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MVIS Blog is not responsible for transcription errors or omissions. Updated 5/6/05.

Brian Heagler: Welcome to 1Q05 Conference Call. Forward looking statements disclaimer.

Rick Rutkowski: Thanks for joining us this afternoon. Jump right in to the numbers and talk about operating strategy going forward. Very solid quarter for first quarter and strong outlook for Q2. Review of financial results. Revenue delayed in 1Q will be captured in the future, includes $100,000 subcontract to Raytheon. Very strong comparisons to prior year. Microvision vs. Lumera revenue recognition explanation. Microvision only had 2.7M last year vs. 4.0M in present year. Q2 will be 20-25% higher over Q1, $4.8-5.0M Q2 guidance would be record quarter for the company.

Revenue results breakout from press release. We booked 100 Nomad units during the quarter. Delivery schedules have a number of those sales booked in Q2. 165 Nomads to General Dynamics for $1.2M. Guidance of $4.8-5.0M assumes delivery of 50 Nomads in Q2, 115 Nomads scheduled for June, 3Q. Price per unit of $7,000.

Still seeing some scrap on discontinued parts inventory. Agressive cost reduction plan for Nomad this year, going quite well. $622,000 expenses related to recent financing. Ended quarter with $6M in cash. Significant cash infusion from Ethicon contract. Lower than usual cash usage during first quarter due to Ethicon contract. Full absorption accounting method.

Finished Goods:

Turning from press release, putting strategic framework around press release. With respect to product sales, as we said in the last two calls, our primary focus continues to be on channel development. Had highly visible instance of this recently with Microsoft at their Global Automotive Summit. Fortunate enough to capture the attention of Bill Gates who made some nice comments. Partnering with Microsoft for marketing of Nomad. With respect to Nomad channel development there are 3 key aspects. Physical footprint and sales presence. Expectation is leverage the model by partnering with solutions providers that are selling to targeted customers in automotive and manufacturing. Launch co-marketing efforts with other vendors as well. New applications, 2 opportunities to connect to instruments or tools that are already in use in the dealership, large install base and readily discernable ROI. Physical presence, co-marketing support, beachhead applications. Significant impact of relationships begins in Q3. Focusing on key channel deal in auto service segment for Nomad that is still pending. Major Japanese systems integrator ($2.5B company) completed test marketing phase with Nomad very successfully, enter into agreement with them very likely this summer. Dovetails well with approach to broader segment of factory automation and plant maintenance. Two trials in Germany yielding very positive results with major manufacturers. Broader opportunity is significant. Partnered with small systems integrator, doing a fantastic job. Getting interest from much larger systems integrators. Opportunity to provide value added to their customers. Continue to work with Microsoft to increase visibility outside of automotive. Targeting new application in aftermarket automotive centers: Sears automotive centers, BF Goodrich stores in maintenance business, going to be addressing a very large installed base of equipment that the Nomad can connect to. Expectation for that launch is early to mid-June. MSFT next month is holding mobile and embedded conference and Nomad may be referenced by MSFT senior executive in keynote address. Broader audience of systems integrators developing applications. Flic will be working with its development partners at the show as well.

For Nomad in the military, good success with potential for greater success going forward. Work with General Dynamics on Mounted Warrior. Announced for $1.2M contract for 165 Nomads. Process of spiral development. Deliver something and in parallel continue to improve that. Focus of development is on formal qualification of the product for NSN number (national stocking number) streamlines future acquisitions, makes Nomad more of a catalog type of product authorized for government purchase. Very positive development. ND2500 is itself a good example of spiral development. Product shipped to Stryker a year ago was ND1000. ND2500 is half the weight, 20% smaller, increased luminence, has numerous product enhancements. Focus on packaging and formal qualification of the product. Troops in Iraq are very excited to get their hands on this product.

Recent delivery in Virtual Cockpit program. Contracted through same program office that runs Mounted Warrior and Air Warrior, called the PM Soldier - Warrior. Current helmet mounted display is full color, high luminence display for helicopter pilots with rack mountable control module will be demonstrated next week in Orlando in the Air Warrior booth at the Army Aviation Association tradeshow. We think that this convergence between Mounted Warrior and Air Warrior looks very promising from our perspective. In addition to a development contract associated with further Mounted Warrior contracts we are expecting 2 other contracts relating to VCOP development, in the aggregate, 3 contracts valued in excess of $5M. Begun a very good dialogue with GD, really enjoying collaborating with them. I think we're at the point where we're looking at product roadmaps and even defining systems contexts that are enabled by the Nomad and other products within the realm of battle management systems that General Dynamics C$ works. An exciting new partnership emerging that could have very interesting possibilities for us.

For Flic, first half should be pretty much steady as she goes. Our new partners should start to have an effect in the second half. Bulk of sales was through 16 ISVs and resellers in US and Europe. Want to flesh out channel partners with top tier patners. Top tier reseller would do thousands of units annually. One of the significant areas is mobile devices. We announced in the last quarter compatibility with BlackBerry. Very large installed base, increasingly widely used for sales and service forces. Data capture has become a significant initiative for mobile players. Flic enjoys key advantages -- ergonomically friendly and affordable. Customers seek the product out. Kick in in the 2H for these reasons. Get good traction out of the conference next week, software developer’s kit has improved dramatically, is unique in the industry. Application development environment for Flic allows people to get up and running with applications in days. That increasingly is a unique feature set that we can play to. Interesting opportunities emerging through the 2H and on through next year. Significant volume potentials available to the product through new channel partners.

OEM Solutions:

Driving a product pipeline. Key metrics to measure success is idea of R&D productivity. Are we seeing promising new products moving through and into the pipeline at a reasonable rate. Has been an outstanding success for us for the last year plus. Will be in Boston at Society for Information Display on May 22-27, you’ll get to see an array of products including the Virtual Cockpit, Auto HUD, Nomad and new prototype efforts. We're finding the amount of leverage in having built, designed, refined and improved the Nomad and branched into some miltary applications of it is our ability to integrate other systems and applications is improving all the time.

The development of business cases - the contract model has been to contract to turn technology into product systematically. Work with world leaders in various product categories. Ethicon, Canon, BMW, Audi and others fit that bill. In parallel with the development, define and understand the business model and build it into our product roadmap. Expect new commercial bookings with respect to Auto HUD and Laser Printer, we’ve seen an increase in Laser Printer this year, Ethicon was bumped up slightly. Next phase of Ethicon is additional $5.5M to go from prototype to production, assumes successful evaluation period, book late this year, early next year. Project is going quite well. Potential product very exciting. R&D productivity -- look at R&D investments, make sure that maps to future product opportunities with scale to it. Looking at some very exciting businesses. Auto HUD is a good example. Opportunity is 4M unit a year by 2010. Entering that market at an opportune time. Companies are still making technology driven product choices. Our product has really significant discriminators in terms of package size, performance. Bill Gates touched on HUD for in vehicle systems in addition to vehicle maintenance. Working with prospective development/commercialization partners in addition to VW/Audi. Should be entering into third OEM dev contract with major carmaker, a very significant one. Next steps in this domain will be to structure production deals similar to Ethicon.

With regards to laser printer, had $500k added to contract this year. We don't have as good visibility on those timelines. Handing off an engine, haven’t yet been given visibility into product timeline. Our customer is one of the largest printer manufacturers in the world. In consumer electronics our focus continues to be on both electronic viewfinder and more recently our wide field of view system. It is a technological breakthrough that probably can't be achieved by other means. What we mean by that is that when people have tried to make very wide field of view displays (80-100") in a wearable configuration, they run into the laws of optics and end up using very complex, bulky and expensive lenses to accomplish this. Our design eliminates that and reduces this to a system of two simple lenses, complexity in other areas. Performance, cost, package potential of this leapfrogs anything else in the market. Over the last ten years, very little has happened in wide field of view, because people are up against optics restraint . Make sure the import is understood in regards to entertainment systems, electronic gaming where you’d want to have wide field of view. New systems architecture. We are talking about something quite disruptive in some very very large markets.

For EVF, focused on production partners for LED parts of the system. Begun dialogue with certain companies in Asia to advance that. We are achieving unmatched color saturation in the industry.

Later in the year a series of development contracts. Move HUD to production deal similar to Ethicon deal. We think the prospects are very good. In terms of observation, general awareness in both commercial and miltary domain has gone way up. We've been contacted twice to bid on military contracts with significant defense contractors in addition with the work we're doing with General Dynamics. Those are opportunities that are coming to us in addition to opportunities with Microsoft and others.

Restaurant metaphor...beachhead application, co-marketing, visibility we get with Microsoft. Interesting piece that came out in the last two days, that highlighted service and maintenance profits, cite increasing inventory and rates putting pressure on auto sales. More focused than ever on fixed-ops of auto business. Andrew, can you add color here?

Andrew Lee: Focus in the last two to three months has been to perfect application focus within the dealerships. Results are recognized quickly by buying constituents is significant for dealer's quest for profit, for turning cars quicker. Beachhead applications somewhat understated, but appropriate. Team with companies that have found value in Microvision's offering to help sell their products.

RR: In a few weeks time, we’ll be able to speak more about this. Product launch in early to mid-June, quite exciting and a real catalyst in the marketplace. Looking forward to a very strong record 2Q, $4.8-5.0M assumes only 50 of 165 ND2500 units.

Q&A:

Jim McIlery, Unterberg Towbin: Rick can you help with 2Q #s? $1M in products, $4M in contracts?

RR: In excess of $1M in products and under $4M in contracts. We expect to see some uptick, see some orders coming out of the distribution deal. Small amount would need to be booked, on the order of $2-300k, small portion of larger contract.

UT: 3 programs totalling $5M is 2H05?

RR: Different scenarios for the 3 contracts. 800k, 3M, 1.5-2.0M. will likely book in that order in the current quarter.

UT: Nomads sent to GD this quarter, are these the same design?

RR: Working on a quick release cable as an improvement to the product. Everything else we're good to go, superb optics. Best system we've ever built in terms of performance.

Lionshare Financial: Congratulations. Question considering Nomad Expert with reference accounts. Major auto service centers using the product. Can you talk about users who have had the product for 6 months to a year?

RR: For newcomers, the product really got into the market in August-September of last year. We are know 2 quarters into rollout. Partners who have established sales infrastructure selling into that domain. The key to building on what we have done is does it work and do people like it. Feeling strongly that we have validated fundamental product premise. Like anything new, there will be an early adopter bellcurve. Partner is significant company has performed rigorous due diligence and has spoken with numerous customers. Best second hand evidence of reference accounts meeting our objectives. Very satisfied customers. Some of the ways that we can leverage Microsoft is increasing visibility of reference accounts and Good Housekeeping seal of approval. Work with us to publish case studies on video. With MSFT will straddle auto service domain as well as manufacturing domain. Leverage MSFT to build and grow that awareness, leverage pending disty partner to gain physical presence. Important catalyst in gaining traction.

Eugene, Investor: Honda Nomad question.

RR: Complex story in this case, change at Honda in required tools program. Our product came on the heels of a required tool that had not been successful. Honda provided assistance in terms of integrating with their systems. Have discontinued one diagnostic system and are going forward with a new one. Meeting in Tokyo last week. Going to market directly and then leveraging it back into a distribution model of the kind we've been describing. We did see OEM activity coming into the equation, coming in farther out. Ford Access Program getting ready to roll out in the next year. Focused on approaching the market in a very different way for the past 2 or 3 quarters.

Eugene: Progress with Canon, digital camera viewfinders, speak specifically to Canon:

RR: With Canon specifically, work that was sponsored by them was sponsored by R&D group. Handoff to product group, interested in timelines, product strategy, roadmap. Our emphasis had been manufacturing partner for EELED for that particular product. Had demonstrated 9 megapixel display. Parallel path for development for Canon. 3 systems architecture that address a range of products. Miniaturization is not the challenge, the challenge is one of manufacturing and supply nature. Pushed forward in multi-line scanning. New interest in consumer electronics strategy. Manufacturers we are talking with is basically talking about making a catalog part. This company does a lot of business in this domain.

Steve Willey: with regards to the edge emitting platform. pleased with the performance, proceed toward commercialization of headsets and media players.

Eugene: Opportunity in digital camera sphere or portable phone sphere?

SW: Going back a couple of years ago, we saw viewfinder. In the last year there's been a plethora of new media players, iPod like media players. Strong belief in industry of need for high performance highly miniaturized virtual display. Horse race. Staggering volumes for consumer products.

RR: Important point. Multi-line systems use conventional surface emitting leds. Edge emitting could be used in these kinds of applications but the multi-line array system that would be absolutely unique in a gaming environment. For gaming we can provide very immersive experience.

Joe Dubrof, Morgan Stanley: Go back to Nomad, when you move from one generation to the next, from ND1000 to 2500.

RR: On the commercial, we haven't made revision, have had parts substitution results in cost reduction. There are some others scheduled but are more marginal than incremental in nature. From 1000 to 2500, huge reduction in cost, package size, weight.

Jeff Neal, Bear Stearns: 2 CCs ago, made statement that the company would need $20-30M capital to reach breakeven. You've raised $10M, has your view changed in that regard?

RR: No, not significantly. Require $14-15M in rev per quarter to reach cashflow profitability. As we move toward that crossover point our cash requirements would decline.

JN: Transformation towards product sales, need additional employees on senior management level?

RR: There's always room to improve and add to the team. A lot of change in sales and marketing organization. One area of focus is, leverage into other channels pretty quickly. Focus on biz dev marketing types to create relationships. From an operating perspective see some additions to the team to add to bench depth of the team. We can always do better and it's always about cycle time. Bring on new OEM partners, the faster we can grow the business and everything grows faster. You'll see some development. From budgetary standpoint ... going through this period we've got a significant push on product development, we're able to lean out the engineering organization, the technology is more leverageable, reallocate resources toward sales and marketing organization.

Closing remarks: Thanks for joining us, 2Q looking very strong, 3Q will benefit from significant new relationships put in place during the current quarter. Very excited, General Dynamics, Microsoft and others are key to the strategy. R&D productivity, product development pipeline very encouraging. Nature of tech developments and business case developing.

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