| MICROVISION INC ITEM 1A RISK FACTORS Risk Factors Relating to the Microvision Business We have a history of operating losses and expect to incur significant losses in the future |
| We have had substantial losses since our inception |
| We cannot assure you that we will ever become or remain profitable |
| * As of December 31, 2005, we had an accumulated deficit of dlra215dtta7 million |
| The likelihood of our success must be considered in light of the expenses, difficulties and delays frequently encountered by companies formed to develop and market new technologies |
| In particular, our operations to date have focused primarily on research and development of the scanned beam technology and development of demonstration units |
| We are unable to accurately estimate future revenues and operating expenses based upon historical performance |
| We cannot be certain that we will succeed in obtaining additional development contracts or that we will be able to obtain substantial customer orders for our products |
| In light of these factors, we expect to continue to incur substantial losses and negative cash flow at least through 2006 and likely thereafter |
| We will require additional capital to fund our operations and to implement our business plan |
| If we do not obtain additional capital, we may be required to curtail our operations substantially |
| Raising additional capital may dilute the value of current shareholders &apos shares |
| Based on our current operating plan and budgeted cash requirements, we expect our cash to fund operations through July 2006 |
| We will require additional capital to continue to fund our operations, including to: * Further develop the scanned beam technology |
| * Develop and protect our intellectual property rights |
| * Fund long-term marketing and business development opportunities; and * Add manufacturing capacity |
| The Company can raise limited additional cash through the sale of its Lumera common stock in the public market under Rule 144 of the Securities Act of 1933 or through a private placement |
| As of March 1, 2006, Microvision owns approximately 322cmam000 shares of Lumera common stock that have not been pledged as collateral for the Companyapstas convertible notes issued as of March 11, 2005 and December 1, 2005 |
| Based on the March 1, 2006 closing price of dlra4dtta10, the Lumera shares that have not been pledged as collateral have a market value of approximately dlra1dtta3 million |
| The Company may be deemed to be an affiliate of Lumera |
| Under Rule 144 of the Securities Act, an affiliate is entitled to sell within any three-month period a number of shares of Lumera common stock that does not exceed the greater of 1prca of the then outstanding shares of Lumera common stock or the average weekly trading volume of Lumera common stock on the NASDAQ National Market during the four calendar weeks preceding the filing of a notice of the sale on Form 144 |
| The immediate sale of Lumera stock in the public market could have a negative impact on the Lumera stock price |
| Our capital requirements will depend on many factors, including, but not limited to, the rate at which we can, directly or through arrangements with original equipment manufacturers, introduce products incorporating the scanned beam and image capture technologies and the market acceptance and competitive position of such products |
| If revenues are less than we anticipate, if the level and mix of revenues vary from anticipated amounts and allocations or if expenses exceed the amounts budgeted, we may require additional capital earlier than July 2006 to further the development of our technologies, for expenses associated with product development, and to respond to competitive pressures or to meet unanticipated development difficulties |
| In addition, our operating plan provides for the development of strategic relationships with systems and equipment manufacturers that may require additional investments by us |
| Additional financing may not be available to us or, if available, may not be available on terms acceptable to us on a timely basis |
| Raising additional capital may involve issuing securities with rights and preferences that are senior to our common stock and may dilute the value of current shareholders &apos shares |
| If adequate funds are not available to satisfy either short-term or long-term capital requirements, we may be required to limit our operations substantially |
| This limitation of operations may include reductions in staff and operating costs as well as reductions in capital expenditures and investment in research and development |
| The value of our investment in Lumera may decrease |
| Lumeraapstas stock price is subject to fluctuation and may decrease, lowering the value of our investment |
| As of March 1, 2006 we own approximately 12prca of Lumeraapstas common stock |
| Since we hold a large percentage of Lumeraapstas common stock, if an active market does not develop or is not sustained, it may be difficult for us to sell our shares of Lumeraapstas common stock at an attractive price or at all |
| The likelihood of Lumeraapstas success, and the value of the common stock we hold, must be considered in light of the risks frequently encountered by early stage companies, especially those formed to develop and market new technologies |
| These risks include Lumeraapstas potential inability to establish product sales and marketing capabilities to establish and maintain markets for their potential products; and to continue to develop and upgrade their technologies to keep pace with changes in technology and the growth of markets using polymer materials |
| If Lumera is unsuccessful in meeting these challenges, its stock price, and the value of our investment, could decrease |
| Our convertible notes may adversely impact our common stockholders or limit our ability to obtain additional financing |
| In March 2005 and December 2005, we issued convertible notes |
| Among other provisions, these notes include material limitations on our ability to incur additional debt or incur liens while the convertible notes are outstanding |
| These limitations could materially adversely affect our ability to raise funds we expect to need in 2006 and 2007 |
| We cannot be certain that the scanned beam technology or products incorporating this technology will achieve market acceptance |
| If the scanned beam technology does not achieve market acceptance, our revenues may not grow |
| Our success will depend in part on customer acceptance of the scanned beam technology |
| The scanned beam technology may not be accepted by manufacturers who use display technologies in their products, by systems integrators who incorporate our products into their products or by end users of these products |
| To be accepted, the scanned beam technology must meet the expectations of our potential customers in the defense, industrial, medical and consumer markets |
| If our technology fails to achieve market acceptance, we may not be able to continue to develop the scanned beam technology |
| It may become more difficult to sell our stock in the public market |
| Our common stock is listed for quotation on The NASDAQ National Market |
| To keep our listing on this market, we must meet NASDAQapstas listing maintenance standards |
| If we are unable to continue to meet NASDAQapstas listing maintenance standards, our common stock could be delisted from The NASDAQ National Market |
| If our common stock were delisted, we likely would seek to list the common stock on the NASDAQ SmallCap Market, the American Stock Exchange or on a regional stock exchange |
| Listing on such other market or exchange could reduce the liquidity for our common stock |
| If our common stock were not listed on the SmallCap Market or an exchange, trading of our common stock would be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities or directly through market makers in our common stock |
| If our common stock were to trade in the over-the-counter market, an investor would find it more difficult to dispose of, or to obtain accurate quotations for the price of, the common stock |
| A delisting from The NASDAQ National Market and failure to obtain listing on such other market or exchange would subject our securities to so-called penny stock rules that impose additional sales practice and market-making requirements on broker-dealers who sell or make a market in such securities |
| Consequently, removal from The NASDAQ National Market and failure to obtain listing on another market or exchange could affect the ability or willingness of broker-dealers to sell or make a market in our common stock and the ability of purchasers of our common stock to sell their securities in the secondary market |
| In addition, when the market price of our common stock is less than dlra5dtta00 per share, we become subject to penny stock rules even if our common stock is still listed on The NASDAQ National Market |
| While the penny stock rules should not affect the quotation of our common stock on The NASDAQ National Market, these rules may further limit the market liquidity of our common stock and the ability of investors to sell our common stock in the secondary market |
| During the first and second quarter of 2003, the third quarter of 2004, the second quarter and fourth quarter of 2005, and the first quarter of 2006, the market price of our stock traded below dlra5dtta00 per share |
| Our lack of the financial and technical resources relative to our competitors may limit our revenues, potential profits, overall market share or value |
| Our current products and potential future products will compete with established manufacturers of existing products and companies developing new technologies |
| Many of our competitors have substantially greater financial, technical and other resources than us |
| Because of their greater resources, our competitors may develop products or technologies that are superior to our own |
| The introduction of superior competing products or technologies could result in reduced revenues, lower margins or loss of market share, any of which could reduce the value of our business |
| We may not be able to keep up with rapid technological change and our financial results may suffer |
| The information display industry has been characterized by rapidly changing technology, accelerated product obsolescence and continuously evolving industry standards |
| Our success will depend upon our ability to further develop the scanned beam technology and to cost effectively introduce new products and features in a timely manner to meet evolving customer requirements and compete with competitors &apos product advances |
| We may not succeed in these efforts because of: * delays in product development, * lack of market acceptance for our products, or * lack of funds to invest in product development and marketing |
| The occurrence of any of the above factors could result in decreased revenues, market share and value |
| We could face lawsuits related to our use of the scanned beam technology or other technologies |
| Defending these suits would be costly and time consuming |
| An adverse outcome in any such matter could limit our ability to commercialize our technology and products, reduce our revenues and increase our operating expenses |
| We are aware of several patents held by third parties that relate to certain aspects of scanned beam displays and image capture products |
| These patents could be used as a basis to challenge the validity, limit the scope or limit our ability to obtain additional or broader patent rights of our patents or patents we have licensed |
| A successful challenge to the validity of our patents or patents we have licensed could limit our ability to commercialize the scanned beam technology and other technologies and, consequently, materially reduce our revenues |
| Moreover, we cannot be certain that patent holders or other third parties will not claim infringement by us with respect to current and future technology |
| Because US patent applications are held and examined in secrecy, it is also possible that presently pending US applications will eventually be issued with claims that will be infringed by our products or the scanned beam technology |
| The defense and prosecution of a patent suit would be costly and time consuming, even if the outcome were ultimately favorable to us |
| An adverse outcome in the defense of a patent suit could subject us to significant cost, to require others and us to cease selling products that incorporate scanned beam technology, to cease licensing scanned beam technology or to require disputed rights to be licensed from third parties |
| Such licenses, if available, would increase our operating expenses |
| Moreover, if claims of infringement are asserted against our future co-development partners or customers, those partners or customers may seek indemnification from us for damages or expenses they incur |
| Our planned future products are dependent on advances in technology by other companies |
| We rely on and will continue to rely on technologies, such as light sources and optical components that are developed and produced by other companies |
| The commercial success of certain of our planned future products will depend in part on advances in these and other technologies by other companies |
| Due to the current business environment, many companies that are developing new technologies are reducing expenditures on research and development |
| This may delay the development and commercialization of components we would use to manufacture certain of our planned future products |
| Our products may be subject to future health and safety regulations that could increase our development and production costs |
| Products incorporating scanned beam display technology could become subject to new health and safety regulations that would reduce our ability to commercialize the scanned beam display technology |
| Compliance with any such new regulations would likely increase our cost to develop and produce products using the scanned beam display technology and adversely affect our financial results |
| If we cannot manufacture products at competitive prices, our financial results will be adversely affected |
| To date, we have produced limited quantities of our Nomad and Flic products and demonstration units for research, development and demonstration purposes |
| The cost per unit for these units currently exceeds the level at which we could expect to profitably sell these products |
| If we cannot lower our cost of production, we may face increased demands on our financial resources, possibly requiring additional equity and/or debt financing to sustain our business operations |
| Our future growth will suffer if we do not achieve sufficient market acceptance of our products to compete effectively |
| Our success depends, in part, on our ability to gain acceptance of our current and future products by a large number of customers |
| Achieving market- based acceptance for our products will require marketing efforts and the expenditure of financial and other resources to create product awareness and demand by potential customers |
| We may be unable to offer products consistently or at all that compete effectively with products of others on the basis of price or performance |
| Failure to achieve broad acceptance of our products by potential customers and to effectively compete would have a material adverse effect on our operating results |
| Because we plan to continue using foreign contract manufacturers, our operating results could be harmed by economic, political, regulatory and other factors in foreign countries |
| We currently use a contract manufacturer in Asia to manufacture our Flic product, and we plan to continue using foreign manufacturers to manufacture some of our other products where appropriate |
| These international operations are subject to inherent risks, which may adversely affect us, including: * political and economic instability; * high levels of inflation, historically the case in a number of countries in Asia; * burdens and costs of compliance with a variety of foreign laws; * foreign taxes; and * changes in tariff rates or other trade and monetary policies |
| If we experience delays or failures in developing commercially viable products, we may have lower revenues |
| We began production of the current version of our Nomad product in the first quarter of 2004 |
| In September 2002, we introduced our Flic product |
| In addition, we have developed demonstration units incorporating the scanned beam technology |
| However, we must undertake additional research, development and testing before we are able to develop additional products for commercial sale |
| Product development delays by us or our potential product development partners, or the inability to enter into relationships with these partners, may delay or prevent us from introducing products for commercial sale |
| If we cannot supply products in commercial quantities, we will not achieve commercial success |
| We are developing our capability to manufacture products in commercial quantities |
| Our success depends in part on our ability to provide our components and future products in commercial quantities at competitive prices |
| Accordingly, we will be required to obtain access, through business partners or contract manufacturers, to manufacturing capacity and processes for the commercial production of our expected future products |
| We cannot be certain that we will successfully obtain access to sufficient manufacturing resources |
| Future manufacturing limitations of our suppliers could result in a limitation on the number of products incorporating our technology that we are able to produce |
| If our licensors and we are unable to obtain effective intellectual property protection for our products and technology, we may be unable to compete with other companies |
| Intellectual property protection for our products is important and uncertain |
| If we do not obtain effective intellectual property protection for our products, processes and technology, we may be subject to increased competition |
| Our commercial success will depend in part on our ability and the ability of the University of Washington and our other licensors to maintain the proprietary nature of the scanned beam display and other key technologies by securing valid and enforceable patents and effectively maintaining unpatented technology as trade secrets |
| We try to protect our proprietary technology by seeking to obtain United States and foreign patents in our name, or licenses to third-party patents, related to proprietary technology, inventions, and improvements that may be important to the development of our business |
| However, our patent position and the patent position of the University of Washington and other licensors involve complex legal and factual questions |
| The standards that the United States Patent and Trademark Office and its foreign counterparts use to grant patents are not always applied predictably or uniformly and can change |
| Additionally, the scope of patents are subject to interpretation by courts and their validity can be subject to challenges and defenses, including challenges and defenses based on the existence of prior art |
| Consequently, we cannot be certain as to the extent to which we will be able to obtain patents for our new products and technology or the extent to which the patents that we already own or license from others protect our products and technology |
| Reduction in scope of protection or invalidation of our licensed or owned patents, or our inability to obtain new patents, may enable other companies to develop products that compete with ours on the basis of the same or similar technology |
| We also rely on the law of trade secrets to protect unpatented know-how and technology to maintain our competitive position |
| We try to protect this know-how and technology by limiting access to the trade secrets to those of our employees, contractors and partners with a need to know such information and by entering into confidentiality agreements with parties that have access to it, such as our employees, consultants and business partners |
| Any of these parties could breach the agreements and disclose our trade secrets or confidential information, or our competitors might learn of the information in some other way |
| If any trade secret not protected by a patent were to be disclosed to or independently developed by a competitor, our competitive position could be materially harmed |
| We could be exposed to significant product liability claims that could be time-consuming and costly, divert management attention and adversely affect our ability to obtain and maintain insurance coverage |
| We may be subject to product liability claims if any of our product applications are alleged to be defective or cause harmful effects |
| For example, because our scanned beam displays are designed to scan a low power beam of colored light into the userapstas eye, the testing, manufacture, marketing and sale of these products involve an inherent risk that product liability claims will be asserted against us |
| Product liability claims or other claims related to our products, regardless of their outcome, could require us to spend significant time and money in litigation, divert management time and attention, require us to pay significant damages, harm our reputation or hinder acceptance of our products |
| Any successful product liability claim may prevent us from obtaining adequate product liability insurance in the future on commercially desirable or reasonable terms |
| An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our products |
| We rely heavily on a limited number of development contracts with the US government, which are subject to immediate termination by the government for convenience at any time, and the termination of one or more of these contracts could have a material adverse impact on our operations |
| During 2005 and 2004, 35prca and 42prca, respectively, of Microvisionapstas consolidated revenue was derived from performance on a limited number of development contracts with the US government |
| Therefore, any significant disruption or deterioration of our relationship with the US government would significantly reduce our revenues |
| Our government programs must compete with programs managed by other contractors for limited amounts and uncertain levels of funding |
| The total amount and levels of funding are susceptible to significant fluctuations on a year-to-year basis |
| Our competitors continuously engage in efforts to expand their business relationships with the government and are likely to continue these efforts in the future |
| Our contracts with the government are subject to immediate termination by the government for convenience at any time |
| The government may choose to use contractors with competing display technologies or it may decide to discontinue any of our programs altogether |
| In addition, those development contracts that we do obtain require ongoing compliance with applicable government regulations |
| Termination of our development contracts, a shift in government spending to other programs in which we are not involved, a reduction in government spending generally, or our failure to meet applicable government regulations could have severe consequences for our results of operations |
| Our products have long sales cycles, which make it difficult to plan our expenses and forecast our revenues |
| Our products have lengthy sales cycles that involve numerous steps including determination of a product application, exploring the technical feasibility of a proposed product, evaluating the costs of manufacturing a product and manufacturing or contracting out the manufacturing of the product |
| Our long sales cycle, which can last several years, makes it difficult to predict the quarter in which sales will occur |
| Delays in sales could cause significant variability in our revenues and operating results for any particular quarterly period |
| Our development contracts may not lead to products that will be profitable |
| Our developmental contracts, including without limitation those discussed in this document are exploratory in nature and are intended to develop new types of products for new applications |
| These efforts may prove unsuccessful and these relationships may not result in the development of products that will be profitable |
| Our revenues are highly sensitive to developments in the defense industry |
| Our revenues to date have been derived principally from product development research relating to defense applications of the scanned beam display technology |
| We believe that development programs and sales of potential products in this market will represent a significant portion of our future revenues |
| Developments that adversely affect the defense sector, including delays in government funding and a general economic downturn, could cause our revenues to decline substantially |
| Our Virtual Retinal Display technology depends on our licenses from the University of Washington |
| If we lose our rights under the licenses, our operations would be adversely affected |
| We have acquired the exclusive rights to the Virtual Retinal Display under a license from the University of Washington |
| The license expires upon expiration of the last of the University of Washingtonapstas patents that relate to this technology, which we currently anticipate will not occur until after 2011 |
| We could lose our exclusivity under the license if we fail to respond to an infringement action or fail to use our best efforts to commercialize the licensed technology |
| In addition, the University of Washington may terminate the license upon our breach and has the right to consent to all sublicense arrangements |
| If we were to lose our rights under the license, or if the University of Washington were to refuse to consent to future sublicenses, we would lose a competitive advantage in the market, and may even lose the ability to commercialize our products completely |
| Either of these results could substantially decrease our revenues |
| We are dependent on third parties in order to develop, manufacture, sell and market our products |
| Our strategy for commercializing the scanned beam technology and products incorporating the scanned beam technology includes entering into cooperative development, manufacturing, sales and marketing arrangements with corporate partners, original equipment manufacturers and other third parties |
| We cannot be certain that we will be able to negotiate arrangements on acceptable terms, if at all, or that these arrangements will be successful in yielding commercially viable products |
| If we cannot establish these arrangements, we would require additional capital to undertake such activities on our own and would require extensive manufacturing, sales and marketing expertise that we do not currently possess and that may be difficult to obtain |
| In addition, we could encounter significant delays in introducing the scanned beam technology or find that the development, manufacture or sale of products incorporating the scanned beam technology would not be feasible |
| To the extent that we enter into cooperative development, sales and marketing or other joint venture arrangements, our revenues will depend upon the performance of third parties |
| We cannot be certain that any such arrangements will be successful |
| Loss of any of our key personnel could have a negative effect on the operation of our business |
| Our success depends on our executive officers and other key personnel and on the ability to attract and retain qualified new personnel |
| Achievement of our business objectives will require substantial additional expertise in the areas of sales and marketing, research and product development and manufacturing |
| Competition for qualified personnel in these fields is intense, and the inability to attract and retain additional highly skilled personnel, or the loss of key personnel, could reduce our revenues and adversely affect our business |
| We are dependent on a small number of customers for our revenue |
| Our quarterly performance may vary substantially and this variance, as well as general market conditions, may cause our stock price to fluctuate greatly and potentially expose us to litigation |
| Our revenues to date have been generated primarily from a limited number of development contracts with US government entities and commercial partners |
| Our quarterly operating results may vary significantly based on: * reductions or delays in funding of development programs involving new information display technologies by the US government or our current or prospective commercial partners; * changes in evaluations and recommendations by any securities analysts following our stock or our industry generally; * announcements by other companies in our industry; * changes in business or regulatory conditions; * announcements or implementation by our competitors of technological innovations or new products; * the status of particular development programs and the timing of performance under specific development agreements; * economic and stock market conditions; or * other factors unrelated to our company or industry |
| In one or more future quarters, our results of operations may fall below the expectations of securities analysts and investors and the trading price of our common stock may decline as a consequence |
| In addition, following periods of volatility in the market price of a companyapstas securities, shareholders often have instituted securities class action litigation against that company |
| If we become involved in a class action suit, it could divert the attention of management, and, if adversely determined, could require us to pay substantial damages |
| If we fail to manage expansion effectively, our revenue and expenses could be adversely affected |
| Our ability to successfully offer products and implement our business plan in a rapidly evolving market requires an effective planning and management process |
| We have significantly expanded the scope of our operations |
| The growth in business and relationships with customers and other third parties has placed, and will continue to place, a significant strain on our management systems and resources |