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U.S. Securities and Exchange Commission
 Washington, D. C. 20549
 Form 10-KSB
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number : 0-26226
 MICROFIELD GROUP, INC.
  Oregon
    
    93-0935149(State or other jurisdiction
    
    (I. R. S. Employerof incorporation or organization)
    
    Identification No.)
 1631 NW Thurman St., Suite 200
Portland, Oregon 97209    (503) 419-3580
 Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
 þ o
 þ
   o
    o þ




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##### 



MICROFIELD GROUP, INC.
FORM 10-KSB INDEX
 PagePART IItem 1.
    
    Description of BusinessItem 2.
    
    Description of PropertyItem 3.
    
    Legal ProceedingsItem 4.
    
    Submission of Matters to a Vote of Security HoldersPART IIItem 5.
    
    Market for Common Equity and Related Stockholder MattersItem 6.
    
    Managements Discussion and Analysis of Financial Condition or Plan of OperationItem 7.
    
    Financial
StatementsItem 8.
    
    Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 8A.
    
    Controls and ProceduresPART IIIItem 9.
    
    Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange ActItem 10.
    
    Executive CompensationItem 11.
    
    Security Ownership of Certain Beneficial Owners and ManagementItem 12.
    
    Certain Relationships and Related TransactionsItem 13.
    
    ExhibitsItem 14.
    
    Principal Accountant Fees and ServicesEXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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This filing includes statements that may constitute forward-looking statements.
These statements are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and
uncertainties that could cause or contribute to such differences that include, but are not
limited to, competitive factors, the success of new products and services in the marketplace,
dependence upon third party vendors, and the ability to obtain financing. By making these
forward-looking statements, the Company undertakes no obligation to update these statements
for revisions or changes after the date of this filing.
 
 PART I
 
 Item 1. Description of Business
 General
   
    
    Electrical and systems engineering and design
 °
    
    Controls, lighting,
and cabling°
    
    Building electric service°
    
    Solar, wind, distributed
generation, and substations°
    
    Information technology networks°
    
    Telecommunications, computer telephony, and integrated systems°
    
    Life
safety and security systems°
    
    Redistribution in malls and shopping
centers
 
    
    Construction, maintenance, inspection, and upgrades
 °
    
    Integrated building controls, wiring, and
cabling
 §
    
    HVAC,§
    
    Lighting§
    
    Life safety systems
 °
    
    Telecommunications systems integration and
infrastructure
 §
    
    Computer telephony integration§
    
    Digital Video CCTV systems§
    
    Enterprise security
systems§
    
    Wireless networking solutions§
    
    Information technology networks§
    
    Voice / data systems
 °
    
    Electrical construction service
 §
    
    Buildings and industrial systems§
    
    Substations§
    
    Wind farms,
solar collectors, and distributed generation§
    
    Redistribution in malls and shopping centers
 
    
    Software development
 °
    
    Commercial building energy data management, data acquisition, and
modeling°
    
    Regional grid data monitoring, data management, and price forecasting°
    
    Electric
consumer transactional interface, wholesale products, and transaction management°
    
    Settlement systems and related protocols
 
    
    Electric Power Transactions
 3




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°
    
    Service electric energy, capacity, and reserve needs of regional electric grids°
    
    Service wholesale electric markets to improve electric supply and delivery efficiencies°
    
    Enable buildings and industrial consumers to contribute to these services
      Recent Acquisitions
   4




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www.microfield.com
 Products and Services
  Electrical Design & Construction Services
  Digital Video CCTV Systems and Infrastructure
  Telecommunications Systems and Infrastructure
  Enterprise Security and Life Safety Systems
  Wireless Networking Solutions
  Information Technology (IT) Network Design & Engineering
 5




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Power Services
  Electricity Redistribution Services
  Wholesale Power Transactions
  Discontinued Lines
  Sales and Distribution
   6




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Customers
    Acquisitions and Investments
   Competition
  7




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Manufacturing and Supply
   8




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Intellectual Property
    9




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Government Approval or Regulations
  Employees
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
    10




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Item 4. Submission of Matters of a Vote of Security Holders
  11




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PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters
  High
    
    LowFiscal 2004First Quarter
    
    $
    0.95
    
    
    $
    0.35Second Quarter
    
    
    0.75
    
    
    
    0.30Third Quarter
    
    
    0.69
    
    
    
    0.31Fourth Quarter
    
    
    0.51
    
    
    
    0.30Fiscal 2005First Quarter
    
    $
    0.48
    
    
    $
    0.24Second Quarter
    
    
    0.62
    
    
    
    0.25Third Quarter
    
    
    2.60
    
    
    
    0.50Fourth Quarter
    
    
    2.68
    
    
    
    1.46
      Securities Authorized for Issuance Under Equity Compensation Plans
  12




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Number ofsecuritiesremainingavailable forNumber of
    
    
    
    
    
    future issuanceSecurities to be
    
    
    
    
    
    under equityissued upon
    
    Weighted average
    
    compensationexercise of
    
    exercise price of
    
    plans (excludingoutstanding
    
    outstanding
    
    securitiesoptions and
    
    options and
    
    reflected inwarrants
    
    warrants
    
    column (a))Plan category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    7,717,765
    
    
    $
    0.44
    
    
    
    3,153,423Equity compensation
plans not approved
by security holders
    
    
    27,364,849
    
    
    $
    2.03
    
    
    
    -0-Total
    
    
    35,082,614
    
    
    $
    1.68
    
    
    
    3,153,423
      13




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Item 6. Managements Discussion and Analysis of Financial Condition or Plan of Operation
  
    
    discuss our future expectations;
    
    contain projections of our future results of operations or of our financial condition; and
    
    state other forward-looking information.
  Overview
       
    
    Electrical and systems engineering and design
 o
    
    Controls, lighting, and cablingo
    
    Building electric serviceo
    
    Solar, wind, distributed generation, and substations
 15




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o
    
    Information technology networkso
    
    Telecommunications, computer telephony, and integrated systemso
    
    Life safety and security systemso
    
    Redistribution in malls and shopping centers
 
    
    Construction, maintenance, inspection, and upgrades
 o
    
    Integrated building controls, wiring, and cabling
 §
    
    HVAC,§
    
    Lighting§
    
    Life safety systems
 o
    
    Telecommunications systems integration and infrastructure
 §
    
    Computer telephony integration§
    
    Digital Video CCTV systems§
    
    Enterprise security systems§
    
    Wireless networking solutions§
    
    Information technology networks§
    
    Voice / data systems
 o
    
    Electrical construction service
 §
    
    Buildings and industrial systems§
    
    Substations§
    
    Wind farms, solar collectors, and distributed generation§
    
    Redistribution in malls and shopping centers
 
    
    Software development
 o
    
    Commercial building energy data management, data acquisition, and modelingo
    
Regional grid data monitoring, data management, and price forecastingo
    
    Electric consumer transactional interface, wholesale products, and transaction managemento
    
    Settlement systems and related protocols
 
    
    Electric Power Transactions
 o
    
    Service electric energy, capacity, and reserve needs of regional electric gridso
    
    Service wholesale electric markets to improve electric supply and delivery efficiencieso
    
    Enable buildings and industrial consumers to contribute to these services
     16




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Managements Focus in Evaluating Financial Condition and Operating Performance.
  Revenue.
 Expense Control
 Cash Requirements.
  Research and Development.
 Customer service.
 17




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Safety.
 Business Characteristics.
 Revenue.
 Cash.
   Opportunities and Risks.
  Business Goal Attainment.
  Trends.
  18




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Critical Accounting Policies
         19




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Recent Accounting Pronouncements
  FIN 47.
 SFAS 154.
 SFAS 155
 Results of Operations
  Fiscal
    
    
    Fiscal2005
    
    
    2004Net sales
    
    
    100
    %
    
    
    100
    %Cost of goods sold
    
    
    82
    
    
    
    83Gross profit
    
    
    18
    
    
    
    17Operating expenses
    
    
    149
    
    
    
    29Loss from continuing operations
    
    
    (131
    )
    
    
    (12
    )
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Fiscal
    
    
    Fiscal2005
    
    
    2004Other income (expense)
    
    
    (4
    )
    
    
    (5
    )Income (loss) before income taxes
    
    
    (135
    )
    
    
    (17
    )Benefit from income taxes
    
    
    
    
    
    
    Loss before discontinued operations
    
    
    (135
    )
    
    
    (17
    )Discontinued operations
    
    
    
    
    
    
    1Net income (loss)
    
    
    (135
    )%
    
    
    (16
    )%
  Sales
 Cost of Sales
 Gross Profit.
  Sales, General and Administrative Expenses (S, G & A)
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Write-off of impaired goodwill and intangibles
 Interest
Expense
 Loss on valuation of warrant liability
 Gain / Loss From Discontinued Operation.
 Income Taxes.
 Non-cash Expense Items
  23




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Year ended
    
    
    Year endedNon-cash expense item description*
    
    December 31, 2005
    
    
    January 1, 2005Stock-based derivative liability re-measurement
    
    $
    88,024
    
    
    $
    16,150Interest expense on warrant issuances and
re-measurements
    
    
    320,967
    
    
    
    912,402Re-valuation of warrant liability
    
    
    503,543
    
    
    
    Common stock
and stock options issued for services
    
    
    244,000
    
    
    
    560,000Interest expense on amortization of debt discount
    
    
    13,564
    
    
    
    158,869Intangible write-off and amortization
    
    
    77,419,759
    
    
    
    110,556Gain on disposal of assets and lease termination
    
    
    (7,145
    )
    
    
    (92,137
    )Write down of impaired intangible asset
    
    
    
    
    
    
    376,000Unused reserve for legal fees to contest lawsuit
    
    
    (120,000
    )
    
    
    205,568Loss on debt extinguishment
    
    
    
    
    
    
    515,000Total transactional non-cash income and expense
    
    $
    78,462,712
    
    
    $
    2,762,408
 
 * This table does not include recurring non-cash expenses such as depreciation. Liquidity and Capital Resources
      24




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25




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Inflation
  Off-Balance Sheet Arrangements
  Related Party Transactions
  26




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Amount of
    
    MonthlyRelated Party
    
    Type of Obligation
    
    Maturity Date
    
    Obligation
    
    PaymentChristenson Leasing LLC(a)(g)
    
    T. I. lease
    
    December 2007
    
    
    168,345

    
    
    7,940Christenson Leasing LLC(a)(g)
    
    Vehicle leases
    
    various
    
    
    76,693

    
    variousChristenson Leasing LLC(a)(g)
    
    Equipment lease
    
    December 2007
    
    
    

    
    (f)60,000JMW Group, LLC(a)
    
    Note payable
    
    August 2006
    
    
    303,225

    
    (c)41,667JMW Group, LLC(a)
    
    Indemnity fees
    
    Open obligation
    
    
    
    
    
    (i)12,500Aequitas Capital Management(a)
    
    Note payable
    
    April 2006
    
    
    65,447
    
    variousRod Boucher(h)
    
    Note payable
    
    September 13, 2008
    
    
    329,033
    
    
    11,309William C. McCormick
    
    Note payable
    
    July 2005
    
    (i)250,000
    
    interest onlyMark Walter
    
    Bond guarantee fees
    
    Open obligation
    
    
    

    
    (b)1,200Destination Microfield, LLC(d)
    
    Vehicle lease
    
    August 2006
    
    
    

    
    (e)36,350William C. McCormick
    
    Indemnity fees
    
    Open obligation
    
    
    

    
    
    3,246John B. Conroy
    
    Note receivable
    
    September 2005
    
    
    66,250

    
    
 
 (a)
    
    Robert J. Jesenik, a former director owns a significant interest in these entities.(b)
    
    This bond guarantee fee is an approximation, and fluctuates based on the total open bond liability.(c)
    
    This payment amount is for principal only. An additional amount is due monthly which includes interest at prime plus 10%.(d)
    
    William C. McCormick, Chairman of our board of directors, holds a minority ownership interest in this entity.(e)
    
    These payments vary over the term of the loan. This amount represents the monthly payment in effect on December 31, 2005.(f)
    
    This payment was reduced to $60,000 per month by terms of the reissued note, starting November 1, 2005.(g)
    
    William C. McCormick holds a beneficial minority ownership interest in this company.(h)
    
    This debt was paid in full in October 2005 in connection with a private placement.(i)
    
    This note represents deferred salaries and expenses payable to Mr. Boucher prior to the acquisition of EnergyConnect.(j)
    
    These indemnity fees are payments made on standby letters of credit which are in place to guarantee payments to vendors on specific jobs.  Notes Payable to Destination Capital, LLC
   27




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Warrants to beDate
    
    Loan Balance
    
    IssuedAugust 1, 2004
    
    $
    300,000
    
    
    
    37,500September 1, 2004
    
    $
    750,000
    
    
    
    93,750October 1, 2004
    
    $
    1,200,000
    
    
    
    150,000November 1, 2004
    
    $
    1,200,000
    
    
    
    150,000December 1, 2004
    
    $
    1,200,000
    
    
    
    150,000January 1, 2005
    
    $
    1,200,000
    
    
    
    150,000February 1, 2005
    
    $
    1,200,000
    
    
    
    150,000March 1, 2005
    
    $
    1,200,000
    
    
    
    150,000April 1, 2005
    
    $
    1,200,000
    
    
    
    150,000May 1, 2005
    
    $
    1,200,000
    
    
    
    150,000June 1, 2005
    
    $
    1,200,000
    
    
    
    150,000July 1, 2005
    
    $
    1,158,334
    
    
    
    144,792Total warrants to be issued as of October 1, 2005
    
    
    
    
    
    
    1,626,042
   Note Payable to Rod Boucher
 th
 28




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Note Payable to William McCormick
 th
 Bond Guarantee Fees
 Christenson Velagio
  Christenson Electric
   Tenant improvement lease
 
  Equipment Lease Agreement
  29




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Master Vehicle Lease Agreements
 Christenson Velagio
  Christenson Electric
  Real Property Sub Leases
   Administrative Services Agreement
  30




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Note receivable
  Contractual Obligations and Commitments
  Less than
    
    
    1-2
    
    
    3-5
    
    
    More thanTotal
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsOperating Leases
    
    $
    4,716,949
    
    
    $
    2,230,615
    
    
    $
    1,804,850
    
    
    $
    681,484
    
    
    $
    Employment and Consulting Agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total obligations
    
    $
    4,716,949
    
    
    $
    2,230,615
    
    
    $
    1,804,850
    
    
    $
    681,484
    
    
    $
    
  Recent Accounting Pronouncements
 FIN 47.
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SFAS 154.
 SFAS 155
 CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
  Risks Relating to Our Business
 We Have a History Of Losses Which May Continue and Which May Negatively Impact Our Ability to
Achieve Our Business Objectives.
  If We Are Unable to Obtain Additional Funding Our Business Operations Will be Harmed and If We Do
Obtain Additional Financing Our Then Existing Shareholders May Suffer Substantial Dilution.
  32




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Our Independent Registered Public Accounting Firm Has Expressed Substantial Doubt About Our
Ability to Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future
Financing.
  Many Of Our Competitors Are Larger and Have Greater Financial and Other Resources than We Do and
Those Advantages Could Make It Difficult For Us to Compete With Them.
  The Failure To Manage Our Growth In Operations And Acquisitions Of New Product Lines And New
Businesses Could Have A Material Adverse Effect On Us.
  
    
    operations and financial systems;
    
    procedures and controls; and
    
    training and management of our employees.
    
    
    difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
    
    different or conflicting regulatory or legal requirements;
    
    foreign currency fluctuations; and
    
    diversion of significant time and attention of our management.
 Potential future acquisitions could be difficult to integrate, disrupt our business, dilute
stockholder value and adversely affect our operating results.
 33




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If We Are Unable to Retain the Services of Messrs. Boucher and Walter, or If We Are Unable to
Successfully Recruit Qualified Managerial and Sales Personnel Having Experience in Business, We May
Not Be Able to Continue Our Operations.
  Our success is dependent on the growth in energy management and curtailment programs, and the
continued need for electrical construction and technology services, and to the extent that such
growth slows and the need for services curtail , our business may be harmed.
  Our quarterly results fluctuate and may cause our stock price to decline.
   
    
    Construction and energy market conditions and economic conditions generally;
    
    Timing and volume of customers specialty construction projects;
    
    The timing and size of construction projects by end users;
    
    Fluctuations in demand for our services;
    
    Changes in our mix of customers projects and business activities;
    
    The length of sales cycles;
    
    Adverse weather conditions, particularly during the winter season, could
effect our ability to render services in certain regions of the United
States;
    
    The ability of certain customers to sustain capital resources to pay their
trade accounts receivable balances;
    
    Reductions in the prices of services offered by our competitors; and
 34




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
    
    Costs of integrating technologies or businesses that we add.
  
    
    Changes in the actual and estimated costs and time to complete
fixed-price, time-certain projects that may result in revenue
adjustments for contracts where revenue is recognized under the
percentage of completion method;
    
    The timing of expansion into new markets;
    
    Costs incurred to support internal growth and acquisitions;
    
    Fluctuations in operating results caused by acquisitions; and
    
    The timing and payments associated with possible acquisitions.
  Failure to keep pace with the latest technological changes could result in decreased revenues.
  Failure to properly manage projects may result in costs or claims.
    35




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Our failure to comply with, or the imposition of liability under, environmental laws and
regulations could result in significant costs.
  The electric infrastructure servicing business is subject to seasonal variations, which may cause
our operating results to vary significantly from period to period and could cause the market price
of our stock to fall.
  Employee strikes and other labor-related disruptions may adversely affect our operations.
  Our Trademark and Other Intellectual Property Rights May not be Adequately Protected Outside the
United States, Resulting in Loss of Revenue.
  36




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Intellectual Property Litigation Could Harm Our Business.
      Risks Relating to Our Common Stock
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If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed From the OTC
Bulletin Board Which Would Limit the Ability of Broker-Dealers to Sell Our Securities and the
Ability of Stockholders to Sell Their Securities in the Secondary Market.
  Our Common Stock is Subject to the Penny Stock Rules of the SEC and the Trading Market in Our
Securities is Limited, Which Makes Transactions in Our Stock Cumbersome and May Reduce the
Value of an Investment in Our Stock.
  
    
    that a broker or dealer approve a persons account for transactions in
penny stocks; and
    
    the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to be
purchased.
  
    
    obtain financial information and investment experience objectives of the
person; and
    
    make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and experience in
financial matters to be capable of evaluating the risks of transactions in penny
stocks.
  
    
    sets forth the basis on which the broker or dealer made the suitability
determination; and
    
    that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
   Potential Fluctuations in Annual Operating Results
  38




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Limitation of Liability and Indemnification of Officers and Directors
  Continued Influence of Current Officers and Directors
  Management of Growth
  39




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RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP  Certified Public Accountants
 REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
 
     /s/
RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
 
 40




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##### Table of Contents



MICROFIELD GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 AND JANUARY 1, 2005
 December 31, 2005
    
    
    January 1, 2005Current assets:Cash and cash equivalents
    
    $
    729,016
    
    
    $
    10,992Accounts receivable, net of allowances of $228,767 and $103,969
    
    
    8,536,851
    
    
    
    6,241,001Accounts receivable  related parties
    
    
    20,904
    
    
    
    178,900Inventory, net of allowances (Note 4)
    
    
    720,769
    
    
    
    239,328Costs in excess of billings (Note 6)
    
    
    2,039,040
    
    
    
    822,656Other current assets
    
    
    607,793
    
    
    
    450,602Total current assets
    
    
    12,654,373
    
    
    
    7,943,479Property and equipment, net (Note 5)
    
    
    450,988
    
    
    
    125,777Intangible assets, net (Note 7 & 8)
    
    
    6,008,937
    
    
    
    1,393,281Goodwill (Note 7 & 8)
    
    
    35,962,766
    
    
    
    2,276,243Other assets
    
    
    164,283
    
    
    
    36,243Total Assets
    
    $
    55,241,347
    
    
    $
    11,775,023Current liabilities:Cash disbursed in excess of available funds
    
    $
    942,436
    
    
    $
    26,125Accounts payable
    
    
    7,141,573
    
    
    
    3,451,991Accounts payable  related parties
    
    
    
    
    
    
    99,932Accrued payroll taxes and benefits
    
    
    1,762,626
    
    
    
    1,297,379Bank line of credit (Note 14)
    
    
    5,957,470
    
    
    
    4,392,975Current portion of notes payable (Note 14)
    
    
    950,993
    
    
    
    673,968Current portion of notes payable  related parties (Notes 14 &
18)
    
    
    727,766
    
    
    
    485,500Billings in excess of costs (Note 6)
    
    
    802,640
    
    
    
    523,919Other current liabilities
    
    
    67,052
    
    
    
    226,788Total current liabilities
    
    
    18,352,556
    
    
    
    11,178,577Long-term liabilities:Long term notes payable (Note 14)
    
    
    1,605,477
    
    
    
    412,922Long term notes payable  related parties (Notes 14 & 18)
    
    
    464,977
    
    
    
    700,635Warrant liability (Note 13)
    
    
    6,790,462
    
    
    
    Derivative liability  notes (Note 12)
    
    
    123,928
    
    
    
    41,863Total long-term liabilities
    
    
    8,984,844
    
    
    
    1,155,420Commitments and contingencies (Note 19)
    
    
    
    
    
    
    Shareholders equity(deficit):Convertible Series 2 preferred stock, no par value, 10,000,000
shares authorized, 5,875,241 and 6,821,436 shares issued and
outstanding (Note 10)
    
    
    2,367,699
    
    
    
    2,765,101Convertible Series 3 preferred stock, no par value, 10,000,000
shares authorized, 3,485 and 3,641 shares issued and
respectively (Note 10)
    
    
    1,463,658
    
    
    
    1,273,667Convertible Series 4 preferred stock, no par value, 10,000,000
shares authorized, 4,392 and 4,605 shares issued and
respectively (Note 10)
    
    
    1,643,423
    
    
    
    1,568,834Common stock, no par value, 125,000,000 shares authorized,
55,557,870 and 18,491,618 shares issued and outstanding,
respectively
    
    
    91,532,139
    
    
    
    20,707,192Common stock warrants (Note 13)
    
    
    38,391,161
    
    
    
    2,256,112Accumulated deficit
    
    
    (107,494,133
    )
    
    
    (29,129,880
    )Total shareholders equity (deficit)
    
    
    27,903,947
    
    
    
    (558,974
    )Total liabilities and shareholders equity (deficit)
    
    $
    55,241,347
    
    
    $
    11,775,023
  41




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##### Table of Contents



MICROFIELD GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND JANUARY 1, 2005
 December 31,
    
    
    January 1,2005
    
    
    2005Sales
    
    $
    57,935,035
    
    
    $
    36,466,618Cost of goods sold
    
    
    47,702,498
    
    
    
    30,334,987Gross profit
    
    
    10,232,537
    
    
    
    6,131,631Operating expensesSales, general and administrative
    
    
    (8,759,333
    )
    
    
    (9,748,188
    )Write-off of impaired goodwill and intangible assets (Note 7)
    
    
    (77,419,759
    )
    
    
    (376,000
    )Loss on lease termination (Note 13)
    
    
    
    
    
    
    (515,000
    )Loss from operations
    
    
    (75,946,555
    )
    
    
    (4,507,557
    )Other income (expense)Interest income
    
    
    
    
    
    
    1,126Interest expense
    
    
    (1,580,462
    )
    
    
    (1,959,104
    )Gain on debt extinguishment (Note 13)
    
    
    111,847
    
    
    
    Derivative expense
    
    
    (88,024
    )
    
    
    (16,150
    )Gain (loss) on disposal of assets
    
    
    7,145
    
    
    
    87,795Loss on
valuation of warrant liability (Note 13)
    
    
    (503,543
    )
    
    
    Total other income (expense)
    
    
    (2,053,037
    )
    
    
    (1,886,333
    )Loss before provision for income taxes
    
    
    (77,999,592
    )
    
    
    (6,393,890
    )Provision for income taxes
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (77,999,592
    )
    
    
    (6,393,890
    )Discontinued operations:Gain on discontinued operations  Velagio and IST (Note 9)
    
    
    
    
    
    
    149,380Gain on sale of discontinued operations  SoftBoard (Note 9)
    
    
    46,399
    
    
    
    62,827Net loss
    
    $
    (77,953,193
    )
    
    $
    (6,181,683
    )Deemed
preferred stock dividend (Note 10)
    
    
    (411,060
    )
    
    
    (1,170,641
    )Net loss attributable to common shareholders
    
    $
    (78,364,253
    )
    
    $
    (7,352,324
    )Basic and diluted net loss per share from continuing
operations (Note 17)
    
    $
    (2.88
    )
    
    $
    (0.37
    )Basic and diluted net income per share from discontinued
Operations (Note 17)
    
    $
    0.00
    
    
    $
    0.01Basic and diluted net loss per share (Note 17)
    
    $
    (2.88
    )
    
    $
    (0.36
    )Basic and diluted net loss per share attributable to common
shareholders
    
    $
    (2.89
    )
    
    $
    (0.42
    )Weighted average shares used in per share calculations:Basic and diluted
    
    
    27,048,127
    
    
    
    17,340,152
  42




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##### Table of Contents



Microfield Group, Inc.
Statement of Changes in Shareholders Equity (Deficit)
Fiscal Years Ended December 31, 2005 and January 1, 2005
  TotalConvertible Series 2
    
    
    Convertible Series 3
    
    
    Convertible Series 4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    
    ShareholdersPreferred Stock
    
    
    Preferred Stock
    
    
    Preferred Stock
    
    

Common Stock
    
    
    Common Stock Warrants
    
    
    Deficit
    
    
    Equity (Deficit)Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Warrants
    
    
    AmountBalance, January 3, 2004
    
    
    6,940,484
    
    
    $
    2,815,101
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    16,772,570
    
    
    $
    18,502,354
    
    
    
    2,066,000
    
    
    $
    468,000
    
    
    $
    (21,777,556
    )
    
    $
    7,899Convertible Series 3
preferred shares issued
for retirement of
related party debt
    
    
    
    
    
    
    
    
    
    
    3,640.803
    
    
    $
    546,121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    983,017
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,529,138Partial satisfaction of
note receivable
through reduction of
account payable
(see Note 18)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,137
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,137Convertible Series 4
preferred shares issued
in private placement,
net of issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,605.265
    
    
    $
    1,125,739
    
    
    
    
    
    
    
    598,684
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,724,423Conversion of preferred
Series 2 shares to
common shares
    
    
    (119,048
    )
    
    
    (50,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,048
    
    
    
    50,000Warrant values
recognized upon
warrant issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,693,750
    
    
    
    798,988
    
    
    
    
    
    
    
    798,988Warrant reclassification
recorded upon
expansion of
authorized common
shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,885,689
    
    
    
    989,124
    
    
    
    
    
    
    
    989,124Common stock issued
for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,600,000
    
    
    
    560,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    560,000Amortization of
beneficial conversion
features accounted for as
deemed preferred stock
dividend (See Note 10)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    727,546
    
    
    
    
    
    
    
    443,095
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,170,641
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,181,683
    )
    
    
    (6,181,683
    )Balance January 1, 2005
    
    
    6,821,436
    
    
    $
    2,765,101
    
    
    
    3,640.803
    
    
    $
    1,273,667
    
    
    
    4,605.265
    
    
    $
    1,568,834
    
    
    
    18,491,618
    
    
    $
    20,707,192
    
    
    
    5,645,439
    
    
    $
    2,256,112
    
    
    $
    (29,129,880
    )
    
    
    (558,974
    )Amortization of
beneficial conversion
features accounted for as
deemed preferred stock
dividend (See Note 10)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    255,471
    
    
    
    
    
    
    
    155,589
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (411,060
    )Warrant values
recognized upon
warrant issuance (Note 13)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    894,792
    
    
    
    320,967
    
    
    
    
    
    
    
    320,967Common shares issued in the
acquisition of Christenson
Electric (Note 7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    1,280,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,280,000Common shares issued in
private placement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,233,603
    
    
    
    3,434,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,434,000Common shares and warrants issued in the
acquisition of
EnergyConnect (Note 7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,365,305
    
    
    
    64,034,814
    
    
    
    19,695,432
    
    
    
    36,495,391
    
    
    
    
    
    
    
    100,530,205Stock options issued in the
acquisition of
EnergyConnect (Note 7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,769,711
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,769,711Stock options issued to outside consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    244,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    244,000Common shares issued upon
conversion of preferred
shares
    
    
    (946,195
    )
    
    
    (397,402
    )
    
    
    (155.905
    )
    
    
    (65,480
    )
    
    
    (213.158
    )
    
    
    (81,000
    )
    
    
    1,315,258
    
    
    
    543,882
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common shares issued upon
exercise and forfeiture of
warrants (Note 13)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,079,440
    
    
    
    743,539
    
    
    
    (1,815,507
    )
    
    
    (681,309
    )
    
    
    
    
    
    
    62,230Common shares issued upon
exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,000
    
    
    
    11,920
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,920Common shares issued upon
retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,646
    
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000Valuation of warrant
liability issued in private
placement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,286,919
    )
    
    
    2,944,693
    
    
    
    
    
    
    
    
    
    
    
    (6,286,919
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77,953,193
    )
    
    
    (77,953,193
    )Balance December 31, 2005
    
    
    5,875,241
    
    
    $
    2,367,699
    
    
    
    3484.898
    
    
    $
    1,463,658
    
    
    
    4,392.107
    
    
    $
    1,643,423
    
    
    
    55,557,870
    
    
    $
    91,532,139
    
    
    
    27,364,849
    
    
    $
    38,391,161
    
    
    $
    (107,494,133
    )
    
    $
    27,903,947
   43




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##### Table of Contents



MICROFIELD GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND JANUARY 1, 2005
 December 31, 2005
    
    
    January 1, 2005Cash Flows From Operating Activities:Net loss
    
    $
    (77,953,193
    )
    
    $
    (6,181,683
    )Add (deduct):(Gain) loss on discontinued operations (Note 9)
    
    
    
    
    
    
    (149,380
    )(Gain) on sale of discontinued operations (Note 9)
    
    
    (46,399
    )
    
    
    (62,827
    )Loss from continuing operations
    
    
    (77,999,592
    )
    
    
    (6,393,890
    )Depreciation on fixed assets (Note 5)
    
    
    116,174
    
    
    
    409,081Amortization on intangible assets (Note 8)
    
    
    220,702
    
    
    
    110,552Amortization of debt discount
    
    
    7,563
    
    
    
    158,869Noncash interest expense recorded on warrant issuance
    
    
    320,967
    
    
    
    882,522Gain on disposal of fixed assets
    
    
    
    
    
    
    (85,795
    )Warrants issued with lease termination
    
    
    
    
    
    
    515,000Warrants and stock options issued for services
    
    
    244,000
    
    
    
    560,000Gain on debt extinguishment
    
    
    (111,847
    )
    
    
    Re-measurement of warrant liability
    
    
    503,543
    
    
    
    43,409Re-measurement of derivative associated with Steelcase note
    
    
    88,024
    
    
    
    6,264Write down of goodwill and intangible assets
    
    
    77,419,759
    
    
    
    376,000Changes in current assets and liabilities, net of effect of acquisitions:Accounts receivable
    
    
    (217,254
    )
    
    
    (808,955
    )Accounts receivable  related party
    
    
    (16,166
    )
    
    
    206,222Inventory
    
    
    (481,441
    )
    
    
    190,201Other current assets
    
    
    282,604
    
    
    
    (56,359
    )Costs in excess of billings
    
    
    (531,877
    )
    
    
    694,570Other long term assets
    
    
    (63,729
    )
    
    
    52,057Cash disbursed in excess of available funds
    
    
    916,311
    
    
    
    (191,656
    )Accounts payable
    
    
    (856,623
    )
    
    
    (443,882
    )Accounts payable  related party
    
    
    (99,932
    )
    
    
    (101,618
    )Billings in excess of cost
    
    
    (99
    )
    
    
    169,375Accrued expenses
    
    
    (185,333
    )
    
    
    Other current liabilities
    
    
    (200,555
    )
    
    
    52,632Net cash used by continuing operations
    
    
    (644,801
    )
    
    
    (3,655,401
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    149,380Net cash provided by sale of discontinued operations
    
    
    46,399
    
    
    
    62,827Net cash used by operating activities
    
    
    (598,402
    )
    
    
    (3,443,194
    )Cash flows from investing activitiesPurchases of fixed assets
    
    
    (47,238
    )
    
    
    (117,713
    )Loan to non-related company
    
    
    
    
    
    
    (200,000
    )Net cash acquired in mergers with CEI and ECI
    
    
    254,820
    
    
    
    Net cash provided (used) by investing activities
    
    
    207,582
    
    
    
    (317,713
    )Cash flows from financing activities:Borrowings on line of credit
    
    
    60,508,869
    
    
    
    36,149,231Repayments on line of credit
    
    
    (60,305,851
    )
    
    
    (36,087,355
    )Borrowing on Union note payable
    
    
    188,012
    
    
    
    958,572Repayments on Union note payable
    
    
    (665,104
    )
    
    
    Repayments on notes payable
    
    
    (278,095
    )
    
    
    (69,773
    )Repayments on notes payable  related party
    
    
    (1,689,137
    )
    
    
    (600,000
    )Borrowings on note payable  related party
    
    
    
    
    
    
    1,800,000Repayments on lease obligation
    
    
    
    
    
    
    (233,732
    )Proceeds from issuance of preferred stock
    
    
    
    
    
    
    1,724,423Proceeds from issuance of common stock
    
    
    3,350,150
    
    
    
    Net cash provided by financing activities
    
    
    1,108,844
    
    
    
    3,641,366Net increase (decrease) in cash and cash equivalents
    
    
    718,024
    
    
    
    (119,541
    )Cash and cash equivalents, beginning of period
    
    
    10,992
    
    
    
    130,533Cash and cash equivalents, end of period
    
    $
    729,016
    
    
    $
    10,992Supplemental schedule of non-cash financing and investing activities:Beneficial conversion feature of Series 3 and
Series 4 preferred stock
    
    $
    
    
    
    $
    1,581,701Amortization of beneficial conversion feature
    
    $
    411,060
    
    
    $
    1,170,641Series 3 preferred stock issued for
related party operating lease obligations
    
    $
    
    
    
    $
    130,000Conversion of account payable-related party to preferred stock
    
    $
    
    
    
    $
    210,209Issuance of preferred stock in exchange for
conversion of related party debt (See Note 18)
    
    $
    
    
    
    $
    1,188,919Valuation of warrants issued with related party debt
    
    $
    320,967
    
    
    $
    172,734Conversion of derivative liabilities to shareholders equity
    
    $
    
    
    
    $
    989,124Conversion of preferred stock to common stock
    
    $
    543,882
    
    
    $
    Reduction of note receivable secured by common stock
    
    $
    
    
    
    $
    13,137Acquisition of CEI:Assets purchased
    
    $
    4,610,103
    
    
    $
    Goodwill
    
    $
    5,934,438
    
    
    $
    Liabilities assumed
    
    $
    (8,916,022
    )
    
    $
    Common stock issued
    
    $
    (1,280,000
    )
    
    $
    Direct acquisition costs
    
    $
    (348,519
    )
    
    $
    Cash paid for acquisition
    
    $
    
    
    
    $
    Acquisition of ECI:Assets purchased
    
    $
    2,689,348
    
    
    $
    Goodwill
    
    $
    106,544,871
    
    
    $
    Liabilities assumed
    
    $
    (1,509,930
    )
    
    $
    Common stock and stock options issued
    
    $
    (70,804,525
    )
    
    $
    Common stock previously issued
    
    $
    (200,000
    )
    
    $
    Warrants issued upon acquisitions
    
    $
    (36,495,391
    )
    
    $
    Direct acquisition costs
    
    $
    (224,373
    )
    
    $
    Cash paid for acquisition
    
    $
    
    
    
    $
    
  44




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##### Table of Contents



MICROFIELD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND JANUARY 1, 2005
 1. Description of the Business
   2. Liquidity Matters
    3. Summary of Significant Accounting Policies
 Fiscal Year
  Principles of Consolidation
 45




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##### Table of Contents



Cash and Cash Equivalents
  Fair Value of Financial Instruments
  Inventories
  Advertising Costs
  Property and Equipment
  Concentrations
   46




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##### Table of Contents



Revenue and Cost Recognition
   Impairment of Long-lived Assets
   Income Taxes
  47




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##### Table of Contents



Computation of Net Income(Loss) per Share
  Pension Plan Contributions
  Stock Based Compensation
    December 31, 2005
    
    
    January 1, 2005Net loss
    
    As reported
    
    $
    (77,953,193
    )
    
    $
    (6,181,683
    )Less: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, not including amounts to non-employees already included in the calculation of net income, net of related tax effects
    
    
    
    
    (591,024
    )
    
    
    (244,354
    )Net loss
    
    Pro forma
    
    $
    (78,544,217
    )
    
    $
    (6,426,037
    )Net loss attributable to common
shareholders
    
    Pro forma
    
    
    (78,955,277
    )
    
    
    (7,596,678
    )Basic and diluted net loss per share
    
    As reported
    
    $
    (2.88
    )
    
    $
    (0.36
    )Pro forma
    
    $
    (2.90
    )
    
    $
    (0.37
    )Basic and diluted net loss per share
attributable to common shareholders
    
    Pro forma
    
    $
    (2.92
    )
    
    $
    (0.44
    )
 48




---



##### Table of Contents



Comprehensive Income
  Use of Estimates
  Recent Accounting Pronouncements
 FIN 47.
 SFAS 154.
 SFAS 155
 49




---



##### Table of Contents



4. Inventories
  December 31,
    
    
    January 1,2005
    
    
    2005Raw materials
    
    $
    530,298
    
    
    $
    47,794Finished Goods
    
    
    405,143
    
    
    
    334,554935,441
    
    
    
    382,348Less allowance for obsolete inventory
    
    
    (214,672
    )
    
    
    (143,020
    )$
    720,769
    
    
    $
    239,328
 5. Property and Equipment
  December 31,
    
    
    January 1,2005
    
    
    2005Tools and equipment
    
    $
    483,861
    
    
    $
    365,323Software
    
    
    109,118
    
    
    
    109,118Furniture
    
    
    
    
    
    
    15,500Leasehold Improvements
    
    
    196,460
    
    
    
    Vehicles
    
    
    117,329
    
    
    
    906,768
    
    
    
    489,941Less accumulated depreciation and amortization
    
    
    (455,780
    )
    
    
    (364,164
    )$
    450,988
    
    
    $
    125,777
 .
  6. Construction Contracts in Progress
  December 31,
    
    
    January 1,2005
    
    
    2005Direct costs to date
    
    $
    28,200,939
    
    
    $
    6,839,044Gross profit to date
    
    
    4,354,967
    
    
    
    1,345,213Earned contract revenue
    
    
    32,555,906
    
    
    
    8,184,257Contract billings to date
    
    
    (31,319,506
    )
    
    
    (7,885,520
    )Net under billings
    
    $
    1,236,400
    
    
    $
    298,737
  50




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##### Table of Contents



December 31,
    
    
    January 1,2005
    
    
    2005Costs and estimated earnings in excess of billings
    
    $
    2,039,040
    
    
    $
    822,656Billings in excess of costs and estimated earnings
    
    
    (802,640
    )
    
    
    (523,919
    )Net under billings
    
    $
    1,236,400
    
    
    $
    298,737
  December 31,2005Backlog, beginning of year
    
    $
    3,424,505Contract additions
    
    
    68,600,542Billings
    
    
    (59,062,685
    )Backlog, end of year
    
    $
    12,962,362
 7. Acquisitions
 Acquisition of Christenson Electric, Inc.
    Common stock
    
    $
    1,280,000Direct acquisition costs
    
    
    348,519Total purchase price
    
    $
    1,628,519
  Cash and other current assets
    
    $
    3,420,300Equipment and other assets
    
    
    317,032Intangible assets  Trade name
    
    
    872,771Goodwill
    
    
    5,934,438Current liabilities
    
    
    (7,046,401
    )Notes payable
    
    
    (1,869,621
    )Total
    
    $
    1,628,519
 51




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##### Table of Contents



Acquisition of EnergyConnect, Inc.
    Common stock
    
    $
    64,234,814Warrant issuance value
    
    
    36,495,391Stock option issuance value
    
    
    6,769,711Direct acquisition costs
    
    
    224,374Total purchase price
    
    $
    107,724,290
  Cash and other current assets
    
    $
    263,256Equipment and other assets
    
    
    35,426Intangible asset  Developed technology
    
    
    2,390,667Goodwill
    
    
    106,544,871Current liabilities
    
    
    (1,509,930
    )Total
    
    $
    107,724,290
  52




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##### Table of Contents



Year EndedDecember 31,2005(unaudited)Sales
    
    $
    69,512,107Net loss
    
    $
    (79,647,557)
    *Basic and diluted net loss per share
    
    $
    (1.59
    )
 
 *
    
    This amount includes a charge of $77,191,344 for the write-off of impaired goodwill at
December 31, 2005. 8. Intangible Assets and Goodwill
      December 31,
    
    
    January 1,2005
    
    
    2005Christenson Velagio trade name
    
    $
    872,771
    
    
    
    872,771Christenson Velagio customer lists
    
    
    663,305
    
    
    
    663,305Christenson Electric trade name
    
    
    758,356
    
    
    
    
 53




---



##### Table of Contents



December 31,
    
    
    January 1,2005
    
    
    2005Christenson Electric customer relationships
    
    
    1,687,335
    
    
    
    EnergyConnect developed technology
    
    
    2,390,667
    
    
    
    6,372,434
    
    
    
    1,536,076Less accumulated depreciation and amortization
    
    
    (363,497
    )
    
    
    (142,795
    )$
    6,008,937
    
    
    $
    1,393,281
 .
 AmortizationYear
    
    Expense2006
    
    
    518,3512007
    
    
    518,3512008
    
    
    518,3512009
    
    
    486,1062010
    
    
    407,801Total
    
    
    2,448,960
  December 31,
    
    
    January 3,2005
    
    
    2004Beginning goodwill balance
    
    $
    2,276,243
    
    
    $
    2,299,084Pre-acquisition expense adjustment
    
    
    
    
    
    
    (22,841
    )Goodwill recorded upon acquisition of CEI
    
    
    5,934,438
    
    
    
    Goodwill allocation due to prior period adjustments in CEI
    
    
    85,893
    
    
    
    Goodwill recorded upon acquisition of ECI
    
    
    106,544,871
    
    
    
    Goodwill write off due to impairment  ECI
    
    
    (77,191,344
    )
    
    
    Reduction of goodwill for reallocation of intangible
asset  CEI
    
    
    (1,687,335
    )
    
    
    Ending goodwill balance
    
    $
    35,962,766
    
    
    $
    2,276,243
  9. Discontinued Operations
 SoftBoard
   54




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##### Table of Contents



10. Capital Stock
  Series 2 Preferred Stock
  Dividends.
 Liquidation Preference
 Conversion.
 55




---



##### Table of Contents



Voting Rights.
 Series 3 Preferred Stock
  Dividends
 Liquidation Preference
 Conversion
 Voting Rights.
 Series 4 Preferred Stock
  56




---



##### Table of Contents



Dividends.
 Liquidation Preference.
 Conversion.
 Voting Rights.
 Common Stock
     57




---



##### Table of Contents



11. Private Placements
   12. Repurchase of Common Stock
   58




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##### Table of Contents



13. Stock Options and Warrants
 Stock Incentive Plan
   Options Outstanding
    
    
    
    
    
    
    Options ExercisableWeighted Average
    
    
    Weighted
    
    
    
    
    
    
    WeightedExercise
    
    
    Number
    
    
    Remaining Contractual
    
    
    Average
    
    
    Number
    
    
    Average ExercisePrices
    
    
    Outstanding
    
    
    Life (Years)
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Price$
    0.26-$0.84
    
    
    
    7,691,376
    
    
    
    4.1
    
    
    $
    0.43
    
    
    
    2,423,770
    
    
    $
    0.47$
    1.76-$2.70
    
    
    
    26,389
    
    
    
    3.9
    
    
    $
    2.27
    
    
    
    26,389
    
    
    $
    2.277,717,765
    
    
    
    4.1
    
    
    $
    0.44
    
    
    
    2,450,159
    
    
    $
    0.49
  December 31, 2005
    
    
    January 1, 2005Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exerciseShares
    
    
    price
    
    
    Shares
    
    
    priceOutstanding at beginning of year
    
    
    2,164,049
    
    
    $
    .46
    
    
    
    688,936
    
    
    $
    .84Granted at market price
    
    
    2,370,000
    
    
    
    .58
    
    
    
    1,870,188
    
    
    
    .43Granted at other than market
price
    
    
    3,410,940
    
    
    
    .32
    
    
    
    
    
    
    
    Exercised
    
    
    (41,000
    )
    
    
    .29
    
    
    
    
    
    
    
    Cancelled
    
    
    (186,224
    )
    
    
    .39
    
    
    
    (395,075
    )
    
    
    .96Outstanding at end of year
    
    
    7,717,765
    
    
    $
    .44
    
    
    
    2,164,049
    
    
    $
    .46Options exercisable at year end
    
    
    2,450,158
    
    
    $
    .49
    
    
    
    850,779
    
    
    $
    .52
  59




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##### Table of Contents



For the year endedDecember 31,
    
    January 1,2005
    
    2005Risk-free interest rate
    
    
    3.50% - 4.45
    %
    
    
    3.10% - 3.97
    %Expected dividend yield
    
    
    
    
    
    
    Expected lives
    
    
    5-10 years
    
    
    5-10 yearsExpected volatility
    
    
    121% - 134
    %
    
    
    151% - 155
    %
  Common Stock Warrants
    60




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##### Table of Contents



61




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##### Table of Contents



14. Debt
 Operating Line of Credit
 1 2
  62




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##### Table of Contents



3 4
 Long Term Debt
  December 31,
    
    January 1,2005
    
    2005Steelcase, Inc. promissory note,
quarterly interest only payments at
12% per annum beginning June 1, 2003.
Annual principal payments of $69,773,
second payment due and payable
February 28, 2005, collateralized by
951,445 shares of the Companys
common stock (reduced by derivative
allocation of $796). (See Note 12)
The Company is in default under the
terms of the note agreement.
    
    $
    138,749
    
    
    $
    133,984Oregon-SW Washington Electrical Trust
Funds (comprised of several union
benefits funds and pension trusts)
promissory note in the amount of
$952,907 payable monthly in payment
amounts ranging from $25,000 per
month to $75,000 per month including
interest at 7% per annum, due and
payable in full by September 1, 2006.
    
    
    412,923
    
    
    
    952,907Destination Capital, LLC business
loan agreement, net of debt discount
of $16,054, nine monthly payments of
interest only, starting September 24,
2004, with fifteen monthly payments
of principal and interest of $41,667,
thereafter, net of debt discount of
$5,109. Interest accrued at prime
plus 10%. (See Note 18)
    
    
    303,225
    
    
    
    1,186,135Techni-Cal Enterprises, Inc.
promissory note effective July 8,
2005 in the amount of $220,000 with a
$40,000 principal payment due at
signing, monthly principal payments
of $5,000 due beginning August 1,
2005 through July 1, 2006, and
monthly principal payments of $10,000
beginning August 1, 2006 through July
1, 2007. This is a non-interest
bearing Note.
    
    
    155,000
    
    
    Oregon-SW Washington Electrical Trust
Funds (comprised of several union
benefits funds and pension trusts)
promissory note in the amount of
$188,012.11 payable monthly at
$32,441.18 per month, including
interest at 12% per annum, due and
payable in full by February 25, 2006.
    
    
    62,893
    
    
    Christenson Leasing Company, LLC
Motor Vehicle Capital Lease agreement
effective March 21, 2005 and April 1,
2005 for 1999 International and Ford
F-350, respectively. The lease terms
are 36 months and 50 months,
respectively, with payments due on
the 24th of each month
beginning in April 2005. The monthly
payments vary by vehicle over the
length of the lease from $1,800 to
$2,000 and $700 to $800,
respectively. The interest rates are
3.625% and 3.875% per annum,
respectively.
    
    
    76,693
    
    
    William C. McCormick promissory note
effective January 28, 2005 in the
amount of $250,000. Interest
payments of 15% per annum are due on
the 28th day of each month
with the entire balance of the note to be paid in full on July 28, 2005.
Final payment of this note is past
due.
    
    
    250,000
    
    
    
 63




---



##### Table of Contents



December 31,
    
    January 1,2005

    
    
    2005Rodney M. Boucher promissory note
effective October 13, 2005 due on demand,
annualized interest accruing at prime
plus 10% due on the 13th
of each month through September 13,
2008.
    
    
    329,033
    
    
    Christenson Leasing Company, LLC
First Addendum to Tenant Improvements
Capital Lease agreement effective
March 1, 2005. principal and
interest payments of $7,940 are due
on the first day of each month
beginning March 2005 and lasting
through December 2007. The interest
rate is 12% per annum.
    
    
    168,345
    
    
    Aequitas Capital Management, Inc.
promissory note effective July 5,
2005 in the amount of $90,847.
Principal and interest payments of
$5,047.05 are due on the first day of
each month beginning in August 2005
and ending April 2006. An additional
principal payment of $50,000 is due
on October 1, 2005. The interest
rate on this Note is 7% per annum.
Payments on this note were
renegotiated in January 2006 to be
made in the amount of $15,000 per
month ending in July 2006.
    
    
    65,447
    
    
    US Bank Term Loan Note effective July
21, 2005 in the amount of $1,900,000.
Monthly interest payments of the
prime rate plus 1.5% are due on the
first day of each month beginning in
August 2005 through July 2008.
Principal payments of $22,619 are due
on the first day of each month
beginning on August 2005 through July
2008. A balloon payment for the
remaining amount is then due in
August 2008.
    
    
    1,786,905
    
    
    Total debt
    
    
    3,749,213
    
    
    
    2,273,026Less current portion
    
    
    (1,678,759
    )
    
    
    (1,159,469
    )Long term debt
    
    $
    2,070,454
    
    
    $
    1,113,557
  Fiscal Year
    
    Amount2006
    
    $
    1,678,7592007
    
    
    589,6172008
    
    
    1,367,3362009
    
    
    113,5012010 and after
    
    
    $
    3,749,213
 15. Segment Information
   64




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##### Table of Contents



16. Income Taxes
    December 31, 2005
    
    
    January 1, 2005Current:Allowance for doubtful accounts
    
    $
    88,075
    
    
    $
    40,028Employee benefits
    
    
    50,418
    
    
    
    65,396Start-up costs
    
    
    31,486
    
    
    
    31,486Inventory allowance
    
    
    82,649
    
    
    
    55,063Other allowances
    
    
    58,394
    
    
    
    41,840311,022
    
    
    
    233,813Non-current:Net operating loss carryforwards
    
    
    10,520,590
    
    
    
    10,066,451Start-up costs
    
    
    
    
    
    
    31,486Research and development credits
    
    
    143,245
    
    
    
    143,24510,663,835
    
    
    
    10,241,182Total deferred tax asset
    
    
    10,974,857
    
    
    
    10,474,995Deferred tax asset valuation allowance
    
    
    (10,974,857
    )
    
    
    (10,474,995
    )Net deferred tax assets
    
    $
    
    
    
    $
    
  17. Net Income (Loss) Per Share
  65




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##### Table of Contents



Year ended
    
    
    Year endedDecember 31, 2005
    
    
    January 1, 2005Net loss available for common shareholders
    
    $
    (78,364,253
    )
    
    $
    (7,352,324
    )Basic and fully diluted loss per share
    
    $
    (2.88
    )
    
    $
    (0.36
    )Continuing operations
    
    $
    (2.88
    )
    
    $
    (0.37
    )Discontinued operations
    
    $
    0.00
    
    
    $
    0.01Weighted average common shares outstanding
    
    
    27,048,127
    
    
    
    17,340,152
 18. Related Party Transactions
  Amount of
    
    
    MonthlyRelated Party
    
    Type of Obligation
    
    Maturity Date
    
    
    Obligation
    
    
    PaymentChristenson Leasing LLC(a)(g)
    
    T. I. lease
    
    December 2007
    
    
    168,345
    
    
    
    7,940Christenson Leasing LLC(a)(g)
    
    Vehicle leases
    
    various
    
    
    76,693
    
    
    variousChristenson Leasing LLC(a)(g)
    
    Equipment lease
    
    December 2007
    
    
    
    
    
    
    (f)60,000JMW Group, LLC(a)
    
    Note payable
    
    August 2006
    
    
    303,225
    
    
    
    (c)41,667JMW Group, LLC(a)
    
    Indemnity fees
    
    Open obligation
    
    
    
    
    
    
    (i)12,500Aequitas Capital Management(a)
    
    Note payable
    
    April 2006
    
    
    65,447
    
    
    variousRod Boucher(h)
    
    Note payable
    
    September 13, 2008
    
    
    329,033
    
    
    
    11,309William C. McCormick
    
    Note payable
    
    July 2005
    
    
    (i)250,000
    
    
    interest onlyMark Walter
    
    Bond guarantee fees
    
    Open obligation
    
    
    
    
    
    
    (b)1,200Destination Microfield, LLC(d)
    
    Vehicle lease
    
    August 2006
    
    
    
    
    
    
    (e)36,350William C. McCormick
    
    Indemnity fees
    
    Open obligation
    
    
    
    
    
    
    3,246John B. Conroy
    
    Note receivable
    
    September 2005
    
    
    66,250
    
    
    
    
 
 (a)
    
    Robert J. Jesenik, a former director owns a significant interest in these
entities.(b)
    
    This bond guarantee fee is an approximation, and fluctuates based on the total
open bond liability.(c)
    
    This payment amount is for principal only. An additional amount is due monthly
which includes interest at prime plus 10%.(d)
    
    William C. McCormick, Chairman of our board of directors, holds a minority
ownership interest in this entity.(e)
    
    These payments vary over the term of the loan. This amount represents the monthly
payment in effect on December 31, 2005.(f)
    
    This payment was reduced to $60,000 per month by terms of the reissued note,
starting November 1, 2005.(g)
    
    William C. McCormick holds a beneficial minority ownership interest in this
company.(h)
    
    This debt was paid in full in October 2005 in connection with a private placement.(i)
    
    This note represents deferred salaries and expenses payable to Mr. Boucher prior
to the acquisition of EnergyConnect.(j)
    
    These indemnity fees are payments made on standby letters of credit which are in
place to guarantee payments to vendors on specific jobs.  Notes Payable to Destination Capital, LLC
  66




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##### Table of Contents



Warrants to beDate
    
    Loan Balance
    
    IssuedAugust 1, 2004
    
    $
    300,000
    
    
    
    37,500September 1, 2004
    
    $
    750,000
    
    
    
    93,750October 1, 2004
    
    $
    1,200,000
    
    
    
    150,000November 1, 2004
    
    $
    1,200,000
    
    
    
    150,000December 1, 2004
    
    $
    1,200,000
    
    
    
    150,000January 1, 2005
    
    $
    1,200,000
    
    
    
    150,000February 1, 2005
    
    $
    1,200,000
    
    
    
    150,000March 1, 2005
    
    $
    1,200,000
    
    
    
    150,000April 1, 2005
    
    $
    1,200,000
    
    
    
    150,000May 1, 2005
    
    $
    1,200,000
    
    
    
    150,000June 1, 2005
    
    $
    1,200,000
    
    
    
    150,000July 1, 2005
    
    $
    1,158,334
    
    
    
    144,792Total warrants to be issued as of October 1, 2005
    
    
    
    
    
    
    1,626,042
  67




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##### Table of Contents



Note Payable to Rod Boucher
 th
 Note Payable to William McCormick
 th
 Bond Guarantee Fees
 Christenson Velagio
  Christenson Electric
   68




---



##### Table of Contents



Tenant improvement lease
 
  Equipment Lease Agreement
   Master Vehicle Lease Agreements
 Christenson Velagio
  Christenson Electric
 69




---



##### Table of Contents



Real Property Sub Leases
   Administrative Services Agreement
  Note receivable
  19. Commitments and Contingencies
 Manufacturing and Purchase Commitments
  Operating lease commitments
 70




---



##### Table of Contents



Year
    
    Amount2006
    
    $
    2,230,6152007
    
    
    1,804,8502008
    
    
    673,9842009
    
    
    7,5002010 and beyond
    
    
    Total
    
    $
    4,716,949
  20. Legal Proceedings
 Lawsuit settlement
    71




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##### Table of Contents



Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 Previous independent registered public accounting firm.
        New independent registered public accounting firm.
 72




---



##### Table of Contents



Item 8A. Controls and Procedures
  Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  Deficiencies and Corrective Actions Relating to the Companys Internal Controls over Financial
Reporting
   73




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##### Table of Contents



Revenue recognition
 
    
    Criteria and procedures established defining approved customer contracts
    
    Control function established to review and monitor compliance to new procedures
    
    Improved document control and file check out procedures
    
    Procedure established defining consistent percentage completion Gross Margin estimation process
 Cash Disbursements and liability recognition
 
    
    Document control system established and monitored for compliance
    
    Cut off procedures formalized and consistently applied
    
    Centralized departmental budgets and accountability established
    
    Purchasing procedures have been formalized and implementation has begun
 Account Reconciliations
 
    
    Procedures established and personnel assigned to reconcile key accounts on a timely basis
    
    Control function added to review reconciliations
 Timely
Closing of Books
 
    
    Management identified a material weakness based on the
Companys delay in closing its books.To
correct the material weakness, checklists will be developed
delineating tasks, preparation responsibilities, and review
responsibilities targeting specific completion dates. The checklist
will provide evidentiary support of work performed and review.
Specific checklists will be developed for non-quarter end months,
quarter end months and the annual close. These checklists have been
developed and will be implemented in the second quarter 2006 close
process and utilized in the preparation of the second quarter 2006
Form 10-Q and subsequent period ends.
  74




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##### Table of Contents



PART III
 
 Item 9. Directors, Executive Officers, Promoters and Control Persons;
  Name
    
    Age
    
    PositionsRodney M. Boucher
    
    
    58
    
    
    Chief Executive Officer and DirectorA. Mark Walter
    
    
    41
    
    
    President and DirectorRandall R. Reed
    
    
    49
    
    
    Chief Financial OfficerGene Ameduri
    
    
    57
    
    
    DirectorWilliam C. McCormick
    
    
    72
    
    
    Chairman of the Board of DirectorsMichael W. Stansell
    
    
    62
    
    
    DirectorGary D. Conley
    
    
    45
    
    
    Director
  Rodney M. Boucher
 A. Mark Walter
 Randall R. Reed
 75




---



##### Table of Contents



Gene Ameduri
 William C. McCormick
 Michael W. Stansell
 Gary D. Conley
 Compliance with Section 16(a) of the Exchange Act
  Audit Committee
   Governance Committee
  76




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##### Table of Contents



Compensation Committee
  
 Item 10. Executive Compensation
 Summary of Cash and Certain Other Compensation
  SUMMARY COMPENSATION TABLE
 Long TermCompensationAwardsAnnual Compensation
    
    SecuritiesUnderlying
    
    All OtherFiscal
    
    
    
    
    
    
    
    
    
    Options
    
    CompensationYear
    
    Salary($)
    
    Bonus($)
    
    (#)
    
    ($)Rodney M. Boucher
(1)
    
    
    2005
    
    
    
    62,500
    
    
    
    
    
    
    
    
    
    
    
    Chief Executive
Officer
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    and Director
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    A. Mark Walter (2)
    
    
    2005
    
    
    
    153,939
    
    
    
    
    
    
    
    1,000,000
    
    
    
    7,200President and
Director
    
    
    2004
    
    
    
    68,289
    
    
    
    
    
    
    
    200,000
    
    
    
    7,2002003
    
    
    
    89,362
    
    
    
    
    
    
    
    
    
    
    
    7,200Randall R. Reed (3)
    
    
    2005
    
    
    
    56,000
    
    
    
    
    
    
    
    100,000
    
    
    
    Chief Financial
Officer
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gene Ameduri (4)
    
    
    2005
    
    
    
    41,667
    
    
    
    
    
    
    
    
    
    
    
    President of
EnergyConnect
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    And Director
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    William C.
McCormick (5)
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    
    1,050,000
    
    
    
    Former Interim
Chief
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    1,200,000
    
    
    
    Executive Officer
and Director
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gary M. Kapral (6)
    
    
    2005
    
    
    
    68,289
    
    
    
    
    
    
    
    
    
    
    
    Chief Financial
Officer
    
    
    2004
    
    
    
    138,462
    
    
    
    
    
    
    
    150,000
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Mr. Boucher was appointed the Companys Chief Executive Officer on October 13, 2005. 77




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##### Table of Contents



(2)
    
    Mr. Walter was appointed the Companys President effective November 18, 2004. Prior
to this appointment he served as the Companys Senior Vice President and Chief Operating
Officer.(3)
    
    Mr. Reed was appointed the Companys Chief Financial Officer on September 19, 2005.(4)
    
    Mr. Ameduri was appointed President of EnergyConnect on October 13, 2005.(5)
    
    Mr. McCormick was appointed Interim CEO effective January 21, 2004. He held this
position with no cash compensation. He resigned that position effective November 15, 2004
with the appointment of A. Mark Walter as President. Mr. McCormick is Chairman of the
Board of Directors.(6)
    
    Mr. Kapral was appointed the Companys Chief Financial Officer effective May 17, 2004.
He left the Company in March 2005. Options Granted in Last Fiscal Year
  Option Exercise and Holdings
  AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
 Number ofSecurities
    
    Value ofUnderlying
    
    UnexercisedUnexercised
    
    In-The-MoneyShares
    
    
    
    
    
    Options
    
    OptionsAcquired
    
    Value
    
    At FY-End (#)
    
    At FY-End ($) (2)On Exercise
    
    Realized
    
    exerciseable/
    
    Exerciseable/
    
    Grant
    
    ExpirationName
    
    (#)
    
    ($) (1)
    
    Unexerciseable
    
    Unexerciseable
    
    Date
    
    DateA. Mark Walter
    
    
    
    
    
    
    
    
    
    
    47,917
    
    
    
    52,083
    
    
    $
    91,042
    
    
    $
    98,958
    
    
    
    1/22/04
    
    
    
    1/22/0925,000
    
    
    
    75,000
    
    
    
    52,500
    
    
    
    157,500
    
    
    
    12/3/04
    
    
    
    12/3/09166,667
    
    
    
    833,333
    
    
    
    358,333
    
    
    
    1,791,667
    
    
    
    4/29/05
    
    
    
    4/29/10Randy Reed
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    
    
    
    $
    166,000
    
    
    
    
    
    
    
    8/23/05
    
    
    
    8/23/10William C. McCormick
    
    
    
    
    
    
    
    
    
    
    1,150,000
    
    
    
    50,000
    
    
    $
    2,369,000
    
    
    $
    103,000
    
    
    
    11/12/04
    
    
    
    11/12/09
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    112,000
    
    
    
    
    
    
    
    4/7/05
    
    
    
    4/7/10
    
    
    
    
    
    
    
    166,667
    
    
    
    833,333
    
    
    
    276,667
    
    
    
    1,383,333
    
    
    
    8/23/05
    
    
    
    8/23/10
 
 (1)
    
    Market value of the underlying securities at exercise date, minus exercise price of
the options.(2)
    
    Market value of the underlying securities at December 31, 2005, $2.50 per share,
minus exercise price of the unexercised options. 78




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##### Table of Contents



Item 11. Security Ownership of Certain Beneficial Owners and Management
  Common Stock andCommon Stock EquivalentsEquivalentCommonShares
    
    ApproximateFive Percent Shareholders, Directors, Director
    
    Beneficially
    
    VotingNominees and Certain Executive Officers
    
    Owned (1)
    
    Percentage(2)
    
    JMW Group, LLC / Aequitas Capital
Management
    
    
    13,486,208
    
    
    
    22.8
    %805 SW Broadway, Suite 560Portland, OR 97205(3)
    
    Energy Fund II
    
    
    14,197,577
    
    
    
    23.6
    %805 SW Broadway, Suite 560Portland, OR 97205(4)
    
    Vince Cushing
    
    
    9,703,245
    
    
    
    16.3
    %c/o Entwistle & Cappucci, LLP333 West Wacker Dr., Suite 2070Chicago, IL 60606(5)
    
    Christenson Group, LLC / CEAC
    
    
    6,328,017
    
    
    
    10.6
    %805 SW Broadway, Suite 560Portland, OR 97205(6)
    
    Christenson Leasing/Destination Capital, LLC
    
    
    3,748,172
    
    
    
    6.3
    %805 SW Broadway, Suite 560Portland, OR 97205(7)
    
    William C. McCormick
    
    
    2,105,203
    
    
    
    3.5
    %1631 NW Thurman Street, Suite 200Portland, OR 97209(8)
    
    Rodney M. Boucher
    
    
    14,818,025
    
    
    
    23.9
    %5487 Vicenza WaySan Jose, CA 95138(9)
    
    Michael Stansell
    
    
    230,602
    
    
    
    *
    %1631 NW Thurman Street, Suite 200Portland, OR 97209(10)
    
    A. Mark Walter
    
    
    310,417
    
    
    
    *
    %1631 NW Thurman Street, Suite 200Portland, OR 97209(11)
    
    Gene Ameduri
    
    
    9,500,199
    
    
    
    16.0
    %1631 NW Thurman Street, Suite 200Portland, OR 97209(12)
    
    Randall R. Reed
    
    
    100,001
    
    
    
    *
    %1631 NW Thurman Street, Suite 200Portland, OR 97209Gary D. Conley
    
    
    
    
    
    
    *
    %1631 NW Thurman Street, Suite 200Portland, OR 97209(13)
    
    All directors and executive officers as a group
as of 5/31/05 (5 persons)
    
    
    26,974,447
    
    
    
    39.6
    %
 79




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##### Table of Contents



*
    
    Less than 1%(1)
    
    Shares to which the person or group has the right to acquire within 60 days after
January 31, 2006 are deemed to be outstanding in calculating the percentage ownership
of the person or group but are not deemed to be outstanding as to any other person or
group.(2)
    
    Includes 2,073,333 common equivalent preferred shares outstanding as of January 31,
2006, and 1,687,387 warrants convertible into common stock within 60 days after
January 31, 2006.(3)
    
    Includes 119,050 common equivalent preferred shares outstanding as of January 31,
2006, and 84,200 warrants convertible into common stock within 60 days after January
31, 2006.(4)
    
    Includes 4,060,914 warrants convertible into common stock within 60 days after
January 31, 2006.(5)
    
    Includes 4,328,017 common equivalent preferred shares outstanding as of January 31,
2006.(6)
    
    Includes 3,241,922 common equivalent preferred shares outstanding as of January 31,
2006, and 506,250 warrants convertible into common stock within 60 days after January
31, 2006.(7)
    
    Includes 263,158 common equivalent preferred shares outstanding as of January 31,
2006, and 1,635,000 warrants and options convertible into common stock within 60 days
after January 31, 2006.(8)
    
    Includes 263,158 common equivalent preferred shares outstanding as of January 31,
2006, and 6,091,371 warrants convertible into common stock within 60 days after
January 31, 2006.(9)
    
    Includes 50,000 options convertible into common stock within 60 days after January
31, 2006.(10)
    
    Includes 310,417 options convertible into common stock within 60 days after January
31, 2006.(11)
    
    Includes 3,857,868 warrants convertible into common stock within 60 days after
January 31, 2006.(12)
    
    Includes 100,000 options convertible into common stock within 60 days after January
31, 2006.(13)
    
    Includes 526,316 common equivalent preferred shares outstanding as of January 31,
2006, and 12,085,655 warrants and options convertible into common stock within 60 days
after January 31, 2006. 
 Item 12. Certain Relationships and Related Transactions
  Amount of
    
    MonthlyRelated Party
    
    Type of Obligation
    
    Maturity Date
    
    Obligation
    
    PaymentChristenson Leasing LLC(a)(g)
    
    T. I. lease
    
    December 2007
    
    
    168,345
    
    
    
    7,940Christenson Leasing LLC(a)(g)
    
    Vehicle leases
    
    various
    
    
    76,693
    
    
    variousChristenson Leasing LLC(a)(g)
    
    Equipment lease
    
    December 2007
    
    
    
    
    
    (f)60,000JMW Group, LLC(a)
    
    Note payable
    
    August 2006
    
    
    303,225
    
    
    (c)41,667JMW Group, LLC(a)
    
    Indemnity fees
    
    Open obligation
    
    
    
    
    
    (i)12,500Aequitas Capital Management(a)
    
    Note payable
    
    April 2006
    
    
    65,447
    
    
    variousRod Boucher(h)
    
    Note payable
    
    September 13, 2008
    
    
    329,033
    
    
    
    11,309William C. McCormick
    
    Note payable
    
    July 2005
    
    (i)250,000
    
    
    interest onlyMark Walter
    
    Bond guarantee fees
    
    Open obligation
    
    
    
    
    
    (b)1,200Destination Microfield, LLC(d)
    
    Vehicle lease
    
    August 2006
    
    
    
    
    
    (e)36,350William C. McCormick
    
    Indemnity fees
    
    Open obligation
    
    
    
    
    
    
    3,246John B. Conroy
    
    Note receivable
    
    September 2005
    
    
    66,250
    
    
    
 80




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##### Table of Contents



(a)
    
    Robert J. Jesenik, a former director owns a significant interest in these
entities.(b)
    
    This bond guarantee fee is an approximation, and fluctuates based on the total
open bond liability.(c)
    
    This payment amount is for principal only. An additional amount is due monthly
which includes interest at prime plus 10%.(d)
    
    William C. McCormick, Chairman of our board of directors, holds a minority
ownership interest in this entity.(e)
    
    These payments vary over the term of the loan. This amount represents the monthly
payment in effect on December 31, 2005.(f)
    
    This payment was reduced to $60,000 per month by terms of the reissued note,
starting November 1, 2005.(g)
    
    William C. McCormick holds a beneficial minority ownership interest in this
company.(h)
    
    This debt was paid in full in October 2005 in connection with a private placement.(i)
    
    This note represents deferred salaries and expenses payable to Mr. Boucher prior
to the acquisition of EnergyConnect.(j)
    
    These indemnity fees are payments made on standby letters of credit which are in
place to guarantee payments to vendors on specific jobs.  Notes Payable to Destination Capital, LLC
   81




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##### Table of Contents



Warrants to beDate
    
    Loan Balance
    
    
    IssuedAugust 1, 2004
    
    $
    300,000
    
    
    
    37,500September 1, 2004
    
    $
    750,000
    
    
    
    93,750October 1, 2004
    
    $
    1,200,000
    
    
    
    150,000November 1, 2004
    
    $
    1,200,000
    
    
    
    150,000December 1, 2004
    
    $
    1,200,000
    
    
    
    150,000January 1, 2005
    
    $
    1,200,000
    
    
    
    150,000February 1, 2005
    
    $
    1,200,000
    
    
    
    150,000March 1, 2005
    
    $
    1,200,000
    
    
    
    150,000April 1, 2005
    
    $
    1,200,000
    
    
    
    150,000May 1, 2005
    
    $
    1,200,000
    
    
    
    150,000June 1, 2005
    
    $
    1,200,000
    
    
    
    150,000July 1, 2005
    
    $
    1,158,334
    
    
    
    144,792Total warrants to be issued as of October 1, 2005
    
    
    
    
    
    
    1,626,042
   Note Payable to Rod Boucher
 th
 Note Payable to William McCormick
 th
 Bond Guarantee Fees
  82




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##### Table of Contents



Christenson Electric
   Tenant improvement lease
 
  Equipment Lease Agreement
   83




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##### Table of Contents



Master Vehicle Lease Agreements
 Christenson Velagio
  Christenson Electric
  Real Property Sub Leases
   Administrative Services Agreement
  Note receivable
  84




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##### Table of Contents



Item 13. Exhibits
 (a)
    
    Exhibits included herein:
 Exhibit No.
 
  (1)
                       85




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##### Table of Contents



Item 14. Principal Accountant Fees and Services
  December 31,
    
    
    January 1,2005
    
    
    2005Fee TypeAudit fees
    
    $
    134,824
    
    
    $
    222,095Audit related fees
    
    
    41,350
    
    
    
    Tax fees
    
    
    
    
    
    
    All other fees
    
    
    
    
    
    
    Total fees
    
    $
    176,174
    
    
    $
    222,095
   86




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##### Table of Contents



87




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##### Table of Contents



SIGNATURES
  Dated:
April 5, 2006MICROFIELD GROUP, INC.By:
    
    /s/ Rodney M. BoucherRodney M. BoucherChief Executive Officer
  Signature
    
    Title/s/ Rodney M. Boucher
    
    Chief Executive Officer and DirectorRodney M. Boucher
    
    Date:/s/ A. Mark Walter
    
    President and DirectorA. Mark Walter
    
    Date:/s/ Michael W. Stansell
    
    DirectorMichael W. Stansell
    
    Date:/s/ Gene Ameduri
    
    DirectorGene Ameduri
    
    Date:/s/ William C. McCormick
    
    DirectorWilliam C. McCormick
    
    Date:
 88