In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, and shareholders' equity, comprehensive loss and cash flows present fairly, in all material respects, the financial position of Microvision, Inc. at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 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 consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, financial statement schedule and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide 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.

/s/ PricewaterhouseCoopers LLP

Seattle, Washington
March 10, 2010

                                                                                            December 31,
                                                                                       ----------------------
                                                                                          2009        2008
                                                                                       ----------  ----------
Assets                                                                                                       
Current assets
  Cash and cash equivalents                                                           $   43,025  $   25,533
  Investment securities, available-for-sale                                                2,710       2,705
  Accounts receivable, net of allowances of $67 and $57                                      913         537
  Costs and estimated earnings in excess of billings on uncompleted contracts                 70         695
  Inventory                                                                                  926       1,525
  Other current assets                                                                       751         889
                                                                                       ----------  ----------
    Total current assets                                                                  48,395      31,884

  Property and equipment, net                                                              3,904       3,701
  Restricted investments                                                                   1,189       1,332
  Other assets                                                                                48          47
                                                                                       ----------  ----------
      Total assets                                                                    $   53,536  $   36,964
                                                                                       ==========  ==========

Liabilities and Shareholders' Equity                                                                         
Current liabilities
  Accounts payable                                                                    $    4,949  $    3,487
  Accrued liabilities                                                                      4,190       3,545
  Billings in excess of costs and estimated earnings on uncompleted contracts                 55          62
  Liability associated with common stock warrants                                            840         331
  Current portion of capital lease obligations                                                62          41
  Current portion of long-term debt                                                           78          71
                                                                                       ----------  ----------
    Total current liabilities                                                             10,174       7,537

  Capital lease obligations, net of current portion                                          157          45
  Long-term debt, net of current portion                                                     244         322
  Deferred rent, net of current portion                                                    1,070       1,409
                                                                                       ----------  ----------
    Total liabilities                                                                     11,645       9,313
                                                                                       ----------  ----------

Commitments and contingencies

Shareholders' Equity
  Preferred stock, par value $.001; 25,000 shares authorized; 0 and
     0 shares issued and outstanding                                                          --          --
  Common stock, par value $.001; 200,000 shares authorized; 88,686 and
     68,080 shares issued and outstanding                                                     89          68
  Additonal paid-in capital                                                              373,405     319,662
  Accumulated other comprehensive loss                                                       (33)        (38)

  Accumulated deficit                                                                   (331,570)   (292,041)
                                                                                       ----------  ----------
    Total shareholders' equity                                                            41,891      27,651
                                                                                       ----------  ----------
      Total liabilities and shareholders' equity                                      $   53,536  $   36,964
                                                                                       ==========  ==========

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

                                                                                               Years Ended December 31,
                                                                                         ----------------------------------
                                                                                            2009        2008        2007
                                                                                         ----------  ----------  ----------
Contract revenue                                                                        $    2,817  $    4,874  $    9,010
Product revenue                                                                              1,016       1,737       1,474
                                                                                         ----------  ----------  ----------
Total revenue                                                                                3,833       6,611      10,484
                                                                                         ----------  ----------  ----------

Cost of contract revenue                                                                     1,531       1,708       4,916
Cost of product revenue                                                                      2,363       2,143       1,690
                                                                                         ----------  ----------  ----------
Total cost of revenue                                                                        3,894       3,851       6,606
                                                                                         ----------  ----------  ----------
    Gross margin                                                                               (61)      2,760       3,878
                                                                                         ----------  ----------  ----------


Research and development expense                                                            24,577      22,575      14,944
Sales, marketing, general and administrative expense                                        14,540      15,730      15,779
Gain on disposal of fixed assets                                                                --          (5)       (117)
                                                                                         ----------  ----------  ----------
Total operating expenses                                                                    39,117      38,300      30,606
                                                                                         ----------  ----------  ----------
Loss from operations                                                                       (39,178)    (35,540)    (26,728)

Interest income                                                                                212       1,130       1,358
Interest expense                                                                               (68)        (48)       (513)
Impairment of investment securities, available-for-sale                                         --        (300)         --
Gain (loss) on derivative instruments, net                                                    (506)      2,196        (483)
Other income (expense)                                                                          11         (58)        (27)
                                                                                         ----------  ----------  ----------
Net loss before Lumera transactions                                                        (39,529)    (32,620)    (26,393)

Gain on sale of investment in Lumera                                                            --          --       6,606
                                                                                         ----------  ----------  ----------
Net loss                                                                                $  (39,529) $  (32,620) $  (19,787)
                                                                                         ==========  ==========  ==========
Net loss per share basic and diluted                                                    $    (0.54) $    (0.53) $    (0.40)
                                                                                         ==========  ==========  ==========

Weighted-average shares outstanding basic and diluted                                       73,760      61,643      49,963
                                                                                         ==========  ==========  ==========

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

                                                                          Shareholders' Equity (Deficit)
                                           ---------------------------------------------------------------------------------------------------

                                                                           Receivables   Accumulated
                                               Common Stock   Additional      from          other                        Total
                                           -----------------   paid-in       related    comprehensive  Accumulated   Shareholders'
                                           Shares   Par Value  capital       parties       income        deficit        Equity
                                           -------  --------  ----------   -----------  -------------  ------------  -------------
Balance at December 31, 2006               42,921  $     43  $  253,086   $      (250) $       8,619  $   (239,634) $      21,864
Amortization of share-based compensation                          1,886                                                     1,886
Exercise of warrants and options           13,350        13      35,883                                                    35,896
Sales of common stock and warrants                                  130                                                       130
Issuance of common stock for payment on senior
 secured exchangeable convertible notes       452         1       1,367                                                     1,368
Issuance of common stock for payment of
 interest on senior secured exchangeable
 convertible notes                              7                    22                                                        22
Sale of Lumera stock held as collateral
  on receivables from related parties                                             227                                         227
Allowance for doubtful accounts on
  receivables from related parties                                                 23                                          23
Other comprehensive income                                                                     (8,568)                     (8,568)
Net loss                                                                                                   (19,787)       (19,787)
                                           -------  --------  ----------   -----------  -------------  ------------  -------------
Balance at December 31, 2007               56,730        57     292,374            --             51      (259,421)        33,061
Amortization of share-based compensation       35                 2,857                                                     2,857
Exercise of warrants and options              143        --         388                                                       388
Sales of common stock and warrants         11,172        11      24,043                                                    24,054
Other comprehensive income                                                                       (89)                         (89)
Net loss                                                                                                   (32,620)       (32,620)
                                           -------  --------  ----------   -----------  -------------  ------------  -------------
Balance at December 31, 2008               68,080        68     319,662            --            (38)     (292,041)        27,651
Amortization of share-based compensation       22                 3,335                                                     3,335
Exercise of warrants and options            1,470         2       4,792                                                     4,794
Sales of common stock and warrants         19,114        19      45,616                                                    45,635
Other comprehensive income                                                                         5                            5
Net loss                                                                                                   (39,529)       (39,529)
                                           -------  --------  ----------   -----------  -------------  ------------  -------------
Balance at December 31, 2009               88,686  $     89  $  373,405  $        --  $         (33) $   (331,570) $       41,891
                                           =======  ========  ==========   ===========  =============  ============  =============

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

                                                                                               Years Ended December 31,
                                                                                         ----------------------------------
                                                                                            2009        2008        2007
                                                                                         ----------  ----------  ----------
Net loss                                                                                $  (39,529) $  (32,620) $  (19,787)
                                                                                         ----------  ----------  ----------
Other comprehensive gain (loss)
    Unrealized gain (loss) on investment securities, available-for-sale:
        Unrealized holding gain (loss) arising during period                                     5         (89)     (1,962)
        Less: reclassification adjustment for gains realized in net loss                        --          --      (6,606)
                                                                                         ----------  ----------  ----------
        Net unrealized gain (loss)                                                               5         (89)     (8,568)
                                                                                         ----------  ----------  ----------
Comprehensive loss                                                                      $  (39,524) $  (32,709) $  (28,355)
                                                                                         ==========  ==========  ==========

See accompanying notes to consolidated financial statements.

Microvision, Inc.

Consolidated Statements of Cash Flows
(in thousands)

                                                                                             Years Ended December 31,
                                                                                         -------------------------------
                                                                                           2009       2008       2007
                                                                                         ---------  ---------  ---------
Cash flows from operating activities                                                                                    
  Net loss                                                                              $ (39,529) $ (32,620) $ (19,787)
  Adjustments to reconcile net loss to net cash used in operations:
    Depreciation                                                                            1,138        989        953
    Gain on disposal of fixed assets                                                           --         (5)      (117)
    Non-cash expenses related to issuance of stock, warrants, and options,
     and amortization of deferred compensation                                              3,373      2,831      1,897
    Non-cash interest expense, net                                                             --         --        371
    Loss (gain) on derivative instruments                                                     506     (2,196)       482
    Impairment of short-term investment securities                                             --        300         --
    Inventory write-downs                                                                   1,257        475         84
    Allowance for receivables from related parties                                             --       (241)        23
    Gain on sale of investment in Lumera                                                       --         --     (6,606)
    Net accretion of discount on short-term investments                                        --        (97)       (80)
    Non-cash deferred rent                                                                   (276)      (275)      (277)
  Change in:
    Accounts receivable                                                                      (376)     1,348       (719)
    Costs and estimated earnings in excess of billings on uncompleted contracts               625       (252)       122
    Inventory                                                                                (658)    (1,239)       198
    Other current assets                                                                      115        184        408
    Other assets                                                                               (1)        --         (6)
    Accounts payable                                                                        1,477      1,188        461
    Accrued liabilities                                                                       646       (642)       515
    Billings in excess of costs and estimated earnings on uncompleted contracts                (7)      (908)       770
                                                                                         ---------  ---------  ---------
      Net cash used in operating activities                                               (31,710)   (31,160)   (21,308)
                                                                                         ---------  ---------  ---------
Cash flows from investing activities                                                                                    
  Sales of investment securities                                                               --     20,400      7,200
  Purchases of investment securities                                                           --       (986)   (29,504)
  Sales of restricted investment securities                                                    --         --      2,329
  Purchases of restricted investment securities                                                --       (350)    (2,329)
  Decrease in restricted investment                                                           143        143        143
  Collections of receivables from related parties                                              --        241        227
  Sale of long-term investment - Lumera                                                        --         --      8,637
  Proceeds on sale of property and equipment                                                   --          5        117
  Purchases of property and equipment                                                      (1,360)      (495)    (1,058)
                                                                                         ---------  ---------  ---------
      Net cash provided by (used in) investing activities                                  (1,217)    18,958    (14,238)
                                                                                         ---------  ---------  ---------
Cash flows from financing activities                                                                                    
  Principal payments under capital leases                                                     (60)       (41)       (45)
  Principal payments under long-term debt                                                     (71)       (65)       (58)
  Payments on notes payable                                                                    --         --     (1,400)
  Net proceeds from issuance of common stock and warrants                                  50,550     24,442     35,896
                                                                                         ---------  ---------  ---------
      Net cash provided by financing activities                                            50,419     24,336     34,393
                                                                                         ---------  ---------  ---------
Net increase (decrease) in cash and cash equivalents                                       17,492     12,134     (1,153)
Cash and cash equivalents at beginning of period                                           25,533     13,399     14,552
                                                                                         ---------  ---------  ---------
Cash and cash equivalents at end of period                                              $  43,025  $  25,533     13,399
                                                                                         =========  =========  =========
                                                                                                                        
Supplemental disclosure of cash flow information                                                                        
Cash paid for interest                                                                  $      68  $      48  $      92
                                                                                         =========  =========  =========
                                                                                                                        
Supplemental schedule of non-cash investing and financing activities                                                    
Property and equipment acquired under capital leases                                    $      95  $      --  $      --
                                                                                         =========  =========  =========
Other non-cash additions to property and equipment                                      $      85  $     199  $      46
                                                                                         =========  =========  =========
Issuance of common stock for payment of principal and interest on senior
   secured exchangeable convertible notes                                               $      --  $      --  $   1,388
                                                                                         =========  =========  =========

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

1. The Company

We are developing high-resolution miniature display and imaging engines based upon our proprietary PicoP® display engine platform. Our technology platform utilizes our expertise in two dimensional Micro-Electrical Mechanical Systems (MEMS), 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.

Our strategy is to develop and supply a proprietary display engine called PicoP 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, PDAs, 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 flat or curved surfaces.

We recently launched the sale of a small accessory projector that is the first commercial product based on the PicoP display engine. The accessory projector can display images from a variety of video sources including cell phones, portable media players, PDAs, gaming consoles, laptop computers, digital cameras, and other consumer electronics products. We have been selling the accessory projector in limited quantity through our Asian and European based distributors. In March 2010, we announced the sales launch of the accessory projector to customers in the United States. We plan to add distribution channels as the production capacity for our manufacturing partner, green laser suppliers and other component suppliers increases.

The PicoP with some modification could be embedded into a vehicle or integrated into a portable standalone aftermarket device to create a high-resolution head-up display (HUD) that could project point-by-point navigation, critical operational, safety and other information important to the driver or pilot. The PicoP 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.

Based on our current operating plan, we anticipate that we have sufficient cash and cash equivalents to fund our operations through the first quarter of 2011. We will require additional cash to fund our operating plan past that time. We plan to obtain additional cash through the issuance of equity or debt securities.

Our capital requirements will depend on many factors, including, but not limited to, the rate at which we can, directly or through arrangements with OEMs, introduce products incorporating the PicoP display engine and image capture technologies and the market acceptance and competitive position of such products. If revenues are less than anticipated, if the mix of revenues vary from anticipated amounts 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.

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

2. Summary of significant accounting policies

The preparation of financial statements in conformity with generally accepted accounting principles of the United States requires us 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. We have identified the following areas where significant estimates and assumptions have been made in preparing the financial statements: revenue recognition, valuation of auction-rate securities, allowance for uncollectible receivables, inventory valuation and valuation of derivative financial instruments.

The consolidated financial statements include Microvision and equity investments in which Microvision has the ability to exercise significant influence but does not have voting control.

Our financial instruments include cash and cash equivalents, investments available-for-sale including auction rate securities (ARS), accounts receivable, accounts payable, accrued liabilities and long-term debt. Excluding the ARS and long term debt, the carrying value of our financial instruments approximates fair value due to their short maturities. For the ARS, the carrying value approximates fair value due to an other-than-temporary impairment adjustment. The carrying amount of long-term debt at December 31, 2009 and 2008 was not materially different from the fair value based on rates available for similar types of arrangements.

The fair value of financial instruments is defined as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three level fair value inputs hierarchy, with Level 1 being observable inputs such as quoted market prices in active markets spanning to Level 3 where inputs are unobservable by market participants outside of the Company and must be estimated using assumptions we develop. We use market data, assumptions and risks we believe market participants would use in measuring the fair value of the asset or liability, including the risks inherent in the inputs and the valuation techniques. We disclose the lowest level input significant to each category of asset or liability. We use inputs which are as observable as possible and the methods most applicable to the specific situation of each company or valued item.

We consider fair valued assets impaired when the fair value is less than cost. When the impairment is significant, we judge whether the impairment is temporary or other-than-temporary. An impairment is generally considered to be other-than-temporary and recorded as such in the period when there is deemed sufficient reason to conclude that the fair value of the asset is not expected to recover to the recorded fair value prior to the expected time of sale or maturity. We classify other-than-temporary fair value impairments into one of two categories: "credit" or "other factors". Other-than-temporary impairments are charged to current earnings if they are of the "credit" type or recorded to other comprehensive loss if they are due to "other factors".

Our cash equivalents and investment securities available-for-sale are comprised of U.S. government and agency securities, corporate debt and ARS. We classify investment securities available-for-sale purchased with 90 days or less remaining until contractual maturities as cash equivalents. Investment securities purchased with more than 90 days until contractual maturities are classified as current investment securities available-for-sale on the consolidated balance sheet with unrealized gains and losses included in the consolidated statement of comprehensive loss. Interest income, realized gains and losses, and other-than-temporary credit type impairments are recognized in the period earned or incurred and presented separately in the consolidated statement of operations. Changes in the fair values of derivatives are realized in the period of remeasurement and recorded in Gain (loss) on derivative instruments, net in the consolidated statement of operations. The cost of securities sold is based on the specific identification method.

Inventory consists of raw material, work in process and finished goods for our SHOWWX and ROV products. Inventory is recorded at the lower of cost or market with cost determined using the weighted-average method. We periodically assess the need to provide for obsolescence of inventory and adjust the carrying value of inventory to its net realizable value when required. In addition, we reduce the value of our inventory to its estimated scrap value when we determine that it is not probable that the inventory will be consumed through normal production during the next twelve months.

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.

As of December 31, 2009, restricted investments were in money market funds and serve as collateral for $1.2 million in irrevocable letters of credit. Two letters of credit totaling $839,000 are outstanding in connection with a lease agreement for our corporate headquarters building in Redmond, WA. The required balance decreases over the term of the lease, which expires in 2013. In addition, a $350,000 letter of credit is outstanding under the terms of a supplier agreement.

Revenue has primarily been generated from contracts to develop the light scanning technology and to produce demonstration units for commercial enterprises and the U.S. government. 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. Our revenue contracts generally include a statement of the work we are to complete and the total fee we will earn from the contract. When we begin work on the contract and at the end of each accounting period, we estimate the labor, material, and other cost required to complete the statement of work compared to cost incurred to date. We use information provided by our technical team, project managers, vendors, outside consultants and others to develop our cost estimates. Since our contracts generally require some level of technology development to complete, the actual cost required to complete a statement of work can vary from our estimates. We have developed processes that allow us to reasonably estimate the cost to complete a contract. Historically, we have made only immaterial revisions in the estimates to complete the contract at each reporting period. 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. In the future, revisions in these estimates could significantly impact recognized revenue in any one reporting period. The U.S. government can terminate a contract with the Company at any time for convenience. If the U.S. government cancels a contract, we would receive payment 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.

We recognize contract revenue for prototype units and evaluation kits for development work and product revenue when the product is shipped, there is sufficient evidence of an arrangement, the selling price is fixed or determinable and collection is reasonably assured. Revenue for prototype units, evaluation kits, and product shipments with acceptance provisions 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.

Cost of revenue includes both the direct and allocated indirect costs of performing on development contracts and producing prototype units, evaluation kits, and ROV units. Cost of revenue for the SHOWWX includes the direct costs of manufacturing products sold to customers. Because we are in the early phase of SHOWWX production and the design and manufacturing processes are not yet sufficiently mature to support commercial production, we classify overhead cost allocated to the SHOWWX as research and development expense. When the SHOWWX design and production processes reach a level to support commercial production, all manufacturing costs will be included in cost of revenue.

Direct costs include labor, materials and other costs incurred directly in performing on a contract or producing prototype units, evaluation kits, and ROV and SHOWWX units. Indirect costs include labor and other costs associated with operating our research and development department and building our manufacturing and technical 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.

Financial instruments that potentially subject us to concentrations of credit risk are primarily cash equivalents, investment securities available-for-sale and accounts receivable. We typically do not require collateral from our customers. Our investment policy generally directs investment managers to select investments to achieve the following goals: preservation of principal, adequate liquidity and return. As of December 31, 2009, the Company's cash and cash equivalents and investments securities portfolio are comprised of short-term highly rated money market funds and commercial paper, and guaranteed student loan ARS (SLARS).

As of December 31, 2009 and 2008, we held $3.0 million par value SLARS, fair valued at approximately $2.7 million. As of December 31, 2009, approximately 94% of our total cash and cash equivalents and investment securities available-for-sale had variable interest rates or were very short-term discount notes traded in active markets. Therefore, we believe our exposure to credit market and interest rate risks is not material. The remainder is composed of the $3.0 million par value SLARS. The SLARS are investment grade long-term bonds, structured with variable interest rate resets, with purchases and sales to be determined via a Dutch Auction process every 28 days. They were issued to fund U.S. government guaranteed student loans. Beginning in February 2008, the rapid declines in global credit markets and liquidity, and resultant economic recession, led to insufficient investor bids to clear the SLARS auctions and fund the secondary SLARS market. The issuers then began and continue to pay interest at "maximum rates", instead of "auction rates", in accordance with the bond terms. Given the adverse credit market conditions and SLARS short-term illiquidity, the fair value of the principal became more sensitive to changes in interest rates and the spread between short and long rates than it was in the pre-2008 ARS credit marketplace. As a result, we estimated the fair value of the SLARS to be approximately $2.7 million at December 31, 2008. There were no adjustments to the fair value of the SLARS during 2009. If market conditions worsen, we may have to further adjust the estimated fair value and record additional charges to earnings, if we believe the adjustment is other-than-temporary. In the event we need immediate access to the funds invested in the SLARS, we could be required to sell them below our current carrying value. Any of these events could affect our consolidated financial condition, results of operations and cash flows. However, based on market stabilization and strengthening during 2009, we do not expect to be required to sell the securities materially below their current estimated fair values.

The U.S. government accounted for approximately 43%, 34% and 61% of total revenue during 2009, 2008, and 2007, respectively. Two government customers accounted for approximately 24% and 17%, respectively of total revenue in 2009, two commercial customers accounted for approximately 15% and 11%, respectively, of total revenue during 2008, and one commercial customer accounted for approximately 15% of total revenue during 2007. Contracts with three commercial customers represented 17%, 35%, and 22% of total revenues during 2009, 2008, and 2007, respectively. The U.S. government accounted for approximately 37% and 19% of the accounts receivable balance at December 31, 2009 and 2008, respectively.

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.

Basic net loss per share is calculated using the weighted-average number of common shares outstanding during the periods. Net loss per share assuming dilution is calculated using 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 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, 2009, 2008, and 2007, we 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 December 31, 2009, 2008, and 2007.

                                                                                December 31,
                                                                   ------------------------------------
                                                                      2009         2008         2007
                                                                   -----------  -----------  ----------             
Publicly traded warrants                                            6,025,000    6,703,000          --
Options and private warrants                                       12,683,000    9,804,000   9,518,000
                                                                   -----------  -----------  ----------
                                                                   18,708,000   16,507,000   9,518,000
                                                                   ===========  ===========  ==========

Research and development costs are expensed as incurred.

We evaluate the recoverability of our long-lived assets when an impairment is indicated based on expected undiscounted cash flows. We recognize impairment of the carrying value of long-lived assets, if any, based on the fair value of such assets.

We have one share-based incentive compensation plan and a separate board of director share-based compensation plan. In June 2008, we determined that we would not issue additional options from the director plan. Both plans are more fully described in Note 11.

We use the straight-line attribution method to allocate the fair value of share-based compensation awards over the requisite service period for each award. The following table shows the amount of share-based compensation expense included in the statements of operations for each period shown:

                                                                         Year Ended December 31,
                                                                   ------------------------------------
                                                                      2009         2008         2007
                                                                   -----------  -----------  ---------- 
Cost of contract revenue                                          $   101,000  $    85,000  $  138,000
Cost of product revenue                                                18,000       25,000      20,000
Research and development expense                                    1,213,000      824,000     365,000
Sales, marketing, general and administrative expense                1,956,000    1,873,000   1,274,000
                                                                   -----------  -----------  ----------
                                                                  $ 3,288,000  $ 2,807,000  $1,797,000
                                                                   ===========  ===========  ==========

New accounting pronouncements

In May 2009, the Financial Accounting Standards Board (FASB) issued guidance establishing general standards for accounting and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued. This standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that should be made about events or transactions that occurred after the balance sheet date. The standard is effective for fiscal years and interim periods ended after June 15, 2009. We adopted this standard during the quarter ended June 30, 2009 and have evaluated any subsequent events through the date of this filing. The adoption of the guidance did not have a material impact on our consolidated financial statements.

In October 2009, the FASB issued guidance which provides amendments to establish a selling price hierarchy for determining the selling price of a deliverable and expands the disclosures required for multiple-deliverable revenue arrangements. The guidance is effective for revenue arrangements that are entered into or are materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the impact that implementation of this guidance will have on our financial statements.

In October 2009, the FASB issued guidance which allows exclusion of software from the scope of the software revenue recognition guidance if the software is included with tangible products and is essential to the tangible product's functionality. The guidance becomes effective for revenue arrangements that are entered into or are materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the impact that implementation of this guidance will have on our financial statements.

In January 2010, the FASB issued guidance which improves disclosures about the measurement of the fair value of financial instruments including (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3 of the fair value inputs hierarchy. The guidance is effective for fiscal years and interim periods ended after December 15, 2009. The adoption of the guidance did not have a material impact on our consolidated financial statements..

Cost and estimated earnings in excess of billings on uncompleted contracts comprises amounts of revenue recognized on contracts that we have not yet billed to customers because the amounts were not contractually billable at December 31, 2009 and 2008. The following table summarizes when we will be contractually able to bill the balance as of December 31, 2009 and 2008.

                                                                        Year Ended December 31,
                                                                      --------------------------
                                                                          2009          2008
                                                                      ------------  ------------
Billable within 30 days                                              $     63,000  $    688,000
Billable between 31 and 90 days                                                --            --
Billable after 90 days                                                      7,000         7,000
                                                                      ------------  ------------
                                                                     $     70,000  $    695,000
                                                                      ============  ============

Our 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 us for negotiated actual direct and indirect cost incurred in performing the contracted services. We are not obligated to spend more than the contract value to complete the contracted services. The period of performance is generally one year. Each of our contracts with the U.S. government can be terminated for convenience by the government at any time. To date, the U.S. government has not terminated a contract with us.

In July 2009, we entered into a 9 month $1.0 million subcontract with Lockheed Martin Corporation to supply two full-color, daylight readable, see-through display systems as part of the U.S. government's Urban Leader Tactical Response, Awareness & Visualization program. Lockheed Martin holds a prime contract with the U.S. government for development of the soldier worn display.

In December 2007, we entered into a $1.0 million contract with a commercial customer to develop prototype units based on our PicoP technology, for evaluation of future consumer electronics product applications. The development work under this contract was initiated and fully completed in 2008.

In May 2007, we entered into a $3.2 million contract with the U.S. Air Force to provide a lightweight, see-through, full-color eyewear display prototype to the government. The contract, which continues a development effort with the Air Force, specifies the development, design, verification, testing, and delivery of a lightweight, see-through full-color wearable display for evaluation by several DOD project offices. This contract was completed during 2008.

The following table summarizes the costs incurred on our revenue contracts:

                                                                      December 31,  December 31,
                                                                          2009          2008
                                                                      ------------  ------------
Costs and estimated earnings incurred on uncompleted contracts       $  4,951,000  $ 14,166,000
Billings on uncompleted contracts                                      (4,936,000)  (13,533,000)
                                                                      ------------  ------------
                                                                     $     15,000  $    633,000
                                                                      ============  ============
Included in accompanying balance sheets under the following captions:                           

Costs and estimated earnings in excess of billings on uncompleted
 contracts                                                           $     70,000  $    695,000
Billings in excess of costs and estimated earnings on uncompleted
 contracts                                                                (55,000)      (62,000)
                                                                      ------------  ------------
                                                                     $     15,000  $    633,000
                                                                      ============  ============

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three level fair value inputs hierarchy, and requires an entity to maximize the use of observable valuation inputs and minimize the use of unobservable inputs. We use market data, assumptions and risks we believe market participants would use in measuring the fair value of the asset or liability, including the risks inherent in the inputs and the valuation techniques. The hierarchy is summarized below.

Level 1 - Observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs such as quoted prices for similar assets or liabilities in markets that are not sufficiently active to qualify as Level 1 or, other observable inputs.

Level 3 - Unobservable inputs for which there is little or no market data, which requires us to develop our own assumptions, which are significant to the measurement of the fair values.

Our investment securities are comprised of debt securities. Generally, they are issued by the U.S. government, its agencies, corporations, and student loan financial aid organizations. Accounting for these investments is discussed in Note 2.

The principal markets for the debt securities are dealer markets which have a high level of price transparency. The market participants for debt securities are typically large money center banks and regional banks, brokers, dealers, pension funds, and other entities with debt investment portfolios.

As of December 31, 2009, approximately 94% of our total cash, cash equivalents and investment securities, available-for-sale have variable interest rates or are very short-term discount notes traded in active markets. The remainder is composed of $3.0 million par student loan auction-rate securities (SLARS) fair valued at approximately $2.7 million. The SLARS are investment grade long-term bonds, structured with variable interest rate resets, with purchases and sales to be determined via a Dutch Auction process every 28 days. They were issued to fund U.S. government guaranteed student loans. Beginning in February 2008, the rapid declines in global credit markets and liquidity, and resultant economic recession, led to insufficient investor bids to clear the SLARS auctions and fund the secondary SLARS market. The issuers then began and continue to pay interest at "maximum rates", instead of "auction rates", in accordance with the bond terms.

The valuation inputs hierarchy classification for assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2009:

                                            Level 1     Level 2     Level 3       Total
                                          -----------  ----------  ----------  -----------
Assets
    Corporate equity securities          $        --  $   10,000  $       --  $    10,000
    Auction rate securities                       --          --   2,700,000    2,700,000
                                          -----------  ----------  ----------  -----------
                                         $        --  $   10,000  $2,700,000  $ 2,710,000
                                          ===========  ==========  ==========  ===========
Liabilities
    Liability associated with
        common stock warrants                         $  840,000              $   840,000
                                                       ==========              ===========

The corporate debt securities and liability associated with common stock warrants are classified within Level 2 of the fair value hierarchy because they are valued using inputs and common methods with sufficient levels of transparency and observability. The SLARS are classified in Level 3 of the fair value hierarchy because of the significance of sufficiently unobservable assumptions and inputs developed by us and used in the valuations.

The following table summarizes the activity for those financial assets where fair value measurements are estimated utilizing Level 3 inputs:

Balance, December 31, 2008                                                    $ 2,700,000
Transfer into Level 3, 2009                                                            --
Recognized loss included in earnings                                                   --
                                                                               -----------
Balance, December 31, 2009                                                    $ 2,700,000
                                                                               ===========

Our investments and liability associated with common stock warrants are summarized below as of December 31, 2009 and December 31, 2008.

                                                                                                     Classification on Balance Sheet
                                                                                            -------------------------------------------------
                                                                                                                                   Liability
                                                                                                                                  Associated
                                                                                                         Investment                  With
                                             Cost/       Gross       Gross                               Securities,    Other       Common
                                           Amortized   Unrealized  Unrealized   Estimated      Cash      Available-    Current       Stock
                                             Cost        Gains       Losses    Fair Value   Equivalents   For-Sale      Assets     Warrants
                                          -----------  ----------  ----------  -----------  -----------  -----------  ----------  -----------
As of December 31, 2009:
  Assets
    Corporate equity securities          $    43,000  $       --  $  (33,000) $    10,000  $        --  $    10,000  $       --
    Auction-rate securities                2,700,000          --          --    2,700,000           --    2,700,000          --
                                          -----------  ----------  ----------  -----------  -----------  -----------  ----------
                                         $ 2,743,000  $       --  $  (33,000) $ 2,710,000  $        --  $ 2,710,000  $       --
                                          ===========  ==========  ==========  ===========  ===========  ===========  ==========
  Liabilities
    Liability associated with
       common stock warrants                                                  $   840,000                                        $   840,000
                                                                               ===========                                        ===========


                                                                                                     Classification on Balance Sheet
                                                                                            -------------------------------------------------
                                                                                                                                   Liability
                                                                                                                                  Associated
                                                                                                         Investment                  With
                                             Cost/       Gross       Gross                               Securities,    Other       Common
                                           Amortized   Unrealized  Unrealized   Estimated      Cash      Available-    Current       Stock
                                             Cost        Gains       Losses    Fair Value   Equivalents   For-Sale      Assets     Warrants
                                          -----------  ----------  ----------  -----------  -----------  -----------  ----------  -----------
As of December 31, 2008:
  Assets
    Corporate debt and equity securities $ 5,022,000  $       --  $  (38,000) $ 4,984,000  $ 4,979,000  $     5,000  $       --
    Auction-rate securities                2,700,000          --          --    2,700,000           --    2,700,000          --
                                          -----------  ----------  ----------  -----------  -----------  -----------  ----------
                                         $ 7,722,000  $       --  $  (38,000) $ 7,684,000  $ 4,979,000  $ 2,705,000  $       --
                                          ===========  ==========  ==========  ===========  ===========  ===========  ==========
  Liabilities
    Liability associated with
       common stock warrants                                                  $   331,000                                        $   331,000
                                                                               ===========                                        ===========

As of December 31, 2009, the unrealized losses on our investments in debt securities were due primarily to declines in the pricing of the debt securities. The realized gains and losses resulting from the liability associated with common stock warrants were primarily due to changes in our own stock price and decreasing terms to expiration. The maturities of the auction rate securities available-for-sale as of December 31, 2009 are greater than 5 years.

We classify other-than-temporary fair value impairments into one of two categoriesa "credit" or "other factors". As of September 30, 2008, based on continuing low market liquidity and auction failures with significant uncertainty as to when such conditions would improve, we determined that the estimated fair value of the SLARS no longer approximated par value, and the impairments were other-than-temporary. An "impairment of investment securities, available-for-sale" of $300,000 ws recorded on the consolidated statements of operations. We used a discounted cash flow model, with rates adjusted for liquidity, to determine that the present value of estimated cash collections was less than the adjusted cost. The other-than-temporary impairment recorded during the period ended September 30, 2008 was categorized as "credit" type.

Our significant nonfinancial assets and liabilities that are subject to consideration for recognition and disclosure at fair value in the financial statements on a nonrecurring basis primarily include property and equipment, capital lease obligations, a tenant improvement loan agreement and deferred rent. If we conclude there has been an event indicating the potential impairment of a nonfinancial asset or liability, or periodically if no such indicating event is deemed to have occurred, we determine the fair value, test for impairments, and record significant impairments, in the period of determination.

The maturities of the investment securities available-for-sale as of December 31, 2009 are shown below:

                                                            Gross        Gross
                                             Amortized   Unrealized   Unrealized    Estimated
                                               Cost         Gains       Losses      Fair Value
                                            -----------  -----------  -----------  ------------
Maturity date:
    Less than one year                     $    43,000           --      (33,000) $     10,000
    Due in 1-3 years                                --                                      --
    Greater than five years                  2,700,000                               2,700,000
                                            -----------                            ------------
                                           $ 2,743,000                            $  2,710,000
                                            ===========                            ============

Inventory consists of the following:

                                                       December 31,   December 31,
                                                           2009           2008
                                                       -------------  ------------
Raw materials                                         $     626,000  $     45,000
Finished goods                                              300,000     1,480,000
                                                       -------------  ------------
                                                      $     926,000  $  1,525,000
                                                       =============  ============

The inventory at December 31, 2009 consisted of raw materials primarily for our accessory projector SHOWWX, and finished goods primarily comprised of ROV, our hand-held barcode scanner. The inventory at December 31, 2008 consisted of raw materials and finished goods for ROV and the discontinued Flic bar code product. 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 2009, 2008, and 2007, Microvision recorded inventory write-downs of $1,257,000, $475,000, and $84,000, respectively.

Accrued liabilities consist of the following:

                                                               December 31,
                                                       ---------------------------
                                                           2009           2008
                                                       -------------  ------------
Bonuses                                               $   1,300,000  $    500,000
Payroll and payroll taxes                                   773,000       809,000
Compensated absences                                        682,000       623,000
Deferred rent credit                                        339,000       311,000
Adverse purchase commitments                                173,000       119,000
Professional fees                                           247,000       343,000
Other                                                       676,000       840,000
                                                       -------------  ------------
                                                      $   4,190,000  $  3,545,000
                                                       =============  ============

Property and equipment consists of the following:

                                                               December 31,
                                                       ---------------------------
                                                           2009           2008
                                                       -------------  ------------
Production equipment                                  $   3,610,000  $  3,124,000
Leasehold improvements                                    3,317,000     3,310,000
Computer hardware and software/lab equipment              7,945,000     7,192,000
Office furniture and equipment                            1,591,000     1,496,000
                                                       -------------  ------------
                                                         16,463,000    15,122,000
Less: Accumulated depreciation                          (12,559,000)  (11,421,000)
                                                       -------------  ------------
                                                      $   3,904,000  $  3,701,000
                                                       =============  ============

Depreciation expense was $1,138,000, $989,000 and $953,000 in 2009, 2008 and 2007, respectively.

In 2000, 2001 and 2002, the Board of Directors authorized the Company to provide unsecured lines of credit to each of the Company's three officers. The lines of credit carry interest rates of 5.4% to 6.2% and were due within one year of the officer's termination.

In January 2006, one officer left the Company and his outstanding loans became due in January 2007. In May 2007, we foreclosed on 50,000 shares of Lumera common stock pledged as collateral for the loans. In October 2009, we entered into a settlement agreement with the former officer. We have received total proceeds of $237,000 to date, and the officer has committed to make additional payments of $30,000 over the next two years. Pursuant to the settlement agreement, all claims and counterclaims filed in the collection lawsuit, including the previously disclosed claim by the former officer against us for $15 million have been dismissed.

Another officer with outstanding loans left the Company in August 2007 and his loans became due in August 2008. We are pursuing collection of the remaining outstanding balance from the former officer.

As of December 31, 2009 and December 31, 2008, the total amount outstanding under the lines of credit was $400,000 and $1,851,000, respectively, and the balances were fully reserved.

In November and December 2009, we raised an aggregate of $33.1 million, before issuance costs of $2.3 million, through underwritten public offerings of 11.0 million shares of our common stock.

In June 2009, we raised approximately $15.0 million, before issuance costs of approximately $218,000, from the sale of 8.1 million shares of common stock and warrants to purchase approximately 2.0 million shares of our common stock to Max Display Enterprises Limited, a subsidiary of Walsin Lihwa. Walsin Lihwa is the parent company of Touch Micro-system Technology Corp. (TMT). We have worked for a number of years with both Walsin Lihwa and TMT, as manufacturers of our Micro-Electrical Mechanical systems (MEMS) chips. Based on filings by Max Display Enterprises Limited with the Securities Exchange Commission, as of December 31, 2009, Max Display Enterprises Limited beneficially owned 11.1% of our common stock, as determined in accordance with the rules of the Securities Exchange Commission.

In July 2008, we raised approximately $26.0 million, before issuance costs of approximately $2.0 million, through a registered direct public offering of 11.2 million shares of common stock and warrants to purchase 6.7 million shares of our common stock. Details of the warrants are described below in Note 10.

On June 21, 2007, we exercised our right to call our publicly traded warrants issued in 2006. We received $34.1 million from the exercise of 12.9 million publicly traded warrants.

In June 2009, we raised approximately $15.0 million, before issuance costs of approximately $218,000, from the sale of 8.1 million shares of common stock and warrants to purchase approximately 2.0 million shares of our common stock to Max Display Enterprises Limited, a subsidiary of Walsin Lihwa. The warrants have an exercise price of $2.1850 per share, a three year term, and are exercisable on the date of issuance. We can call the warrants if the average closing bid price of our stock is over $8.74 for any 20 consecutive trading days.

In July 2008, we raised approximately $26.0 million, before issuance costs of approximately $2.0 million, through a registered direct public offering of 11.2 million shares of our common stock and warrants to purchase 6.7 million shares of our common stock. The warrants have an exercise price of $3.60 per share, a five year term, and are exercisable one year from the date of issuance. We can call the warrants after one year from the date of issuance if the average closing bid price of our stock is over $7.20 (200% of exercise price) for any 20 consecutive trading days. The 6.7 million warrants were listed on the NASDAQ Global Market under the ticker "MVISW".

The following summarizes activity with respect to Microvision common stock warrants during the three years ended December 31, 2009:

                                              Warrants to   Weighted-
                                                purchase     average
                                                 common     excercise
                                                 Shares       price
                                              ------------  ---------
Outstanding at December 31, 2006               17,557,000  $    3.50
Granted:
   Exercise price greater than intrinsic value    537,000       2.65
   Exercise price equal to intrinsic value         25,000       3.42
Exercised                                     (13,803,000)      2.59
Canceled/expired                                 (252,000)      6.30
                                              ------------
Outstanding at December 31, 2007                4,064,000       6.19
Granted:
   Exercise price greater than intrinsic value  6,703,000       3.60
   Exercise price equal to intrinsic value             --         --
Exercised                                              --         --
Canceled/expired                               (1,257,000)      6.11
                                              ------------
Outstanding at December 31, 2008                9,510,000       4.32
Granted:
   Exercise price greater than intrinsic value  2,019,000       2.19
   Exercise price equal to intrinsic value             --         --
Exercised                                      (1,135,000)      3.46
Canceled/expired                                       --         --
                                              ------------
Outstanding at December 31, 2009               10,394,000  $    3.96
                                              ============
Exercisable at December 31, 2009               10,394,000  $    3.96
                                              ============

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

                                                                     Year Ended December 31,
                                                             -------------------------------------
                                                                2009         2008         2007
                                                             -----------  -----------  -----------
Exercise price greater than fair value                      $        --  $      1.59  $        --
Exercise price equal to fair value                                   --           --         2.08
Exercise price less than fair value                                1.27           --         0.47

We estimated the fair value of our common stock warrants on the respective grant dates using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2009, 2008 and 2007, respectively: dividend yield of zero percent for all years; expected volatility of 75%, 65%, and 47%; risk-free interest rates of 1.5%, 3.2% and 4.9% and expected lives of 3, 5 and 0.3 years, respectively.

The following table summarizes information about our common stock warrants outstanding and exercisable at December 31, 2009:

                                      Warrants outstanding               Warrants exercisable
                                     ---------------------------------  ------------------------
                                                  Weighted
                                       Number      average   Weighted      Number      Weighted
                                     outstanding aremaining   average   exercisable at  average
                                     December 31, contractualexcercise  December 31,   excercise
Range of exercise prices                2009      life (years  price        2009         price
-----------------------------------  -----------  ---------  ---------  -------------  ---------
                                                                                             
$2.185                                2,019,000       2.47  $    2.19      2,019,000  $    2.19
$2.7625-$3.42                           592,000       1.05       3.04        592,000       3.04
$3.60                                 6,025,000       3.56       3.60      6,025,000       3.60
$3.94                                 1,089,000       0.92       3.94      1,089,000       3.94
$4.55-$5.32                             469,000       0.19       4.56        469,000       4.56
$34.00                                  200,000       0.61      34.00        200,000      34.00
                                     -----------                        -------------
$2.185-$34.00                        10,394,000                           10,394,000
                                     ===========                        =============

We use the straight-line attribution method to allocate the fair value of share-based compensation awards over the requisite service period for each award. The valuation of and accounting for share-based awards includes a number of complex and subjective estimates. These estimates include, but are not limited to, the future volatility of our stock price, future stock option exercise behaviors, estimated employee turnover and award forfeiture rates.

Description of Incentive Plans

The Company currently has two share-based incentive plans. The 2006 Incentive Plan described below is administered by the Board of Directors, or its designated committee ("Plan Administrator"), and provides for various awards as determined by the Plan Administrator. We terminated using a second share-based incentive plan, the Independent Director Stock Option Plan described below, in June 2008.

The 2006 Incentive Plan has 11.4 million shares authorized, of which 2.1 million shares were available for awards as of December 31, 2009. The 2006 Incentive Plan 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, directors 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). In June 2008, the Company shareholders approved an amendment to the 2006 Incentive Plan to increase the common stock reserved for issuance under the plan to 11.4 million shares and allow non-employee directors to participate in the plan.

The Independent Director Stock Option Plan (IDSOP) has 900,000 shares authorized, of which 875,000 are issued and outstanding as of December 31, 2009. The IDSOP permits granting NSOs to independent directors of the Company. Grants awarded under the IDSOP 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. In June 2008, the Company shareholders approved an amendment to the 2006 Incentive Plan described above to allow non-employee directors to participate in the plan. The Company does not intend to issue additional options from the IDSOP.

We use the Black-Scholes option valuation model to determine the fair value of options granted and use the closing price of our common stock as the fair market value of our stock on that date.

We consider historical stock price volatilities, volatilities of similar companies and other factors in determining estimates of future volatilities.

We use 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 during the periods shown below:

                                                                          Year Ended December 31,
                                                                   ------------------------------------
                                                                      2009         2008         2007
                                                                   -----------  -----------  ----------             
Assumptions (weighted average)
Volatility                                                                 75%          65%         68%
Expected term (in years)                                                  5.1          5.1         6.2
Risk-free rate                                                            2.0%         3.0%        5.0%
Expected dividends                                                         --           --          --
Pre-vest forfeiture rate                                                  5.0%         5.0%        5.0%
Grant date fair value of options granted                          $      1.20  $      1.32  $     2.67

The following table summarizes activity and positions with respect to options for the year ended December 31, 2009:

                                                                                              Weighted
                                                                                              Average
                                                                                 Weighted    Remaining
                                                                                  Average    Contractual  Aggregate
                                                                                 Exercise       Term      Intrinsic
Options                                                              Shares        Price      (years)       Value
-----------------------------------------------------------------  -----------  -----------  ----------  -----------
Outstanding as of December 31, 2006                                 5,711,000  $      6.04         6.9  $ 1,384,000
Granted                                                             1,617,000         4.08
Exercised                                                             (84,000)        2.78
Forfeited or expired                                               (1,790,000)        9.05
                                                                   -----------
Outstanding as of December 31, 2007                                 5,454,000         4.52         6.9    3,320,000
Granted                                                             2,276,000         2.33
Exercised                                                            (143,000)        2.72
Forfeited or expired                                                 (590,000)        2.93
                                                                   -----------
Outstanding as of December 31, 2008                                 6,997,000         3.98         7.2       63,000
Granted                                                             1,996,000         1.97
Exercised                                                            (335,000)        2.58
Forfeited or expired                                                 (344,000)        3.01
                                                                   -----------
Outstanding as of December 31, 2009                                 8,314,000  $      3.59         7.0  $ 4,823,000
                                                                   ===========  ===========  ==========  ===========

Vested and expected to vest as of December 31, 2009                 8,132,000  $      3.62         6.9  $ 4,628,000
                                                                   ===========  ===========  ==========  ===========

Exercisable as of December 31, 2009                                 4,845,000  $      4.30         6.0  $ 2,084,000
                                                                   ===========  ===========  ==========  ===========

The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 were $455,000, $87,000 and $163,000, respectively.

The total grant date fair value of options vested during the years ended December 31, 2009, 2008, and 2007 was $1.6 million, $2.0 million and $2.1 million, respectively. As of December 31, 2009, our unamortized share-based compensation was $3.6 million which we plan to amortize over the next 2.3 years.

In April 2009, our Board of Directors approved the issuance of 291,000 nonvested equity shares of the Company's common stock to the executive employees under the 2006 Incentive Plan. Included was a grant of 165,000 shares to one executive which vests conditionally upon completion of certain service and performance objectives the later of three years from the date of grant or the first day thereafter that the executive is not in a closed window, and 14,000 shares to the same executive in lieu of a cash salary increase which vested in four equal installments through December 31, 2009. The remaining shares vest over a three year period from the date of grant. The nonvested equity shares were valued at fair value on the date of grant and the share-based compensation expense will be amortized over the service period.

In October 2008, our Board of Directors approved the payment of one half of each independent director's annual retainer fee to be paid in the Company's common stock. The common stock was valued at fair value and fully expensed on the grant date. Each independent director received 7,092 shares of common stock.

In March 2008, our Board of Directors approved the issuance of 125,000 nonvested equity shares of the Company's common stock to the executive employees under the 2006 Incentive Plan. The shares vest over a three year period from the date of grant. The nonvested equity shares were valued at fair value on the date of grant and the share-based compensation expense will be amortized over the three year service period.

As of December 31, 2009, our unamortized nonvested equity share-based compensation was $390,000 which we plan to amortize over the next 2.0 years.

In October 1993, we entered into a Research Agreement and an exclusive license agreement ("License Agreement") with the UW. The License Agreement grants us the rights to certain intellectual property, including the technology being subsequently developed under the Microvision research agreement ("Research Agreement"), whereby we have an exclusive, royalty-bearing license to make, use and sell or sublicense the licensed technology. We are required to pay the UW a nonrefundable license maintenance fee of $10,000 per quarter, to be credited against royalties due.

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 management believes would have a material adverse effect on the Company's financial position, results of operations or cash flows.

We lease our office space and certain equipment under noncancelable capital and operating leases with initial or remaining terms in excess of one year.

We 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
                                                  -------------  -------------
2010                                             $     102,000  $     870,000
2011                                                    71,000        904,000
2012                                                    62,000        938,000
2013                                                    62,000        564,000
2014                                                    21,000             --
Thereafter                                                  --             --
                                                  -------------  -------------
Total minimum lease payments                           318,000  $   3,276,000
                                                                 =============
Less: Amount representing interest                     (99,000)
                                                  -------------
Present value of capital lease obligations             219,000
Less: Current portion                                  (62,000)
                                                  -------------
Long-term obligation at December 31, 2009        $     157,000
                                                  =============

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 $1,106,000 and $1,024,000, respectively, at December 31, 2009 and $1,017,000 and $932,000, respectively, at December 31, 2008.

Net rent expense was $862,000, $861,000, and $830,000 for 2009, 2008, and 2007, respectively.

During 2006, we entered into a loan agreement with the lessor of our 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 $322,000 at December 31, 2009.

We have periodically entered into noncancelable purchase contracts in order to ensure the availability of materials to support bar code scanner production. We periodically assess the need to provide for impairment on these purchase contracts and records a loss on purchase commitments when required. During 2009, we recorded a loss of $55,000 to cost of product revenue as a result of commitments to purchase materials for the ROV scanner that were in excess of our estimated future proceeds from sale of the ROV scanners. In December 2008, the Company recorded a loss of $119,000 to cost of product revenue as a result of commitments to purchase materials for the ROV scanner that were in excess of its estimated future proceeds from the sale of the ROV scanners.

                                                           December 31,
                                                  ----------------------------
                                                      2009           2008
                                                  -------------  -------------
Deferred tax assets, current
   Reserves                                      $   1,421,000  $   1,990,000
   Other                                             1,244,000        996,000
                                                  -------------  -------------
Total gross deferred tax assets, current             2,665,000      2,986,000
                                                  -------------  -------------
Deferred tax assets, noncurrent
   Net operating loss carryforwards                 81,199,000     74,605,000
   R&D credit carryforwards                          4,905,000      4,258,000
   Depreciation/amortization deferred               20,926,000     15,665,000
   Other                                             4,484,000      3,520,000
                                                  -------------  -------------
Total gross deferred tax assets, noncurrent        111,514,000     98,048,000
                                                  -------------  -------------
Deferred tax liabilities, noncurrent
   Convertible debt                                   (873,000)    (1,828,000)
                                                  -------------  -------------
Total gross deferred tax liabilities, noncurrent      (873,000)    (1,828,000)
                                                  -------------  -------------
Net deferred taxes before valuation allowance      113,306,000     99,206,000
Less: Valuation allowance                         (113,306,000)   (99,206,000)
                                                  -------------  -------------
Deferred tax assets                              $          --  $          --
                                                  =============  =============

We have a retirement savings 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.

Under the plan, we match 50% of employee contributions to the plan up to 6% of the employee's per pay period compensation. During 2009, 2008 and 2007 we contributed $369,000, $365,000, and $295,000, respectively, to the plan under the matching program.

The following table presents the Company's unaudited quarterly financial information for the years ending December 31, 2009 and 2008:

                                                       Year Ended December 31, 2009
                                        ----------------------------------------------------------
                                        December 31,   September 30,    June 30,       March 31,
                                        -------------  -------------  -------------  -------------
Revenue                                $     971,000  $     924,000  $     987,000  $     951,000
Gross margin (loss)                         (130,000)      (175,000)       (83,000)       327,000
Net loss                                  (8,745,000)   (11,525,000)   (10,394,000)    (8,865,000)
Net loss per share basic and diluted           (0.11)         (0.15)         (0.15)         (0.13)

                                                       Year Ended December 31, 2008
                                        ----------------------------------------------------------
                                        December 31,   September 30,    June 30,       March 31,
                                        -------------  -------------  -------------  -------------
Revenue                                $   1,525,000  $     894,000  $   1,622,000  $   2,570,000
Gross margin                                 287,000        285,000        719,000      1,469,000
Net loss                                  (9,873,000)    (8,443,000)    (9,266,000)    (5,038,000)
Net loss per share basic and diluted           (0.15)         (0.13)         (0.16)         (0.09)

MICROVISION, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES SCHEDULE
(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, 2007
        Allowance for receivables from related parties  $      2,473  $        23  $        --  $         --  $       2,496
        Tax valuation allowance                               76,565           --       11,086            --         87,651

    Year Ended December 31, 2008
        Allowance for receivables from related parties         2,496           --           --          (645)         1,851
        Tax valuation allowance                               87,651           --       11,555            --         99,206

    Year Ended December 31, 2009
        Allowance for receivables from related parties         1,851           --           --        (1,451)           400
        Tax valuation allowance                               99,206           --       14,100           --         113,306

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, 2009 and 2008.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer ("CEO") and the 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 December 31, 2009, our disclosure controls and procedures were 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 Framework issued 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, 2009.

The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their attestation report, which is included in Item 8 of this Annual Report on Form 10-K under the heading "Report of Independent Registered Public Accounting Firm."

(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, 2009 which have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

None

Information regarding executive officers is included in Part I of this Annual Report on Form 10-K in Item 4A. The information required by this Item and not provided in Item 4A will appear under the caption "Discussion of Proposals Recommended by the Board" in the Proxy Statement, which section is incorporated in this Item by reference. The Proxy Statement will be filed prior to the Company's annual shareholders' meeting scheduled to be held on June 17, 2010.

The information required by this Item will appear under the captions "Executive Compensation," "Compensation Committee Interlocks and Insider Participation" and "Director Compensation for 2009" in the Proxy Statement, which sections are incorporated in this Item by reference.

Information as of December 31, 2009 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                 8,313,000  $               3.59                  2,139,000
Equity compensation plans not approved by shareholders               233,000                 29.79                         --
                                                         --------------------                        -------------------------
    Total                                                          8,546,000  $               4.31                  2,139,000
                                                         ====================                        =========================

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. The warrants were fully exercisable as of December 31, 2007, have an exercise price of $34.00 per share and expire in August 2010. 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. 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.

In February 2007, Microvision issued a warrant to purchase 25,000 shares of common stock to a third party for services. The warrant was immediately exercisable, has an exercise price of $3.42 per share, and expires in February 2012. In July 2005, Microvision issued a warrant to purchase 6,925 shares of common stock to a third party for services. The warrant was 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 warrants may be exercised are subject to adjustment for certain changes in the Company's capital structure. Where the Company's 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 Company's common stock from a reorganization, reclassification, consolidation, or merger, the holders will be entitled to receive, upon the exercise of the warrants, the same amount and kind of securities, cash or property to which the holders would have been entitled if, immediately prior to the change in capital structure, the warrant holders had held the number of shares of common stock obtainable upon the exercise of the warrants.

The other information required by this Item will appear under the caption "Information About Microvision Common Stock Ownership" in the Proxy Statement, which section is incorporated in this Item by reference.

The information required by this Item will appear under the captions "Certain Relationships and Related Transactions" and "Board Meetings and Committees" in the Proxy Statement, which sections are incorporated in this Item by reference.

The information required by this Item will appear under the caption "Independent Registered Public Accounting Firm" in the Proxy Statement, which section is incorporated in this Item by reference.

(b) Exhibits

The following exhibits are referenced or included in this report.