with General
Dynamics C4 Systems to continue the development of a helmet-mounted display for
the Air Warrior Block 3 system.  General Dynamics is under contract with the
U.S. Army's Product Manager -- Air Warrior in Huntsville, Ala., to develop and
integrate the Air Warrior Block 3 system.   Our helmet-mounted display is being
designed as a full-color, see-through, daylight and night-readable, high-resolution display.

We had a contract revenue backlog of $2.8 million at December 31, 2005

Product Revenue.

`% of                  % of
                                                             product               product
                                                   2005      revenue     2004      revenue   $ change   % change
                                                 ---------  ---------  ---------  ---------  ---------  ---------
Flic revenue                                    $   1,570       46.7  $   1,732       66.7  $    (162)      (9.4)
Nomad revenue                                       1,790       53.3        865       33.3        925      106.9
                                                 ---------             ---------             ---------
Total product revenue                           $   3,360             $   2,597             $     763       29.4
                                                 =========             =========             =========`

Revenue on sales of the Flic product declined in 2005 from 2004 due to fewer
units sold.  During 2005, we completed the sale of 165 Nomad units totaling $1.2
million to General Dynamics.

We had a product revenue backlog of $579,000 at December 31, 2005.

Cost of Contract Revenue.

`% of                  % of
                                                            contract              contract
                                                   2005      revenue     2004      revenue   $ change   % change
                                                 ---------  ---------  ---------  ---------  ---------  ---------
Cost of contract revenue                        $   6,456       56.7  $   5,539       62.8  $     917       16.6`

On a percentage of contract revenue bases, cost of contract revenue decreased
to 57% from 63% in 2004.  The change in cost of contract revenue percentage is
primarily attributable to changes in the contract costs mix.  Total direct costs
in 2005 increased approximately 23% from 2004.  The direct labor cost portion of
direct cost increased by approximately 8% from 2004.  The increase in direct
labor cost resulted from a higher volume of contract work performed during 2005
compared to 2004.

Cost of Product Revenue.

`% of                  % of
                                                             product               product
                                                   2005      revenue     2004      revenue   $ change   % change
                                                 ---------  ---------  ---------  ---------  ---------  ---------
Cost of product revenue                         $   8,636      257.0  $   3,868      148.9  $   4,768      123.3`

Our costs to produce Nomad units during 2005 were substantially higher than
product revenue.  Until October 2004, we classified production cost in excess of
product revenue as research and development expense.  In October 2004, we
determined that Nomad production and manufacturing processes were sufficiently
mature to support "commercial production" as described in SFAS No. 2
"Accounting for Research and Development Costs".  As a result of this
determination we began full absorption of manufacturing overhead cost.

Cost of product revenue in 2005 includes the write off of $3.0 million of
Nomad inventory and $700,000 of Flic inventory.  The write-off's were due to
changes in product design and customer demand that caused components and
accessories to become obsolete or excess to forecasted demand.

Research and Development Expense.

`2005       2004     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Research and development                        $   6,587  $  15,257  $  (8,670)     (56.8)`

Research and development expense in 2004 included approximately $4.3 million
in manufacturing overhead associated with Nomad production.

Research and development expense attributable to Lumera was $0 in 2005
compared to $1.1 million in 2004.  The decrease in research and development
expense attributable to Lumera accounts for 14% of the decrease in consolidated
research and development expense.

We allocate research and development resources to customer funded projects
and internally funded projects based on management's determination of customer
requirements, product development requirement, and the availability of research
and development resources to meet project objectives.  During 2005 we allocated
$917,000 more resources to customer funded projects than in 2004.

Sales, Marketing, General and Administrative Expense.

`2005       2004     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Sales, marketing, general and administrative    $  20,352  $  20,798  $    (446)      (2.1)`

The decrease in sales, marketing, general and administrative expense is due
to lower non-cash compensation expense.  Non-cash compensation expense includes
the amortization of the value of stock options granted to individuals who are
not employees or directors of the Company for services provided to the Company
as well as employee stock based compensation expenses.  Non-cash compensation
expense decreased by $1.7 million to $429,000 in 2005, from $2.1 million in
2004.

The decrease in non-cash compensation expenses was offset by the increase in
sales and marketing activity related to Nomad and Flic sales.  We added sales
staff, demonstration equipment and promotion materials to support increased
sales of Nomad and Flic.

In 2000, the Board of Directors authorized Microvision to provide unsecured
lines of credit to each of its three senior officers.  One of the officers
pledged 50,000 shares of Lumera common stock as collateral for the loans.  No
loans have been made under either Microvision's Executive Option Exercise Note
Plan or the Executive Loan Plan since July 2002, and we do not intend to make
any additional loans under these plans.  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.

In 2005, we determined that certain of our senior officers may have had
insufficient net worth and short-term earnings potential to repay their
outstanding loans.  As a result, we recorded additional allowances for doubtful
accounts for the receivables from senior officers of $1,031,000.  The balance of
the allowance for doubtful accounts for receivables from senior officers was
$1.9 million at December 31, 2005.  Two of the officers left the Company in
January 2006.  In accordance with the terms, the due dates of the loans were set
in January 2007.

Interest Income and Expense.

`2005       2004     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Interest income                                 $     263  $     272  $      (9)      (3.3)`

`2005       2004     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Interest expense                                $   3,253  $     151  $   3,102    2,054.3`

In March 2005, we raised $10 million before issuance costs of $423,000 from
the issuance of convertible notes ("March Notes") and warrants to
purchase an aggregate of 462,000 shares of Microvision common stock.  In
December 2005, we raised $10 million before issuance costs of $134,000 from the
issuance of convertible notes ("December Notes"), 838,000 shares of
Microvision common stock and warrants to purchase an aggregate of 1,089,000
shares of Microvision common stock.  This increase in interest expense relates
to the stated interest on the March Notes and December Notes, (together
"the Notes") as well as the amortization of the discount recorded on
the Notes due to the warrants and embedded derivative feature of the Notes.

Gain on Derivative Instruments, Net.

The following table shows the gain on derivative instruments, net:

`2005       2004     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Gain on derivative instruments, net             $   5,975  $       0  $   5,975      N/A`

In connection with the issuance of our March Notes, we concluded that the
note holders' right to convert all or a portion of the notes into Microvision or
Lumera common stock is an embedded derivative instrument as defined by FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. Accordingly, $2,955,000 of the cash proceeds were allocated to
the embedded derivative instrument, which represents the fair value of the
instrument on the date of issuance.  The derivative instrument was valued using
the higher of the Microvision or Lumera conversion feature.  The value was
determined 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 4.62%; and contractual life of six months to two years,
which corresponds to the principal repayment dates.  Due to change in the stock
price and remaining life, the fair value of the embedded derivative instrument
decreased to $2,463,000 at July 25, 2005, the date of the extinguishment as
discussed below.  The change in value of $492,000 for the period from issuance
to July 25, 2005 was recorded as a non-operating gain and is included in
"Gain on derivative instruments, net" in the consolidated statement of
operations.

We issued warrants to purchase 462,000 shares of common stock in connection
with the issuance of the March Notes.  The warrants vested on the date of grant,
have an initial exercise price of $6.84 per share and expire in March 2010.  The
initial exercise price is subject to adjustment in the event we issue common
stock or common stock equivalents at a price per share of common stock below the
exercise price of the warrant.  Under the terms of the restructuring of the
notes in July 2005, we issued three year warrants to purchase 750,000 shares of
Microvision common stock at an initial exercise price of $6.84.  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.  Accordingly, $1,651,000 of the cash proceeds
were allocated to the original warrants and an additional $2,295,000 was
allocated to the warrant issued in July 2005.  These amounts which represent the
fair value of the warrants on the date of issuance have been included in current
liabilities.  Subsequent changes in the fair value of the warrants will be
recorded in the statement of operations each period. As of December 31, 2005,
the warrants were valued using the Black-Scholes option pricing model with the
following assumptions:  expected volatilities of 65% and 58%; expected dividend
yield of 0%; risk free interest rates ranging from 4.36% to 4.39%; and
contractual lives of 4.2 years and 2.6 years.  The change in value of the
warrants of $2,671,000 for the year ended December 31, 2005 was recorded as a
non-operating gain and is included in "Gain on derivative instruments,
net" in the consolidated statement of operations.

The amended conversion feature described above continued to meet the
definition of a derivative under FAS 133 and accordingly was recorded at fair
value at issuance and included within long term liabilities.  The carrying
amount of the derivative was adjusted to fair value at each balance sheet date.
The derivative feature was valued at $331,000 at December 31, 2005 and a gain of
$3,151,000 was recorded from issuance to December 31, 2005.

In connection with the issuance of the December Notes, we concluded that the
note holders' right to convert all or a portion of the notes into Microvision
common stock is an embedded derivative instrument as defined by FASB Statement
No. 133, $1.1 million of the cash proceeds were allocated to the embedded
derivative instrument, which represents the fair value of the instrument on the
date of issuance.  The value of the derivative feature was determined using the
Black-Scholes option pricing model with the following assumptions: expected
volatility of 58%; expected dividend yield of 0%; risk free interest rates
ranging from 4.01% to 4.39%; and contractual life of four to sixteen months,
which corresponds to the principal repayment dates.  Due to change in the stock
price and remaining life, the fair value of the embedded derivative instrument
decreased to $1,038,000 at December 31, 2005.  The change in value of $78,000
was recorded as a non-operating gain and is included in "Gain on derivative
instruments, net" in the consolidated statement of operations.

We issued warrants to purchase 1,089,000 shares of common stock in connection
with the issuance of the December Notes.  The warrants vested on the date of
grant, have an initial exercise price of $3.94 per share and expire in December
2010.  The initial exercise price is subject to adjustment in the event we issue
common stock or common stock equivalents at a price per share of common stock
below the exercise price of the warrant.  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 it makes a cash payment to the
holders of the warrants.  Accordingly, $2.2 million of the cash proceeds were
allocated to the original warrants which represent the fair value of the
warrants on the date of issuance, and the amount was recorded as a current
liability.  Subsequent changes in the fair value of the warrants will be
recorded in the statement of operations each period.  As of December 31, 2005,
the warrants were valued 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 4.35%; and contractual life of five years.  The
change in value of $22,000 was recorded as a non-operating gain and is included
in "Gain on derivative instruments, net" in the consolidated statement
of operations.

Loss on debt extinguishment.

`2005       2004     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Loss on debt extinguishment                     $  (3,313) $       0  $  (3,313)     N/A`

In July 2005, we entered into an agreement to amend the March Notes.  In
connection with the amendment, we issued three year warrants to purchase 750,000
shares of Microvision common stock with an initial exercise price of $6.84 per
share.   The conversion price of the amended notes and exercise price of the
warrants are subject to anti-dilution adjustments.  In addition, the price at
which the note holder can convert the March Notes into our common stock was
reduced to $5.85 per share, and the price at which we can mandatorily convert
the March Notes into our common stock was reduced to $10.24.  We have pledged
1,750,000 shares of our Lumera common stock as collateral for the March and
December Notes.  As a result of the amendment, the amended notes are no longer
exchangeable into Lumera common stock.

We concluded that the amendment of the March Notes met the criteria of a debt
extinguishment and recorded a charge of $3,313,000 for the change in the fair
value of the debt in July 2005.  The charge was measured as the value of the
additional warrants that were issued to the note holders and the fair value of
the reduced price at which the debt could be converted into our common stock.
The additional warrants were initially valued on the amendment date at
$2,295,000 using the Black-Scholes option pricing model with the following
assumptions:  expected volatility of 75%; expected dividend yield of 0%; risk
free interest rate of 3.66%; and contractual life of three years.  The valuation
of the reduction in the conversion price was estimated on the amendment date at
$1,018,000 using the Black-Scholes option pricing model with the following
assumptions:  expected volatility of 75%; expected dividend yield of 0%; risk
free interest rates ranging from 3.25% to 3.58%; and contractual life equal to
the length of the option.

Equity in losses of Lumera.

`2005       2004     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Equity in losses of Lumera                      $  (3,242) $  (1,711) $  (1,531)      89.5`

In July 2004, Lumera completed an initial public offering of its common
stock.  In connection with the offering, all Lumera Series A and Series B
Preferred Stock was converted to Lumera common stock.  Immediately after the
offering, we owned 5,434,000 shares, or 33%, of the common stock of Lumera.  As
a result of the change in ownership percentage, we changed the method of
accounting for our investment in Lumera to the equity method.  Under the equity
method, we recorded our ownership interest in the net book value of Lumera
immediately following the initial public offering as an investment in equity
method subsidiary of $11.9 million.  We record our pro rata share of Lumera's
income or loss as an adjustment in the value of our investment in Lumera.  Our
share in Lumera's losses was $3.2 million for the year ended December 31, 2005
and $1.7 million for the period from July 2004 to December 31, 2004.

Gain on sale of securities of equity investment.

`2005       2004     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Gain on sale of securities of equity investment $   2,700  $       0  $   2,700      N/A`

During 2005, we sold 812,000 shares of its Lumera common stock at prices
between $4.04 and $5.00 per share.  The total proceeds from the sales were
$3,893,000.  The sales prices were higher than the average carrying value of the
shares and we recognized a gain of $2.7 million in 2005.

Income Taxes.

At December 31, 2005, we had net operating loss carry-forwards of
approximately $191.0 million for federal income tax reporting purposes.  In
addition, we had research and development tax credits of $2.6 million.

Inducement for Conversion of Preferred Stock.

`2005       2004     $ change   % change
                                                 ---------  ---------  ---------  ---------                      
Inducement for conversion of preferred stock    $  (1,184) $       0  $  (1,184)     N/A`

In September 2004, we raised $10.0 million before issuance costs of $90,000
from the sale of 10,000 shares of convertible preferred stock and a warrant to
purchase 362,000 shares of common stock.   The preferred stock terms include a
dividend of 3.5% per annum, payable quarterly in cash or registered common
stock, at our election, subject to certain conditions.

The net cash proceeds of $9,910,000 were allocated to the preferred stock and
the warrant based on the relative fair values of the securities.  The warrants
were valued using the Black-Scholes option pricing model with the following
assumptions:  expected volatility, 75%; risk free interest rate, 3.4%, and
contractual life five years.  $1.3 million of the proceeds were allocated to the
warrant and was recorded as an increase to additional paid-in capital.

Subsequent to the relative fair value allocation, the effective conversion
price of the convertible preferred stock was less than the closing price of our
common stock on the date of commitment to purchase the preferred stock,
resulting in the recognition of a beneficial conversion feature in accordance
with Emerging Issues Task Force No 00-27 "Application of Issue No. 98-5 to
Certain Convertible Instruments."  This beneficial conversion feature was
measured as $1.2 million, which represents the difference between the fair value
of the common stock and the effective conversion price.  This beneficial
conversion feature was recorded to additional paid-in capital and will be
recorded as a deemed dividend to preferred stockholders (accretion) using the
effective interest method, over the stated life of the preferred stock, which is
three years.  During 2005, we recorded $280,000 in dividends on the preferred
stock and $303,000 in accretion of the beneficial conversion feature of the
preferred stock.

In August 2005, the preferred stock holder agreed to convert 5,000 shares of
our preferred stock into 734,000 shares of common stock.  As an inducement to
convert the preferred stock we issued 124,000 shares of our common stock to the
preferred stock holder and adjusted the exercise price from $8.16 to $6.84 per
share for the existing warrants to purchase 362,000 shares of common stock
issued in connection with the original sale of preferred stock.  The total value
of the 124,000 common shares issued of $701,000, the change in the value of the
warrants of $62,000 and the amount of unamortized beneficial conversion feature
on the preferred stock of $421,000 was recorded as an inducement to convert the
preferred stock and charged to common shareholders in 2005.  The warrants were
valued using the Black-Scholes option pricing model with the following
assumption:  expected volatility 65%, risk free interest rate 4.25% and
contractual life 4.1 years.

Liquidity and Capital Resources

We have incurred significant losses since inception.  We have funded
operations to date primarily through the sale of common stock, convertible
preferred stock, warrants, the issuance of convertible debt and, to a lesser
extent, from development contract revenues and product sales.  At December 31,
2006, we had $14.6 million in cash and cash equivalents.  We own 1,750,000
shares of Lumera common stock which are pledged as collateral for the
convertible notes.  The final payments on the notes are due March 15, 2007.
After we repay the notes in full, the pledged shares are released to us and
become eligible for sale.  Based on the March 1, 2007 closing price of $4.28,
the pledged Lumera shares have a market value of approximately $7.5 million.
The market price of Lumera's common stock is subject to fluctuations based on
Lumera's financial performance, published accomplishments and overall market
conditions.  During the 90 calendar day period ended March 1, 2007, Lumera
common stock has traded between $4.06 and $10.35.  We believe that the
combination of cash, cash equivalents and Lumera common stock will satisfy our
budgeted cash requirements through 2007.  Based on our

Cash used in operating activities totaled $27.1 million during 2006, compared
to $19.7 million during 2005.

We had the following material gains and charges, and changes in assets and
liabilities during the year ended December 31, 2006.

- "Non cash interest expense, net"

- "Derivative feature of notes payable"

- "Allowance for receivables from related parties"

Two of the three officers with outstanding loans left Microvision in January
2006.  In accordance with the terms, the loans were due in January 2007.
Neither of the officers has repaid their loans.  One of the officers pledged
50,000 shares of Lumera common stock as collateral for the loans.  We are
pursuing collection of the outstanding balances.  As a result of our review of
the financial position of the former executives and the potential difficulty in
collecting loans from former employees we have recorded additional allowances
for doubtful accounts for the receivables from senior officers of $542,000
during 2006.  With this adjustment in 2006, the allowance for receivables from
related parties of $2,473,000 is based on a total receivable balance of
$2,723,000 less the estimated value of the collateral.

- "Equity losses in Lumera" and "Gain on sale
of securities of equity investment" Until January 2006, we accounted
for our investment in Lumera using the equity method.  We recorded our pro rata
share of Lumera's income or loss as an adjustment in the value of our investment
in Lumera.  Our share in Lumera's losses was $290,000 and $3.2 million for the
years ended December 31, 2006 and December 31, 2005, respectively.

In January 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
investment" 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.

During 2005, we sold 812,000 shares of our Lumera common stock at prices
between $4.04 and $5.00 per share for total proceeds of $3,893,000.  The
aggregate carrying value of the shares sold in 2005 was $1,192,000 resulting in
a gain of $2,700,000.



- "Inventory"

`December 31,
                                                                   ------------------------
                                                                      2006         2005
                                                                   -----------  -----------
Raw materials                                                     $   146,000  $   267,000
Work in process                                                            --      141,000
Finished goods                                                        897,000      351,000
                                                                   -----------  -----------
                                                                  $ 1,043,000  $   759,000
                                                                   ===========  ===========`

Cash provided by investing activities totaled $11.8 million in 2006 compared
to $1.0 million in 2005.  During 2006 and 2005, we had no net purchases of
investment securities.  The proceeds from the sales of investment securities
were used to fund our operations.

We used cash of $2.2 million for capital expenditures in 2006, compared to
$1.2 million 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.

Cash provided by financing activities totaled $23.0 million in 2006, compared
to $24.3 million in 2005.  The following is a list of payments made on our March
and December 2005 Convertible Notes during 2006 and 2005.

In May 2006, we entered into a Conversion Agreement with the holders of our
Series A Convertible Preferred Stock to convert 5,000 shares of Preferred Stock.
As consideration for the conversion, we issued a total of 1,353,066 shares of
our common stock, $.001 par value, of which 565,000 shares were issued as an
inducement to convert ("Incentive Shares").  In connection with the
conversion, we were required to register the Incentive Shares.  Under the
conversion agreement, we agreed to pay the difference, only if positive, of
$3.62 minus the 45 day trailing volume weighted average price as of the 45th
trading day after the effective date of the required registration statement with
respect to any of the Incentive Shares that were sold by the holder during the
45 day period or that were held in an economically neutral position as of the
end of the 45 day period.

We determined that 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").  We recorded the estimated initial
value of the derivative feature at conversion of $401,000 as a non-operating
expense included in "Gain on derivative instruments, net."  In August
2006, the Company determined and recorded the final value and paid the liability
of $1,074,000.

The following is a list of scheduled payments we made in connection with our
March and December 2005 convertible notes during 2006 and 2005.

- During 2006:
- During 2005:

The following is a list of securities issuances during 2006 and 2005.

- In June and July 2006, the Company raised an aggregate of $27.1 million
before issuance cost of $2.2 million through an underwritten public offering of
11.6 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 November 2006, we raised $7.9 million before issuance costs of $779,000
through an underwritten public offering of 3,318,000 shares of our common stock.

- In March 2005, we raised $10.0 million, before issuance costs of $423,000,
from the issuance of convertible notes ("March Notes") and warrants to
purchase an aggregate of 462,000 shares of Microvision common stock.  The March
Notes are convertible on demand by the holders into Microvision common stock,
had an initial conversion price of $6.84 per share of Microvision common stock,
and were convertible into Lumera common stock held by us at an initial
conversion price of $5.64 per share up to a limit of 1,750,000 shares of Lumera
common stock.  The March Notes were amended in July 2005 and the holders' right
to exchange the March Notes into shares of Lumera common stock was
removed.

In December 2005, we raised $10.0 million, before issuance costs of $134,000,
from the issuance of convertible notes ("December Notes") 838,000
shares of common stock and warrants to purchase an aggregate of 1,089,000 shares
of Microvision common stock.  The December Notes are convertible on demand by
the holders into Microvision common stock at an initial conversion price of
$3.94 per share.

The holders of the March and December notes (together the "Notes")
may convert all or a portion of their notes.  The initial conversion price is
subject to adjustment in the event we issue common stock or common stock
equivalents at a price per share of common stock below the conversion price of
the Notes.  In addition, upon the request of the note holders, we are required
to redeem the Notes for cash upon a change of control or an event of default at
a redemption price equal to 125% of the then outstanding balance of the notes.
We have pledged 1,750,000 shares of our Lumera common stock as collateral for
the Notes, described above.  The pledged Lumera shares have been classified as a
"Current restricted investments" on our consolidated balance
sheet.

The terms of the March and December Notes include interest at LIBOR plus 3.0%
payable quarterly in cash or Microvision common stock, at our election, subject
to certain conditions.  For both Notes, in no case shall the interest rate be
less than 6.0% or greater than 8.0%.  At December 31, 2006, the interest rate
was 8%.  If we choose to pay interest in Microvision common stock instead of
cash, the interest conversion price will be based on 92% of the arithmetic
average of the volume weighted average prices for the 10 trading days prior to
the payment date.  Additionally, in order to pay interest on the December Notes
in Microvision stock, our stock price must be greater than $4.06.

The March Notes are payable in six equal quarterly installments beginning in
December 2005. The December Notes are payable in five equal quarterly
installments beginning in March 2006.  For both Notes, if we choose to pay
principal in Microvision common stock instead of cash, the principal conversion
price will be based on 90% of the arithmetic average of the volume weighted
average prices for the 15 trading days prior to the payment date.  Additionally,
in order to pay principal on the December Notes in Microvision stock, our stock
price must be greater than $4.06.

We concluded that the note holders' rights to convert all or a portion of the
March and December Notes into our common stock are embedded derivative
instruments as defined by FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133").  Accordingly, $3.0 million
of the cash proceeds from the March Notes and $1.1 million of the cash proceeds
from the December Notes were allocated to the embedded derivative instruments,
which represent the fair values of the instruments on the dates of issuance.
The initial values were estimated using the Black-Scholes option pricing model
with the following assumptions:  expected volatilities of 83% and 58%
respectively; expected dividend yields of 0%; risk free interest rates of 4.01%
to 4.62%; and contractual lives of four months to two years, which correspond to
the principal repayment dates.  Due to changes in our stock price and remaining
contractual lives, the fair values of the embedded derivative features decreased
to $68,000 and $1,368,000 at December 31, 2006 and 2005, respectively.  The
change in value of $1,300,000 and $1,587,000 for the years ended December 31,
2006 and 2005, respectively, was recorded as a non-operating gain and included
in "Gain on derivative instruments, net" in the consolidated statement
of operations.

In connection with the July 2005 amendment, we issued three year warrants to
purchase 750,000 shares of Microvision common stock at an exercise price of
$6.84 per share.  The conversion price of the amended Notes and exercise price
of the warrants are subject to anti-dilution adjustments, subject to conditions.
In addition, the price at which the Note holders can convert the Notes to
Microvision common stock was reduced to $5.85 per share, and the price at which
we can mandatorily convert the Notes to Microvision common stock was reduced to
$10.24.

We concluded that the July 2005 amendment of the March Notes met the criteria
of a debt extinguishment.  We recorded a non cash charge of $3,313,000 for the
change in the fair value of the debt and related consideration.  The change in
the value was measured as the value of the additional warrants that were issued
to the note holders and the change in the price at which the debt could be
converted into our common stock.  The additional warrants were valued using the
Black-Scholes option pricing model with the following assumptions:  expected
volatilities of 75%; expected dividend yields of 0%; risk free interest rates of
3.66%; and contractual lives of three years.  The additional warrants were
initially valued at $2,295,000.  The change in the note conversion feature was
valued using the Black-Scholes option pricing model with the following
assumptions:  expected volatilities of 75%; expected dividend yields of 0%; risk
free interest rates ranging from 3.25% to 3.58% and contractual lives of .4
years to 1.6 years, which corresponds to the principal repayment dates.  The
change in the conversion price was valued at $1,018,000.

The amended conversion feature continued to meet the definition of a
derivative under FAS 133 and, accordingly, was recorded at fair value and
adjusted to fair value at each balance sheet date.  An adjustment of $323,000
and $3,151,000 was recorded during the years ended December 31, 2006 and 2005,
respectively.

The five year warrants granted with the March and December Notes vested on
the date of grant, have exercise prices of $6.84 and $3.94, respectively, per
share of common stock.  The initial exercise price of each warrant is subject to
adjustment in the event we issue common stock or common stock equivalents at a
price per share of common stock below the exercise price of the warrant.  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.  Accordingly, $1.7 million and $2.2
million, or the cash proceeds from the March and December Notes, respectively,
were allocated to the warrants, which represents the fair values of the warrants
on the dates of issuance and the amounts were recorded as current liabilities.
Subsequent changes in the fair values of the warrants are recorded in the
statement of operations each period.  The combined liability for the initial
warrant and additional warrant associated with the March Notes and those
associated with the December Notes was valued at $2,572,000 and $3,452,000 at
December 31, 2006 and 2005, respectively.  The combined adjustments in value
were$880,000 and $2,693,000 for the years ended December 31, 2006 and 2005,
respectively.  The warrants issued with the March and December Notes were valued
using the Black-Scholes option pricing model with the following assumptions:
expected volatilities of 67% and 58% to 65%, respectively; expected dividend
yields of 0%; risk free interest rates of 4.72% to 4.90%, and 4.35% to 4.39%,
and contractual lives of 1.6 to 3.9 years and 2.6 to 4.9 years, respectively.

- In August and September 2005, we raised $7.0 million before issuance costs
through the sale of 1,333,000 shares of our common stock at a price of $5.25 per
share and five-year warrants to purchase a total of 301,000 shares of our common
stock at a price of $6.50 to a holder of the Company's preferred stock and new
investors.

We may also raise cash through future sales of our preferred or common stock,
issuance of debt securities or other borrowings.  Should expenses exceed the
amounts budgeted, we may require additional cash earlier than expected to
further the development of our technology, for expenses associated with product
development, and to respond to competitive pressures or to meet unanticipated
development difficulties.  The operating plan also provides for the development
of strategic relationships with systems and equipment manufacturers that may
require additional investments.  There can be no assurance that additional
financing will be available to us or that, if available, it will be available on
acceptable terms on a timely basis.  If adequate funds are not available to
satisfy either short-term or long-term capital requirements or planned revenues
are not generated, that we may be required to limit its operations
substantially.  This limitation of operations may include reductions in staff
and discretionary costs, which may include non-contractual research costs.  Our
cash 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 our technology and the
market acceptance and competitive position of such products.

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.

In order to maintain our exclusive rights under our license agreement with
the University of Washington, we are obligated to make royalty payments to the
University of Washington with respect to the Virtual Retinal Display technology.
If we are successful in establishing original equipment manufacturer co-
development and joint venture arrangements, we expect our partners to fund
certain non-recurring engineering costs for technology development and/or for
product development.  Nevertheless, we expect our cash requirements to remain
high as we expand our activities and operations with the objective of
commercializing the light scanning technology.

The following table lists our contractual obligations (in thousands):

`December 31,
                                               -----------------------------------------------------------------
                                                 2007       2008       2009       2010       2011     After 2011    Total
                                               ---------  ---------  ---------  ---------  ---------  ----------  ---------
Contractual Obligations:                                                                                                   
Open purchase orders *                        $   2,156  $      --  $      --  $      --  $      --  $       --  $   2,156
Minimum payments under senior secured
  convertable notes including interest            2,767         --         --         --         --          --      2,767
Minimum payments under capital leases                60         55         33         27         20          --        195
Minimum payments under operating leases             856        882        882        911        945       1,585      6,061
Minimum payments under research, royalty
 and licensing agreements+                          390        215        215        175        350          --      1,345
                                               ---------  ---------  ---------  ---------  ---------  ----------  ---------
    Total                                     $   6,229  $   1,152  $   1,130  $   1,113  $   1,315  $    1,585  $  12,524
                                               =========  =========  =========  =========  =========  ==========  =========`

*	Open purchase orders represent commitments to purchase inventory,
materials, capital equipment and other goods used in the normal course of the Company's business.

+	License and royalty obligations continue through the lives of the
underlying patents, which is currently through at least 2017.

New 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 Statements 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.

In July 2006, FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
109" ("FIN 48").  FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with FASB Statement No. 109, Accounting for Income Taxes.  FIN 48
also prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return.  The new FASB standard also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition.  The provisions of FIN 48 are to be
applied to all tax positions upon initial adoption of the standard.  FIN 48 is
effective for fiscal years beginning after December 15, 2006.  We are currently
assessing the guidance in FIN 48 and the potential impacts it may have on us in
relation to deferred taxes and taxes payable.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB 108 requires an analysis of misstatements using both an income
statement (rollover approach) and a balance sheet (iron curtain) approach in
assessing materiality. An adjustment to the financial statements must be made if
either approach considers the misstatement to be material. SAB 108 is effective
for fiscal years ending after November 15, 2006.  The Company's results of
operations and financial position were not affected by the adoption of SAB
108.

Subsequent Events

At a special meeting of shareholders of Microvision, Inc. on January 18,
2007, shareholders approved an amendment to our Certificate of Incorporation to
increase the number of authorized shares of common stock from 73.0 million
shares to 125.0 million shares.  The newly authorized shares or common stock
have the same rights as the previously authorized shares, including the right to
cast one vote per share of common stock.

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Substantially all of our cash equivalents and investment securities have
variable interest rates and, as such, the fair values of the principal of these
instruments are not 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 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.

The maturities of cash equivalents and investment securities, available-for-
sale, as of December 31, 2006, are as follows:

`Amount      Percent
                                          ------------  ---------  
Cash and cash equivalents                $ 14,552,000      100.0 %
Less than one year                                 --         --
                                          ------------  ---------
                                         $ 14,552,000      100.0 %
                                          ============  =========`

All of the Company's development contract payments are made in U.S. dollars.
However, in the future the Company may enter into additional development
contracts in foreign currencies that may subject the Company to foreign exchange
rate risk.  The Company intends to enter into foreign currency hedges to offset
the exposure to currency fluctuations when it can determine the timing and
amounts of the foreign currency exposure.

Cash and cash equivalents were $14.6 million as of December 31, 2006.

We own 1,750,000 million shares of Lumera common stock which are pledged as
collateral for the convertible notes.  The final payments on the notes are due
March 15, 2007.  After we repay the notes in full, the pledged shares are
released to us and become eligible for sale.  Based on the March 1, 2007 closing
price of $4.28, the pledged Lumera shares have a market value of approximately
$7.5 million.  The market price of Lumera's common stock is subject to
fluctuations based on Lumera's financial performance, published accomplishments
and overall market conditions.  During the 90 calendar day period ended March 1,
2007, Lumera common stock has traded between $4.06 and $10.35.  We own
approximately 8.8% of Lumera's common stock.  Since we hold a large percentage
of Lumera's common stock, if an active market does not develop or is not
sustained, it may be difficult to sell the shares of Lumera's common stock at an
attractive price or at all.  The likelihood of Lumera's success, and the value
of our common stock, must be considered in light of the risks frequently
encountered by early stage companies, especially those formed to develop and
market new technologies.  These risks include Lumera's potential inability to
establish product sales and marketing capabilities; to establish and maintain
markets for their potential products; and to continue to develop and upgrade
their technologies to keep pace with changes in technology and the growth of
markets using polymer materials.  If Lumera is unsuccessful in meeting these
challenges, its stock price, and the value of our investment, could
decrease.

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                                                                     | Page
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|Report of Independent Registered Public Accounting Firm                                                                                                              | XX  
|                                                                                                                                                                     |     
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                                                                                         | XX  
|                                                                                                                                                                     |     
|Consolidated Statements of
Operations for the years ended December 31, 2006, 2005 and 2004                                                                           | XX  
|                                                                                                                                                                     |     
|Consolidated Statements of Mandatory Redeemable Convertible
Preferred Stock and Shareholders' Equity (Deficit)  for the years ended December
31, 2006, 2005 and 2004 | XX  
|                                                                                                                                                                     |     
|Consolidated Statements
of Comprehensive Loss for the years ended December 31, 2006, 2005 and
2004                                                                   | XX  
|                                                                                                                                                                     |     
|Consolidated  Statements of
Cash Flows for the years ended December 31, 2006, 2005 and 2004                                                                          | XX  
|                                                                                                                                                                     |     
|Notes to Consolidated
Financial Statements                                                                                                                           | XX  
|                                                                                                                                                                     |     
|Valuation and Qualifying
Accounts and Reserves                                                                                                                       | XX  

---

Report of Independent Registered Public
Accounting Firm

To the Board of Directors
  and Shareholders of Microvision, Inc.:

We have completed integrated audits of Microvision, Inc.'s consolidated
financial statements and of its internal control over financial reporting as of
December 31, 2006, in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Our opinions, based on our audits,
are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Microvision, Inc. and its subsidiary at December 31, 2006 and
December 31, 2005, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of America.  In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidatedfinancial statements.  These financial statements and financial statement
scheduleare the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements and
financial statement schedulebased on our audits.  We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 13 to the financial statements, during the year ended
December 31, 2006, the Company changed the manner in which it accounts for stock
compensation costs.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2006 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal Control -
Integrated Framework issued by the COSO.  The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting.  Our responsibility is to express opinions on management's assessment
and on the effectiveness of the Company's internal control over financial
reporting based on our audit. We conducted our audit of internal control over
financial reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances.  We believe that our
audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company's internal control
over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements.  Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP

Seattle, Washington
   March 14, 2007

---





Microvision, Inc.
                           Consolidated Balance Sheets
                    (in thousands, except per share amounts)

`December 31,
                                                                                       ----------------------
                                                                                          2006        2005
                                                                                       ----------  ----------
Assets                                                                                                       
Current assets
  Cash and cash equivalents                                                           $   14,552  $    6,860
  Accounts receivable, net of allowances of $216 and $264                                  1,166       1,380
  Costs and estimated earnings in excess of billings on uncompleted contracts                565       1,204
  Inventory                                                                                1,043         759
  Current restricted investments                                                              --       1,856
  Current restricted investment in Lumera                                                 10,693          --
  Other current assets                                                                     1,986       1,512
                                                                                       ----------  ----------
    Total current assets                                                                  30,005      13,571

  Investment in Lumera                                                                        --       3,582
  Property and equipment, net                                                              4,011       2,902
  Restricted investments                                                                   1,268       1,000
  Restricted investment in Lumera                                                             --       2,184
  Other assets                                                                                41         124
                                                                                       ----------  ----------
      Total assets                                                                    $   35,325  $   23,363
                                                                                       ==========  ==========

Liabilities, Mandatorily Redeemable Convertible Preferred Stock and Shareholders' Equity (Deficit)           
Current liabilities
  Accounts payable                                                                    $    1,785  $    2,328
  Accrued liabilities                                                                      3,698       4,513
  Billings in excess of costs and estimated earnings on uncompleted contracts                200          51
  Liability associated with common stock warrants                                          2,572       3,452
  Liability associated with embedded derivative feature                                       68          --
  Current portion of notes payable                                                         2,418       7,896
  Current portion of capital lease obligations                                                45          32
  Current portion of long-term debt                                                           59          22
                                                                                       ----------  ----------
    Total current liabilities                                                             10,845      18,294

  Notes payable, net of current portion                                                       --       1,447
  Liability associated with embedded derivative feature                                       --       1,368
  Capital lease obligations, net of current portion                                          132         105
  Long-term debt, net of current portion                                                     457          --
  Deferred rent, net of current portion                                                    2,027       1,492
                                                                                       ----------  ----------
    Total liabilities                                                                     13,461      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; 42,921 and
  25,138 shares issued and outstanding                                                        43          25
  Additonal paid-in capital                                                              253,086     212,993
  Deferred compensation                                                                       --         (85)
  Receivables from related parties, net                                                     (250)       (792)
  Accumulated other comprehensive income                                                   8,619          --
  Accumulated deficit                                                                   (239,634)   (215,650)
                                                                                       ----------  ----------
    Total shareholders'  equity (deficit)                                                 21,864      (3,509)
                                                                                       ----------  ----------
      Total liabilities, mandatorily redeemable convertible preferred stock
      and shareholders' equity (deficit)                                              $   35,325  $   23,363
                                                                                       ==========  ==========`

The accompanying notes are an integral part of these consolidated financial statements.
Microvision, Inc.
                     Consolidated Statements of Operations 
                    (in thousands, except per share amounts)
Years Ended December 31,
                                                                                         ----------------------------------
                                                                                            2006        2005        2004
                                                                                         ----------  ----------  ----------
Contract revenue                                                                        $    5,275  $   11,386  $    8,821
Product revenue                                                                              1,768       3,360       2,597
                                                                                         ----------  ----------  ----------
Total revenue                                                                                7,043      14,746      11,418
                                                                                         ----------  ----------  ----------

Cost of contract revenue                                                                     3,398       6,456       5,539
Cost of product revenue                                                                      4,768       8,636       3,868
                                                                                         ----------  ----------  ----------
Total cost of revenue                                                                        8,166      15,092       9,407
                                                                                         ----------  ----------  ----------
    Gross margin                                                                            (1,123)       (346)      2,011
                                                                                         ----------  ----------  ----------


Research and development expense                                                            10,715       6,587      15,257
Sales, marketing, general and administrative expense                                        17,362      20,352      20,798
(Gain) loss on disposal of fixed assets                                                       (198)         --           1
                                                                                         ----------  ----------  ----------
Total operating expenses                                                                    27,879      26,939      36,056
                                                                                         ----------  ----------  ----------
Loss from operations                                                                       (29,002)    (27,285)    (34,045)

Interest income                                                                                719         263         272
Interest expense                                                                            (5,753)     (3,253)       (151)
Gain on derivative instruments, net                                                          1,627       5,975          --
Loss on debt extinguishment                                                                     --      (3,313)         --
Other expense                                                                                  (23)        (28)         --
                                                                                         ----------  ----------  ----------
Net loss before minority interests and other Lumera transactions                           (32,432)    (27,641)    (33,924)
Minority interests in loss of consolidated subsidiary                                           --          --       2,438
Equity in losses of Lumera                                                                    (290)     (3,242)     (1,711)
Gain on sale of securities of equity investment                                              8,738       2,700          --
                                                                                         ----------  ----------  ----------
Net loss                                                                                   (23,984)    (28,183)    (33,197)

Stated dividend on mandatorily redeemable convertible preferred stock                          (59)       (280)       (108)
Accretion to par value of preferred stock                                                     (138)       (637)       (238)
Inducement for conversion of preferred stock                                                (3,076)     (1,184)         --
                                                                                         ----------  ----------  ----------
Net loss available for common shareholders                                              $  (27,257) $  (30,284) $  (33,543)
                                                                                         ==========  ==========  ==========
Net loss per share basic and diluted                                                    $    (0.81) $    (1.35) $    (1.56)
                                                                                         ==========  ==========  ==========

Weighted-average shares outstanding basic and diluted                                       33,572      22,498      21,493
                                                                                         ==========  ==========  ==========
The accompanying notes are an integral part of these consolidated financial statements.
Microvision, Inc.
       Consolidated Statements of Mandatorily Redeemable Convertable Preferred Stock and Stockholders' Equity (Deficit)
                      (in thousands)
Shareholders' Equity (Deficit)
                                                           Mandatorily     -----------------------------------------------------------------------------------------------------------------------
                                                           redeemable     |
                                                          convertible     |                                                 Subscriptions  Receivables   Accumulated
                                                         preferred stock  |    Common Stock      Additional                  receivable       from          other                        Total
                                                       -------------------|-------------------     paid-in      Deferred    from related     related    comprehensive  Accumulated   Shareholders'
                                                        Shares    Amount  | Shares   Par Value     capital     Compensation    parties       parties       income        defecit     Equity (Deficit)
                                                       --------  ---------|--------  ---------  -------------  -----------  -------------  -----------  -------------  ------------  -------------
Balance at December 31, 2003                                --  $      -- | 21,449  $      21  $     180,354  $      (846) $        (166) $    (1,823) $          25  $   (154,270) $      23,295
Issuance of options to board members for services                         |                               81          (81)                                                                     --
Issuance of stock, options and warrants to                                |
  non-employees for services                                              |                              143         (143)                                                                     --
Issuance of Lumera options to Microvision employees                       |                              134                                                                                  134
Amortization of share-based compensation                                  |                                           765                                                                     765
Exercise of warrants and options                                          |     60          1            382                                                                                  383
Sales of common stock                                                     |                               (8)                                                                                  (8)
Sales of preferred stock and warrants                       10      8,590 |                            1,281                                                                                1,281
Beneficial conversion feature of mandatorily                              |
  redeemable convertible preferred stock                           (1,181)|                            1,181                                                                                1,181
Dividend on preferred stock                                               |                             (108)                                                                   --           (108)
Non-cash accretion on mandatorily redeemable                              |
  convertible preferred stock                                         238 |                             (238)                                                                                (238)
Net change in interest gain on Lumera                                     |
  initial public offering                                                 |                           13,727                                                                               13,727
Other comprehensive income                                                |                                                                                      (25)                         (25)
Net loss                                                                  |                                                                                                (33,197)       (33,197)
                                                       --------  ---------|--------  ---------  -------------  -----------  -------------  -----------  -------------  ------------  -------------
Balance at December 31, 2004                                10      7,647 | 21,509         22        196,929         (305)          (166)      (1,823)            --      (187,467)         7,190
Issuance of stock, options and warrants to                                |
  non-employees for services                                              |      7                        65                                                                                   65
Deferred compensation on stock options                                    |                              144         (144)                                                                     --
Amortization of share-based compensation                                  |                                           364                                                                     364
Exercise of warrants and options                                          |      5         --             20                                                                                   20
Sales of common stock                                                     |  2,171          2          9,908                                                                                9,910
Conversion of preferred stock                               (5)    (4,539)|    855          1          4,538                                                                                4,539
Conversion of senior secured exchageable covertible notes                 |    310         --          1,837                                                                                1,837
Stock received for subscriptions receivable                               |    (28)        --           (169)                        166                                                       (3)
Inducement to preferred shareholders                                      |                             (763)                                                                                (763)
Issuance of common stock and change in warrant value to                   |
  preferred shareholders                                                  |                              763                                                                                  763
Beneficial conversion feature of mandatorily redeemable                   |
  convertible preferred stock                                         421 |                             (421)                                                                                (421)
Issuance of common stock for payment on senior                            |
  exchangeable convertible notes                                          |    258         --            867                                                                                  867
Issuance of common stock for payment of interest                          |
  on senior secured exchangeable convertible notes                        |     40         --            130                                                                                  130
Issuance of common stock on preferred dividend                            |     11         --             62                                                                                   62
Dividend on preferred stock                                               |                             (280)                                                                                (280)
Non-cash accretion on mandatorily redeemable                              |
  convertible preferred stock                                         637 |                             (637)                                                                                (637)
Allowance for doubtful accounts on receivables from                       |
  related parties                                                         |                                                                     1,031                                       1,031
Net loss                                                                  |                                                                                                (28,183)       (28,183)
                                                       --------  ---------|--------  ---------  -------------  -----------  -------------  -----------  -------------  ------------  -------------
Balance at December 31, 2005                                 5      4,166 | 25,138         25        212,993          (85)            --         (792)            --      (215,650)        (3,509)
Amortization of share-based compensation                                  |                            1,740           85                                                                   1,825
Exercise of warrants and options                                          |     16                        44                                                                                   44
Sales of common stock and warrants                                        |                                                                                                                    --
 (net of issuance costs of $3.0 million)                                  | 14,867         15         32,015           --                                                                  32,030
Conversion of preferred stock                               (5)    (5,000)|    786          1          4,999                                                                                5,000
Inducement to preferred shareholders                                      |                           (2,379)                                                                              (2,379)
Unamortized discount and offering costs                                   |                                                                                                                    --
 on preferred stock                                                   419 |                             (419)                                                                                (419)
Issuance of common stock and change in                                    |                                                                                                                    --
  warrant value to preferred shareholders                                 |    565          1          1,978                                                                                1,979
Beneficial conversion feature of                                          |                                                                                                                    --
 mandatorily redeemable convertible preferred stock                   278 |                             (278)                                                                                (278)
Non-cash accretion on mandatorily redeemable convertible                  |                                                                                                                    --
 preferred stock                                                      137 |                             (137)                                                                                (137)
Issuance of common stock for payment on senior                            |                                                                                                                    --
 secured exchangeable convertible notes                                   |  1,466          1          1,966                                                                                1,967
Issuance of common stock for payment of interest on senior                |                                                                                                                    --
 secured exchangeable convertible notes                                   |     67                        88                                                                                   88
Issuance of common stock on preferred dividend                            |     16                        59                                                                                   59
Dividend on preferred stock                                               |                              (59)                                                                                 (59)
Warrants to purchase Lumera common stock                                  |                              476                                                                                  476
Allowance for doubtful accounts on receivables from                       |
  related parties                                                         |                                                                       542                                         542
Other comprehensive income                                                |                                                                                    8,619                        8,619
Net loss                                                                  |                                                                                                (23,984)       (23,984)
                                                       --------  ---------|--------  ---------  -------------  -----------  -------------  -----------  -------------  ------------  -------------
Balance at December 31, 2006                                --  $      -- | 42,921  $      43  $     253,086  $        --  $          --  $      (250) $       8,619  $   (239,634) $      21,864
                                                       ========  ========= ========  =========  =============  ===========  =============  ===========  =============  ============  =============
The accompanying notes are an integral part of these consolidated financial statements.
Microvision, Inc.
       Consolidated Statements of Comprehensive Income
                      (in thousands)
Years Ended December 31,
                                                                                         ----------------------------------
                                                                                            2006        2005        2004
                                                                                         ----------  ----------  ----------
Net loss                                                                                $  (23,984) $  (28,183) $  (33,197)
                                                                                         ----------  ----------  ----------
Other comprehensive loss
    Unrealized gain (loss) on investment securities, available-for-sale:
        Unrealized holding gain (loss) arising during period                                17,357          --         (25)
        Less: reclassification adjustment for gains realized in net loss                    (8,738)         --          --
                                                                                         ----------  ----------  ----------
        Net unrealized gain (loss)                                                           8,619          --         (25)
                                                                                         ----------  ----------  ----------
Comprehensive loss                                                                      $  (15,365) $  (28,183) $  (33,222)
                                                                                         ==========  ==========  ==========



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


Microvision, Inc.
                     Consolidated Statements of Cash Flows
                                 (in thousands)
Years Ended December 31,
                                                                                         -------------------------------
                                                                                           2006       2005       2004
                                                                                         ---------  ---------  ---------
Cash flows from operating activities
  Net loss                                                                              $ (23,984) $ (28,183) $ (33,197)
  Adjustments to reconcile net loss to net cash used in operations:
    Depreciation                                                                            1,218      1,602      2,406
    (Gain) loss on disposal of fixed assets                                                  (198)        --          1
    Non-cash expenses related to issuance of stock, warrants, and options,
     and amortization of deferred compensation                                              1,825        429      2,118
    Non-cash interest expense, net                                                          4,753      2,730         --
    Derivative features of notes payable                                                   (1,627)    (2,659)        --
    Inventory write-downs                                                                   1,181      3,732      2,084
    Allowance for receivables from related parties                                            542      1,031         --
    Minority interests in loss of consolidated subsidiary                                      --         --     (2,438)
    Equity in losses of Lumera                                                                290      3,242      1,711
    Gain on sale of securities of equity investment                                        (8,738)    (2,700)        --
    Loss on debt extinguishment                                                                --      3,313         --
    Non-cash deferred rent                                                                   (231)       (21)       (86)
    Interest on notes payable                                                                  --         --        125
    Allowance for estimated contract losses                                                    --        (53)        53
  Change in:
    Accounts receivable                                                                       214      3,847     (3,420)
    Intercompany receivable                                                                    --         --         38
    Costs and estimated earnings in excess of billings on uncompleted contracts               639       (607)        35
    Inventory                                                                              (1,465)    (1,324)    (4,920)
    Other current assets                                                                      121         61       (427)
    Other assets                                                                               83        340         87
    Accounts payable                                                                         (689)    (1,050)     2,631
    Accrued liabilities                                                                    (1,139)      (190)       865
    Billings in excess of costs and estimated earnings on uncompleted contracts               149     (3,267)     3,265
    Notes payable                                                                              --         --         --
    Research liability, current and long-term                                                  --         --     (1,762)
                                                                                         ---------  ---------  ---------
      Net cash used in operating activities                                               (27,056)   (19,727)   (30,831)
                                                                                         ---------  ---------  ---------Cash flows from investing activities
  Sales of investment securities                                                               --      1,248     12,053
  Purchases of investment securities                                                           --     (1,248)    (1,000)
  Sales of restricted investment securities                                                 1,100      1,238      1,269
  Purchases of restricted investment securities                                              (268)    (2,101)    (1,238)
  Decrease in restricted cash                                                                 755       (755)        --
  Sale of long term investment - Lumera                                                    12,142      3,893         --
  Proceeds on sale of property and equipment                                                  200         --         --
  Purchases of property and equipment                                                      (2,152)    (1,239)    (1,040)
                                                                                         ---------  ---------  ---------
      Net cash provided by investing activities                                            11,777      1,036     10,044
                                                                                         ---------  ---------  ---------Cash flows from financing activities
  Principal payments under capital leases                                                     (40)       (46)       (63)
  Proceeds from issuance of short term notes                                                   --         --      2,300
  Principal payments under long-term debt                                                     (55)       (77)       (70)
  Increase in long-term debt                                                                  536         --         --
  Proceeds from issuance of notes and warrants                                                 --     14,148         --
  Payments on notes payable                                                                (9,600)    (1,000)        --
  Increase in deferred rent                                                                 1,042      1,492         --
  Payment of embedded derivative feature of preferred stock conversion                     (1,074)        --         --
  Payment of preferred dividend                                                               (43)      (173)      (108)
  Net proceeds from issuance of common stock and warrants                                  32,205      9,939        360
  Net proceeds from issuance of preferred stock and warrants                                   --         --      9,886
  Net proceeds from sale of subsidiary's equity to minority interests                          --         --        500
                                                                                         ---------  ---------  ---------
      Net cash provided by financing activities                                            22,971     24,283     12,805
                                                                                         ---------  ---------  ---------
Net increase (decrease) in cash and cash equivalents                                        7,692      5,592     (7,982)
Cash and cash equivalents at beginning of period                                            6,860      1,268     10,700
Change in cash due to Lumera deconsolidation                                                   --         --     (1,450)
                                                                                         ---------  ---------  ---------
Cash and cash equivalents at end of period                                              $  14,552  $   6,860      1,268
                                                                                         =========  =========  =========
                                                                                                                        Supplemental disclosure of cash flow information
Cash paid for interest                                                                  $     786  $     348  $     151
                                                                                         =========  =========  =========
                                                                                                                        Supplemental schedule of non-cash investing and financing activities
Property and equipment acquired under capital leases                                    $      80  $     135  $      15
                                                                                         =========  =========  =========
Other non-cash additions to property and equipment                                      $     115  $     812  $      18
                                                                                         =========  =========  =========
Conversion of preferred stock into common stock                                         $   4,417  $   4,117  $      --
                                                                                         =========  =========  =========
Deferred compensation - warrants, options and stock grants                              $      --  $     209  $      --
                                                                                         =========  =========  =========
Issuance of common stock for payment of principal and interest on senior
   secured exchangeable convertible notes                                               $   1,755  $     997  $      --
                                                                                         =========  =========  =========
Conversion of convertible debt into common stock                                        $     344  $      --  $      --
                                                                                         =========  =========  =========
Inducement for conversion of preferred stock                                            $   3,076  $      --  $      --
                                                                                         =========  =========  =========



The accompanying notes are an integral part of these financial statements.1. 	The Company



The consolidated financial statements include the accounts of Microvision,
Inc. ("Microvision"), a Delaware corporation, and Lumera Corporation
("Lumera"), a Delaware corporation, (collectively the
"Company").  Prior to July 2004, Lumera was a subsidiary and was
consolidated into Microvision.  In July 2004, Lumera completed an initial public
offering of its common stock and as a result of the change in ownership, ceased
to be consolidated and became an equity method investment of Microvision.  In
January 2006, Microvision sold 2,550,000 shares of its Lumera common stock.  As
a result of the reduction in ownership, Microvision changed to the cost basis of
accounting for its investment in Lumera.

Microvision was established to acquire, develop, manufacture and market light
scanning technology, which projects images using a single beam of light.
Microvision has entered into contracts with commercial and U.S. government
customers to develop applications using the light scanning technology.
Microvision has one commercial product, Flic, a hand-held bar code scanner.  In
addition, Microvision has produced and delivered various demonstration units
using Microvision's display technology.  Microvision is developing an integrated
photonics module that will be a common platform for the Company's future
potential products.   The integrated photonics module consists of a MEMS
scanner, a light source module, and electronics to drive the MEMS scanner and
video input and output.  The Company believes the integrated photonics module
could be readily modified to meet OEM product requirements for different product
configurations.

Microvision has incurred significant losses since inception. Microvision
believes that its cash, cash equivalent and investment securities balances
totaling $14,552,000 at December 31, 2006 and potential sales of Lumera common
stock will satisfy its budgeted cash requirements through 2007.  Based on
ourcurrent operating
plan, we anticipate we will require additional cash by February 2008. We plan to
obtain additional cash through the issuance of equity or debt securities. There
can be no assurance that such cash will be available to us, or if available, on
terms acceptable to us or on a timely basis

Microvision owns 1,750,000 shares of Lumera common stock which are pledged as
collateral for its convertible notes.  The final payments on the notes are due
March 15, 2007.  After the Company repays the notes in full, the pledged shares
are released and become eligible for sale.  Based on the March 1, 2007 closing
price of $4.28, the pledged Lumera shares have a market value of approximately
$7.5 million.  The market price of Lumera's common stock is subject to
fluctuations based on Lumera's financial performance, published accomplishments
and overall market conditions.  During the 90 calendar day period ended March 1,
2007, Lumera common stock has traded between $4.06 and $10.35.  The immediate
sale of Lumera stock in the public market could have a negative impact on the
Lumera stock price and could reduce any proceeds available to Microvision.

The Company's operating plan calls for the addition of sales, marketing,
technical and other staff and the purchase of additional laboratory and
production equipment.  The Company's future expenditures and capital
requirements will depend on numerous factors, including the progress of its
research and development program, 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 the ability of the Company to establish cooperative
development, joint venture and licensing arrangements.  There can be no
assurance that additional financing will be available to the Company or that, if
available, it will be available on terms acceptable to the Company or on a
timely basis.  If adequate funds are not available to satisfy either short-term
or long-term capital requirements or proceeds for the sales of Lumera common
stock are less than anticipated, or planned revenues are not generated, the
Company may be required to limit its operations substantially.  This limitation
of operations may include reduction in capital expenditures and reductions in
staff and discretionary costs, which may include non-contractual research costs.
The Company's capital requirements will depend on many factors, including, but
not limited to, the rate at which the Company can, directly or through
arrangements with original equipment manufacturers, introduce products
incorporating the light scanning technology and the market acceptance and
competitive position of such products.

2. 	Summary of significant accounting policies

Use of estimates

The preparation of financial statements in conformity with generally
accepted accounting principles of the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those estimates.
The Company's management has identified the following areas where significant
estimates and assumptions have been made in preparing the financial statements:
revenue recognition, allowance for uncollectible receivables and management
loans, inventory valuation and valuation of derivative financial
instruments.

Principles of consolidation

The Company has historically included both Microvision and Lumera
Corporation ("Lumera"), a subsidiary that was consolidated through
July 2004.  In July 2004, Lumera completed an initial public offering of its
common stock.

In connection with the Lumera initial public offering, all Lumera Series A
and Series B Preferred Stock was converted into Lumera common stock.
Immediately after the offering, Microvision owned 5,434,000 shares, or 33%, of
the common stock of Lumera.  As a result of the change in ownership percentage,
Microvision changed the method of accounting for its investment in Lumera to the
equity method and after July 2004 recorded its share of Lumera income or losses.
Microvision recorded a non-cash change in ownership interest gain of $13.7
million to stockholders equity as a component of additional paid-in capital
during 2004.  At December 31, 2004 and 2005, Microvision owned 33% and 28%,
respectively, of Lumera's common stock.

In January 2006, Microvision sold 2,550,000 shares of its Lumera common
stock.  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.  As of December 31, 2006, Microvision owns 1,750,000 shares, or approximately
8.8%, of Lumera common stock.  Microvision also owns a warrant exercisable at
$8.80 to purchase 170,500 shares of Lumera common stock.

Cash, cash equivalents and investment securities

The Company considers all investments that mature within 90 days of the
date of purchase to be cash equivalents.  At December 31, 2006, all short-term
investment securities held by the Company were classified as cash
equivalents.

Inventory

Inventory consists of raw material; work in process and finished goods
for the Company's Nomad and Flic products.  Inventory is recorded at the lower
of cost or market with cost determined on the weighted-average method.
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.

Restricted investments

As of December 31, 2006, restricted investments include:

- $1.3 million in irrevocable letters of credit as security on a lease
agreement for the corporate headquarters building in Redmond, WA.  The required
letter of credit balance decreases over the term of the lease, which expires in
2013.
- 1,750,000 shares of Lumera common stock pledged as collateral for the
Company's Notes.  Based on the closing price of Lumera common stock on December
31, 2006, the fair market value of the collateral is $10,693,000.

Property and equipment

Property and equipment is stated at cost and depreciated over the
estimated useful lives of the assets (two to five years) using the straight-line
method.  Leasehold improvements are depreciated over the shorter of estimated
useful lives or the lease term.

Revenue recognition

Revenue has primarily been generated from contracts for further
development of the light scanning technology and to produce demonstration units
for commercial enterprises and the United States government.  Revenue on such
contracts is recorded using the percentage-of-completion method measured on a
cost incurred basis.  The percentage of completion method is used because the
Company can make reasonably dependable estimates of the contract cost.  Changes
in contract performance, contract conditions, and estimated profitability,
including those arising from contract penalty provisions, and final contract
settlements, may result in revisions to costs and revenues and are recognized in
the period in which the revisions are determined.  Profit incentives are
included in revenue when realization is assured.  If the U.S. Govenment cancels
a contract, we would receive pament for work performed and costs committed to
prior to the cancellation.

The Company recognizes losses, if any, as soon as identified.  Losses occur
when the estimated direct and indirect costs to complete the contract exceed
unrecognized revenue.  The Company evaluates the reserve for contract losses on
a contract-by-contract basis.

Revenue from product shipments is recognized in accordance with Staff
Accounting Bulletin No. 104 "Revenue Recognition."  Revenue is
recognized when there is sufficient evidence of an arrangement, the selling
price is fixed or determinable and collection is reasonably assured.  Revenue
for product shipments is recognized upon acceptance of the product by the
customer or expiration of the contractual acceptance period, after which there
are no rights of return.  Provisions are made for warranties at the time revenue
is recorded.  Warranty expense was not material for any periods presented.

Concentration of credit risk and sales to major customers

Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash equivalents, investments and
accounts receivable.  The Company typically does not require collateral from its
customers.  The Company has a cash investment policy that generally restricts
investments to ensure preservation of principal and maintenance of
liquidity.

The United States government accounted for approximately 51%, 35%, and 42% of
total revenue during 2006, 2005 and 2004, respectively.  One commercial customer
accounted for approximately 11% and 33% of revenue during 2006 and 2005,
respectively. Contracts with three commercial customers represented 17%, 38%,
and 25% of total revenues during 2006, 2005, and 2004, respectively.  The United
States government accounted for approximately 45% and 41% of the accounts
receivable balance at December 31, 2006 and 2005, respectively.

Income taxes

Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax bases of the assets and liabilities that will
result in taxable or deductible amounts in the future, based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income.  Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.  Income tax
expense is recorded for the amount of income tax payable for the period
increased or decreased by the change in deferred tax assets and liabilities
during the period.

Net loss per share

Basic net loss per share is calculated on the basis of the weighted-
average number of common shares outstanding during the periods.  Net loss per
share assuming dilution is calculated on the basis of the weighted-average
number of common shares outstanding and the dilutive effect of all potentially
dilutive securities, including common stock equivalents and convertible
securities.  Net loss per share assuming dilution for 2006, 2005 and 2004 is
equal to basic net loss per share because the effect of dilutive securities
outstanding during the periods including options and warrants computed using the
treasury stock method, is anti-dilutive.

As of December 31, 2006, 2005 and 2004, the Company excluded the following
convertible securities from diluted net loss per share 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 as of the
years ended December 31, 2006, 2005 and 2004.

`December 31,
                                                                   ------------------------------------
                                                                      2006         2005         2004
                                                                   -----------  -----------  ----------            
Publicly traded warrants                                           12,362,000           --          --
Options and private warrants                                       10,906,000    9,440,000   6,836,000
Notes payable                                                         620,000    3,101,000          --
Mandatorily redeemable convertible preferred stock                         --      786,000   1,447,000
                                                                   -----------  -----------  ----------
                                                                   23,888,000   13,327,000   8,283,000
                                                                   ===========  ===========  ==========`

Research and development

Research and development costs are expensed as incurred.



Fair value of financial instruments

The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities and long-term debt.
The carrying amount of long-term debt at December 31, 2006 and 2005 was not
materially different from the fair value based on rates available for similar
types of arrangements.  The carrying value of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities approximate fair
value due to the short maturities.  The convertible notes are not publicly
traded and it is not practicable for the Company to estimate the fair value of
the convertible notes due to the absence of comparable publicly traded financial
instruments.

Long-lived assets

The Company evaluates the recoverability of its long-lived assets when an
impairment is indicated based on expected undiscounted cash flows and recognizes
impairment of the carrying value of long-lived assets, if any, based on the fair
value of such assets.

Stock-based compensation

The Company has one employee incentive compensation plan and one board of
director stock-based compensation plan.  Both are more fully described in Note
13.

The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Statement of Financial Accounting Standards
No. 123, as revised December 2004 ("FAS 123(R)").  The Company adopted
FAS123(R) effective January 1, 2006.  The Company accounts for equity
instruments issued to non-employees in accordance with the provisions of FAS No.
123 and Emerging Issues Task Force Issue No. 96-18.  The following table shows
the amount of stock-based compensation expense included in the Statement of
Operations:

`Year Ended December 31,
                                                                   ------------------------------------
                                                                      2006         2005         2004
                                                                   -----------  -----------  ----------            
Cost of contract revenue                                          $    80,000  $        --  $       --
Cost of product revenue                                                70,000           --          --
Research and development expense                                      246,000           --     548,000
Sales, marketing, general and administrative expense                1,429,000      429,000   1,570,000
                                                                   -----------  -----------  ----------
                                                                  $ 1,825,000  $   429,000  $2,118,000
                                                                   ===========  ===========  ==========`

New 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 Statements 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.

In July 2006, FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109"
("FIN 48").  FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes."  FIN 48 also prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return.  The new FASB standard also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.  The provisions of FIN 48 are to be applied to all
tax positions upon initial adoption of the standard.  FIN 48 is effective for
fiscal years beginning after December 15, 2006.  The Company is currently
assessing the guidance in FIN 48 and the potential impacts it may have on the
Company in relation to deferred taxes and taxes payable.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 108 (SAB 108), "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements." SAB 108 requires an analysis of misstatements using both an income
statement (rollover approach) and a balance sheet (iron curtain) approach in
assessing materiality. An adjustment to the financial statements must be made if
either approach considers the misstatement to be material. SAB 108 is effective
for fiscal years ending after November 15, 2006.  The Company's results of
operations and financial position were not affected by the adoption of SAB
108.

3. 	Long-term contracts

Cost and estimated earnings in excess of billings on uncompleted contracts
comprises amounts of revenue recognized on contracts that the Company has not
yet billed to customers because the amounts were not contractually billable at
December 31, 2006 and 2005.  The following table summarizes when the Company
will be contractually able to bill the balance as of December 31, 2006 and
2005.

`Year Ended December 31,
                                                                      --------------------------
                                                                          2006          2005
                                                                      ------------  ------------
Billable within 30 days                                              $    547,000  $    686,000
Billable between 31 and 90 days                                                --         3,000
Billable after 90 days                                                     18,500       515,000
                                                                      ------------  ------------
                                                                     $    565,500  $  1,204,000
                                                                      ============  ============`

The Company's current contracts with the U.S. government are primarily cost
plus fixed fee type contracts.  Under the terms of a cost plus fixed fee
contract, the U.S. government reimburses the Company for negotiated actual
direct and indirect cost incurred in performing the contracted services.  The
Company is under no obligation to spend more than the contract value to complete
the contracted services.  The period of performance is generally one year.  Each
of the Company's contracts with the United States government can be terminated
for convenience by the government at any time.  To date, the U.S. government has
not terminated a contract with the Company.

In September 2006, the Company entered into a 12 month development agreement
with Visteon, a major global Tier 1 automotive supplier, to develop a commercial
scanned-beam head-up display (HUD) product for automotive applications.  Under
the agreement, Visteon and Microvision will design and produce a series of
advanced HUD samples, including devices specifically designed to be compatible
with automotive environmental requirements.

In September 2006, the Company entered into an 18 month $5,945,000 contract
with General Dynamics C4 Systems to supply full-color, daylight readable, see-
through helmet-mounted displays as part of the U.S. Army's Mounted Warrior HMD
Improvement Program.  General Dynamics holds prime contracts with the U.S. Army
for other Warrior programs including Land Warrior, Air Warrior and Future Force
Warrior Advanced Technology Demonstration.  The contract specifies the
development and delivery of ten full-color display units for evaluation.

In June 2005, the Company entered into a 12 month $4,359,000 contract with
General Dynamics C4 Systems to continue the development of a helmet-mounted
display for the Air Warrior Block 3 system.  General Dynamics is under contract
with the U.S. Army's Product Manager -- Air Warrior in Huntsville, Ala., to
develop and integrate the Air Warrior Block 3 system.  The Microvision helmet-
mounted display is being designed as a full-color, see-through, daylight and
night-readable, high-resolution display.

In May 2004, Microvision entered into a 12 month $3,900,000 contract
modification with the U.S. Army's Aviation Applied Technology Directorate to
continue work on an advanced helmet mounted display and imaging system to be
used in the Virtual Cockpit Optimization Program.

In December 2004, Microvision entered into a $6,200,000 contract with Ethicon
Endo-Surgery, Inc., a subsidiary of Johnson & Johnson, to integrate
Microvision's technology into certain medical products.  The contract includes
an exclusive license for Microvision's technology for certain human medical
applications during the term of the development agreement.  We delivered the
prototype devices as required and completed the work under the contract in 2006.

The following table summarizes the costs incurred on the Company's revenue
contracts:

`December 31,  December 31,
                                                                          2006          2005
                                                                      ------------  ------------
Costs and estimated earnings incurred on uncompleted contracts       $  4,340,500  $ 17,325,000
Billings on uncompleted contracts                                      (3,975,000)  (16,172,000)
                                                                      ------------  ------------
                                                                     $    365,500  $  1,153,000
                                                                      ============  ============
Included in accompanying balance sheets under the following captions:                           

Costs and estimated earnings in excess of billings on uncompleted
 contracts                                                           $    565,500  $  1,204,000
Billings in excess of costs and estimated earnings on uncompleted
 contracts                                                               (200,000)      (51,000)
                                                                      ------------  ------------
                                                                     $    365,500  $  1,153,000
                                                                      ============  ============`

4.	Inventory

Inventory consists of the following:

`December 31,   December 31,
                                                           2006           2005
                                                       -------------  ------------
Raw materials                                         $     146,000  $    267,000
Work in process                                                  --       141,000
Finished goods                                              897,000       351,000
                                                       -------------  ------------
                                                      $   1,043,000  $    759,000
                                                       =============  ============`

The inventory at December 31, 2006 and 2005 consisted of raw materials; work
in process and finished goods for Nomad and 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 the normal course of
business during the next twelve months.  In 2006, 2005 and 2004, Microvision
recorded inventory write-downs of $1,181,000, $3,732,000 and $2,084,000,
respectively.  The 2006 write-down of $1,181,000 includes $210,000 write-down
of Nomad inventory.

During the second quarter of 2006, the Company determined that it would no
longer promote the Nomad product and recorded an expense of $210,000 to reduce
the value of Nomad inventory to zero.  In addition, the Company recorded
$100,000 as additional accelerated depreciation expense related to fixed assets
used in Nomad production. Both inventory and fixed asset balances related to
Nomad production are zero.

5.	Accrued liabilities

Accrued liabilities consist of the following:

`December 31,
                                                       ---------------------------
                                                           2006           2005
                                                       -------------  ------------
Bonuses                                               $     700,000  $  1,000,000
Payroll and payroll taxes                                   603,000       732,000
Compensated absences                                        382,000       497,000
Deferred rent credit                                        278,000        21,000
Adverse purchase commitments                                310,000            --
Professional Fees                                           406,000       558,000
Consultants                                                      --       525,000
Other                                                     1,019,000     1,180,000
                                                       -------------  ------------
                                                      $   3,698,000  $  4,513,000
                                                       =============  ============`

6.	Property and equipment, net

Property and equipment consists of the following:

`December 31,
                                                       ---------------------------
                                                           2006           2005
                                                       -------------  ------------
Lab and production equipment                          $   2,350,000  $  2,126,000
Leasehold improvements                                    3,252,000     3,990,000
Computer hardware and software                            6,625,000     6,495,000
Office furniture and equipment                            1,444,000     1,124,000
                                                       -------------  ------------
                                                         13,671,000    13,735,000
Less: Accumulated depreciation                           (9,660,000)  (10,833,000)
                                                       -------------  ------------
                                                      $   4,011,000  $  2,902,000
                                                       =============  ============`

Depreciation expense was $1,218,000, $1,602,000 and $2,406,000 in 2006, 2005
and 2004, respectively.

7.	Receivables from related parties

In 2000, the Board of Directors authorized the Company to provide unsecured
lines of credit to each of the Company's three senior officers.  The limit of
the line of credit was three times the executives' base salary less any amounts
outstanding under the Executive Option Exercise Note Plan.  In 2002 and 2001,
the Board of Directors authorized additions totaling $700,000, to the limit for
one senior officer.  The lines of credit carry interest rates of 5.4% to 6.2%.
The lines of credit must be repaid within one year of the senior officer's
termination or within thirty days of demand by the Company in the event of a
plan termination, provided that in the event of such a demand the senior officer
may elect to deliver a promissory note with a one-year term in lieu of payment.
At December 31, 2006 and 2005, a total of $2,723,000 was outstanding under the
lines of credit.

In 2002, the Company determined that certain of its senior officers may have
insufficient net worth and short-term earnings potential to repay loans
outstanding under the Company's lines of credit.  In 2003 and 2002, the Company
recorded allowances for doubtful accounts for receivables from senior officers
totaling $900,000.

In January 2006, two senior officers left the Company.  Because the lines of
credit are not fully secured and collection was uncertain, the Company recorded
an additional allowance of $1,031,000 in December 2005.

The interest on the lines of credit is forgiven if the executive is an
employee of the Company at December 31 of the respective year.  Compensation
expense of $22,000, $156,000 and $163,000 was recognized in 2006, 2005 and 2004,
respectively, for interest forgiven.

8.	Accounting for Lumera

Investment Securities, Available-for-Sale

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 investment" of approximately $7.3 million. As a result of the
reduction in ownership below 20% and reduced influence over Lumera management,
Microvision changed to the cost basis of accounting for its investment in Lumera
in accordance with FAS 115.

In October 2006, the Company sold 322,000 unpledged shares of Lumera common
stock for $1.9 million.  The Company recorded a "Gain on sale of securities of
equity investment" of approximately $1.5 million.

As of December 31, 2006, Microvision owns 1,750,000 shares of Lumera common
stock, recorded at fair market value, all of which are pledged as collateral for
the convertible notes. The shares of common stock are recorded as "Current
restricted investments".

The cost, net unrealized gain and estimated fair market value of the shares
of Lumera common stock as of December 31, 2006, are shown below:

`Net     Estimated
                                Unrealized   Fair
                       Cost       Gain       Value
                     ---------  ---------  ---------             
Lumera common stock $   2,074  $   8,619  $  10,693
                     =========  =========  =========`

Warrant

In connection with the change in accounting from equity to cost basis in
January 2006, the Company recorded $476,000 in "Other current assets"
for the fair value of a warrant previously received to purchase 170,500 shares
of Lumera common stock at an exercise price of $8.80 per share.  On the
transaction date, the warrant was 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 4.6%; and contractual life of
5.1 years.

At December 31, 2006, the warrant was 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 4.7%; and contractual
life of 4.2 years.  The fair value of the warrant increased to $595,000 and the
change in value of $119,000 was recorded as a non-operating gain and is included
in "Gain on derivative instruments, net" in the consolidated statement
of operations.

In July 2004, Lumera completed an initial public offering of its common
stock.  As a result of the offering, Microvision's ownership interest in Lumera
was reduced to 33%.  As a result of the reduction in ownership, Microvision
changed to the equity method of accounting for its investment in Lumera.
Microvision recorded a non-cash change in interest gain of $13.7 million during
the third quarter.  Because of uncertainty surrounding the ultimate
realizability of the gain, the gain was recorded as an increase to stockholders'
equity as a component of additional paid-in capital.  As of December 31, 2005,
Microvision owned 4,622,000 shares or 28% of Lumera's common stock.

During the period from inception to July 2004, losses in Lumera were first
allocated to the holders of the common stock and then to the holders of the
preferred shareholders pro rata in accordance with their respective ownership
interest.  Losses were not allocated to the options and warrants until
exercised.

Lumera common stock, Series A preferred stock and Series B preferred stock
were eliminated in consolidation with Microvision interests in Lumera common
stock, Series A preferred stock, Series B preferred stock and options and
warrants to purchase equity in Lumera held by investors other than the Company,
and are presented as minority interests on the Company's consolidated balance
sheet.

A reconciliation of the changes in ownership interests through Lumera's
initial public offering is as follows (in thousands):

`Minority Interests
                                     ---------------------------------
                                       Common     Preferred    Total     Microvision     Total
                                     -----------  ---------  ---------  -------------  ---------
Balance at December 31, 2003        $       322  $   1,525  $   1,847  $        (530) $   1,317
Issuance of preferred stock, net             --        500        500             --        500
Preferred stock reallocation                 --        413        413           (413)
Options and warrants                        342         --        342                       342
Loss allocation for 2004                            (2,438)    (2,438)        (1,286)    (3,724)
                                     -----------  ---------  ---------  -------------  ---------
Balance at July 2004                $       664  $      --  $     664  $      (2,229) $  (1,565)
                                     ===========  =========  =========  =============  =========`

As a result of the Series B stock issuance, the allocations of Lumera losses
changed between Microvision and other minority interests and resulted in an
additional $413,000 of losses being allocated to minority interest during 2004,
with a resultant change in interest loss allocated to Microvision.  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.  Microvision recorded a non-cash
change in interest gain of $14,138,000 during the third quarter of 2004 as a
result of the change to the equity method.  The net change in interest gain for
2004 was $13,727,000.  Because of uncertainty surrounding the ultimate
realizability of the gain; the gain was recorded as an increase to stockholders'
equity as a component of additional paid-in capital.

The following table shows the Lumera balances included in the consolidated
balance sheet immediately prior to the change in interest and the reconciliation
to the investment account shown at December 31, 2005.

`Cash and cash equivalents                                    $     657
Costs and estimated earnings in excess of billings on
   uncompleted contracts                                           117
Other current assets                                             1,077
Property and equipment, net                                      2,369
Other assets                                                        33
Accounts payable                                                  (434)
Accrued liabilities                                             (1,315)
Current portion of research liability                              (78)
Notes payable - current                                         (2,386)
Other long-term liabilities                                       (245)
                                                              ---------
Net Assets                                                        (205)
Less minority interest options and warrants                       (664)
Cumulative losses in excess of investment                       (1,360)
                                                              ---------
                                                                (2,229)
Gain on change in interest                                      14,138
Investment losses from July 2004 to December 31, 2004           (1,708)
                                                              ---------
Investment in Lumera at December 31, 2004                       10,201
Investment losses from January 1, 2005 to December 31, 2005     (3,242)
Sales of Lumera Stock                                           (1,193)
                                                              ---------
Investment in Lumera at December 31, 2005                    $   5,766
                                                              =========`

The difference between the amount at which an investment is carried at
December 31, 2005 and the amount of underlying equity in net assets of Lumera is
a result of equity transactions of Lumera for which Microvision does not
recognize any change in interest gains or losses.

9.	Long-term Notes

The following table summarizes the activity in 2006 and 2005 related to the issuance of
convertible notes:

`Embedded     Common       Loss on
                                                                                    derivative  stock and   extinguishment
                                                                Notes    Warrants    feature       APIC         of debt        Total
                                                              ---------  ---------  ----------  ----------  ---------------  ---------
March 10, 2005 issuance                                      $   5,395  $   1,650  $    2,955  $       --  $            --  $  10,000
Debt restructuring at July 25, 2005                                         2,295       1,018                       (3,313)        --
Conversion of debt to common stock at October 11, 2005          (1,398)                  (439)      1,837                          --
December 1, 2005 issuance                                        3,667      2,200       1,116       3,017                      10,000
Principal payments on notes                                       (867)                               867                          --
Discount accretion for the year ended December 31, 2005          2,546                                                          2,546
Changes in market value for the year ended December 31, 2005               (2,693)     (3,282)                                 (5,975)
                                                              ---------  ---------  ----------  ----------  ---------------  ---------
Balances at December 31, 2005                                    9,343      3,452       1,368       5,721           (3,313)
Principal payments on notes                                    (11,567)                             1,967                      (9,600)
Discount accretion for the year ended December 31, 2006          4,642                                                          4,642
Changes in market value for the year ended December 31, 2006                 (880)     (1,300)                                 (2,180)
                                                              ---------  ---------  ----------  ----------  ---------------  ---------
Balances at December 31, 2006                                $   2,418  $   2,572  $       68  $    7,688  $        (3,313)
                                                              =========  =========  ==========  ==========  ===============`

March Notes

In March 2005, the Company raised $10,000,000, before issuance costs of
$423,000, from the issuance of convertible March Notes ("March Notes")
and warrants to purchase an aggregate of 462,000 shares of Microvision common
stock.  The March Notes are convertible on demand by the holders into
Microvision common stock at a conversion price of $6.84 per share of Microvision
common stock or Lumera common stock held by the Company at a conversion price of
$5.64 per share up to a limit of 1,750,000 shares of Lumera common stock.  The
right to convert the March Notes into shares of Lumera common stock was removed
pursuant to the amendment described below.  The initial conversion price is
subject to adjustment in the event Microvision issues common stock or common
stock equivalents at a price per share of common stock below the conversion
price of the March Notes.  Due to below market issuances of Company's common
stock, the conversion price of the March Notes at December 31, 2006 was $5.17
per share of common stock.  In addition, upon the request of the Note holders,
the Company is required to redeem the March Notes for cash upon a change of
control or an event of default at a redemption price equal to 125% of the then
outstanding balance of the March Notes.  The Company has pledged 1,750,000
shares of its Lumera common stock as collateral for the March Notes and the
December Notes described below.

The terms of the March Notes include interest at LIBOR plus 3.0% payable
quarterly in cash or Microvision common stock, at the election of the Company,
subject to certain conditions.  However, in no case shall the interest rate be
less than 6.0% or greater than 8.0%.  The interest rate at December 31, 2006 was
8.0%.  If the Company chooses to pay interest in Microvision common stock as
opposed to cash, the price will be based on 92% of the arithmetic average of the
volume weighted average prices for the 10 trading days prior to the payment
date.  The March Notes are payable in six equal quarterly installments beginning
in December 2005.  The Company can subject to certain conditions, elect to make
the principal payments in common stock in lieu of cash.  If the Company elects
to pay principal in common stock, the Note holders can elect to receive
Microvision or Lumera common stock.  Payment in stock will be issued at a 10%
discount to the arithmetic average of the volume weighted average prices for the
15 trading days prior to the payment date.

The Company concluded that the note holders' right to convert all or a
portion of the March Notes into Microvision or Lumera common stock is an
embedded derivative instrument as defined by FASB Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("FAS 133").
Accordingly, $2,955,000 of the cash proceeds were allocated to the embedded
derivative instrument, which represents the fair value of the instrument on the
date of issuance.  The derivative instrument was valued using the higher of the
Microvision or Lumera conversion feature.  The value was determined 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
4.62%; and contractual life of nine months to two years, which corresponds to
the principal repayment dates.  Due to changes in Lumera and Microvision's stock
price and remaining contractual life, the fair value of the embedded derivative
feature decreased to $2,463,000 at July 25, 2005 the date of the deemed
extinguishment described below.  The decrease in the fair value of $492,000 for
the period from issuance to extinguishment was recorded as a non-operating gain
and included in "Gain on derivative features of note payable" in the
consolidated statement of operations.

The warrants issued with the March Notes vested on the date of grant, have an
exercise price of $6.84 per common share and expire in March 2010.  The initial
exercise price is subject to adjustment in the event Microvision issues common
stock or common stock equivalents at a price per share of common stock below the
exercise price of the warrant.  Due to below market issuances of the Company's
common stock the exercise price of the warrants issued with the March Notes was
$5.85 as of December 31, 2006.  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 the Company cannot engage in certain corporate transactions affecting
the common stock unless it makes a cash payment to the holders of the warrants.
Accordingly, $1,651,000 of the cash proceeds were allocated to the warrants,
which represents the fair value of the warrants on the date of issuance and the
amount was recorded as a current liability.  Subsequent changes in the fair
value of the warrants will be recorded in the statement of operations each
period.  The warrants were initially valued using the Black-Scholes option
pricing model with the following assumptions:  expected volatility of 75%;
expected dividend yield of 0%; risk free interest rate of 4.62%; and contractual
life of five years.  The remaining gross proceeds of $5,394,000 were allocated
to the Notes.

In July 2005, the Company entered into an agreement to amend the March Notes.
In connection with the amendment, the Company issued three year warrants to
purchase 750,000 shares of Microvision common stock at an exercise price of
$6.84 per share.  The conversion price of the amended March Notes and exercise
price of the warrants are subject to anti-dilution adjustments, subject to
conditions.  In addition, the price at which the note holders can convert the
March Notes to Microvision common stock was reduced to $5.85 per share, and the
price at which the Company can mandatorily convert the March Notes to
Microvision common stock was reduced to $10.24.  The note holders may convert
all or a portion of their March Notes.  As a result of the amendment, the March
Notes are no longer exchangeable into Lumera common stock.

The Company has concluded that the amendment of the Notes met the criteria of
a debt extinguishment.  The Company recorded a charge of $3,313,000 for the
change in the fair value of the debt and related consideration between the
original and the amended March Notes.  The change in the value was measured as
the value of the additional warrants that were issued to the note holders and
the change in the price at which the debt could be converted to Microvision
common stock.  The additional warrants were valued using the Black-Scholes
option pricing model with the following assumptions:  expected volatility of
75%; expected dividend yield of 0%; risk free interest rate of 3.66%; and
contractual life of three years.  The additional warrants were initially valued
at $2,295,000.  The change in the conversion feature was valued using the Black-
Scholes option pricing model with the following assumptions:  expected
volatility of 75%; expected dividend yield of 0%; risk free interest rates
ranging from 3.25% to 3.58% and contractual life equal to the length of the
option.  The change in the conversion price was valued at $1,018,000.

The amended conversion feature continued to meet the definition of a
derivative under FAS 133 and accordingly has been recorded at fair value and
included within long-term liabilities.  The carrying amount of the derivative is
adjusted to fair value at each balance sheet date.  The adjustments for the year
ended December 31, 2006 and the period from July 25, 2005 to December 31, 2005
were $323,000 and $2,712,000, respectively.  The adjustments were recorded in
"Gain on derivative instrument instruments, net" in the statement of
operations.

In October 2005, the note holder converted $1.8 million of the March Notes to
310,000 shares of common stock.  The value of the embedded derivative feature
associated with the converted shares of $439,000 was recorded to additional paid
in capital.

The combined liability for both the initial warrant and the additional
warrant was valued at $883,000 and $1,273,000 at December 31, 2006 and 2005,
respectively.  The combined adjustments in value were $390,000 and $2,672,000 for
the years ended December 31, 2006 and 2005, respectively.  The warrants were
valued using the Black-Scholes option pricing model with the following
assumptions:  expected volatilities of 67% and 58% to 65%; expected dividend
yields of 0%; risk free interest rates ranging from 4.74% to 4.90% and 4.36% to
4.39%; and contractual lives ranging from 1.6 to 3.2 years and 2.6 to 4.2 years
at December 31, 2006 and 2005, respectively.  At December 31, 2006, total
principal payments of $1,367,000 remain under the March Notes.

December Notes

In December 2005, the Company raised $10,000,000, before issuance costs
of $134,000, from the issuance of notes ("December Notes"), 838,000 shares of
common stock and warrants to purchase an aggregate of 1,089,000 shares of
Microvision common stock.  The December Notes are convertible on demand by the
holders into Microvision common stock at a conversion price of $3.94 per share.
The note holders may convert all or a portion of their December Notes.  In
addition, upon the request of the note holders, the Company is required to
redeem the notes for cash upon a change of control or an event of default at a
redemption price equal to 125% of the then outstanding balance of the December
Notes.  The Company has pledged 1,750,000 shares of its Lumera common stock as
collateral for the December Notes and the notes issued as of March 2005 ("March
Notes") described below.  Those shares have been classified as a "Current
restricted investments" on the Company's consolidated balance sheet.

The terms of the December Notes include interest at LIBOR plus 3.0%, provided
that the interest rate shall not be less than 6% or greater than 8% payable
quarterly in cash or Microvision common stock if the stock price is greater than
$4.06 per share, at the election of the Company, subject to certain additional
conditions.  The interest rate at December 31, 2006 was 8.0%.  Under certain
circumstances the interest rates increases to LIBOR plus 6% but not less than
12% or greater than 15%.  If the Company chooses to pay interest in Microvision
common stock as opposed to cash, the price will be based on 90% of the
arithmetic average of the volume weighted average prices for the 20 trading days
prior to the payment date.  The December Notes are payable in five equal
quarterly installments beginning in March 2006.  The Company can elect to make
the principal payments in common stock in lieu of cash if the stock price is
greater than $4.06 per share, subject to certain other conditions.  If the
Company elects to pay principal in stock the stock will be issued at a 10%
discount to the arithmetic average of the volume weighted average prices for the
15 trading days prior to the payment date.

The Company concluded that the note holders' right to convert all or a
portion of the December Notes into Microvision common stock is an embedded
derivative instrument as defined by FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133").  Accordingly, $1.1
million of the cash proceeds were allocated to the embedded derivative
instrument, which represents the fair value of the instrument on the date of
issuance.  The value was determined using the Black-Scholes option pricing model
with the following assumptions:  expected volatility of 58%; expected dividend
yield of 0%; risk free interest rates ranging from 4.01%to 4.39%; and
contractual life of four to sixteen months, which corresponds to the principal
repayment dates.  Due to changes in Microvision's stock price and remaining
contractual life, the fair value of the embedded derivative feature decreased to
$60,000 at December 31, 2006.  The change in value of $978,000 was recorded as a
non-operating gain and included in "Gain on derivative features of note
payable" in the consolidated statement of operations.  At December 31, 2006
total principal payments of $1.4 million remain under the December Notes.

The warrants issued with the December Notes vested on the date of grant, have
an exercise price of $3.94 per share of common stock share and expire in
December 2010.  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 the
Company cannot engage in certain corporate transactions affecting the common
stock unless it makes a cash payment to the holders of the warrants.
Accordingly, $2.2 million of the cash proceeds were allocated to the warrants,
which represents the fair value of the warrants on the date of issuance and the
amount was recorded as a current liability.  Subsequent changes in the fair
value of the warrants will be recorded in the statement of operations each
period.  The warrants were initially valued 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 4.35%; and contractual
life of five years.

The liability for the warrants was valued at $1,689,000 and $2,179,000 at
December 31, 2006 and 2005, respectively.  The adjustments in value were
$490,000 and $21,000 during the years ended December 31, 2006 and 2005,
respectively.  The warrants were valued using the Black-Scholes option pricing
model with the following assumptions:  expected volatilities of 67% and 65%;
expected dividend yields of 0%; risk free interest rates of 4.72% and 4.35%; and
contractual lives of 3.9 and 4.9 years at December 31, 2006 and 2005,
respectively.

The Microvision common stock was valued at the closing price on the date of
closing of $3.60 per share.  Aggregate proceeds of $3.0 million were allocated
to the common stock.  The remaining gross proceeds of $3.7 million were
allocated to the notes.  At December 31, 2006, total principal payments of
$1,400,000 remain under the December Notes.

10.	Convertible Preferred Stock

In September 2004, Microvision raised $10,000,000 before issuance costs of
$90,000 from the sale of 10,000 shares of convertible preferred stock and a
warrant to purchase 362,000 shares of common stock.  The preferred stock was
convertible on demand by the holder into common stock at a conversion price of
$6.91 per share of common stock.  The initial conversion price was subject to
adjustment in the event Microvision issues common stock or derivative securities
at a price per share of common stock below the market price or the conversion
price of the preferred stock.  Due to below market issuances of Company's common
stock the conversion price of the Preferred Stock as of December 31, 2005 was
$6.36 per share of common stock.  In addition, upon the request of the preferred
stockholder, Microvision was required to redeem the preferred stock for cash in
certain circumstances, including in the event of a material breach of
representations, warranties or covenants under the purchase agreement or a
change in control.  Accordingly, Microvision has classified the preferred stock
as "mandatorily redeemable convertible preferred stock" in its
consolidated balance sheet.

The preferred stock terms include a dividend of 3.5% per annum, payable
quarterly in cash or registered common stock, at the election of the Company,
subject to certain conditions.  The preferred stock matures on September 10,
2007, at which time it is payable in cash or registered common stock, at the
election of the Company, subject to certain conditions.  Some of the conditions
which would preclude the Company from paying in common stock are not within the
Company's immediate control.  The Company can elect to convert the preferred
stock into common stock if the stock price exceeds $12.09 per share, subject to
certain conditions.  The warrant was vested on the date of grant, has an
exercise price of $8.16 per share and expires on September 10, 2009.  The
initial exercise price is subject to adjustment in the event Microvision issues
common stock or derivative securities at a price per share of common stock below
the market price or the exercise price of the warrant.  Due to below market
issuances of Company's common stock the exercise price of the warrants issued
with the Preferred Stock was $4.02 as of December 31, 2006.

The net cash proceeds of $9,910,000 were allocated to the preferred stock and
the warrant based on the relative fair values of the securities.  The warrants
were valued using the Black-Scholes option pricing model with the following
assumptions:  expected volatility of 75%, risk free interest rate of 3.4%, and
contractual life of five years.  Proceeds of $1.3 million were allocated to the
warrant and were recorded as an increase to additional paid-in capital.

Subsequent to the relative fair value allocation, the effective conversion
price of the convertible preferred stock was less than the closing price of
Microvision's common stock on the date of commitment to purchase the preferred
stock resulting in the recognition of a beneficial conversion feature in
accordance with Emerging Issues Task Force No. 00-27, "Application of Issue
No. 98-5 to Certain Convertible Instruments."  This beneficial conversion
feature was measured as $1,181,000 which represents the difference between the
fair value of the common stock and the effective conversion price.  This
beneficial conversion feature was recorded to additional paid-in capital and
will be recorded as a deemed dividend to preferred stockholders (accretion) over
the stated life of the preferred stock which is three years.  During 2006 and
2005, the Company recorded $59,000 and $280,000, respectively, in dividends on
the preferred stock and $66,000 and $303,000, respectively, in accretion of the
beneficial conversion feature of the preferred stock.

In August 2005, the holder of the Company's preferred stock agreed to convert
5,000 shares of the Company's preferred stock into 734,000 shares of common
stock.  As an inducement to convert the preferred stock the Company issued
124,000 shares of its common stock to the preferred stock holder and adjusted
the exercise price from $8.16 to $6.84 per share for the existing warrants to
purchase 362,000 shares of common stock issued in connection with the original
sale of the Company's preferred stock.  The value of the common shares issued of
$701,000, the change in the value of the warrants of $62,000 and the amount of
unamortized beneficial conversion feature on the preferred stock of $421,000 was
recorded as an inducement to convert the preferred stock and charged to common
shareholders in 2005.

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 1,353,000 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.  Under the conversion agreement, the Company agreed to pay the
difference, only if positive, of $3.62 minus the 45 day trailing volume weighted
average price as of the 45th trading day after the effective date of the
required registration statement with respect to any of the Incentive Shares that
were sold by the holder during the 45 day period or that were held in an
economically neutral position as of the end of the 45 day period.

The Company determined that 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
"Inducement for conversion of preferred stock." In August 2006,
the Company determined the final value of the price protection feature and paid
the liability of $1,074,000.  The changes in the estimated fair value of the
derivative feature of $673,000 for the year ended December 31, 2006 have been
included as a non-operating expense in "Gain on derivative instruments,
net."

11.	Common Stock

In November 2006, the Company raised $7.9 million, before issuance costs
of $779,000, through an underwritten public offering of 3,318,000 shares of our
common stock.

In June and July 2006, the Company raised an aggregate of $27.1 million,
before issuance costs of $2.2 million, through an underwritten public offering of
11.6 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 August and September 2005, the Company raised $7,000,000, before issuance
costs, through the sale of 1,333,000 shares of common stock at a price of $5.25
per share and five-year fully exercisable warrants to purchase 301,000 shares of
common stock at an exercise price of $6.50 per share to a holder of the
Company's preferred stock and other investors.  The holder of the Company's
preferred stock also agreed to convert 5,000 shares of the Company's preferred
stock into 734,000 shares of common stock. (See Note 10).

12.	Warrants

The following summarizes activity with respect to Microvision common stock
warrants during the three years ended December 31, 2006:

`Warrants to   Weighted-
                                             purchase     average
                                              common     excercise
                                              Shares       price
                                           ------------  ---------
Outstanding at December 31, 2003             1,574,000  $   13.76
Granted:
Exercise price greater than intrinsic value    362,000       8.16
Exercised                                      (22,000)      6.50
Canceled/expired                              (196,000)     18.41
                                           ------------
Outstanding at December 31, 2004             1,718,000      13.76
Granted:
Exercise price greater than intrinsic value  2,602,000       5.59
Exercise price equal to intrinsic value          7,000       5.32
Exercised                                           --         --
Canceled/expired                              (207,000)     25.14
                                           ------------
Outstanding at December 31, 2005             4,120,000       6.99
Granted:
Exercise price greater than intrinsic value 12,900,000       2.66
Exercise price equal to intrinsic value        537,000       2.81
Exercised                                           --         --
Canceled/expired                                    --         --
                                           ------------
Outstanding at December 31, 2006            17,557,000  $    3.50
                                           ============
Exercisable at December 31, 2006             4,120,000  $    6.57
                                           ============`

The following table summarizes information about the weighted-average fair
value of Microvision common stock warrants granted:

`Year Ended December 31,
                                                             -------------------------------------
                                                                2006         2005         2004
                                                             -----------  -----------  -----------
Exercise price greater than fair value                      $      1.81  $      2.74  $      4.07
Exercise price equal to fair value                                   --         3.24           --
Exercise price less than fair value                                2.00           --           --`

The following table summarizes information about Microvision common stock
warrants outstanding and exercisable at December 31, 2006:

`Warrants outstanding               Warrants exercisable
                                     ---------------------------------  ------------------------
                                       Number     Weighted
                                     outstanding   average   Weighted      Number      Weighted
                                         at       remaining   average   exercisable at  average
                                     December 31, contractualexcercise  December 31,   excercise
Range of exercise prices                2006        life       price        2006         price
-----------------------------------  -----------  ---------  ---------  -------------  ---------
                                                (years)                                      
$2.65                                12,362,000       5.08  $    2.65             --         --
$2.76-$2.81                           1,075,000       4.43       2.89             --         --
$3.87-$3.94                           1,390,000       3.83       3.93      1,390,000       3.93
$4.02-$5.32                             603,000       1.87       4.34        603,000       4.34
$6.14-$6.56                           1,857,000       1.79       6.27      1,857,000       6.27
$7.50-$34.00                            270,000       2.86      27.30        270,000      27.30
                                     -----------                        -------------
$2.65-$34.00                         17,557,000                            4,120,000
                                     ===========                        =============`

The fair value of the Microvision common stock warrants granted was estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 2006, 2005 and 2004,
respectively: dividend yield of zero percent for all years; expected volatility
of 65%, 70% and 75%; risk-free interest rates of 5.0%, 4.2%, and 3.4% and
expected lives of 5, 4 and 5 years, respectively.

13.	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 existing 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 additional non-cash compensation.  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                                               5.0%         5.0%`

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 FAS 123 in 2005 and 2004, 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):

`Year Ended December 31,
                                                                     ----------------------
                                                                        2005        2004
                                                                     ----------  ----------
Net loss available for common shareholders, as reported             $  (30,284) $  (33,543)
Add: Stock-based employee compensation expense included in net loss
   available for common shareholders, as reported                           94         339
Deduct: Total stock-based employee compensation expense determined
   under fair value based method for all awards                         (1,931)     (5,886)
                                                                     ----------  ----------
Net loss available for common shareholders, pro forma               $  (32,121) $  (39,090)
                                                                     ==========  ==========
Net loss per share as reported                                      $    (1.35) $    (1.56)
                                                                     ==========  ==========
  Basic and diluted pro forma                                       $    (1.43) $    (1.82)
                                                                     ==========  ==========`

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 inter-period
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 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,
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 to use the straight-line method.  The
accelerated expense attribution method under Financial Accounting Standards
Board Interpretation No. 28 ("FIN 28") 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 loss for the year ended
December 31, 2006 was $1.8 million greater than had it continued to account for
share-based employee compensation under APB 25.  In addition, basic and diluted
net loss per share was greater by $0.05 per share.

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

`Year Ended December 31,
                                                                   ------------------------------------
                                                                      2006         2005         2004
                                                                   -----------  -----------  ----------            
Share-based employee compensation cost charged against income     $     1,825  $        94  $      339
                                                                   ===========  ===========  ==========`

Description of Incentive Plans

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

In July 2006, the 1996 Stock Option Plan (the "1996 Plan") expired.
In September 2006, Company shareholders approved the 2006 Microvision, Inc.
Incentive Plan which amends, restates and renames the 1996 Plan ("2006
Incentive Plan").  All awards outstanding under the 1996 Plan remain
outstanding under the 2006 Incentive Plan.  The 2006 Incentive Plan retained the
8.0 million share authorization that was under the 1996 Plan and permits
granting non-qualified stock options ("NSOs"), incentive stock options
("ISOs"), stock appreciation rights, restricted or unrestricted stock,
deferred stock, other share-based awards, or cash awards to employees, officers
and certain non-employees of the Company.  Any award may be a performance-based
award.  Awards granted under the 2006 Incentive Plan have generally been to
employees under non-qualified stock option agreements with the following
provisions: exercise prices greater than or equal to the Company's closing 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 a limited time to exercise their options
(typically three to twelve months).

The Independent Director Stock Option Plan ("Director Option Plan")
has 900,000 shares authorized and permits granting NSOs to independent directors
of the Company.  In June 2005, shareholders approved an amendment to the
Director Option Plan, increasing the number of shares reserved for the plan by
400,000 to 900,000 shares. Under the 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.  Grants awarded under the Director Option Plan generally, have the
following terms: exercise price equal to the Company's closing 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 volatilities, volatilities of
similar companies and other factors in determining its estimates of future
volatilities.

The Company follows the guidance provided by Staff Accounting Bulletin No.
107 ("SAB 107") for estimating "plain vanilla" option lives.
For  "non plain vanilla" 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 U.S. Treasury Yield Curve as published by
the U.S. 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:

`Year Ended December 31,
                                                                   ------------------------------------
                                                                      2006         2005         2004
                                                                   -----------  -----------  ----------            
Assumptions (weighted average)
Volatility                                                                 72%          70%         76%
Expected term (in years)                                                  6.1          5.1         3.0
Risk-free rate                                                            5.0%         4.0%        3.0%
Expected dividends                                                         --           --          --
Pre-vest forfeiture rate                                                  5.0%       n/a          n/a
Grant date fair value of options granted                          $      2.26  $      3.44  $     3.45`

Options Activity and Positions

The following table summarizes activity and positions with respect to options
for the year ended December 31, 2006:

`Weighted
                                                                                              Average
                                                                                 Weighted    Remaining
                                                                                  Average    Contractual Aggregate
                                                                                 Exercise       Term     Intrinsic
Options                                                              Shares        Price      (years)      Value
-----------------------------------------------------------------  -----------  -----------  ----------  ----------
Outstanding at December 31, 2003                                    4,721,000  $     12.43
Granted                                                               754,000         7.14
Exercised                                                             (38,000)        6.25
Forfeited or expired                                                 (319,000)       12.03
                                                                   -----------
Outstanding as of December 31, 2004                                 5,118,000        11.72         7.6  $  683,000
Granted                                                               574,000         5.33
Exercised                                                              (5,000)        4.03
Forfeited or expired                                                 (367,000)       10.99
                                                                   -----------
Outstanding at December 31, 2005                                    5,320,000        11.09         6.8  $    3,000
Granted  *                                                          4,280,000         2.99
Exercised                                                             (16,000)        2.77
Forfeited or expired  *                                            (3,873,000)        9.62
                                                                   -----------
Outstanding as of December 31, 2006                                 5,711,000  $      6.04         6.9  $1,384,000
                                                                   ===========  ===========  ==========  ==========

Vested and expected to vest as of December 31, 2006                 5,381,000  $      6.22         6.8  $1,287,000
                                                                   ===========  ===========  ==========  ==========

Exercisable as of December 31, 2006                                 2,563,000  $      9.69         6.0  $  361,000
                                                                   ===========  ===========  ==========  ==========`

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

The total intrinsic value of options exercised during the years ended
December 31, 2006, 2005 and 2004 were $5,000, $9,000 and $117,000,
respectively.

As of December 31, 2006, the Company's unamortized share-based compensation
was $3.4 million.  The Company plans to amortize this share-based compensation
cost over the next 2.1 years.

During 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 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
additional paid-in capital.

14.	Commitments and contingencies

Agreements with the University of Washington

In October 1993, the Company entered into a Research Agreement and an
exclusive license agreement ("License Agreement") with the UW.  The
License Agreement grants the Company the rights to certain intellectual
property, including the technology being subsequently developed under the
Microvision research agreement ("Research Agreement"), whereby the
Company has an exclusive, royalty-bearing license to make, use and sell or
sublicense the licensed technology.  In consideration for the license, the
Company agreed to pay a one-time nonrefundable license issue fee of $5,134,000.
Payments under the Research Agreement were credited to the license fee.  In
addition to the nonrefundable fee, which has been paid in full, the Company is
required to pay certain ongoing royalties.  Beginning in 2001, the Company is
required to pay the UW a nonrefundable license maintenance fee of $10,000 per
quarter, to be credited against royalties due.

Litigation

The Company is subject to various claims and pending or threatened lawsuits
in the normal course of business.  The Company is not currently party to any
legal proceedings that management believes the adverse outcome of which would
have a material adverse effect on the Company's financial position, results of
operations or cash flows.

Lease commitments

The Company leases its office space and certain equipment under noncancelable
capital and operating leases with initial or remaining terms in excess of one
year.

The Company entered into a 90 month facility lease that commenced in February
2006.  The lease includes extension and rent escalation provisions over the 90
month term of the lease. Rent expense will be recognized on a straight-line
basis over the lease term.

Future minimum rental commitments under capital and operating leases for
years ending December 31 are as follows:

`Capital       Operating
                                                     leases         leases
                                                  -------------  -------------
2007                                             $      60,000  $     812,000
2008                                                    55,000        838,000
2009                                                    49,000        839,000
2010                                                    40,000        868,000
2011                                                     8,000        901,000
Thereafter                                                  --      1,499,000
                                                  -------------  -------------
Total minimum lease payments                           212,000  $   5,757,000
                                                                 =============
Less: Amount representing interest                     (34,000)
                                                  -------------
Present value of capital lease obligations             178,000
Less: Current portion                                  (45,000)
                                                  -------------
Long-term obligation at December 31, 2006        $     133,000
                                                  =============`

The capital leases are collateralized by the related assets financed and by
security deposits held by the lessors under the lease agreements.  The cost and
accumulated depreciation of equipment under capital leases was $1,017,000, and
$837,000, respectively, at December 31, 2006 and $1,309,000 and $1,140,000,
respectively, at December 31, 2005.

Net rent expense was $1,082,000, $1,435,000, and $1,689,000 for 2006, 2005
and 2004, respectively.  Sub-lease income of $125,000, $575,000 and $363,000 for
2006, 2005, and 2004 respectively was included as a reduction in rent
expense.

Long-term debt

During 2006, the Company entered into a loan agreement with the lessor of the
Company's corporate headquarters in Redmond 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 was $516,000 at December
31, 2006

Adverse purchase commitments

The Company has periodically entered into noncancelable purchase contracts in
order to ensure the availability of materials to support Flic production.
Management periodically assesses the need to provide for impairment on these
purchase contracts and records a loss on purchase commitments when required.  In
December 2006, the Company recorded a loss of $310,000 to cost of product
revenue as a result of commitments to purchase materials for the Flic scanner
that are in excess of our estimated future proceeds from the sale of the Flic
scanners.

15.	Income taxes

A provision for income taxes has not been recorded for 2006, 2005 and 2004
due to the valuation allowances placed against the net operating losses and
deferred tax assets arising during such periods.  A valuation allowance has been
recorded for all deferred tax assets because based on the Company's history of
losses since inception, the available objective evidence creates sufficient
uncertainty regarding the realizability of the deferred tax assets.

At December 31, 2006, Microvision has net operating loss carry forwards of
approximately $198.0 million, for federal income tax reporting purposes.  In
addition, Microvision has research and development tax credits of $2.9 million.
The net operating loss carry forwards and research and development credits
available to offset future taxable income, if any, will expire in varying
amounts from 2008 to 2025 if not previously utilized.  In certain circumstances,
as specified in the Internal Revenue Code, a 50% or more ownership change by
certain combinations of the Company's stockholders during any three-year period
would result in limitations on the Company's ability to utilize its net
operating loss carry-forwards.  The Company has determined that such a change
occurred during 1995 and the annual utilization of loss carry-forwards generated
through the period of that change will be limited to approximately $761,000.  An
additional change occurred in 1996; and the limitation for losses generated in
1996 is approximately $1,600,000.

Deferred tax assets are summarized as follows:

`December 31,
                                                  ----------------------------
                                                      2006           2005
                                                  -------------  -------------
Net operating loss carry forwards Microvision    $  67,335,000  $  65,006,000
R&D credit carry forwards Microvision                2,894,000      2,559,000
Other                                                9,266,000      3,463,000
                                                  -------------  -------------
                                                    79,495,000     71,028,000
Less: Valuation allowance                          (79,495,000)   (71,028,000)
                                                  -------------  -------------
Deferred tax assets                              $          --  $          --
                                                  =============  =============`

The valuation allowance and the research and development credit carry
forwards account for substantially all of the difference between the Company's
effective income tax rate and the Federal statutory tax rate of 34%.

Certain net operating losses arise from the deductibility for tax purposes of
compensation under nonqualified stock options equal to the difference between
the fair value of the stock on the date of exercise and the exercise price of
the options.  For financial reporting purposes, the tax effect of this deduction
when recognized is accounted for as a credit to shareholders' equity.

16.	Retirement savings plan

The Company has a retirement savings plan ("the Plan") that
qualifies under Internal Revenue Code Section 401(k).  The Plan covers all
qualified employees.  Contributions to the Plan by the Company are made at the
discretion of the Board of Directors.

In February 2000, the Board of Directors approved a plan amendment to match
50% of employee contributions to the Plan up to 6% of the employee's per pay
period compensation, starting on April 1, 2000.  During 2006, 2005 and 2004, the
Company contributed $308,000, $321,000 and $337,000, respectively, to the Plan
under the matching program.

17.	Segment Information

Prior to Lumera's initial public offering in July 2004, the Company was
organized into two segments - Microvision, which is engaged in light scanning
and related technologies, and Lumera, which is engaged in optical systems
components technology.  The segments were determined based on how management
views and evaluates the Company's operations.

The accounting policies used to derive reportable segment results are
described in Note 2, "Summary of Significant Accounting Policies."

A portion of each segments' administration expenses arise from shared
services and infrastructure that Microvision has provided to both segments in
order to realize economies of scale and to efficiently use resources.  These
efficiencies include costs of certain legal, accounting, human resources and
other Microvision corporate and infrastructure costs.  These expenses are
allocated to the segments and the allocation has been determined on a basis that
the Company considered to be a reasonable reflection of the utilization of
services provided to, or benefits received by, the segments.

Since 2000, Microvision has held an investment in Lumera.  From inception to
July 2004, Lumera was a consolidated subsidiary and treated as a separate
segment within Microvision.  Subsequent to July 2004, Lumera became an equity
method investment.  Since July 2004, Microvision has operated as one
segment.

At January 31, 2006 and December 31 2005, Lumera was a significant
unconsolidated equity investment of Microvision.  For the one month period ended
January 31, 2006, Lumera revenue was $168,000, gross profit was $82,000, loss
from operations was $1,109,000 and net loss was $1,040,000.  For 2005, Lumera
revenue was $1,509,000, gross profit was $587,000, loss from operations was
$11,108,000 and net loss was $10,453,000.  For the period that Lumera was an
unconsolidated investment in 2004 (July 2004 through December 31, 2004) Lumera
revenue was $303,000, gross profit was $85,000, loss from operations was
$5,205,000 and net loss was $5,199,000.  At December 31, 2005, Lumera had
current assets of $22,384,000, non-current assets of $1,322,000, current
liabilities of $1,552,000 and shareholders' equity of $22,154,000.
The following table reflects the results of the Company's
reportable segments under the Company's management system (in thousands).

`Year Ended December 31, 2004
                                                 --------------------------------------------------
                                                 Microvision    Lumera     Elimination     Total
                                                 -----------  -----------  -----------  -----------
Contract Revenue                                $     8,135  $       686  $        --  $     8,821
Product  Revenue                                      2,597           --           --        2,597
Cost of Contract Revenue                              5,106          433           --        5,539
Cost of Product Revenue                               3,868           --           --        3,868
Research and development expense                     13,581        1,129                    14,710
Marketing, general and administrative expense        17,795        1,433           --       19,228
Non-cash compensation expense                           821        1,297           --        2,118
Interest income                                         270            2           --          272
Interest expense                                         31          120           --          151
Segment loss                                         32,257        3,724       (2,438)      33,543
Depreciation                                          1,711          695           --        2,406
Expenditures for capital assets                         970           70           --        1,040
Segment assets                                       25,538           --                    25,538`

18.	Quarterly Financial Information (Unaudited)

The following table presents the Company's unaudited quarterly financial
information for the years ending December 31, 2006 and 2005:

`Year Ended December 31, 2006
                                        ----------------------------------------------------------
                                        December 31,   September 30,    June 30,       March 31,
                                        -------------  -------------  -------------  -------------
Revenue                                $   1,842,000  $     823,000  $   1,906,000  $   2,472,000
Gross Margin                                (181,000)      (195,000)      (774,000)        27,000
Net loss available for common shareholde  (8,681,000)    (7,692,000)   (11,215,000)       331,000
Net loss per share basic and diluted           (0.21)         (0.20)         (0.38)          0.01

                                                       Year Ended December 31, 2005
                                        ----------------------------------------------------------
                                        December 31,   September 30,    June 30,       March 31,
                                        -------------  -------------  -------------  -------------
Revenue                                $   2,709,000  $   3,330,000  $   4,725,000  $   3,982,000
Gross Margin                              (1,756,000)      (434,000)       840,000      1,004,000
Net loss available for common shareholde  (5,566,000)   (12,571,000)    (4,968,000)    (7,179,000)
Net loss per share basic and diluted           (0.23)         (0.56)         (0.23)         (0.33)`

During 2006 and 2005, the Company recorded inventory write-offs and adverse
purchase commitments of $1,491,000 and $3,732,000, respectively, of which $900,000
and $1,297,000 were during the quarters ended December 31, 2006 and 2005,
respectively.

19.	Subsequent Event

At a special meeting of shareholders of Microvision, Inc. on January 18,
2007, shareholders approved an amendment to our Certificate of Incorporation to
increase the number of authorized shares of common stock from 73.0 million
shares to 125.0 million shares.  The newly authorized shares or common stock
have the same rights as the previously authorized shares, including the right to
cast one vote per share of common stock.

---

MICROVISION, INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                  (in thousands)

`Additions
                                                                       ------------------------
                                                          Balance at   Charges to   Charges to                  Balance at
                                                         beginning of   costs and      other                      end of
                      Description                        fiscal period  expenses     accounts     Deductions   fiscal period
-------------------------------------------------------  ------------  -----------  -----------  ------------  -------------
    Year Ended December 31, 2004
        Allowance for receivables from related parties  $        900  $        --  $        --  $         --  $         900
        Tax valuation allowance                               63,513           --       11,015       (10,556)        63,972

    Year Ended December 31, 2005
        Allowance for receivables from related parties           900        1,031           --            --          1,931
        Tax valuation allowance                               63,972           --        7,056            --         71,028

    Year Ended December 31, 2006
        Allowance for receivables from related parties         1,931          542           --            --          2,473
        Tax valuation allowance                               71,028           --        8,467            --         79,495`

ITEM 9. 	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no changes in or disagreements with accountants in accounting
or financial disclosure matters during the Company's fiscal years ended December
31, 2006 and 2005.

ITEM 9A. 	CONTROLS AND PROCEDURES 
(a)Evaluation of disclosure controls and procedures. Our Chief Executive
Officer("CEO") and Chief Financial Officer ("CFO") evaluated our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), prior to the filing of
this Form 10-K. Based on that evaluation, our CEO and CFO concluded that, as of the end
of the period covered by this Form 10-K, our disclosure controls and
procedures were, in design and operation, effective.

(b) Management's Report on Internal Control Over Financial
Reporting. Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Our management conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control - Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on its
evaluation under the framework in Internal Control - Integrated Framework,our management concluded that our internal control over financial reporting
was effective as of December 31, 2006. 
Our management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included in Item 8 of  this Annual Report on
Form 10-K.

(c) Changes in internal controls over financial reporting. There have
not been any changes in the Company's internal control over financial reporting
during the quarter ended December 31, 2006 which have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.

ITEM 9B.	OTHER INFORMATION

None



PART III

ITEM 10. 	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

In accordance with Instruction G(3) of Form 10-K, the information required by this item
is incorporated herein by reference to the Proxy Statement, except for the information
regarding the executive officers of the Company.  Information regarding executive officers
is included in Part I of this report under the caption "Executive Officers of the
Registrant."  The Proxy Statement will be filed prior to the Company's annual
shareholders' meeting scheduled to be held on June 13, 2007.

ITEM 11.	EXECUTIVE COMPENSATION.

In accordance with Instruction G(3) of Form 10-K, the information required by this Item
is incorporated herein by reference to the Proxy Statement (see Item 10 above).

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                   AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Information as of December 31, 2006 regarding equity compensation plans approved and
not approved by stockholders is summarized in the following table:

`Equity Compensation Plan Information
                                                         ---------------------------------------------------------------------
                                                              Number of             Weighted-          Number of securities
                                                           securities to be     average excercise     remaining available for
                                                             issued upon             price of         further issuance under
                                                             excercise of          outstanding          equity compensation
                                                             outstanding        options, warrants        plans (excluding
                                                          options, warrants         and rights        securities reflected in
                                                              and rights                                    column (a))
Plan Category                                                    (a)                   (b)                      (c)
-------------------------------------------------------  --------------------  --------------------  -------------------------
Equity compensation plans approved by shareholders                 5,710,000  $               6.04                  2,387,000
Equity compensation plans not approved by shareholders               278,000                 26.71                         --
                                                         --------------------                        -------------------------
    Total                                                          5,988,000  $               7.00                  2,387,000
                                                         ====================                        =========================`

In August 2000, the Company issued two non-plan warrants to purchase an
aggregate of 200,000 shares of Microvision common stock to two consultants in
connection with entering into certain consulting agreements with the Company.
Subsequently, one of the consultants was elected to the Board of Directors by
shareholders.  The warrants were fully outstanding as of December 31, 2006.  The
warrants have an exercise price of $34.00 per share and are exercisable prior to
their expiration in August 2010.  As of the date of grant, all but 25,000 of the
underlying shares of common stock issuable to each consultant upon exercise of
the warrants were subject to lock-up restrictions that prevent the holder from
transferring such shares.  The number of shares subject to the lock-up
restrictions is reduced by 25,000 for each consultant on each June 7 subsequent
to the grant date.  Rather than issue shares of common stock upon exercise of
the warrants, the Company may elect to redeem the warrants if, in the opinion of
the Board of Directors upon advice of counsel, it would be unlawful to issue the
underlying securities.  The warrants are transferable upon prior written
approval of the Company.  The Company cannot unreasonably withhold such approval
with respect to transfers of warrants to purchase at least 10,000 shares that
are not subject to the lock-up restrictions.  If the Company terminates the
consulting agreement due to the consultant's failure to provide consulting
services during the first three years of the agreement, the consultant must
return to the Company a pro-rata portion of the 75,000 warrants initially
subject to the lock-up restrictions based on the number of calendar days
remaining in the initial three year period.  The number, class and price of
securities for which the warrants may be exercised are subject to adjustment for
certain changes in the Company's capital structure.  The number of securities
and exercise price per share will be proportionately adjusted if outstanding
shares of the Company's common stock are divided into a greater number of shares
or combined into a smaller number of shares, or a stock dividend is paid on the
common stock.  In the event of a change in the common stock from a merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, or other change in the capital structure of the Company, the
Company will, as a condition of the change in capital structure, make provision
for the warrant holder to receive upon the exercise of the warrants the kind and
amount of shares of stock, other securities or property to which the holder
would have been entitled if, immediately prior to the change in capital
structure, the warrant holder had held the number of shares of common stock
obtainable upon the exercise of the warrants, and the exercise price will be
proportionately adjusted.

The Company has two warrants outstanding to purchase an aggregate of 70,000
shares of Microvision common stock that were issued in September 2003 to a third
party for services.  The first warrant for 60,000 shares has an exercise price
of $7.50 per share and vests in three equal traunches.  The first traunche vested
on the issue date, and the second and third traunches vested three and six months
following the issue date, respectively.  The second warrant for 10,000 shares
has an exercise price of $12.00 per share and vested six months after the issue date.
Vested warrants are exercisable prior to their expiration in
September 2007.  The warrant holder may transfer any portion or all of the
warrant shares by delivering the original warrant certificate and a form of
assignment to the Company.  The number and price of securities for which the
warrant may be exercised are subject to adjustment for certain changes in the
Company's capital structure.  Where the outstanding shares of common stock are
divided into a greater number of shares, combined into a smaller number of
shares, or a stock dividend is paid on the common stock, the exercise price per
share shall be proportionately adjusted by the ratio of common shares
outstanding immediately before and after the transaction.  In the event of a
change in the common stock from a merger, consolidation, reclassification,
tender offer or exchange offer, or partial or complete liquidation, the holder
will be entitled to receive, upon the exercise of the warrants, the same amount
and kind of securities, cash or property to which the holder would have been
entitled if, immediately prior to the change in capital structure, the warrant
holder had held the number of shares of common stock obtainable upon the
exercise of warrants.

In July 2005, Microvision issued a warrant to purchase 6,925 shares of common
stock to a third party for services.  The warrant is immediately exercisable,
has an exercise price of $5.32 per share, and expires in July 2010.  The number
and price of securities for which the warrant may be exercised are subject to
adjustment for certain changes in the Company's capital structure.  Where the
outstanding shares of common stock are divided into a greater number of shares,
combined into a smaller number of shares, or a stock dividend is paid on the
common stock, the exercise price per share shall be proportionately adjusted by
the ratio of common shares outstanding immediately before and after the
transaction.  In the event of a change in the common stock from a
reorganization, reclassification, consolidation, or merger, the holder will be
entitled to receive, upon the exercise of the warrants, the same amount and kind
of securities, cash or property to which the holder would have been entitled if,
immediately prior to the change in capital structure, the warrant holder had
held the number of shares of common stock obtainable upon the exercise of the
warrants.

In accordance with Instruction G(3) of Form 10K, the other information required by
this Item is incorporated herein by reference to the Proxy Statement (see Item 10 above).

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

In accordance with Instruction G(3) of Form 10-K, the information requred by this Item is
incorporated herein by reference to the Proxy Statement (see Item 10 above).

ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES.

In accordance with Instruction G(3) of Form 10-K, the information required by this Item is
incorporated herein by reference to the Proxy Statement (see Item 10 above).



PART IV

ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) 	Documents filed as part of the report:

Financial Statements

Balance Sheets as of December 31, 2006 and 2005

Statements of Operations for the years ended December 31, 2006, 2005
and 2004

Consolidated Statements of Mandatory Redeemable Convertible Preferred
Stock and Shareholders' Equity (Deficit) for the years ended December 31, 2006, 2005 and 2004

Statements of Comprehensive Loss for the years ended December 31, 2006, 2005 and 2004

Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004

Valuation and Qualified Accounts and Reserves for the years ended December 31, 2006, 2005 and 2004

(b)	Exhibits

|3.1   | Certificate of Incorporation of Microvision, Inc., as amended.                                                                                                                                                                                       
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2   | Bylaws of Microvision, Inc.(2)                                                                                                                                                                                                                       
|4.1   | Form of Specimen Stock Certificate for Common
Stock.(2)                                                                                                                                                                                              
|4.2   | Form of Warrant issued on July 22, 2002.(7)                                                                                                                                                                                                          
|4.3   | Form of Warrant Agreement dated March 5, 2003.(6)                                                                                                                                                                                                    
|4.4   | Registration Rights Agreement dated as of September 9, 2004 by
and between Microvision, Inc. and Satellite Strategic Finance Associates,
LLC.(10)                                                                                                    
|4.5   | Warrant No. 76 to Purchase Common Stock of Microvision, Inc.
issued September 10, 2004 to Satellite Strategic Finance Associates, LLC.(10)                                                                                                           
|4.6   | Registration Rights Agreement executed in connection with the
Securities Purchase Agreement dated as of March 11, 2005 by and among
Microvision, Inc. and the investors listed on the Schedule of Buyers
thereto.(11)                                
|4.7   | Form of Warrant issued under the Securities Purchase Agreement
dated as of March 11, 2005 by and among Microvision, Inc. and the investors
listed on the Schedule of Buyers thereto.(11)                                                             
|4.8   | Form of Amended and Restated Note issued as of March 11, 2005
under the Master Amendment Agreement dated July 25, 2005 by and among
Microvision, Inc. and the investors listed on the Schedule of Buyers
thereto.(14)                                
|4.9   | Form of Warrant issued as of July 25, 2005 under the Master
Amendment Agreement dated as of July 25, 2005 by and among Microvision, Inc. and
the investors listed on the Schedule of Buyers thereto.(14)                                             
|4.10  | Registration Rights Agreement dated as of August 8, 2005 by and
between Microvision, Inc., Satellite Strategic Finance Associates, LLC and
Satellite Strategic Finance Partners, Ltd.(16)                                                            
|4.11  | Warrant No. 86 to Purchase Common Stock of Microvision, Inc.
issued August 9, 2005 to Satellite Strategic Finance Partners, Ltd.(16)                                                                                                                 
|4.12  | Warrant No. 87 to Purchase Common Stock of Microvision, Inc.
issued August 9, 2005 to Satellite Strategic Finance Associates, LLC.(16)                                                                                                               
|4.13  | Registration Rights Agreement dated as of August 31, 2005 by and
between Microvision, Inc. and Omicron Master Trust.(17)                                                                                                                             
|4.14  | Warrant No. 88 to Purchase Common Stock of Microvision, Inc.
issued August 31, 2005 to Omicron Master Trust(17)                                                                                                                                      
|4.15  | Registration Rights Agreement executed in connection with the
Securities Purchase Agreement dated as of November 30, 2005 by and among
Microvision, Inc. and the investors listed on the Schedule of Buyers
thereto.(19)                             
|4.16  | Form of Note issued as of December 1, 2005 under the Securities
and Purchase Agreement dated as of November 30, 2005 by and among Microvision,
Inc. and the investors listed on the Schedule of Buyers
thereto.(18)                                  
|4.17  | Form of Warrant issued under the Securities Purchase Agreement
dated as of November 30, 2005 by and among Microvision, Inc. and the investors
listed on the Schedule of Buyers thereto.(18)                                                          
|4.18  | Form of Amended and Restated Pledge and Security Agreement
executed in connection with the Securities Purchase Agreement dated as of
November 30, 2005 by and among Microvision, Inc. and the investors listed on the
Schedule of Buyers thereto.(18)
|4.19  | Registration Rights Agreement dated as of May 3, 2006 by and
between Microvision, Inc. and Satellite Strategic Finance Associates,
LLC.(20)                                                                                                          
|4.20  | Form of Warrant Agreement dated June 5, 2006 by and between
Microvision, Inc. and American Stock Transfer & Trust
Company.(21)                                                                                                                       
|4.21  | Form of Underwriter's Warrant Agreement dated June 5, 2006 by
and between Microvision, Inc. and MDB Capital Group,
LLC.(21)                                                                                                                          
|4.22  | Form of Underwriter's Warrant to Acquire Warrants Agreement
dated June 5, 2006 by and between Microvision, Inc. and MDB Capital Group,
LLC.(21)                                                                                                      
|10.1  | Assignment of License and Other Rights between The University of
Washington and the Washington Technology Center and the H. Group, dated July 25,
1993.(1)                                                                                           
|10.2  | Project II Research Agreement between The University of
Washington and the Washington Technology Center and Microvision, Inc., dated
October 28, 1993.(1)+                                                                                           
|10.3  | Exclusive License Agreement between The University of Washington
and Microvision, Inc., dated October 28, 1993.(1)+                                                                                                                                  
|10.4  | Exclusive License Agreement between the University of Washington
and Microvision, Inc. dated March 3, 1994.(6)                                                                                                                                       
|10.5  | 2006 Microvision, Inc. Incentive Plan.                                                                                                                                                                                                               
|10.6  | Independent Director Stock Option Plan, as
amended.(5)*                                                                                                                                                                                              
|10.7  | Form of Common Stock Purchase Warrant issued to Avram Miller and
Jacqueline Brandwynne dated August 10, 2000.(3)                                                                                                                                     
|10.8  | Executive Loan Plan and Related Form of
Note.(4)*                                                                                                                                                                                                    
|10.9  | Form of the Option Agreement for options granted outside of the
Plans.(8)                                                                                                                                                                            
|10.10 | Securities Purchase Agreement dated as of September 9, 2004 by
and between Microvision, Inc. and Satellite Strategic Finance Associates,
LLC.(10)                                                                                                    
|10.11 | License and Development Agreement dated as of December 30, 2004
by and between Microvision, Inc. and Ethicon Endo-Surgery,
Inc.(12)+                                                                                                                 
|10.12 | Securities Purchase Agreement dated as of March 11, 2005 by and
among Microvision, Inc. and the investors listed on the Schedule of Buyers
thereto.(11)                                                                                              
|10.13 | Employment Agreement between Microvision, Inc. and Alexander Y.
Tokman dated July 18, 2005.(13)                                                                                                                                                      
|10.14 | Master Amendment Agreement dated July 25, 2005 by and among
Microvision, Inc. and the investors listed on the Schedule of Buyers
thereto.(14)                                                                                                        
|10.15 | Lease Agreement between CarrAmerica Reality Operating
Partnership, L.P. and Microvision, Inc., dated July 15,
2005.(15)                                                                                                                              
|10.16 | Securities Purchase Agreement dated as of August 8, 2005 by and
between Microvision, Inc., Satellite Strategic Finance Associates, LLC and
Satellite Strategic Finance Partners, Ltd.(16)                                                            
|10.17 | Conversion and Modification Agreement dated as of August 8, 2005
by and between Microvision, Inc. and Satellite Strategic Finance Associates,
LLC.(16)                                                                                               
|10.18 | Securities Purchase Agreement dated as of August 31, 2005 by and
between Microvision, Inc. and Omicron Master Trust.(17)                                                                                                                             
|10.19 | Securities Purchase Agreement dated as of November 30, 2005 by
and among Microvision, Inc. and the investors listed on the Schedule of Buyers
thereto.(19)                                                                                           
|10.20 | Conversion Agreement dated as of May 3, 2006 by and between
Microvision, Inc. and Satellite Strategic Finance Associates,
LLC.(20)                                                                                                                   
|10.21 | Microvision, Inc. 2006 Incentive Plan                                                                                                                                                                                                                
|23    | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                            
|31.1  | Principal Executive Officer certification pursuant to Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|31.2  | Principal Financial Officer certification pursuant to Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|32.1  | Principal Executive Officer certification pursuant to Rule 13a-14(b)
or Rule 15d-14(b) and Section 1350, Chapter 63 of Title 18 United States
Code (18 U.S.C. 1350), as adopted pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.               
|32.2  | Principal Financial Officer certification pursuant to Rule 13a-14(b)
or Rule 15d-14(b) and Section 1350, Chapter 63 of Title 18 United States
Code (18 U.S.C. 1350), as adopted pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.               

(1)	Incorporated by reference to the Company's Form SB-2 Registration
Statement, Registration No. 333-05276-LA.

(2)	Incorporated by reference to the Company's Post-Effective Amendment to
Form S-3 Registration Statement, Registration No. 333-102244.

(3) 	Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended September 30, 2000, available at the SEC's Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549 under the Company's
Commission File Number, 0-21221.

(4) 	Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001, available at the SEC's Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549 under the Company's
Commission File Number, 0-21221.

(5) 	Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 2002.

(6) 	Incorporated by reference to the Company's Current Report on Form 8-K
filed on March 5, 2003.

(7) 	Incorporated by reference to the Company's Current Report on Form 8-K
filed on July 23, 2002.

(8) 	Incorporated by reference to the Company's Schedule TO filed on
November 1, 2002.

(9) 	Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended September 30, 1998, available at the SEC's Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549 under the Company's
Commission File Number, 0-21221.

(10)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on September 10, 2004.

(11)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on March 14, 2005.

(12)	Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2004.

(13)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on July 7, 2005.

(14) 	Incorporated by reference to the Company's Current Report on Form 8-K filed on July 29, 2005.

(15) 	Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 2005.

(16)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 10, 2005.

(17)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on September 2, 2005.

(18) 	Incorporated by reference to the Company's Current Report on Form 8-K filed on December 1, 2005.

(19)	Incorporated by reference to the Company's Current Report on Form 8-K\A filed on December 2, 2005.

(20)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on May 5, 2006.

(21)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on May 31, 2006.

+	Subject to confidential treatment.

*	Management contracts and compensatory plans and arrangements required to
be filed as exhibits pursuant to Item 15(b) of this Report.

---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: March 15, 2007 | By | Alexander Tokman Alexander Tokman
   President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the following capacities on March 15, 2007.

|Signature                                 | Title                                                                
|----------------------------------------- | ---------------------------------------------------------------------
|/s/ Alexander Tokman Alexander Tokman     | Chief Executive Officer and Director
   (Principal Executive Officer)
|                                          |                                                                      
|/s/ Jeff Wilson Jeff Wilson               | Chief Financial Officer                                              
|                                          |                                                                      
|/s/ Richard A. Cowell   Richard A. Cowell | Director                                                             
|/s/ Slade Gorton   Slade Gorton           | Director                                                             
|                                          |                                                                      
|/s/ Marc Onetto   Marc Onetto             | Director                                                             
|                                          |                                                                      
|/s/ Jeannette Horan   Jeannette Horan     | Director                                                             
|                                          |                                                                      
|/s/ Brian Turner   Brian Turner           | Director                                                             

---



EXHIBIT INDEX

The following documents are filed herewith or have been included as exhibits
to previous filings with the Securities and Exchange Commission and are
incorporated by reference as indicated below.

|3.1   | Certificate of Incorporation of Microvision, Inc., as amended.                                                                                                                                                                                       
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2   | Bylaws of Microvision, Inc.(2)                                                                                                                                                                                                                       
|4.1   | Form of Specimen Stock Certificate for Common
Stock.(2)                                                                                                                                                                                              
|4.2   | Form of Warrant issued on July 22, 2002.(7)                                                                                                                                                                                                          
|4.3   | Form of Warrant Agreement dated March 5, 2003.(6)                                                                                                                                                                                                    
|4.4   | Registration Rights Agreement dated as of September 9, 2004 by
and between Microvision, Inc. and Satellite Strategic Finance Associates,
LLC.(10)                                                                                                    
|4.5   | Warrant No. 76 to Purchase Common Stock of Microvision, Inc.
issued September 10, 2004 to Satellite Strategic Finance Associates, LLC.(10)                                                                                                           
|4.6   | Registration Rights Agreement executed in connection with the
Securities Purchase Agreement dated as of March 11, 2005 by and among
Microvision, Inc. and the investors listed on the Schedule of Buyers
thereto.(11)                                
|4.7   | Form of Warrant issued under the Securities Purchase Agreement
dated as of March 11, 2005 by and among Microvision, Inc. and the investors
listed on the Schedule of Buyers thereto.(11)                                                             
|4.8   | Form of Amended and Restated Note issued as of March 11, 2005
under the Master Amendment Agreement dated July 25, 2005 by and among
Microvision, Inc. and the investors listed on the Schedule of Buyers
thereto.(14)                                
|4.9   | Form of Warrant issued as of July 25, 2005 under the Master
Amendment Agreement dated as of July 25, 2005 by and among Microvision, Inc. and
the investors listed on the Schedule of Buyers thereto.(14)                                             
|4.10  | Registration Rights Agreement dated as of August 8, 2005 by and
between Microvision, Inc., Satellite Strategic Finance Associates, LLC and
Satellite Strategic Finance Partners, Ltd.(16)                                                            
|4.11  | Warrant No. 86 to Purchase Common Stock of Microvision, Inc.
issued August 9, 2005 to Satellite Strategic Finance Partners, Ltd.(16)                                                                                                                 
|4.12  | Warrant No. 87 to Purchase Common Stock of Microvision, Inc.
issued August 9, 2005 to Satellite Strategic Finance Associates, LLC.(16)                                                                                                               
|4.13  | Registration Rights Agreement dated as of August 31, 2005 by and
between Microvision, Inc. and Omicron Master Trust.(17)                                                                                                                             
|4.14  | Warrant No. 88 to Purchase Common Stock of Microvision, Inc.
issued August 31, 2005 to Omicron Master Trust(17)                                                                                                                                      
|4.15  | Registration Rights Agreement executed in connection with the
Securities Purchase Agreement dated as of November 30, 2005 by and among
Microvision, Inc. and the investors listed on the Schedule of Buyers
thereto.(19)                             
|4.16  | Form of Note issued as of December 1, 2005 under the Securities
and Purchase Agreement dated as of November 30, 2005 by and among Microvision,
Inc. and the investors listed on the Schedule of Buyers
thereto.(18)                                  
|4.17  | Form of Warrant issued under the Securities Purchase Agreement
dated as of November 30, 2005 by and among Microvision, Inc. and the investors
listed on the Schedule of Buyers thereto.(18)                                                          
|4.18  | Form of Amended and Restated Pledge and Security Agreement
executed in connection with the Securities Purchase Agreement dated as of
November 30, 2005 by and among Microvision, Inc. and the investors listed on the
Schedule of Buyers thereto.(18)
|4.19  | Registration Rights Agreement dated as of May 3, 2006 by and
between Microvision, Inc. and Satellite Strategic Finance Associates,
LLC.(20)                                                                                                          
|4.20  | Form of Warrant Agreement dated June 5, 2006 by and between
Microvision, Inc. and American Stock Transfer & Trust
Company.(21)                                                                                                                       
|4.21  | Form of Underwriter's Warrant Agreement dated June 5, 2006 by
and between Microvision, Inc. and MDB Capital Group,
LLC.(21)                                                                                                                          
|4.22  | Form of Underwriter's Warrant to Acquire Warrants Agreement
dated June 5, 2006 by and between Microvision, Inc. and MDB Capital Group,
LLC.(21)                                                                                                      
|10.1  | Assignment of License and Other Rights between The University of
Washington and the Washington Technology Center and the H. Group, dated July 25,
1993.(1)                                                                                           
|10.2  | Project II Research Agreement between The University of
Washington and the Washington Technology Center and Microvision, Inc., dated
October 28, 1993.(1)+                                                                                           
|10.3  | Exclusive License Agreement between The University of Washington
and Microvision, Inc., dated October 28, 1993.(1)+                                                                                                                                  
|10.4  | Exclusive License Agreement between the University of Washington
and Microvision, Inc. dated March 3, 1994.(6)                                                                                                                                       
|10.5  | 2006 Microvision, Inc. Incentive Plan.                                                                                                                                                                                                               
|10.6  | Independent Director Stock Option Plan, as
amended.(5)*                                                                                                                                                                                              
|10.7  | Form of Common Stock Purchase Warrant issued to Avram Miller and
Jacqueline Brandwynne dated August 10, 2000.(3)                                                                                                                                     
|10.8  | Executive Loan Plan and Related Form of
Note.(4)*                                                                                                                                                                                                    
|10.9  | Form of the Option Agreement for options granted outside of the
Plans.(8)                                                                                                                                                                            
|10.10 | Securities Purchase Agreement dated as of September 9, 2004 by
and between Microvision, Inc. and Satellite Strategic Finance Associates,
LLC.(10)                                                                                                    
|10.11 | License and Development Agreement dated as of December 30, 2004
by and between Microvision, Inc. and Ethicon Endo-Surgery,
Inc.(12)+                                                                                                                 
|10.12 | Securities Purchase Agreement dated as of March 11, 2005 by and
among Microvision, Inc. and the investors listed on the Schedule of Buyers
thereto.(11)                                                                                              
|10.13 | Employment Agreement between Microvision, Inc. and Alexander Y.
Tokman dated July 18, 2005.(13)                                                                                                                                                      
|10.14 | Master Amendment Agreement dated July 25, 2005 by and among
Microvision, Inc. and the investors listed on the Schedule of Buyers
thereto.(14)                                                                                                        
|10.15 | Lease Agreement between CarrAmerica Reality Operating
Partnership, L.P. and Microvision, Inc., dated July 15,
2005.(15)                                                                                                                              
|10.16 | Securities Purchase Agreement dated as of August 8, 2005 by and
between Microvision, Inc., Satellite Strategic Finance Associates, LLC and
Satellite Strategic Finance Partners, Ltd.(16)                                                            
|10.17 | Conversion and Modification Agreement dated as of August 8, 2005
by and between Microvision, Inc. and Satellite Strategic Finance Associates,
LLC.(16)                                                                                               
|10.18 | Securities Purchase Agreement dated as of August 31, 2005 by and
between Microvision, Inc. and Omicron Master Trust.(17)                                                                                                                             
|10.19 | Securities Purchase Agreement dated as of November 30, 2005 by
and among Microvision, Inc. and the investors listed on the Schedule of Buyers
thereto.(19)                                                                                           
|10.20 | Conversion Agreement dated as of May 3, 2006 by and between
Microvision, Inc. and Satellite Strategic Finance Associates,
LLC.(20)                                                                                                                   
|10.21 | Microvision, Inc. 2006 Incentive Plan                                                                                                                                                                                                                
|23    | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                            
|31.1  | Principal Executive Officer certification pursuant to Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|31.2  | Principal Financial Officer certification pursuant to Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|32.1  | Principal Executive Officer certification pursuant to Rule 13a-14(b)
or Rule 15d-14(b) and Section 1350, Chapter 63 of Title 18 United States
Code (18 U.S.C. 1350), as adopted pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.               
|32.2  | Principal Financial Officer certification pursuant to Rule 13a-14(b)
or Rule 15d-14(b) and Section 1350, Chapter 63 of Title 18 United States
Code (18 U.S.C. 1350), as adopted pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.               

(1)	Incorporated by reference to the Company's Form SB-2 Registration
Statement, Registration No. 333-05276-LA.

(2)	Incorporated by reference to the Company's Post-Effective Amendment to
Form S-3 Registration Statement, Registration No. 333-102244.

(3) 	Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended September 30, 2000, available at the SEC's Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549 under the Company's
Commission File Number, 0-21221.

(4) 	Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001, available at the SEC's Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549 under the Company's
Commission File Number, 0-21221.

(5) 	Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 2002.

(6) 	Incorporated by reference to the Company's Current Report on Form 8-K
filed on March 5, 2003.

(7) 	Incorporated by reference to the Company's Current Report on Form 8-K
filed on July 23, 2002.

(8) 	Incorporated by reference to the Company's Schedule TO filed on
November 1, 2002.

(9) 	Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended September 30, 1998, available at the SEC's Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549 under the Company's
Commission File Number, 0-21221.

(10)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on September 10, 2004.

(11)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on March 14, 2005.

(12)	Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2004.

(13)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on July 7, 2005.

(14) 	Incorporated by reference to the Company's Current Report on Form 8-K filed on July 29, 2005.

(15) 	Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 2005.

(16)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 10, 2005.

(17)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on September 2, 2005.

(18) 	Incorporated by reference to the Company's Current Report on Form 8-K filed on December 1, 2005.

(19)	Incorporated by reference to the Company's Current Report on Form 8-K\A filed on December 2, 2005.

(20)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on May 5, 2006.

(21)	Incorporated by reference to the Company's Current Report on Form 8-K
filed on May 31, 2006.

+	Subject to confidential treatment.

*	Management contracts and compensatory plans and arrangements required to
be filed as exhibits pursuant to Item 15(b) of this Report.

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