U.S.
Securities and Exchange Commission





Washington,
D. C. 20549





Form
10-K





x ANNUAL REPORT
UNDER  SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For the
fiscal year ended December 29, 2007





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.


(Exact
Name of Registrant as Specified in Its Charter)




Oregon
            93-0935149(State
      or other jurisdiction of
      incorporation or organization)
            (I.
      R. S. Employer Identification
      No.)





111
SW Columbia Ave., Suite 480


Portland,
Oregon 97201


(Address
of principal executive offices and zip code)





(503)
419-3580


(Registrant’s
telephone number)





Securities
registered under Section 12(b) of the Exchange
Act:   None


Securities
registered under Section 12(g) of the Exchange Act:


Common
Stock





Indicate
by check mark if the registrant is a well-know seasoned issuer, as defined in
Rule 405 of the Securities Act.   o Yes  xNo




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





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:          Yes
x    No
o





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer,  a non-accelerated filer , or a smaller reporting
company . See the definitions of “large accelerated filer, an accelerated
filer,” and “smaller reporting company”  in Rule 12b-2 of the Exchange
Act.  (Check one):





o Large Accelerated
Filer    x Accelerated
Filer   o Non-Accelerated
Filer    o Smaller reporting
company





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  o





The
aggregate market value of the voting stock and non-voting common equity held by
non-affiliates (based upon the closing sale price of $0.94 per share on the Over
the Counter Bulletin Board on June 29, 2007) was $63,798,483.





The
number of shares outstanding of the registrant’s Common Stock as of March 15,
2008 was 85,195,247 shares.











MICROFIELD GROUP, INC.


FORM
10-K  INDEX





PART
      IPageItem
      1.
            Business
            3Item
      1A.
            Risk Factors
            9Item
      1B.
            Unresolved
      Staff CommentsItem
      2.
            Properties
            16Item
      3.
            Legal Proceedings
            16Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            16PART
      IIItem
      5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Repurchases of Equity Securities
            17Item
      6.
            Selected Financial Data
            19Item  7.
            Management’s Discussion and Analysis of
      Financial Condition And Results of Operations
            20Item
      7A.
            Quantitative and Qualitative Disclosures About Market
      Risk
            28Item
      8
            Financial Statements and Supplementary
      Data
            29Item
      9.
            Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
            58Item
      9A.
            Controls and Procedures
            58PART
      IIIItem
      10.
            Directors, Executive Officers, and Corporate
      Governance
            61Item
      11.
            Executive Compensation
            63Item
      12.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            68Item
      13.
            Certain Relationships, Related Transactions and
      Director Independence
            69Item
      14.
            Principal Accountant Fees and Services
            69PART
      IVItem
      15.
            Exhibits and Financial Statement
      Schedules
            70





2
 Index





PART
I





ITEM1.  BUSINESS





Overview





Microfield
Group, Inc. through its subsidiary EnergyConnect, Inc., or ECI, provides a full
range of demand response services to the electric power industry. Our customers
are the regional grid operators who pay us market rates for reductions in
electrical demand during periods of high prices or peak demand and for being on
stand by to reduce electric power demand on request at periods of capacity
limitations or in response to grid emergencies. Our suppliers are large
commercial and industrial consumers of electricity who we pay to shift their
demand for electricity from high priced hours in the day to lower priced hours.
We also pay these participating energy consumers to be on stand by to curtail
electric demand on request.





Through
proprietary technology and business processes we automate electric consumer
demand response transactions and the associated measurement, verification, and
support decisions.   These capabilities make it possible and easy
for electric consumers, particularly commercial and industrial facilities, to
shift load from high priced hours to lower priced periods.





Our
services provide market incentives to reduce electric demand during periods of
peak demand or high prices. By shifting load from high demand periods to times
of lower electrical demand our services improve the operating efficiency of the
electrical grids and improve grid reliability. We also delay the need for
construction of new electrical generating plants. Through higher efficiencies on
the grid, lower cost of generation and improved reliability all consumers of
electricity benefit from our demand response activities on the electrical grid.
By providing consumers of electricity an effective means of responding to grid
wholesale prices of electricity we complete the supply demand market place for
electricity and provide offsetting market forces to electricity
generators.





Our
customers are regional electric grid operators such as PJM, the largest electric
grid in the nation, and selected electric utilities who support and sponsor
demand response.  All of our current operations are in the United
States with services provided in 27 states.  Following a three year
testing and pilot period, we began commercial operations in 2005 and have been
growing steadily since then.  Our revenues in 2006 were $3.2 million
and in 2007 were $12.7 million.  Our suppliers are commercial and
industrial electric energy consumers who we pay to shift, curtail, bank, and in
some cases produce electric energy.





ECI
operates on a national footprint currently serving consumers and grid operators
in more than 25 states.


ECI
delivers services to wholesale electric markets of regional electric
grids.  Selected needs of electric grid operators, including energy,
capacity, and reserves have been formed into products that can be delivered
through ECI systems to the grid.  ECI technologies, processes, and
services enable buildings and electric consumers to contribute to such wholesale
services in direct competition with expensive peaking power plants.





In 2005,
we acquired Christenson Electric, Inc., or CEI, and ECI.  This
combined a 60 year old electrical contracting and technology business with a
high growth demand response business.   In 2007 we determined
that ECI had grown to a self sustaining transition point and in November 2007 we
agreed to sell the stock of CEI.  Our objective is to leverage our
unique and proprietary technologies, business processes, and resources and build
a viable, profitable demand response business servicing North American wholesale
power markets. Financial statements and accompanying notes included in this
report include disclosure of the results of operations for CEI, for all periods
presented, as discontinued operations.





For the
fiscal year ended December 29, 2007 we generated $12,626,000 in revenues and
recorded a net loss of $14,035,000. The net loss included a loss from
discontinued operations of $9,695,000. In the fiscal year ended December 30,
2006, we generated $3,202,000 in revenues and had net income of
$833,000.  This net income included a non-cash gain of $8.3 million
from the revaluation of warrant liabilities.  For the year ended
December 31, 2005, we generated $1,173,000 in revenues and had a net loss of
$77,953,000. This loss included a non-cash charge of $77,191,000 due to
impairment of our goodwill and intangibles.





3
 Index





Products and
Services





ECI
provides grid operators with products similar to those the grid operator
purchases from electric power generators. Our products can be grouped into three
main categories: energy, capacity and reserve.





Energy





Electrical
energy consumption has a repeating daily rise and fall with lowest consumption
at night and peak usage in most of the U.S. during the 3:00pm to 7:00pm
timeframe. Our priced based energy product provides reduction in usage during
peak usage or at any time of high prices for electrical energy on the grid. The
grid operator pays EnergyConnect for measured and verified reductions from
baseline usage. Grid operators provide a real time next hour market for
electrical energy and a day-ahead market.





EnergyConnect
provides grid operators with aggregated reductions in usage that are meaningful
to the grid and provides participants with the information, support and
procedures necessary to participate. Building operators in particular benefit
from EnergyConnect procedures that allow buildings to shift electrical energy
consumption while keeping all aspects of the building within
specification.  Products take numerous forms generally in the
following categories:





Real time
response





Participants
reduce usage of electricity over the next hour in response to estimated prices
provided by EnergyConnect. EnergyConnect is paid for aggregated measured
reduction that hour at the same market rate as the grid operator pays electric
power generators less the related composite average retail charge from the local
utility to the participating consumers.  This is a payment for service
product and there are generally no penalties or charges for not
participating.





Real time
dispatch





Participants
reduce usage of electricity over the next hour in response to requests by the
grid operator. EnergyConnect is paid for the aggregated response to the grid
operator request at the same market price paid to electric power generators in
each hour.  This is a payment for service product and there are
generally no penalties or charges for not participating.





Day
ahead





Some grid
operators establish day-ahead energy markets with forward hourly electricity
prices. Day-ahead forward prices reflect the inherent unpredictability of
conditions  Day-ahead prices often track the real time price, but
can,  deviate substantially.  The price certainty of the day
ahead market provides a known return for pre-cooling buildings in early morning
hours to create subsequent reductions of energy use in the peak afternoon hours.
EnergyConnect provides participating consumers with all the information and
support required to execute pre cooling strategies and bid into the day ahead
electrical energy market. EnergyConnect is paid for the aggregated reduction in
usage.  Reductions in excess of the amount committed to the day ahead
market are generally paid at the prevailing real time rate. Under delivery
generally must be made up by buying energy at the real time rate.





Capacity





The
capacity product is the traditional demand response capability and has been in
use for over 40 years. Regional utilities as well as grid operators sponsor and
purchase this demand response product. Capacity is designed to address the few
times a year that an electrical grid may approach the capacity limits of
electrical generation in the region.  Participants in the program are
generally paid a monthly fee to be on standby to respond on several hours notice
to a request to reduce electrical usage for a four, six or eight hour period.
Each grid operator and or utility may have unique requirements for notification
time, response duration, and performance penalties.





EnergyConnect
is paid monthly by the grid for having stand by capability to reduce usage with
specific timing for response and duration. In PJM, the annual
commitment  and registration  is done in the spring for the
following 12 months, particularly targeting the summer
season.  Payments are made monthly for the 12 month
period.  Obligations are for 6 hours duration on two hour
notice.





4
 Index





Reserves, Ancillary
Services, and Others





Reserve
products address the grid operator’s need to respond to emergencies on the
electrical grid such as a lightening strike, a switch failure, loss of a
tie-line, or sudden loss of a generating plant. Response is generally required
within 10 minutes and response duration generally less than 30
minutes.  EnergyConnect is paid a fee for the period of commitment to
have load reduction or back up generation available on short notice. The amount
of the fee may vary hour by hour and over the year.





This
product group includes other products that may involve even shorter intervals,
such as 5 minute energy response, balancing (both up and down) that takes place
in seconds, and even the potential to support black start after a total grid
failure.





Some
grids limit the participation of demand response in these products at this
time.   In the PJM grid, demand response may provide 25% of the
synchronous reserve needs in each area of the region.  No other
reserve or ancillary services products are permitted.  Synchronous
reserve is 10 minute response, 30 minute duration maximum.





Additional
demand response products and services now being addressed by selected utilities
and a regional grids include: local distribution feeder support to reduce the
cost of operating, maintaining, and replacing these facilities; smart grid and
micro-grid enhancement, solar integration, wind generation capacity support, and
gas-electric arbitrage.  All of these products and services are
supported by the EnergyConnect platform.





Strategy





We intend
to leverage our industry leading and scalable technology in priced based demand
response and its leading market position in the largest US market, to be the
premier provider of demand response services.  We have developed the
most extensive platform available for delivery of demand response and the
broadest array of demand response products. Our platform increases the size of
the viable market, by making it feasible for a much broader base of electric
energy consumers to participate in demand response and by making more products
available to the regional grids.  We view our initial target market in
the US as about $12 billion of the $300 billion US electric market.





With only
about one percent of the target market being served today, our growth strategy
is to access and serve as many potential participants as possible. We will focus
on those regional grids that support priced based demand response services. The
PJM grid is currently the most supportive of priced based demand response and
our largest customer.  The New England ISO and the New York ISO are
also supportive of priced based demand response and are our next areas of
expansion for these services.





To access
large numbers of large energy consumers near term, we use channels or
partnerships.  Most of these partners are companies that benefit from
the nature of our services or from the payments we make to our
suppliers.  We have successfully developed alliances with large
partners and is continuing to build alliances with others.  These
channels, combined with direct sales in every regional market are the backbone
of our growth plan.





Our
current acquisition strategy is to review target opportunities for value-added
potential and pursue targets that bring significant benefits.





Electric Power
Industry





While
demand for electricity in North America continues to grow, constraints on new
generating or transmission infrastructure are moving the regional electric grids
closer to capacity limitations. Whether the constraints on new construction come
from “not in my back yard” or environmentalists worried about global warming or
the space limitations of large urban cities the result is delay in planned
electrical generation, transmission, and distribution capacity.  In
this environment demand response can provide the added buffer to keep grids
functioning reliably and to delay the need to build new
infrastructure.





The
electric power industry is in a state of  change.  Costs of
all fuels and materials to produce and deliver electric energy are
increasing.  Worldwide shortages of key materials and fuels,
environmental footprint limits, and public perception are driving
change.   Expectations and pressures for the industry to improve
efficient use of fuels and materials, to improve reliability, and to reduce
system losses have increased steadily during that last two
decades.  All of these pressures and changes support the advancement
and development of more and better demand response.  We are aligned
with the changing industry and helps support the needed changes while
concurrently reducing electricity costs.





5
 Index





The
electric utility industry has many stakeholders.  The consumer
ultimately bears the price of delivered electricity that is the result of the
successful coordination of all of these stakeholders.  The industry is
dominated by utilities that generally operate as monopolies in their local
service territories and are regulated at both the state and federal
levels.  For regions serving about two thirds of the consumers in
North America, regional grids have replaced the grid management activities of
vertically integrated utilities that for many years built and operated the power
generating plants and transmission lines that make up the backbone of power
supply.  These regional grids, in addition to operating the
transmission system, operate wholesale electric markets, into which generators
bid to supply power and from which electric utilities and other retail suppliers
bid to purchase power.  These markets are more efficient than the
vertically integrated monopoly model, and have created substantial savings for
consumers.  Introducing demand response in these markets adds a
significant additional level of efficiencies. By providing consumers of
electricity an effective means of responding to grid wholesale prices of
electricity we complete the supply-demand marketplace for electricity and
provide offsetting market forces to electricity generators.  Wholesale
Power Markets are regulated by the Federal Energy Regulator
Commission.





Anatomy and Challenges of
Demand Response





The use
of demand response as a large scale tool to defer or reduce the need for peaking
power plants, transmission lines, or electric distribution facilities is in its
infancy.  In the US, less than one percent of the initial target
market has been accessed.  Worldwide the potential is even
greater.  Demand response has the potential to significantly reduce
electric energy line losses and prolong the value of existing transmission lines
by reducing congestion, that is reducing electric demand during hours of high
usage. This will also reduce the number of new peaking power plants needed and
shift generation to the most efficient power plants. Demand response can provide
this without significant new capital investment or any invasive facilities in
buildings or industrial sites.





With all
of this potential, the growth of demand response has been limited by technology
and regulation.  Prior to the development of transparent wholesale
electric markets, the internet, and electronic building energy control systems
with internet access, the number of people required to effect substantial demand
response was prohibitive.  Today, by using automated technology to
link wholesale market prices and grid conditions with the status, flexibilities,
and capabilities of buildings and industrial sites, sufficient economic
participation is possible.





Regulatory
Impacts





The
enactment of the New Direction for Energy Independence, National Security and
Consumer Protection Act in December, 2007, (“Energy Act of 2007”) presents
remarkable opportunities for demand response providers to emerge as active
wholesale market resources that are the “green” equivalent to traditional
generation and transmission providers. Demand response is codified in the Energy
Act of 2007 as a necessary and proven resource that will promote energy
conservation, cost savings and energy efficiencies for the emerging “smart grid”
by engaging customers with the intelligence required to actively manage
consumption during peak demand and high prices.





The
Energy Act of 2007’s emphasis on smart grid modernization technologies present
significant opportunities for the core competencies of
EnergyConnect.  Our ability to provide scalable automation of demand
response transactions will increase the price elasticity of demand for
electricity, lower the overall regional market price of energy and improve the
efficiency of electricity grids. In addition to beneficial impacts on regional
energy markets, the participating suppliers of EnergyConnect, Inc. benefit by
maximizing income potential and reducing energy costs.





Pennsylvania,
New Jersey, Maryland Interconnection, LLC (“PJM”)





PJM
continues to provide favorable market conditions for ECI
activities.  The PJM Interconnection Capacity program establishes
three-year laddered pricing structure for demand response participants that is
not subject to market fluctuations.  Each year has a fixed price set
three years in advance and prices can vary by location. Prices through May 31,
2010, are determined and reveal a general, increasing trend in response to load
growth and tightening supplies of conventional generation.





6
 Index





The
Ancillary Services markets provide a growing opportunity for
ECI.   Such markets provide compensation for a commitment to
reduce demand for specified periods of time.  A new market proposal
that provides compensation for providers who are willing to reduce demand (or
increase generation) on 30 minutes notice was approved by PJM for submittal to
FERC in January 2008.  The market proposal is projected for initial
implementation in September 2008, following Federal Energy Regulatory Commission
(“FERC”) approval.





PJM’s
Energy market revenues are impacted by an expired (October 2007) tariff
provision which offered additional compensation to demand response participants
who curtailed load during price volatility.  The expiration is the
subject of an ongoing complaint before FERC.  The complaint is
supported by several state utility commissions and in part, by
PJM.   The restoration of the added compensation is
uncertain.





Customers





Our
customers are the regional grid operators, or alternatively electric utilities,
who pay us market rates for reductions in electrical demand during periods of
high prices or peak demand and for being on stand by to reduce electric power
demand on request at periods of capacity limitations or in response to grid
emergencies.





Sales





Most of
our sales are to large regional electric grid operators, by serving the
wholesale power markets for electricity.  Membership in these regional
grids and participation in the committee decision structures of these
organizaitons provides the access and advocacy channels needed to implement,
execute, and advance our sales. Regional grid programs tend to be broad based
and target the full spectrum of demand response
potential.    In addition, some of our sales are made
directly to electric utilities that sponsor demand response
programs.   Most utility sales are made by competitive bid and
are often limited to event driven capacity-based programs.  Only a
small portion of our sales force is directed toward the grids and
utilities.





Most of
our sales effort and most of our sales force is focused on bringing electric
consumers into our service offerings.  Each consumer we bring into the
portfolio adds to our capability to serve the needs of the wholesale electric
market.





Competition





Competition
includes public and private companies that provide varying segments of demand
response products and services.  ECI is a full service provider that
uses proprietary technology to engage an electrical energy consumer’s inherent
flexibilities and make it easy  to meet the needs of a broad range of
services to the grid.  Our competitors fall into two
categories:  (1) supply only the traditional utility event based
capacity products, and (2) supply traditional and new products and services
manually.





In the
first category are utilities and third party curtailment service providers that
contract with utilities to outsource these programs.  This group makes
up the largest part of the demand response market today and reflects the ongoing
demand response activities of the past 40 years.  These programs are
not particularly well received by consumers and tend to be ineffective in
achieving significant amounts of demand response or significant benefits to the
electric system.  More intense concentration on these programs by
public well-financed utilities and third party providers has improved
performance.





In the
second category are two well financed competitors.  We have a
technological advantage at this time because we are able to do with software
what these competitors must do with people.  We expect these
competitors to attempt to duplicate our business plan and we expect to remain
technically ahead for many years.





With so
few pursuing such a large potential market, it is only with a small percentage
of energy consumers that we engage competitors.





7
 Index





Intellectual
Property





Part of
ECI’s value is contained in the proprietary software that we use to manage and
control energy consumption patterns in participant properties and integrate
strategies and transactions that serve the electric grid.  Our
embedded industry knowledge and information base is a unique and valuable
asset.





ECI has
filed for patent and copyright protection of its energy automation
software.  These patents have been filed for but not yet
approved.  We also purchased a significant amount of intangible assets
as a part of the acquisition of ECI.  These intangible assets were
valued with the assistance of an independent intangible asset valuation
firm.  This firm assists us annually in evaluating whether these
intangible assets retain their value or have an impairment that may cause us to
write down their value.





We
protect our intellectual property rights through a combination of patent,
trademark, trade secret and other intellectual property law, nondisclosure
agreements and other measures. We believe, however, that our financial
performance will depend more upon our service excellence, technical knowledge
and innovative design abilities, than upon such
protection.  Notwithstanding the foregoing, we will strongly defend
all intellectual property rights from infringement.





Government Approval or
Regulations





We are
subject to certain local government regulations. We are subject to and
comply with federal regulations pertaining to health and safety, employment,
privacy, and related regulations pertinent to all public
businesses.  While we are not directly subject to regulation by the
Federal Energy Regulatory Commission (FERC) or state public utility commissions,
these commissions have oversight of regional grids and electric utilities. The
FERC must approve all wholesale products purchased by regional grids, and state
commissions may be involved in approval of transactions with electric
utilities.





Employees





As of
December 29, 2007, we directly employed 38 persons in continuing
operations.  None of our employees in the continuing operations
are covered by collective bargaining agreements, and we believe our relations
with our employees are good.  In addition, we meets our needs with
contract-to-hire, temporary help, contract service, and by training the sales
force of partners.  Approximately 75 additional support personnel fall
in these categories.





Principal
Offices





Our
principal corporate office is located at 111 SW Columbia Ave, Suite 480,
Portland, Oregon 97201, and our telephone number is (503) 419-3580. We are an
Oregon corporation. We maintain websites at www.microfield.com and
www.energyconnectinc.com. The information contained on these websites is not
deemed to be a part of this annual report.





Our
principal operating office is located at 51 E. Campbell Ave., Suite 145,
Campbell, California.  Sales and support offices are located at nine
additional sites throughout North America.





Recent Corporate
Developments





On
November 29, 2007 we signed an agreement to sell all of the shares of our
wholly-owned subsidiary CEI to a corporation formed by the management of CEI,
for $1,650,000 in cash and the assumption of approximately $7.5 million in term
and revolving debt.  The sale of all the capital stock of CEI,
pursuant to the terms of the agreement, was approved by our shareholders in a
vote on March 10, 2008.





CEI
provided electrical construction products and services in the areas of
electrical design, telecommunications systems and infrastructure, high voltage
and substation work, wireless networking, and cabling and low voltage design and
installation.  The balance sheet amounts pertaining to CEI as of the
balance sheet dates presented are disclosed as “discontinued
operations.”  The operating results of CEI for the three years
presented are disclosed in the consolidated statement of operations as “Gain
(loss) from discontinued operations.”





8
 Index





Prior to
October 24, 2000 we developed, manufactured, and marketed computer conferencing
and telecommunications products designed to enhance and facilitate group
communications.  We received royalties from sales of products, through
February of 2006.  These royalties are listed in the income statement
under “discontinued operations.”





ITEM 1A.RISK FACTORS





CAUTIONARY
FACTORS THAT MAY AFFECT FUTURE RESULTS





We
provide the following cautionary discussion of risks, uncertainties and possible
inaccurate assumptions relevant to our business and our products. These are
factors that we think could cause our actual results to differ materially from
expected results. Other factors besides those listed here could adversely affect
us. Investors should carefully consider all of such risk factors before making
an investment decision with respect to our Common Stock.





Risks Relating to Our
Industry





Demand
response, as sponsored by grid operators and utilities, is regulated by state
and federal commissions.  Changes in regulations could limit our
ability to deliver our products to electrical grids.   Lack of
change in some regions could restrict the growth of demand
response.





Demand
response is regulated by FERC, the Federal Energy Regulatory Commission and
State Public Utility Commissions.   Recently regulators at the
federal and state level have been supportive of facilitating the demand response
business as an effective way to improve reliability and reduce costs on the
electrical grids. That could change in response to changes in the political
environment.





Regional
grids that have active wholesale markets could revert to vertical control by
utilities limiting our revenue opportunities.





State
regulators could restrict or eliminate wholesale markets for electricity that
are the basis for priced based energy demand response limiting our revenue
opportunities.  Very high prices or lack of generating capacity to
match demand could create political pressure, as happened in California in 2000,
to return to vertical control of generation thru delivery to utilities. This may
reduce the revenue opportunity for demand response.





Regional
grids establish local operating rules for demand response. Regional grids can
and do set rules that limit the product and revenue opportunity for demand
response.





The rules
in regional grids can and do restrict and limit demand response. Grid operating
rules are established thru committee processes and may be subject to FERC
approval. Demand response providers are members of the regional grids and
participate on committees, but other members such as electrical generators and
utilities are much larger and may use their market power to set rules that limit
demand response.





All
regional grids have rules that limit demand response revenue opportunity. While
current rules will allow growth of demand response revenue, changes in all
regions will be required to reach market potential. Rule changes could evolve
that restrict or eliminate current demand response products and
revenue.





Increased
infrastructure investment and or lower fuel prices could reduce the cost of
electricity, limiting demand response revenue.





Demand
response revenue is dependent on wholesale electric prices for electricity
during periods of high usage.  Prices are particularly high when
system generating capacity operates near its limits. Although increased
investment in electric facilities generally increases costs, in some scenarios,
increased investment in generating and transmission infrastructure could reduce
prices and limit revenue. Decreases in fuel costs, such as natural gas, could
reduce the price of electricity during peak daily usage and reduce the revenue
opportunity of price-based demand response.





9
 Index





Technological
advances could reduce the cost of electricity, limiting our
revenue.





Technological
advances could increase electrical generating capacity, reduce transmission
losses and reduce the price of electricity. In each case demand response revenue
opportunities would be reduced.





Failure
of other providers of demand response to provide valuable service to the
electrical grids may limit the entire demand response market thru unfavorable
regulation and or operating rules on particular grids.





Failure
or perception of failure to meet expectations could induce operating rules that
limit growth in one or more regional grids.





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.





We have
incurred operating losses for the last three years.  We cannot be
certain that we can achieve or sustain profitability on a quarterly or annual
basis in the future. Our operations are subject to the risks and competition
inherent in the establishment of a business enterprise.  Revenues and
profits, if any, will depend upon numerous factors.  If we continue to
incur losses, our accumulated deficit will continue to increase, which may make
it harder for us to obtain financing and achieve our business
objectives.  Failure to achieve such goals would have an adverse
impact which could result in reducing or terminating operations.




If We Experience Continuing Losses
and 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
Dilution.




Additional
capital may be required to effectively support the operations and to otherwise
implement our overall business strategy.  If we receive additional
financing, it may not be sufficient to sustain or expand our research and
development operations or continue our business operations.




There can
be no assurance that financing will be available in amounts or on terms
acceptable to us, if at all. The inability to obtain additional capital will
restrict our ability to grow and may reduce our ability to continue to conduct
business operations. If we are unable to obtain additional financing, we will
likely be required to curtail our business development plans. Any additional
equity financing will involve dilution to our then existing
shareholders.




Some 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.




In the
demand response industry segment several companies that have achieved
substantially greater market shares than we have, have longer operating
histories, have larger customer bases, and have substantially greater financial,
development and marketing resources than we do.  If overall demand for
our products and services should decrease it could have a materially adverse
affect on our operating results.




Competitors
may develop automated systems and business processes that are equivalent to
ours, limiting or removing our current competitive advantage.




Some of
our competitors are larger and may have the financial resources to develop
automated systems and business processes that would allow them to compete
effectively with our price-based products and strategies.  Competitors
may develop the ability to deliver in volume the same set of products that we
currently provide.  Competitors may choose to provide similar products
at lower margins.




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.




The
expected growth of our operations (as to which no representation can be made)
will place a significant strain on our current management resources. To manage
this expected growth, we will need to continue to improve ouroperational and financial
systems,procedures
and controls, andhiring, training and
management of employees.





10
 Index





Our
future growth may be attributable to acquisitions of new product lines and new
businesses. We anticipate that future acquisitions, if successfully consummated,
may create increased working capital requirements, which will likely precede by
several months any material contribution of an acquisition to our net
income.




Our
failure to manage growth or future acquisitions successfully could seriously
harm our operating results. Also, acquisition costs could cause our quarterly
operating results to vary significantly. Furthermore, our stockholders would be
diluted if we financed the acquisitions by incurring convertible debt or issuing
securities.




Although
we currently only have operations within the United States, if we were to
acquire an international operation; we will face additional risks,
including: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.




Since
September 2004, we have acquired three companies and may expand our operations
through targeted, strategic acquisitions over time. This may require significant
management time and financial resources because we may need to integrate widely
dispersed operations with distinct corporate cultures. Our failure to manage
future acquisitions successfully could seriously harm our operating results.
Also, acquisition costs could cause our quarterly operating results to vary
significantly. Furthermore, our stockholders would be diluted if we financed the
acquisitions by incurring convertible debt or issuing securities.




Goodwill Recorded On Our Balance
Sheet May Become Impaired, Which Could Have A Material Adverse Effect On Our
Operating Results.




We have
recorded a significant amount of goodwill. As required by Statement of Financial
Accounting Standards (SFAS) No. 142, “Goodwill and Intangible Assets,” we
annually evaluate the potential impairment of goodwill that was recorded at each
acquisition date. Circumstances could change which would give rise to an
impairment of the value of that recorded goodwill. This potential impairment
would be charged as an expense to the statement of operations which could have a
material adverse effect on our operating results. For the twelve months ended
December 31, 2005, we wrote off, approximately $77 million of goodwill due to
impairment testing of this asset. Goodwill and intangibles of our
discontinued segment, CEI, in an aggregate amount of $9,728,000 was written
off in the twelve months ended December 29, 2007.




If We Are Unable to Retain the
Services of Messrs. Boucher and Ameduri, 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 depends to a significant extent upon the continued service of Mr. Rodney
M. Boucher, our Chief Executive Officer, and Gene Ameduri, our ECI President. We
do not have employment agreements with Messrs. Boucher or Ameduri. Loss of the
services of these officers could have a material adverse effect on our growth,
revenues, and prospective business. We do not maintain key-man insurance on the
lives of Messrs. Boucher or Ameduri. We are not aware of any named executive
officer or director who has plans to leave us or retire. In addition, in order
to successfully implement and manage our business plan, we will be dependent
upon, among other things, successfully recruiting qualified managerial and sales
personnel having experience in business. Competition for qualified individuals
is intense. There can be no assurance that we will be able to find, attract and
retain existing employees or that we will be able to find, attract and retain
qualified personnel on acceptable terms.




Our success is dependent on the
growth in energy management and curtailment programs, and to the extent that such
growth slows and the need for services curtail, our business may be
harmed.




The
demand response industry segment is in a fast changing
environment.  While revenue from the energy products We sell have been
growing annually, rules changes within the grids in which we operate may change
from time to time.   It is difficult to predict whether these
changes will result in continued economic improvement in the industries which
our company serves. If the rate of growth should slow, or energy consumers
reduce their participation in these programs, our operating results may decline
or fail to meet growth goals.





11
 Index





Our
success is dependent on the actions of our participants many of which are large
corporations and who may choose to limit their shifting or curtailment of
electrical load.  Non performance to commitments by participants could
subject us to financial penalties.




We are
dependent on the load shifting and curtailment actions of our participants to
generate energy reductions that are valuable to the grid and produce revenue.
Participants may choose to other strategies to reduce the cost of electricity or
may focus on other areas of their business to increase income or reduce costs.
In some cases for capacity products, failure to meet committed reductions in
energy usage could expose us to financial penalties that exceed the revenue
opportunity.




Our
success is dependent on the continuous operation of our data
center.  We will lose the ability to track revenue transactions during
a data outage which would result in lost revenue.




Our
business processes are highly automated and require the active operation of our
data center to track and process revenue transactions. We will lose the ability
to track and collect revenue for any period of time that our data center is not
operational.  While highly secure, redundant, and hardened, the
operation of our data center is exposed to the negative effects of prolonged
power outages or natural disasters such as earthquakes.




Payment
for most of our products is dependent on administrative approval of the utility
servicing each participant. If one or more utility chooses to delay our payments
our revenues will be delayed or reduced.




The
regional electrical grids are our customers and pay us for our products, but the
utility servicing each participant approves each transaction and can delay or
object to payment based on the rules of the particular grid. Certain utilities
have delayed payments for prolonged periods. While we have not lost material
revenue to date we can not be sure that we will be paid for all transactions in
the future.




Our
growth is partly dependent on the actions of our partners, many of whom are
large corporations.  If our large partners choose not to focus their
actions on demand response our growth may be reduced.




We are
dependent on the actions of our business partners to provide future participants
and our growth may be slowed if one or more partner chooses not to focus
activity on demand response.




Our
growth is dependent on having a broad range of products in each region that we
operate. Restrictions or delays on products that we may provide will reduce or
eliminate our competitive advantage.




Our broad
range of products provides a competitive advantage in the recruitment of
participants. Restrictions on our ability to offer multiple products in a region
or delays in our ability to bring current products to new regions will reduce
our competitive position and delay growth in those regions. We may not be able
to anticipate or control all the rules or regulations that affect each product
in each region.




Our
growth is dependent on the cooperation of other stake holders such as utilities
and electrical generators. To the extent that these stake holders resist change
our growth may be slowed.




Utilities
and electrical generators are the largest members of electrical grids and may
for their own reasons act to slow or prevent the growth of demand response. The
cooperation of all stakeholders is required to facilitate the growth of our
business.




Our
quarterly results fluctuate and may cause our stock price to
decline.




Our
quarterly operating results have fluctuated in the past and will likely
fluctuate in the future.  We believe that period to period comparisons
of our results of operations are not a good indication of our future
performance, but this may not be apparent to all stakeholders. A number of
factors, many of which are outside of our control, are likely to cause these
fluctuations.  The factors outside of our control include:fluctuations in demand for
our services;  length of sales cycles; weather abnormalities;
unexpected price changes; changes in the rules by the electric grid operators
regarding payments for our transactional energy services; while opportunities
for transactional revenue is high in cold weather months,adverse weather
conditions, particularly during the winter season, could affect our ability to
render services in certain regions of the United States; reductions in the
margins of products and services offered by our competitors; costs of
integrating technologies or businesses that we add; and delays in payment
resulting from administrative delays from utilities in processing
settlements.





12
 Index





Factors
substantially within our control include: 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.




Because
our operating results may vary significantly from quarter to quarter, our
operating results may not meet the expectations of securities analysts and
investors, and our common stock could decline significantly which may expose us
to risks of securities litigation, impair our ability to attract and retain
qualified individuals using equity incentives and make it more difficult to
complete acquisitions using equity as consideration.




Failure to keep pace with the latest
technological changes could result in decreased
revenues.




The
market for our services is partially characterized by rapid change and
technological improvements. Failure to respond in a timely and cost-effective
way to these technological developments could result in serious harm to our
business and operating results. We have derived, and we expect to continue to
derive, a significant portion of our revenues from technology based products. As
a result, our success will depend, in part, on our ability to develop and market
product and service offerings that respond in a timely manner to the
technological advances of our customers, evolving industry standards and
changing client preferences.




During the ordinary course of our
business, we may become subject to lawsuits or indemnity claims, which could
materially and adversely affect our business and results of
operations.




We have
in the past been, and may in the future be, named as a defendant in lawsuits,
claims and other legal proceedings during the ordinary course of our business.
These actions may seek, among other things, compensation for alleged personal
injury, workers’ compensation, employment discrimination, breach of contract,
property damage, punitive damages, civil penalties or other losses,
consequential damages or injunctive or declaratory relief. In addition, pursuant
to our service arrangements, we generally indemnify our customers for claims
related to the services we provide thereunder. Furthermore, our electrical,
technology, and transactional services are integral to the operation and
performance of the electric distribution and transmission infrastructure. As a
result, we may become subject to lawsuits or claims for any failure of the
systems that we provide, even if our services are not the cause for such
failures. In addition, we may incur civil and criminal liabilities to the extent
that our services contributed to any property damage or blackout. With respect
to such lawsuits, claims, proceedings and indemnities, we have and will accrue
reserves in accordance with generally accepted accounting principles. In the
event that such actions or indemnities are ultimately resolved unfavorably at
amounts exceeding our accrued reserves, or at material amounts, the outcome
could materially and adversely affect our reputation, business and results of
operations. In addition, payments of significant amounts, even if reserved,
could adversely affect our liquidity position.




Our Trademark and Other Intellectual
Property Rights May not be Adequately Protected Outside the United States,
Resulting in Loss of Revenue.




We
believe that our trademarks, whether licensed or owned by us, and other
proprietary rights are important to our success and our competitive position. In
the course of any potential international expansion, we may, however, experience
conflict with various third parties who acquire or claim ownership rights in
certain trademarks. We cannot assure you that the actions we have taken to
establish and protect these trademarks and other proprietary rights will be
adequate to prevent imitation of our products by others or to prevent others
from seeking to block sales of our products as a violation of the trademarks and
proprietary rights of others. Also, we cannot assure you that others will not
assert rights in, or ownership of, trademarks and other proprietary rights of
ours or that we will be able to successfully resolve these types of conflicts to
our satisfaction. In addition, the laws of certain foreign countries may not
protect proprietary rights to the same extent, as do the laws of the United
States.




Intellectual
Property Litigation Could Harm Our Business.




Litigation
regarding patents and other intellectual property rights is extensive in the
technology industry. In the event of an intellectual property dispute, we may be
forced to litigate. This litigation could involve proceedings instituted by the
U.S. Patent and Trademark Office or the International Trade Commission, as well
as proceedings brought directly by affected third parties. Intellectual property
litigation can be extremely expensive, and these expenses, as well as the
consequences should we not prevail, could seriously harm our
business.




If a
third party claims an intellectual property right to technology we use, we might
need to discontinue an important product or product line, alter our products and
processes, pay license fees or cease our affected business activities. Although
we might under these circumstances attempt to obtain a license to this
intellectual property, we may not be able to do so on favorable terms, or at
all. We are currently not aware of any intellectual property rights that are
being infringed nor have we received notice from a third party that we may be
infringing on any of their patents.





13
 Index





Furthermore,
a third party may claim that we are using inventions covered by the third
party’s patent rights and may go to court to stop us from engaging in our normal
operations and activities, including making or selling our product candidates.
These lawsuits are costly and could affect our results of operations and divert
the attention of managerial and technical personnel. There is a risk that a
court would decide that we are infringing the third party’s patents and would
order us to stop the activities covered by the patents. In addition, there is a
risk that a court will order us to pay the other party damages for having
violated the other party’s patents. The technology industry has produced a
proliferation of patents, and it is not always clear to industry participants,
including us, which patents cover various types of products or methods of use.
The coverage of patents is subject to interpretation by the courts, and the
interpretation is not always uniform. If we are sued for patent infringement, we
would need to demonstrate that our products or methods of use either do not
infringe the patent claims of the relevant patent and/or that the patent claims
are invalid, and we may not be able to do this. Proving invalidity, in
particular, is difficult since it requires a showing of clear and convincing
evidence to overcome the presumption of validity enjoyed by issued
patents.




Because
some patent applications in the United States may be maintained in secrecy until
the patents are issued, because patent applications in the United States and
many foreign jurisdictions are typically not published until eighteen months
after filing, and because publications in the scientific literature often lag
behind actual discoveries, we cannot be certain that others have not filed
patent applications for technology covered by our licensors’ issued patents or
our pending applications or our licensors’ pending applications or that we or
our licensors were the first to invent the technology. Our competitors may have
filed, and may in the future file, patent applications covering technology
similar to ours. Any such patent application may have priority over our or our
licensors’ patent applications and could further require us to obtain rights to
issued patents covering such technologies. If another party has filed a United
States patent application on inventions similar to ours, we may have to
participate in an interference proceeding declared by the United States Patent
and Trademark Office to determine priority of invention in the United States.
The costs of these proceedings could be substantial, and it is possible that
such efforts would be unsuccessful, resulting in a loss of our United States
patent position with respect to such inventions.




Some of
our competitors may be able to sustain the costs of complex patent litigation
more effectively than we can because they have substantially greater resources.
In addition, any uncertainties resulting from the initiation and continuation of
any litigation could have a material adverse effect on our ability to raise the
funds necessary to continue our operations.




Our
Independent Auditors Have Expressed Substantial Doubt About Our Ability to
Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future
Financing.
  In their
report dated March 11, 2008, our independent auditors stated that our financial
statements for the year ended December 29, 2007 were prepared assuming that we
would continue as a going concern, and that they have substantial doubt about
our ability to continue as a going concern.  Our auditors’ doubts are
based on our incurring net losses and deficits in cash flows from
continuing  operations.  We continue to experience net
operating losses.  Our ability to continue as a going concern is
subject to our ability to generate a profit and/or obtain necessary funding from
outside sources, including by the sale of our securities, or obtaining loans
from financial institutions, where possible.  Our continued net
operating losses and our auditors’ doubts increase the difficulty of our meeting
such goals and our efforts to continue as a going concern may not prove
successful.


Risks Relating to Our Common
Stock




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.




Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and must
be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
There can be no assurance that in the future we will always be current in our
reporting requirements.




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.




The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a “penny stock,” for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules
require:





14
 Index





·
            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.




In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:




·
            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.




The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:




·
            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.




Generally,
brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.




Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.




Potential
Fluctuations in Annual Operating Results





Our
annual operating results may fluctuate significantly in the future as a result
of a variety of factors, most of which are outside our control, including: the
demand for our products and services; seasonal weather trends, price competition
or pricing changes in the market; technical difficulties or system downtime;
general economic conditions and economic conditions specific to the
construction  industry.





Our
annual results may also be significantly impaired by the impact of the
accounting treatment of acquisitions, financing transactions or other matters.
Particularly at our early stage of development, such accounting treatment can
have a material impact on the results for any quarter. Due to the foregoing
factors, among others, it is likely that our operating results may fall below
our expectations or those of investors in some future quarter.





Limitation
of Liability and Indemnification of Officers and Directors





Our
officers and directors are required to exercise good faith and high integrity in
our management affairs. Our Articles of Incorporation provide, however, that our
officers and directors shall have no liability to our shareholders for losses
sustained or liabilities incurred which arise from any transaction in their
respective managerial capacities unless they violated their duty of loyalty, did
not act in good faith, engaged in intentional misconduct or knowingly violated
the law, approved an improper dividend or stock repurchase, or derived an
improper benefit from the transaction. Our Articles and By-Laws also provide for
the indemnification by us of the officers and directors against any losses or
liabilities they may incur as a result of the manner in which they operate our
business or conduct the internal affairs, provided that in connection with these
activities they act in good faith and in a manner that they reasonably believe
to be in, or not opposed to, the best interests of Microfield, and their conduct
does not constitute gross negligence, misconduct or breach of fiduciary
obligations.





Management
of Growth





We may
experience growth, which will place a strain on our managerial, operational and
financial systems resources. To accommodate our current size and manage growth
if it occurs, we must devote management attention and resources to improve our
financial strength and our operational systems. Further, we will need to expand,
train and manage our sales and distribution base. There is no guarantee that we
will be able to effectively manage our existing operations or the growth of our
operations, or that our facilities, systems, procedures or controls will be
adequate to support any future growth. Our ability to manage our operations and
any future growth will have a material effect on our stockholders.





15
 Index





ITEM 2.PROPERTIES





We
leased a facility in Portland, Oregon, and one facility in San Jose,
California during 2007.  These facilities consist of approximately
13,000 square feet of office space.  We also lease several offices
around the country in which sales people and sales engineers are
based.  These facilities are occupied pursuant to both fixed-term, and
month-to-month leases.  We do not own or lease any manufacturing
space.





ITEM 3.  LEGAL PROCEEDINGS





From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have, individually
or in the aggregate, a material adverse affect on our business, financial
condition or operating results.





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





No
matters were submitted to a vote of our shareholders during the quarter ended
December 29, 2007.





16
 Index





PART
II





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





Our
common stock is quoted on the Over the Counter Bulletin Board under the symbol
“MICG.OB.” The following table sets forth the high and low sales prices as
reported by the Over the Counter Bulletin Board for the periods
indicated.





Fiscal
      2006First
      Quarter
            
            $
            5.00
            
            
            $
            2.32Second
      Quarter
            
            
            4.38
            
            
            
            2.70Third
      Quarter
            
            
            2.98
            
            
            
            1.73Fourth
      Quarter
            
            
            1.68
            
            
            
            0.52Fiscal
      2007First
      Quarter
            
            $
            0.77
            
            
            $
            0.50Second
      Quarter
            
            
            1.18
            
            
            
            0.61Third
      Quarter
            
            
            0.97
            
            
            
            0.68Fourth
      Quarter
            
            
            1.53
            
            
            
            0.70








As of
February 5, 2008, we had 178 record holders of our common stock. The number of
record holders was determined from the records of our transfer agent and does
not include beneficial owners of common stock whose shares are held in the names
of various security brokers, dealers, and registered clearing
agencies.  There were no cash dividends declared or paid in fiscal
years 2007 or 2006.





Securities
Authorized for Issuance Under Equity Compensation Plans





The
following equity compensation information, as of December 29, 2007, is presented
in compliance with SEC regulation S-K Item 201(d).





Number
      ofsecuritiesremainingavailable
      forNumber
      of
            
            
            
            
            
            future
      issuanceSecurities
      to be
            
            
            Weighted
            
            
            under
      equityissued
      upon
            
            
            average
            
            
            compensationexercise
      of
            
            
            exercise
      price
            
            
            plans
      (excludingoutstanding
            
            
            of
      outstanding
            
            
            securitiesoptions
      and
            
            
            options
      and
            
            
            reflected
      inwarrants
            
            
            warrants
            
            
            column
      (a))Plan
      category
            
            (a)
            
            
            (b)
            
            
            (c)Equity
      compensation plans approved by security holders
            
            
            9,723,750
            
            
            $
            0.69
            
            
            
            9,051,743Equity
      compensation plans not approved by security holders
            
            
            28,549,182
            
            
            $
            2.46
            
            
            
            N/ATotal
            
            
            38,272,931
            
            
            $
            2.01
            
            
            
            N/A


17
 Index




Stock
Price Performance Graph





The
following graph sets forth our total cumulative shareholder return as compared
to the return of the NASDAQ Stock Market (U.S.) Index (“NASDAQ”) and the Russell
2000 Index for the period of December 31, 2003 through December 31,
2007.  The graph reflects the investment of $100 on December 31, 2003
in our stock, the NASDAQ and the Russell 2000 Index.





Total
return also assumes reinvestment of dividends.  As noted above, we
have never paid dividends on our common stock.  Historical stock price
performance should not be relied upon as indicative of future stock price
performance.





Comparison
of Annual Cumulative Total Return Among Microfield Group, Inc.,


The
NASDAQ Stock Market (U.S.) Index and the Russell 2000 Index










18
 Index




ITEM 6.SELECTED FINANCIAL DATA





SELECTED
FINANCIAL DATA




The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this annual report. The statements of operations data for
the twelve months ended December 29, 2007, December 30, 2006, and December 31,
2005 and the balance sheet data at December 29, 2007, and December 30, 2006 are
derived from our audited financial statements which are included elsewhere in
this annual report. The statement of operations data for the years ended January
1, 2005, and January 3, 2004 and the balance sheet data at January 1, 2005, and
January 3, 2004 are derived from our audited financial statements which are not
included in this annual report. The historical results are not necessarily
indicative of results to be expected for future periods. The following
information is presented in thousands, except per share data.




Fiscal years endedDecember 29,
            
            
            December 30,
            
            
            December 31,
            
            
            January 1,
            
            
            January 3,2007
            
            
            2006
            
            
            2005
            
            
            2005
            
            
            2004Statements
      of Operations:Sales
            
            $
            12,626
            
            
            $
            3,202
            
            
            $
            1,173
            
            
            $
            -
            
            
            $
            -Cost
      of sales
            
            
            8,788
            
            
            
            3,032
            
            
            
            666
            
            
            
            -
            
            
            
            -Gross
      profit
            
            
            3,837
            
            
            
            170
            
            
            
            507
            
            
            
            -
            
            
            
            -Operating
      expense
            
            
            8,180
            
            
            
            6,076
            
            
            
            78,215
            *
            
            
            1,023
            
            
            
            707Gain(loss)
      from continuing operations
            
            
            (4,341
            )
            
            
            1,561
            
            
            
            (78,721
            )
            
            
            (2,057
            )
            
            
            (924
            )Net
      income (loss)
            
            
            (14,035
            )
            
            
            833
            
            
            
            (77,953
            )
            
            
            (6,182
            )
            
            
            (6,046
            )Net
      income (loss) per share
            
            $
            (0.17
            )
            
            $
            0.01
            
            
            $
            (2.88
            )
            
            $
            (0.36
            )
            
            $
            (0.59
            )Weighted
      average shares
            
            
            82,536
            
            
            
            71,374
            
            
            
            27,048
            
            
            
            17,340
            
            
            
            10,309Balance
      Sheet Data:Cash
            
            $
            892
            
            
            $
            454
            
            
            $
            729
            
            
            $
            11
            
            
            $
            131Total
      assets
            
            
            48,085
            
            
            
            57,147
            
            
            
            55,241
            
            
            
            11,775
            
            
            
            14,042Total
      liabilities
            
            
            16,828
            
            
            
            13,531
            
            
            
            27,337
            
            
            
            12,334
            
            
            
            14,034Shareholders’
      equity (deficit)
            
            $
            31,258
            
            
            $
            43,616
            
            
            $
            27,904
            
            
            $
            (559
            )
            
            $
            8





*
            Includes
      write-off of impaired goodwill of $77,191,000 resulting from the
      re-valuation of goodwill purchased in the acquisition of ECI in October
      2005.  19
 Index




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




Some of
the information in this annual report contains 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 substantial risks and
uncertainties. One can identify these statements by forward-looking words such
as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,”
or similar words. One should read statements that contain these words carefully
because they:





•
            discuss
      future expectations;





•
            contain
      projections of future results of operations or of financial condition;
      and





•
            state
      other “forward-looking”
information.





We
believe it is important to communicate our expectations. However, there may be
events in the future that we are not able to accurately predict or over which we
have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under “Risk Factors,”
“Business” and elsewhere in this Form 10-K.  See “Risk Factors
beginning on page 9.”





Critical
Accounting Policies





The
discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
continuously evaluate, our estimates and judgments, including those related to
revenue recognition, sales returns, bad debts, excess inventory, impairment of
goodwill and intangible assets, income taxes, contingencies and litigation. Our
estimates are based on historical experience and assumptions that we believe to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.  We discuss the
development and selection of the critical accounting estimates with the Audit
Committee of our Board of Directors on a quarterly basis, and the Audit
Committee has reviewed our related disclosure in this Form 10-K.





We
believe the following critical accounting policies, among others, affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements:





Revenue
recognition




We
produce revenue through agreements with both building owners and the power grid
operators. Under our agreements with facilities owners, we use electrical and
energy related products that help energy consumers control energy use in their
buildings. In conjunction with this agreement we also contract with the power
grid operators to use energy, capacity, and related ancillary services during
specified times and under specified conditions. These transactions are
summarized at the end of each monthly period and submitted to the power grid for
settlement and approval. The transactions are recorded as revenue on the
settlement date, which may fall 45-70 days after the transaction date from which
the revenue is derived, because management feels that without an established
history for this source of revenue, and the potential for disputes, that the
settlement date, on which both parties agree to the amount of revenue to
recognize, is the most conservative and appropriate date to use.





An
additional source of our revenue is derived from agreements with the power grid
operators whereby a monthly reserve fee is paid for our agreement to standby,
ready to provide relief in the form of curtailment of energy usage, in times of
high energy demand.  We record these payments as revenue over the
period during which we’re required to perform under these
programs.  Under certain programs, our obligation to perform may not
coincide with the period over which we receive payments under that
program.  In these cases we record revenue over the mandatory
performance obligation period and record a receivable for the amount of payments
that will be received after that period has been completed.





20
 Index





We will
apply the accrual method of accounting for revenues to all revenue generating
activities when we are satisfied that we can estimate monthly revenue to be
settled with the grid, with a higher degree of certainty.





Accruals
for contingent liabilities





We make
estimates of liabilities that arise from various contingencies for which values
are not fully known at the date of the accrual. These contingencies may include
accruals for reserves for costs and awards involving legal settlements, costs
associated with vacating leased premises or abandoning leased equipment, and
costs involved with the discontinuance of a segment of a business. Events may
occur that are resolved over a period of time or on a specific future date.
Management makes estimates of the potential cost of these occurrences, and
charges them to expense in the appropriate periods. If the ultimate resolution
of any event is different than management’s estimate, compensating entries to
earnings may be required.




Purchase
price allocation and impairment of intangible and long-lived assets





Intangible
and long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amounts of such
assets may not be recoverable. Determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the use of the asset,
and its eventual disposition. Measurement of an impairment loss for intangible
and long-lived assets that management expects to hold and use is based on the
fair value of the asset as estimated using a discounted cash flow
model.




We
measure the carrying value of goodwill recorded in connection with the
acquisitions for potential impairment in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets.” To apply SFAS 142, a company is divided into
separate “reporting units,” each representing groups of products that are
separately managed. For this purpose, we have one reporting unit. To determine
whether or not goodwill may be impaired, a test is required at least annually,
and more often when there is a change in circumstances that could result in an
impairment of goodwill. If the trading of our common stock is below book value
for a sustained period, or if other negative trends occur in our results of
operations, a goodwill impairment test will be performed by comparing book value
to estimated market value. To the extent goodwill is determined to be impaired,
an impairment charge is recorded in accordance with SFAS 142.




Warrant Liability





In
connection with the placement of certain debt instruments during the second
quarter 2006 and the year ended December 30, 2006, we issued freestanding
warrants. Although the terms of the warrants do not provide for net-cash
settlement, in certain circumstances, physical or net-share settlement is deemed
to not be within our control and, accordingly, we are required to account for
these freestanding warrants as a derivative financial instrument liability,
rather than as shareholders’ equity.




The
warrant liability was initially measured and recorded at its fair value, and was
then re-valued at each reporting date, with changes in the fair value reported
as non-cash charges or credits to earnings. For warrant-based derivative
financial instruments, the Black-Scholes option pricing model was used to value
the warrant liability.




The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, was re-assessed at the end of
each reporting period. Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months
of the balance sheet date.




At
September 30, 2006, both of the warrant liabilities were reclassified to equity
as a result of the effective registration of the underlying shares and warrants
issued in both of the private placements.  These derivative
instruments were revalued on the date each of the registrations was declared
effective, with the incremental revaluation amount recorded as a gain in the
consolidated statement of operations.





We do not
use derivative instruments to hedge exposures to cash flow, market, or foreign
currency risks.




We tested
our intangibles for impairment as of the end of fiscal years 2007, 2006, and
2005. Goodwill of $106,544,871 was recorded upon the acquisition of ECI, and
represents the excess of the purchase price over the fair value of the net
tangible and intangible assets acquired. At December 31, 2005, it was determined
in an independent valuation that the goodwill generated in this transaction was
impaired. The Company decided to write off approximately $77,191,344 of this
goodwill.  The write-off of the goodwill, and the amortization of the
intangible assets are included in operating expenses in the consolidated
statements of operations.





21
 Index





Stock-Based
Compensation




On
January 1, 2006, we adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors including employee
stock options based on estimated fair values. SFAS 123(R) supersedes our
previous accounting under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in
fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The
Company has applied the provisions of SAB 107 in its adoption of SFAS
123(R).





We
adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006, the
first day of the Company’s fiscal year 2006. Our Consolidated Financial
Statements for twelve months ended December 29, 2007 reflect the impact of SFAS
123(R). In accordance with the modified prospective transition method, our
Consolidated Financial Statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation
expense recognized under SFAS 123(R) for the twelve months ended December 29,
2007 and December 30, 2006 was $921,000 and $1,442,000,
respectively.





SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our Consolidated Statement of
Operations. Prior to the adoption of SFAS 123(R), we accounted for stock-based
awards to employees and directors using the intrinsic value method in accordance
with APB 25 as allowed under Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the
intrinsic value method, no stock-based compensation expense had been recognized
in our Consolidated Statement of Operations because the exercise price of our
stock options granted to employees and directors equaled the fair market value
of the underlying stock at the date of grant.





Stock-based
compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest during
the period. Stock-based compensation expense recognized in our Consolidated
Statements of Operations for the twelve months ended December 29, 2007 and
December 30, 2006 included compensation expense for share-based payment awards
granted prior to, but not yet vested as of December 31, 2005 based on the grant
date fair value estimated in accordance with the pro forma provisions of SFAS
123 and compensation expense for the share-based payment awards granted
subsequent to December 31, 2005 based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R). SFAS 123(R) requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. In our pro forma
information required under SFAS 123 for the periods prior to fiscal 2006, we
accounted for forfeitures as they occurred.





Upon
adoption of SFAS 123(R), we are using the Black-Scholes option-pricing model as
its method of valuation for share-based awards granted beginning in fiscal 2006,
which was also previously used for our pro forma information required under SFAS
123. Our determination of fair value of share-based payment awards on the date
of grant using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of highly complex and subjective variables. These
variables include, but are not limited to our expected stock price volatility
over the term of the awards, and certain other market variables such as the risk
free interest rate.





Computation
of Net Income(Loss) per Share





Basic
earnings (loss) per common share is computed using the weighted-average number
of common shares outstanding during the period.  Diluted earnings per
common share is computed using the combination of dilutive common share
equivalents, which include convertible preferred shares, options and warrants
and the weighted average number of common shares outstanding during the
period.  During the years ended December 29, 2007 and December 31,
2005, common stock equivalents are not considered in the calculation of the
weighted average number of common shares outstanding because they would be
anti-dilutive, thereby decreasing the net loss per common share.





22
 Index





Concentrations





Financial
instruments that potentially subject us to concentrations of credit risk consist
primarily of accounts receivable.  During the year ended December 29,
2007, revenue from one major customer approximated $11,700,000 or 92.67% of
sales.  This revenue is the result of multiple participating electric
consumers who executed energy transactions that were aggregated and billed to
PJM.  The revenue is dependent on actions taken by these third parties
in conjunction with ECI, for which PJM, as our customer remits
payment.  Of these participants, there were two whose transactions
resulted in revenue that totaled 10% or more of our revenue in the twelve months
ended December 29, 2007 and December 30, 2006.  At December 29, 2007
there was one customer whose accounts receivable accounted for all of our
outstanding trade accounts receivable.  During the years ended
December 30, 2006 and December 31, 2005, revenues from one major customer
approximated 100% of sales. At December 30, 2006 and December 31, 2005 there
were no customers whose accounts receivable accounted for more than 10% of total
outstanding trade accounts receivable. We perform limited credit evaluations of
our customers, do not require collateral on accounts receivable balances, but do
often retain lien rights to reduce our risk.  We have not experienced
material credit losses for the periods presented.   The level of
sales to any single customer may vary and the loss of any one of these
customers, or a decrease in the level of sales to any one of these customers,
could have a material adverse impact on our financial condition and results of
operations.





Recent
Accounting Pronouncements





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
to measure many financial instruments, and certain other items, at fair value.
SFAS 159 applies to reporting periods beginning after November 15, 2007. The
adoption of SFAS 159 is not expected to have a material impact on our financial
condition or results of operations.




In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), “Business Combinations” (“Statement 141(R)”) and Financial Accounting
Standards No. 160, “Noncontrolling Interests in Consolidated Financial
Statements” (“Statement 160”). Statements 141(R) and 160 require most
identifiable assets, liabilities, noncontrolling interests and goodwill acquired
in a business combination to be recorded at “full fair value” and require
noncontrolling interests (previously referred to as minority interests) to be
reported as a component of equity.  Both statements are effective for
fiscal years beginning after December 15, 2008.  Statement 141(R) will
be applied to business combinations occurring after the effective
date.  Statement 160 will be applied prospectively to all
noncontrolling interests, including any that arose before the effective
date.  The Company has not determined the effect, if any, the adoption
of Statements 141(R) and 160 will have on the Company’s financial position or
results of operations.
  Results
of Operations





The
following table sets forth, as a percentage of sales, certain consolidated
statement of operations data relating to the business for the periods
indicated.





Fiscal
            
            
            Fiscal
            
            
            Fiscal2007
            
            
            2006
            
            
            
            2005
            *Net
      sales
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %Cost
      of goods sold
            
            
            70
            
            
            
            95
            
            
            
            57Gross
      profit
            
            
            30
            
            
            
            5
            
            
            
            43Operating
      expenses
            
            
            65
            
            
            
            189
            
            
            
            87Loss
      from operations
            
            
            (35
            )
            
            
            (184
            )
            
            
            (44
            )Other
      income (expense)
            
            
            0
            
            
            
            233
            
            
            
            (86
            )Income
      (loss) before income taxes
            
            
            (35
            )
            
            
            49
            
            
            
            (130
            )Provision
      for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -Income
      (loss) from continuing operations
            
            
            (35
            )
            
            
            49
            
            
            
            (130
            )Discontinued
      operations
            
            
            (77
            )
            
            
            (23
            )
            
            
            65Net
      gain (loss)
            
            
            (111
            )
      %
            
            
            26
            %
            
            
            (65
            )
      %


* This table does not include the
percentage of sales due to the impairment of goodwill and intangibles within ECI
of approximately $77 million.  Presentation of this non-cash item
would make the comparison of this year to the other years presented,
meaningless.





The
financial information presented for the fiscal years ended December 29, 2007 and
December 30, 2006 includes information for ECI for the full fiscal
year.  Due to the acquisition of ECI in 2005, the financial
information presented for the year ended December 31, 2005, represents activity
in ECI for the period from the date of the acquisition to the end of the fiscal
year, combined with revenue, other income and S G & A expenses of Microfield
Group, Inc. for the year ended December 31, 2005.





Sales.  Revenue for
the fiscal year ended December 29, 2007 was $12,626,000 compared to $3,202,000
and   $1,173,000 for the fiscal years ended December 30, 2006 and
December 31, 2005, respectively.  The increase in revenue between
periods is due to increased wholesale energy market transaction activities
within our participant base as well as transactions from new participants. We
also recorded approximately $2.6 million in 2007 revenue from a new capacity
product in PJM.  There were two participants whose transactions
contributed to revenue from PJM that comprised 27% and 14% of our 2007
consolidated revenue. These two participants engaged in transactions that
generated revenue that comprised more than 10% of consolidated revenue in 2006
and 2005.  The company’s revenue is subject to seasonal influences
that affect the wholesale prices on which the majority of our revenue is
derived.





23
 Index





Cost of
Sales.  Cost of sales totaled $8,788,000 (70%) compared to
$3,032,000 (95%) for the fiscal year ended December 30, 2006, and $666,000
(57%), for the fiscal year ended December 31, 2005.  Cost of sales
includes the portion of energy transaction revenue that is paid to participating
energy consumers that initiate revenue generating transactions.  Also
included in cost of sales is amortization of a developed technology intangible
asset that amounted to 2%, 7% and 3% of revenue for the years ended December
2007, December 2006 and December 2005, respectively.





Gross
Profit.  Gross profit for the fiscal year ended December 29,
2007, was $3,837,000 (30%) compared to $170,000 (5%) and $507,000 (43%) for the
fiscal years ended December 30, 2006 and December 31, 2005,
respectively.  This increase in gross profit is due primarily to the
higher levels of revenue generated from participant’s wholesale energy market
transactions.





Future
gross profits and gross margins will depend on the volume and mix of sales of
products and services to our customers.  It is anticipated that new
products with higher margins will somewhat mitigate margin pressures from
competitors in the areas where the company and its participating energy
consumers enter into the wholesale energy markets.





OperatingExpenses.  Operating
expenses are comprised mainly of payroll costs, outside services, stock-based
compensation and product development.  These expenses for the
fiscal year ended December 29, 2007 were $8,180,000 (65%) compared to
$6,076,000 (189%) and $1,023,000 (87%)(excluding approximately $77 million of
goodwill impairment charges) for the fiscal years ended December 30, 2006,
 December 31, 2005.  The increase in operating expenses is due to
the increasing investment underway to build the sales organization and develop
new products in ECI.  We anticipate increasing these expenses further
in the coming periods as we continue our investment in the future growth of the
wholesale energy market transaction business.





Write-off of impaired goodwill and
intangibles.  We have hired an independent valuation firm at
the end of each of the last three fiscal years to perform its impairment test on
the goodwill and intangible assets contained in the two operating subsidiaries.
This independent appraisal concluded that there was no impairment of either the
goodwill or the intangibles as of December 29, 2007.  In 2005 these
charges included a write-off of $77,191,000 for the impairment of the goodwill
recorded in the acquisition of ECI.  We will continue to perform
annual impairment tests on our goodwill and intangible assets.  Future
impairment charges, if any, will be recorded as a charge against
earnings.





Interest
Expense.  Interest expense was $43,000 for the year ended
December 29, 2007 compared to $895,000 and $422,000 for the years ended
December 30, 2006 and December 31, 2005, respectively.  The decrease
in interest expense was primarily a result of the charge for the timing of the
filing of the company’s registration statement associated with the October 2005
private placement.  According to the registration rights document, the
company had a total of 90 days to file its initial registration document and an
additional 30 days to have it declared effective by the SEC.  The cost
for this totaled $825,000 in 2006 and was paid for with the company’s common
stock.  Excluding this charge, interest expense in 2006 was
$70,000.





Gain/(Loss)on valuation of warrant
liability.  As a part of the private placements in October 2005
and June 2006, we issued warrants that were given registration
rights.  These warrants were valued and recorded as a
liability.  In accordance with EITF 00-19, the fair value of the
warrants issued in the private placement must be recorded as a liability in the
financial statements using the Black-Scholes model.  Any subsequent
changes in our stock price would cause the warrant liability to be re-valued at
the end of each quarter, with the resulting decrease or increase in liability
recorded as a gain or loss in the company’s consolidated statement of
operations.  The June 2006 warrant issuance and the subsequent
changes in values of the warrant liabilities resulted in non-cash income during
the fiscal year ended December 30, 2006 of $8,319,000, and non-cash expense in
2005 of $503,543.  Both of these warrant liabilities were reclassified
to equity when their respective registrations were declared effective by the
SEC.  There were no charges of this type in 2007.





24
 Index





Gain / Loss From Discontinued
Operations. Discontinued operations for
all years presented contain the operations of Christenson
Electric.  Christenson Electric was sold to a corporation formed by
management of CEI on November 29, 2007.  The shareholders of the
Company voted to approve the transaction at a shareholders’ meeting on March 10,
2008.





Revenues
for the three years ended December 29, 2007, December 30, 2006 and December 31,
2005, were $56,842,000, $72,939,000, and $57,586,000,
respectively.  The net loss from these discontinued operations was
$9,695,000 for the year ended December 29, 2007.  This loss included a
non-cash charge for impairment of goodwill and intangibles of
$9,728,000.  We incurred a loss on discontinued operations of $745,000
for the year ended December 30, 2006, and recorded a gain of $722,000 for the
year ended December 31, 2005.





Discontinued
operations also contain small gains in 2006 and 2005 from the sale of the
SoftBoard business. (See Item 1, Business – General)  The SoftBoard
business was sold in 2000.  As part of the sale price, the Company
receives royalties from the purchaser of that business, based on sales of
SoftBoard products.  These royalties are listed in the income
statement under “Gain on sale of discontinued operations.”





Income
Taxes.  There was no provision for income taxes in 2007, 2006
or 2005 due to tax losses incurred by us in those years.  No tax
benefit from loss carryback was recorded in these years as there was no income
tax paid in the open loss carryback periods.  Because of the
significant losses recorded in prior periods, we have provided a full valuation
allowance on our net deferred tax asset (see Note 14).





Non-cash
Expense Items





We have
entered into several acquisitions, financings, debt conversions and other
transactions where goodwill and amortizable intangible assets were recorded,
and/or common stock or warrants were issued as a part of the
transactions.  Many of the issuances resulted in non-cash charges to
our statement of operations.  Additionally, other transactions and
events occurred in which significant non-cash expense or income arose due to the
nature of those occurrences.  The following table lists these items
and the effect net income or loss in our statements of operations for the fiscal
years ended December 29, 2007, December 30, 2006 and December 31,
2005.




Year
      ended
            
            
            Year
      ended
            
            
            Year
      endedNon-cash
      (income) or expense item description*
            
            December
      29,
            
            
            December
      30,
            
            
            December
      31,2007
            
            
            2006
            
            
            2005Stock-based
      derivative liability re-measurement
            
            $
            -
            
            
            $
            -
            
            
            $
            88,024Interest
      expense on warrant issuances and re-measurements
            
            
            -
            
            
            
            -
            
            
            
            320,967Re-valuation
      (gain)/ loss of warrant liability
            
            
            -
            
            
            
            (8,319,107
            )
            
            
            503,543Common
      stock issued for services
            
            
            118,500
            
            
            
            -
            
            
            
            -Stock-based
      compensation issued for services
            
            
            -
            
            
            
            718,990
            
            
            
            243,920Stock-based
      compensation issued to directors and employees
            
            
            920,699
            
            
            
            723,261
            
            
            
            -Interest
      expense on amortization of debt discount
            
            
            -
            
            
            
            -
            
            
            
            13,564Intangible
      and amortization
            
            
            528,684
            
            
            
            533,185
            
            
            
            220,750Interest
      expense on late filing, paid with stock
            
            
            -
            
            
            
            824,899
            
            
            
            69,000Gain
      on disposal of assets and lease termination
            
            
            -
            
            
            
            -
            
            
            
            (7,145
            )Write
      down of impaired intangible asset (in disc. operations)
            
            
            9,728,234
            
            
            
            -
            
            
            
            77,419,759Unused
      reserve for legal fees to contest lawsuit
            
            
            -
            
            
            
            -
            
            
            
            (120,000
            )Total
      transactional non-cash (income) and expense
            
            $
            11,296,117
            
            
            $
            (5,518,772
            )
            
            $
            78,752,382





*This
table does not include depreciation expense.





Liquidity
and Capital Resources





Since
inception, we have financed our operations and capital expenditures through
public and private sales of equity securities, cash from operations, and
borrowings under bank lines of credit.  At December 29, 2007, we had
working capital deficit of approximately $1,124,000 and its primary source of
liquidity consisted of cash and its operating lines of credit.





25
 Index





Accounts
receivable increased to $1,533,000 at December 29, 2007 from $99,000 at December
30, 2006.  The increase is due to the deferred payments on a capacity
program under which all the revenue was recorded in the third quarter of 2007.
These receivables are not net of any allowances for doubtful
accounts.  Management expects these receivables to increase in future
periods as revenue from this program increases and as we change our accounting
policy of revenue recognition from cash basis to accrual basis in
2008.





Other
current assets are comprised of $155,000 in notes receivable from employees of
ECI who were given the opportunity to exercise incentive stock options they were
granted upon the acquisition of ECI. These notes were received in lieu of
payment for the exercise of those options in February 2007.  Also
included in other current assets are $239,000 in direct costs incurred in the
sale of CEI. These will be included in the cost of the sale recorded on the
closing date of the sale in the first quarter of 2008.





Current
assets contained in discontinued operations totaled $12,667,000 at December 29,
2007 compared to $14,613,000 at December 30, 2006.  These balances are
comprised mainly of accounts receivable and cost in excess of billings, and will
be transferred out of the consolidated balance sheets as a part of the sale of
Christenson Electric.





Property
and equipment, net of depreciation increased to $202,000 at December 29, 2007
compared to $71,000 at December 30, 2006.  This increase was due to
new computer hardware and software for new employees in ECI, and to add to the
Forefront software system.  We do not anticipate spending any material
amounts to acquire fixed assets for the foreseeable future.





We
recorded $106,545,000 in goodwill from the acquisition of ECI in 2005, which
represents the value of the price paid for the stock of ECI over the net asset
value of the assets and liabilities within ECI.  At December 30, 2006,
an impairment test was performed on the value of the goodwill resulting in an
impairment charge of $77,191,000.  This charge is recorded as an
operating expense in the consolidated statement of operations.  We do
not amortize goodwill.  There was no write down of goodwill during
2007 or 2006.





We also
recorded an intangible asset of $2,390,667 at the date of the ECI acquisition
consisting of developed technology that is currently used within
ECI.  The intangible asset acquired has an estimated useful life of
ten years, and as such is being amortized monthly, over that
period.





Accounts
payable increased to $2,976,000 at December 29, 2007 from $1,429,000 at December
30, 2006.  This increase is the result of the increase in participant
payments from increases in revenue generated in the fourth quarter of 2007 over
that in 2006.  The timing of participant payments also caused an
increase at December 29, 2007.   Payables consist primarily of
the costs of payments for energy automation transactions made by ECI’s
participants and professional service fees payable as a part of the CEI sale
transaction.





We have
one small borrowing facility as a part of continuing operations.  The
amount outstanding under this bank line of credit was approximately $118,000 at
December 29, 2007 and December 30, 2006.  We are in compliance with
its covenants under this loan.





During
the past two years, we have issued common shares in exchange for cash. On June
29, 2006, we issued 7.5 million shares of our common stock and 5,625,000
warrants to purchase common stock in exchange for $15 million in a private
placement.





In 2007,
we incurred operating losses of $4,341,000 and operating income of $1,561,000 in
2006.  While it is anticipated that we can produce income from
continuing operations, our history of recurring losses and liquidity issues may
recur, in which case we may have to raise additional funds to continue to
operate.  The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.  We may not have
sufficient resources to satisfy cash requirements for the next twelve
months.  We believe we have good relations in the financial community
and are optimistic about our ability to raise additional capital if needed to
support operations.  If during that period or thereafter, we are not
successful in generating sufficient liquidity from operations or in raising
sufficient capital resources, on terms acceptable to us, this could have a
material adverse effect on our business, results of operations liquidity and
financial condition.





While we
have raised capital to meet our working capital and financing needs in the past,
additional financing is required within the next 12 months in order to meet our
current and projected cash flow deficits from operations and development. We
have sufficient funds to conduct our operations for several months, but not for
12 months or more. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all.





26
 Index





By
adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during that period or thereafter, we are not successful in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations liquidity and financial
condition.





We
presently do not have any available credit, bank financing or other external
sources of liquidity. Due to our brief history and historical operating losses,
our operations have not been a source of liquidity. We will need to obtain
additional capital in order to expand operations and become profitable. In order
to obtain capital, we may need to sell additional shares of our common stock or
borrow funds from private lenders. There can be no assurance that we will be
successful in obtaining additional funding.





We
will still need additional investments in order to continue operations to cash
flow break even. Additional investments are being sought, but we cannot
guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our
operations.





Our
registered independent certified public accountants have stated in their report
dated March 11, 2008, that we have incurred operating losses and is
experiencing difficulty in generating sufficient cash flow to meet its
obligation and that we are dependent upon management's ability to develop
profitable operations. These factors among others may raise substantial doubt
about our ability to continue as a going concern.





We have
no commitments for capital expenditures in material amounts at December 29,
2007.




Inflation





In the
opinion of management, inflation will not have an impact on our financial
condition and results of its operations.





Off-Balance
Sheet Arrangements





We do not
maintain off-balance sheet arrangements nor does we participate in any
non-exchange traded contracts requiring fair value accounting
treatment.





Related
Party Transactions





We, as a
part of the discontinued operations have previously had a number of promissory
notes, lines of credit and lease obligations owing to related
parties.  As of December 29, 2007, as a part of continuing operations,
there are no amounts owing to related parties other than nominal amounts
incurred in the normal course of business and paid from expense
reports.





Contractual
Obligations and Commitments





The
following is a summary of our significant contractual cash obligations for the
periods indicated that existed as of December 29, 2007, and is based on
information appearing in the notes to consolidated financial statements included
elsewhere in this filing.




Total
            
            
            Less
      than
              1
      Year
            
            
            1-2
              Years
            
            
            3-5
              Years
            
            
            More
      than
              5
      YearsOperating
      Leases
            
            $
            167,600
            
            
            $
            118,248
            
            
            $
            49,352
            
            
            $
            -
            
            
            $
            -Employment
      and Consulting Agreements
            
            
            50,000
            
            
            
            50,000
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      obligations
            
            $
            217,600
            
            
            $
            168,248
            
            
            $
            49,352
            
            
            $
            -
            
            
            $
            -





27
 Index





Recent
Accounting Pronouncements





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
to measure many financial instruments, and certain other items, at fair value.
SFAS 159 applies to reporting periods beginning after November 15, 2007. The
adoption of SFAS 159 is not expected to have a material impact on our financial
condition or results of operations.




In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), “Business Combinations” (“Statement 141(R)”) and Financial Accounting
Standards No. 160, “Noncontrolling Interests in Consolidated Financial
Statements” (“Statement 160”). Statements 141(R) and 160 require most
identifiable assets, liabilities, noncontrolling interests and goodwill acquired
in a business combination to be recorded at “full fair value” and require
noncontrolling interests (previously referred to as minority interests) to be
reported as a component of equity.  Both statements are effective for
fiscal years beginning after December 15, 2008.  Statement 141(R) will
be applied to business combinations occurring after the effective
date.  Statement 160 will be applied prospectively to all
noncontrolling interests, including any that arose before the effective
date.  The Company has not determined the effect, if any, the adoption
of Statements 141(R) and 160 will have on the Company’s financial position or
results of operations.


Item 7a.Quantitative and Qualitative Disclosures
About Market Risk





We do not
own or trade any financial instruments about which disclosure of quantitative
and qualitative market risks are required to be disclosed.





28
 Index




ITEM 8.FINANCIAL STATEMENTS





RBSM
LLP


Certified
Public Accountants








REPORT OF INDEPENDENT
REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM








Board of
Directors


Microfield
Group, Inc.


Portland,
Oregon








We have
audited the accompanying consolidated balance sheets of Microfield Group, Inc.
and its wholly-owned subsidiaries (the "Company") as of December 29, 2007 and
December 30, 2006 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 29, 2007.  These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based upon our audits.





We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America).  Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Microfield Group, Inc. and
its wholly-owned subsidiaries as of December 29, 2007 and December 30, 2006, and
the results of its operations and its cash flows for each of the years in the
three-year period ended December 29, 2007 in conformity with accounting
principles generally accepted in the United States of America.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 29, 2007, based on the
criteria established inInternal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March
11, 2008 expressed an unqualified opinion on management's assessment of the
effectiveness of the Company’s internal control over financial
reporting.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note
17, the Company is experiencing difficulty in generating sufficient cash flow to
meet its obligations and sustain its operations, which raises substantial doubt
about its ability to continue as a going concern.  Management’s plans
in regard to these matters are also described in Note 17.  The
accompanying statements do not include any adjustments that might result from
the outcome of this uncertainty.





/s/RBSM
      LLPMcLean,
      VirginiaMarch
      11, 2008





29
 Index





MICROFIELD
GROUP, INC.


CONSOLIDATED
BALANCE SHEETS


AS
OF DECEMBER 29, 2007 AND DECEMBER 30, 2006





December
      29,
              2007
            
            
            December
      30,
              2006Current
      assets:Cash
      and cash equivalents
            
            $
            758,299
            
            
            $
            420,133Certificates
      of deposit
            
            
            133,400
            
            
            
            33,400Accounts
      receivable, net of allowances of  $194,936 and
      $194,798
            
            
            1,532,843
            
            
            
            98,693Other
      current assets
            
            
            551,601
            
            
            
            48,846Discontinued
      operations (Note 5)
            
            
            12,666,606
            
            
            
            14,613,429Total
      current assets
            
            
            15,642,749
            
            
            
            15,214,501Property
      and equipment, net (Note 3)
            
            
            202,487
            
            
            
            70,515Other
      assets
            
            
            43,175
            
            
            
            44,082Intangible
      assets, net (Note 4 and 6)
            
            
            1,872,689
            
            
            
            2,111,756Goodwill
      (Note 4 and 6)
            
            
            29,353,527
            
            
            
            29,353,527Discontinued
      operations (Note 5)
            
            
            971,017
            
            
            
            10,352,966Total
      Assets
            
            $
            48,085,644
            
            
            $
            57,147,347Current
      liabilities:Accounts
      payable
            
            $
            2,975,847
            
            
            $
            1,429,196Accrued
      expenses
            
            
            118,148
            
            
            
            182,494Bank
      line of credit (Note 11)
            
            
            118,456
            
            
            
            117,454Other
      current liabilities
            
            
            4,504
            
            
            
            100,678Discontinued
      operations (Note 5)
            
            
            13,549,408
            
            
            
            10,440,661Total
      current liabilities
            
            
            16,766,363
            
            
            
            12,270,483Long-term
      liabilities:Discontinued
      operations
            
            
            61,327
            
            
            
            1,260,859Total
      long-term liabilities
            
            
            61,327
            
            
            
            1,260,859Commitments
      and contingencies (Note 15)
            
            
            
            
            
            
            -Shareholders’
      equity:Convertible
      Series 3 preferred stock, no par value, 10,000,000 shares authorized, 0
      and 2,040 shares issued and outstanding, respectively (Note
      7)
            
            
            -
            
            
            
            856,670Convertible
      Series 4 preferred stock, no par value, 10,000,000 shares
      authorized, 0 and 526 shares issued and outstanding,
      respectively (Note 7)
            
            
            -
            
            
            
            174,423Common
      stock, no par value, 225,000,000 shares authorized, 83,569,416 and
      79,023,905 shares issued and outstanding, respectively (Note
      7)
            
            
            115,776,415
            
            
            
            113,067,867Common
      stock warrants (Note 10)
            
            
            36,178,218
            
            
            
            36,178,218Accumulated
      deficit
            
            
            (120,696,679
            )
            
            
            (106,661,173
            )Total
      shareholders’ equity
            
            
            31,257,954
            
            
            
            43,616,005Total
      liabilities and shareholders’ equity
            
            $
            48,085,644
            
            
            $
            57,147,347





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





30
 Index





MICROFIELD
GROUP, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR
THE YEARS ENDED DECEMBER 29, 2007, DECEMBER 30, 2006 AND DECEMBER 31,
2005








December
      29,
            
            
            December
      30,
            
            
            December
      31,2007
            
            
            2006
            
            
            2005Sales
            
            $
            12,625,654
            
            
            $
            3,201,980
            
            
            $
            1,172,783Cost
      of goods sold
            
            
            8,788,454
            
            
            
            3,031,794
            
            
            
            665,585Gross
      profit
            
            
            3,837,200
            
            
            
            170,186
            
            
            
            507,198Operating
      expensesSales,
      general and administrative
            
            
            7,259,489
            
            
            
            4,633,687
            
            
            
            1,023,288Stock–based
      compensation (Note 2)
            
            
            920,699
            
            
            
            1,442,251
            
            
            
            -Write-off
      of impaired goodwill and intangible assets (Note 6)
            
            
            -
            
            
            
            -
            
            
            
            77,191,344Loss
      from operations
            
            
            (4,342,988
            )
            
            
            (5,905,752
            )
            
            
            (77,707,434
            )Other
      income (expense)Interest
      income
            
            
            45,324
            
            
            
            42,740
            
            
            
            -Interest
      expense
            
            
            (43,115
            )
            
            
            (894,710
            )
            
            
            (422,313
            )Derivative
      expense
            
            
            -
            
            
            
            -
            
            
            
            (88,024
            )Gain
      (loss) on valuation of warrant liability (Note 8)
            
            
            -
            
            
            
            8,319,107
            
            
            
            (503,543
            )Total
      other income (expense)
            
            
            2,209
            
            
            
            7,467,137
            
            
            
            (1,013,880
            )Income
      (loss) before provision for income taxes
            
            
            (4,340,779
            )
            
            
            1,561,385
            
            
            
            (78,721,314
            )Provision
      for income taxes (Note 13)
            
            
            -
            
            
            
            -
            
            
            
            -Income
      (loss) from continuing operations
            
            
            (4,340,779
            )
            
            
            1,561,385
            
            
            
            (78,721,314
            )Discontinued
      operations:Gain(loss)
      on discontinued operations - Christenson Electric (Note 5)
            
            
            (9,694,727
            )
            
            
            (745,493
            )
            
            
            721,722Gain
      on sale of discontinued operations – SoftBoard (Note 5)
            
            
            -
            
            
            
            17,068
            
            
            
            46,399Net
      income (loss)
            
            $
            (14,035,506
            )
            
            $
            832,960
            
            
            $
            (77,953,193
            )Deemed
      preferred stock dividend
            
            
            -
            
            
            
            -
            
            
            
            (411,060
            )Net
      income (loss) attributable to common shareholders
            
            $
            (14,035,506
            )
            
            $
            832,960
            
            
            $
            (78,364,253
            )Basic
      and diluted net income (loss) per share from continuing operations (Note
      14)
            
            $
            (0.05
            )
            
            $
            0.02
            
            
            $
            (2.91
            )Basic
      and diluted net income (loss) per share from discontinued Operations (Note
      14)
            
            $
            (0.12
            )
            
            $
            (0.01
            )
            
            $
            0.03Basic
      and diluted net income (loss) per share (Note 14)
            
            $
            (0.17
            )
            
            $
            0.01
            
            
            $
            (2.88
            )Basic
      and diluted net income (loss) per share attributable to common
      shareholders (Note 14)
            
            $
            (0.17
            )
            
            $
            0.01
            
            
            $
            (2.88
            )Weighted
      average shares used in per share calculations:Basic
            
            
            82,536,027
            
            
            
            68,347,814
            
            
            
            27,048,127Diluted
            
            
            82,536,027
            
            
            
            71,374,268
            
            
            
            27,048,127





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





31
 Index





Microfield
Group, Inc.


Statement
of Changes in Shareholders’ Equity (Deficit)


Fiscal
Years Ended December 29, 2007, December 30, 2006 and December 31,
2005





TotalShareholders’Convertible
      Series 2
            
            
            Convertible
      Series 3
            
            
            Convertible
      Series 4
            
            
            
            
            
            
            
            
            Accumulated
            
            
            EquityPreferred
      Stock
            
            
            Preferred
      Stock
            
            
            Preferred
      Stock
            
            
            Common
      Stock
            
            
            Common
      Stock Warrants
            
            
            Deficit
            
            
            (Deficit)Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Warrants
            
            
            AmountBalance
      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
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            255,471
            
            
            
            
            
            
            
            155,589
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (411,060
            )
            
            
            -Warrant
      values recognized upon warrant issuance
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            894,792
            
            
            
            320,967
            
            
            
            
            
            
            
            320,967Common
      shares issued in the acquisition of Christenson Electric
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,000,000
            
            
            
            1,280,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,280,000Common
      shares issued in private placement
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,233,603
            
            
            
            3,434,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,434,000Common
      shares issued in the acquisition of EnergyConnect
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            27,365,305
            
            
            
            64,034,814
            
            
            
            19,695,432
            
            
            
            36,495,391
            
            
            
            
            
            
            
            100,530,205Stock
      options issued in the acquisition of EnergyConnect
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            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
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,079,440
            
            
            
            743,539
            
            
            
            (1,815,507
            )
            
            
            (681,309
            )
            
            
            
            
            
            
            62,230




32
 Index




Common
      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
            
            
            
            3,484.898
            
            
            $
            1,463,658
            
            
            
            4,392.107
            
            
            $
            1,643,423
            
            
            
            55,557,870
            
            
            $
            91,532,139
            
            
            
            27,364,849
            
            
            $
            38,391,161
            
            
            $
            (107,494,133
            )
            
            $
            27,903,947Common
      shares issued in private placement less direct expenses
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,500,000
            
            
            
            13,504,101
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,504,101Stock
      options issued to outside consultants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            718,990
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            718,990Stock
      options issued to Employees and directors
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            723,261
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            723,261Common
      shares issued for delayed registration filing
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            440,344
            
            
            
            893,899
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            893,899Valuation
      of warrant liability issued in private placement
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (14,758,004
            )
            
            
            5,625,000
            
            
            
            
            
            
            
            
            
            
            
            (14,758,004
            )Common
      shares issued  upon conversion of
      preferred  shares
            
            
            (5,875,241
            )
            
            
            (2,367,699
            )
            
            
            (1,445.210
            )
            
            
            (606,988
            )
            
            
            (3,865.790
            )
            
            
            (1,469,000
            )
            
            
            11,186,241
            
            
            
            4,443,687
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Common
      shares issued upon exercise and forfeiture of warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,996,962
            
            
            
            2,385,557
            
            
            
            (4,440,667
            )
            
            
            (2,212,943
            )
            
            
            
            
            
            
            172,614Common
      shares issued upon exercise of options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            265,188
            
            
            
            100,875
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            100,875Conversion
      of warranty liability upon registration of warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,229,360
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,229,360Common
      shares issued upon conversion of debt
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            77,300
            
            
            
            294,002
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            294,002Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            832,960
            
            
            
            832,960




33
 Index




Balance
      December 30, 2006
            
            
            -
            
            
            $
            -
            
            
            
            2,039.688
            
            
            $
            856,670
            
            
            
            526.317
            
            
            $
            174,423
            
            
            
            79,023,905
            
            
            $
            113,067,867
            
            
            
            28,549,182
            
            
            $
            36,178,218
            
            
            $
            (106,661,173
            )
            
            $
            43,616,005Common
      shares issued to outside consultants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            150,000
            
            
            
            118,500
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            118,500Stock
      options issued toEmployees and directors
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            920,699
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            920,699Common
      shares issued  upoconversion of preferred shares
            
            
            
            
            
            
            
            
            
            
            (2,039.688
            )
            
            
            (856,670
            )
            
            
            (526.317
            )
            
            
            (174,423
            )
            
            
            2,566,005
            
            
            
            1,031,093
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Common
      shares issued upon exercise of options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,829,507
            
            
            
            638,256
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            638,256Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (14,035,506
            )
            
            
            (14,035,506
            )Balance
      December 29, 2007
            
            
            
            
            
            
            
            
            
            $
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -
            
            
            
            83,569,417
            
            
            $
            115,776,415
            
            
            
            28,549,182
            
            
            $
            36,178,218
            
            
            $
            (120,696,679
            )
            
            $
            31,257,954





Each
share of Series 3 and Series 4 preferred stock was converted into one thousand
shares of the Company’s common stock.





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





34
 Index





MICROFIELD
GROUP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE YEARS ENDED DECEMBER 29, 2007, DECEMBER 30, 2006 AND DECEMBER 31,
2005





December
      29,
              2007
            
            
            December
      30,
              2006
            
            
            December
      31,
              2005Cash
      Flows From Operating Activities:Net
      Income (loss)
            
            $
            (14,035,505
            )
            
            $
            832,960
            
            
            $
            (77,953,193
            )Depreciation
      on fixed assets
            
            
            286,555
            
            
            
            241,682
            
            
            
            116,174Amortization
      on intangible assets
            
            
            528,684
            
            
            
            533,184
            
            
            
            220,702Amortization
      of debt discount
            
            
            
            
            
            
            -
            
            
            
            7,563Issuance
      of common stock resulting from delayed registration
            
            
            
            
            
            
            893,899
            
            
            
            -Noncash
      interest expense recorded on warrant issuance
            
            
            
            
            
            
            -
            
            
            
            320,967Common
      stock issued for services
            
            
            118,500
            
            
            
            -
            
            
            
            -Warrants
      and stock options issued for services
            
            
            920,699
            
            
            
            1,442,251
            
            
            
            244,000Gain
      on debt extinguishment
            
            
            
            
            
            
            -
            
            
            
            (111,847
            )Re-measurement
      of warrant liability
            
            
            
            
            
            
            (8,319,107
            )
            
            
            503,543Re-measurement
      of derivative associated with Steelcase note
            
            
            
            
            
            
            -
            
            
            
            88,024Write
      down of goodwill and intangible assets
            
            
            9,728,234
            
            
            
            -
            
            
            
            77,419,759Changes
      in current assets and liabilities, net of effect of
      acquisitions:Accounts
      receivable
            
            
            (1,583,131
            )
            
            
            (568,634
            )
            
            
            (217,254
            )Accounts
      receivable – related party
            
            
            -
            
            
            
            
            
            
            
            (16,166
            )Inventory
            
            
            (17,811
            )
            
            
            207,643
            
            
            
            (481,441
            )Other
      current assets
            
            
            (175,070
            )
            
            
            170,690
            
            
            
            282,604Costs
      in excess of billings
            
            
            (44,263
            )
            
            
            (311,298
            )
            
            
            (531,877
            )Other
      long term assets
            
            
            906
            
            
            
            70,202
            
            
            
            (63,729
            )Cash
      disbursed in excess of available funds
            
            
            
            
            
            
            (942,436
            )
            
            
            916,311Accounts
      payable
            
            
            725,344
            
            
            
            (2,082,918
            )
            
            
            (856,623
            )Accounts
      payable – related party
            
            
            
            
            
            
            20,904
            
            
            
            (99,932
            )Billings
      in excess of cost
            
            
            1,012,955
            
            
            
            96,432
            
            
            
            (99
            )Accrued
      expenses
            
            
            26,697
            
            
            
            (72,108
            )
            
            
            (185,333
            )Other
      current liabilities
            
            
            (356,287
            )
            
            
            279,173
            
            
            
            (200,555
            )Net
      cash used by operating activities
            
            
            (2,863,493
            )
            
            
            (7,507,481
            )
            
            
            (598,402
            )Cash
      flows from investing activitiesPurchases
      of fixed assets
            
            
            (790,764
            )
            
            
            (449,989
            )
            
            
            (47,238
            )Purchase
      of certificates of deposit
            
            
            (306,646
            )
            
            
            (351,476
            )
            
            
            -Loan
      to non-related company
            
            
            
            
            
            
            -
            
            
            
            -Net
      cash acquired in mergers with CEI and ECI
            
            
            
            
            
            
            -
            
            
            
            254,820Net
      cash provided (used) by investing activities
            
            
            (1,097,410
            )
            
            
            (801,465
            )
            
            
            207,582Cash
      flows from financing activities:Borrowings
      on line of credit
            
            
            61,642,189
            
            
            
            73,867,430
            
            
            
            60,508,869Repayments
      on line of credit
            
            
            (59,383,443
            )
            
            
            (75,994,579
            )
            
            
            (60,305,851
            )Borrowing
      on Union note payable
            
            
            
            
            
            
            -
            
            
            
            188,012Repayments
      on Union  note payable
            
            
            
            
            
            
            (475,816
            )
            
            
            (665,104
            )Repayments
      on notes payable
            
            
            (474,707
            )
            
            
            (656,973
            )
            
            
            (278,095
            )Repayments
      on notes payable – related party
            
            
            
            
            
            
            (789,020
            )
            
            
            (1,689,137
            )Borrowings
      on notes payable – related party
            
            
            
            
            
            
            44,607Borrowings
      on lease obligations
            
            
            105,172
            
            
            
            -
            
            
            
            -Proceeds
      from issuance of preferred stock
            
            
            
            
            
            
            13,504,101
            
            
            
            -Proceeds
      from issuance of common stock
            
            
            636,683
            
            
            
            273,488
            
            
            
            3,350,150Net
      cash provided by  financing activities
            
            
            2,525,894
            
            
            
            9,773,238
            
            
            
            1,108,844Net
      increase (decrease) in cash and cash equivalents
            
            
            (1,435,009
            )
            
            
            1,464,292
            
            
            
            718,024Cash
      and cash equivalents, beginning of period
            
            
            2,193,308
            
            
            
            729,016
            
            
            
            10,992Cash
      and cash equivalents, end of period
            
            $
            758,299
            
            
            $
            2,193,308
            
            
            $
            729,016Supplemental
      information on interest and taxes:Interest
      paid during the year
            
            $
            767,901
            
            
            $
            1,341,379
            
            
            $
            1,173,007Income
      taxes paid during the year
            
            $
            -
            
            
            $
            -
            
            
            $
            -Supplemental
      schedule of non-cash financing and investing activities:Beneficial
      conversion feature of Series 3 and Series 4 preferred
stock
            
            $
            -
            
            
            $
            -
            
            
            $
            -Amortization
      of beneficial conversion feature
            
            $
            -
            
            
            $
            -
            
            
            $
            411,060Series
      3 preferred stock issued for  related party operating lease
      obligations
            
            $
            -
            
            
            $
            -
            
            
            $
            -Conversion
      of account payable-related party to preferred stock
            
            $
            -
            
            
            $
            -
            
            
            $
            -Issuance
      of pfd stock in exchange for conversion of related party
    debt
            
            $
            -
            
            
            $
            -
            
            
            $
            -Valuation
      of warrants issued with related party debt
            
            $
            -
            
            
            $
            -
            
            
            $
            320,967




35
 Index




Conversion
      of derivative liabilities to shareholders’ equity
            
            $
            -
            
            
            $
            -
            
            
            $
            -Conversion
      of preferred stock to common stock
            
            $
            -
            
            
            $
            -
            
            
            $
            543,882Reduction
      of note receivable secured by common stock
            
            $
            -
            
            
            $
            -
            
            
            $
            -Acquisition
      of CEIAssets
      purchased
            
            $
            -
            
            
            $
            -
            
            
            $
            4,610,103Goodwill
            
            $
            -
            
            
            $
            -
            
            
            $
            5,934,438Liabilities
      assumed
            
            $
            -
            
            
            $
            -
            
            
            $
            (8,916,022
            )Common
      stock issued
            
            $
            
            
            
            $
            -
            
            
            $
            (1,280,000
            )Direct
      acquisition costs
            
            $
            -
            
            
            $
            -
            
            
            $
            (348,519
            )Cash
      paid for acquisition
            
            $
            -
            
            
            $
            -
            
            
            $
            -Acquisition
      of ECI:Assets
      purchased
            
            $
            -
            
            
            $
            -
            
            
            $
            2,689,348Goodwill
            
            $
            -
            
            
            $
            -
            
            
            $
            106,544,871Liabilities
      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
            
            $
            -
            
            
            $
            -
            
            
            $
            -





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





36
 Index





MICROFIELD
GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








1.  Description
of the Business





Microfield
Group, Inc. (the “Company,” “Microfield,” “we,” “us,” or “our”) through its
subsidiaries EnergyConnect, Inc. (“ECI”) specializes in transactions involving
integration of consumers of electricity into the wholesale electricity
markets.   The Company’s objective is to leverage our assets and
resources and build a viable, profitable, energy and electrical services
infrastructure business.





The
consolidated financial statements include the accounts of Microfield and its
wholly owned operating subsidiary, EnergyConnect, Inc. (collectively the
"Company"). Christenson Electric, Inc., while still a wholly-owned subsidiary at
December 29, 2007, was sold on March 10, 2008 (Note 18).  Therefore,
the operations of CEI are presented as discontinued operations in the
consolidated financial statements.  All significant inter-company
accounts and transactions have been eliminated in consolidation.





The
Company was incorporated in October 1986 as an Oregon corporation, succeeding
operations that began in October 1984.  The Company’s headquarters are
located in Portland, Oregon.




2.  Summary
of Significant Accounting Policies





Fiscal
Year





The
Company’s fiscal year is the 52- or 53-week period ending on the Saturday
closest to the last day of December.  The Company’s current fiscal
year is the 52-week period ending December 29, 2007.  The Company’s
last two fiscal years were the 52-week periods ended December 30, 2006 and
December 31, 2005.





Principles
of Consolidation





The
Consolidated Statements of Operations presented above, contain revenue and
expense data of Microfield Group, Inc. for the years ended December 29,
2007, December 30, 2006 and December 31, 2005.  On October 13,
2005, the Company acquired its wholly-owned subsidiary, EnergyConnect, Inc. (see
Note 4).  The revenue and expense data of ECI is included in the
Consolidated Statement of Operations from the acquisition date to the end of the
period presented.  Christenson Electric, Inc., while still a
wholly-owned subsidiary at December 29, 2007, was sold on March 10, 2008 (Note
18).  Therefore, the operations of CEI are presented as discontinued
operations.  All significant inter-company accounts and transactions
between the Company and its subsidiaries have been eliminated in
consolidation.





Cash
and Cash Equivalents





The
Company considers all highly liquid investments with an original maturity or
remaining maturity of three months or less at the date of purchase to be cash
equivalents.  Cash and cash equivalents are primarily maintained at
two financial institutions.





Fair
Value of Financial Instruments





The
carrying value of the Company’s financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities are
carried at cost, which approximates fair value due to the relative short
maturities of these instruments. The carrying value of debt, derivatives and the
liability for warrant settlement are recorded at the estimated fair value of
these instruments.





Inventories





Inventories
are stated at the lower of cost or market, using the first-in, first-out
method.  Inventory is comprised almost entirely of the cost of
material.  The Company provides inventory allowances based on
estimates of excess and obsolete inventories.





37
 Index





Advertising
Costs





Advertising
and marketing costs of $90,000, $40,000 and $0 were expensed as incurred in each
of the years ended December 29, 2007, December 30, 2006 and December 31, 2005,
respectively.





Property
and Equipment





Property
and equipment are stated at cost less accumulated depreciation and
amortization.  Depreciation of computer equipment and software is
computed using straight line or accelerated declining balance method over the
estimated useful lives of the assets.  Estimated lives of three to
five years are used for computer equipment and software.  There are no
other fixed assets owned by the Company.





Concentrations





Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of accounts receivable.  During the year ended
December 29, 2007, revenue from one major customer approximated $11,700,000 or
92.67% of sales.  This revenue is the result of multiple participating
electric consumers who executed energy transactions that were aggregated and
billed to PJM.  The revenue is dependent on actions taken by these
third parties in conjunction with ECI, for which PJM, as our customer remits
payment.  Of these participants, there were two whose transactions
resulted in revenue that totaled 10% or more of our revenue in the twelve months
ended December 29, 2007 and December 30, 2006.  At December 29, 2007
there was one customer whose accounts receivable accounted for all of our
outstanding trade accounts receivable.  This receivable was based on a
single demand response program within PJM.  During the years ended
December 30, 2006 and December 31, 2005, revenues from one major customer
approximated 100% of sales. At December 30, 2006 and December 31, 2005 there
were no customers whose accounts receivable accounted for more than 10% of total
outstanding trade accounts receivable. The Company performs limited credit
evaluations of its customers, does not require collateral on accounts receivable
balances, but does often retain lien rights to reduce its risk.  The
Company has not experienced material credit losses for the periods
presented.   The level of sales to any single customer may vary
and the loss of any one of these customers, or a decrease in the level of sales
to any one of these customers, could have a material adverse impact on the
Company’s financial condition and results of operations.





Revenue
recognition




We
produce revenue through agreements with both building owners and membership in
the electric grid operators. Under our agreements with facilities owners, we use
electrical and energy related products that help energy consumers control energy
use in their buildings. In conjunction with this agreement we also contract with
the power grid operators to use energy, capacity, and related ancillary services
during specified times and under specified conditions. These transactions are
summarized at the end of each monthly period and submitted to the power grid for
settlement and approval. The transactions are recorded as revenue on the
settlement date, which may fall 45-70 days after the transaction date from which
the revenue is derived, because management feels that without an established
history for this source of revenue, and the potential for disputes, that the
settlement date, on which both parties agree to the amount of revenue to
recognize, is the most conservative and appropriate date to use.





An
additional source of our revenue is derived from agreements with the power grid
operators whereby a monthly reserve fee is paid for our agreement to standby,
ready to provide relief in the form of curtailment of energy usage, in times of
high energy demand.  We record these payments as revenue over the
period during which we’re required to perform under these
programs.  Under certain programs, our obligation to perform may not
coincide with the period over which we receive payments under that
program.  In these cases we record revenue over the mandatory
performance obligation period and record a receivable for the amount of payments
that will be received after that period has been completed.





We will
apply the accrual method of accounting for revenues to all revenue generating
activities when we are satisfied that we can estimate monthly revenue to be
settled with the grid, with a higher degree of certainty.





38
 Index





Purchase
price allocation and impairment of intangible and long-lived assets




Intangible
and long-lived assets to be held and used, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amounts of such
assets may not be recoverable. Determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the use of the asset,
and its eventual disposition. Measurement of an impairment loss for intangible
and long-lived assets that management expects to hold and use is based on the
fair value of the asset as estimated using a discounted cash flow
model.




We
measure the carrying value of goodwill recorded in connection with the
acquisitions for potential impairment in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets.” To apply SFAS 142, a company is divided into
separate “reporting units,” each representing groups of products that are
separately managed. For this purpose, we have one reporting unit. To determine
whether or not goodwill may be impaired, a test is required at least annually,
and more often when there is a change in circumstances that could result in an
impairment of goodwill. If the trading of our common stock is below book value
for a sustained period, or if other negative trends occur in our results of
operations, a goodwill impairment test will be performed by comparing book value
to estimated market value. To the extent goodwill is determined to be impaired,
an impairment charge is recorded in accordance with SFAS 142.




Income
Taxes





The
Company accounts for income taxes using the asset and liability approach in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes.  The asset and liability approach
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities.  The effect on deferred
taxes of a change in tax rates is recognized in operations in the period that
includes the enactment date.  Due to recurring losses, there has been
no provision for income taxes in the periods presented.





Computation
of Net Income(Loss) per Share





Basic
earnings (loss) per common share are computed using the weighted-average number
of common shares outstanding during the period.  Diluted earnings per
common share is computed using the combination of dilutive common share
equivalents, which include convertible preferred shares, options and warrants
and the weighted-average number of common shares outstanding during the
period.  During the years ended December 29, 2007 and December 31,
2005, common stock equivalents are not considered in the calculation of the
weighted average number of common shares outstanding because they would be
anti-dilutive, thereby decreasing the net loss per common share.





Pension Plan
Contributions





Thy
contributes to several Multi-Employer Pension Benefit Plans on behalf of its
employees covered by a collective bargaining agreement.  During the
years ended December 29, 2007, December 30, 2006 and December 31, 2005, the
Company contributed $3,943,000, $2,704,000 and $1,895,000 to these plans,
respectively, which was expensed as incurred.





Stock Based Compensation





On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors including employee
stock options based on estimated fair values. SFAS 123(R) supersedes the
Company’s previous accounting under Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods
beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS
123(R). The Company has applied the provisions of SAB 107 in its adoption of
SFAS 123(R).





The
Company adopted SFAS 123(R) using the modified prospective transition method,
which requires the application of the accounting standard as of January 1, 2006,
the first day of the Company’s fiscal year 2006. The Company’s Consolidated
Financial Statements for twelve months ended December 29, 2007 and December
30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified
prospective transition method, the Company’s Consolidated Financial Statements
for prior periods have not been restated to reflect, and do not include, the
impact of SFAS 123(R). Stock-based compensation expense recognized under SFAS
123(R) for the twelve months ended December 29, 2007 and December 30, 2006
was approximately $921,000 and $1,442,000, respectively.





39
 Index





SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company’s Consolidated
Statement of Operations. Prior to the adoption of SFAS 123(R), the Company
accounted for stock-based awards to employees and directors using the intrinsic
value method in accordance with APB 25 as allowed under Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based Compensation”
(“SFAS 123”). Under the intrinsic value method, no stock-based compensation
expense had been recognized in the Company’s Consolidated Statement of
Operations because the exercise price of the Company’s stock options granted to
employees and directors equaled the fair market value of the underlying stock at
the date of grant.





Stock-based
compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest during
the period. Stock-based compensation expense recognized in the Company’s
Consolidated Statements of Operations for the twelve months ended December 29,
2007 and December 30, 2006 included compensation expense for share-based payment
awards granted prior to, but not yet vested as of December 31, 2005 based on the
grant date fair value estimated in accordance with the pro forma provisions of
SFAS 123 and compensation expense for the share-based payment awards granted
subsequent to December 31, 2005 based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R). SFAS 123(R) requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. In the Company’s pro
forma information required under SFAS 123 for the periods prior to fiscal 2006,
the Company accounted for forfeitures as they occurred.





Upon
adoption of SFAS 123(R), the Company is using the Black-Scholes option-pricing
model as its method of valuation for share-based awards granted beginning in
fiscal 2006, which was also previously used for the Company’s pro forma
information required under SFAS 123. The Company’s determination of fair value
of share-based payment awards on the date of grant using an option-pricing model
is affected by the Company’s stock price as well as assumptions regarding a
number of highly complex and subjective variables. These variables include, but
are not limited to the Company’s expected stock price volatility over the term
of the awards, and certain other market variables such as the risk free interest
rate.




The
following table shows the effect on net earnings and earnings per share had
compensation cost been recognized based upon the estimated fair value on the
grant date of stock options for the twelve months ended  December 31,
2005, in accordance with SFAS 123, as amended by SFAS No. 148 “Accounting for
Stock-Based Compensation – Transition and Disclosure”:





December
      31,
              2005Net
      loss
            As
      reported
            
            $
            (77,953,193
            )Less:
      Total stock-based employee compensation expense determined under fair
      value based method for awards, not including amounts to non-employees
      already included in the calculation of net income, net of related tax
      effects
            
            
            
            (591,024
            )Net
      loss
            Pro
      forma
            
            $
            (78,544,217
            )Net
      loss attributable to common shareholders
            Pro
      forma
            
            
            (78,955,277
            )Basic
      and diluted net loss per share
            As
      reported
            
            $
            (2.88
            )Pro
      forma
            
            $
            (2.90
            )Basic
      and diluted net loss per share attributable to common
      shareholders
            Pro
      forma
            
            $
            (2.92
            )


40
 Index




Comprehensive
Income





The
Company has no items of other comprehensive income or
expense.  Accordingly, the Company’s comprehensive loss and net loss
are the same for all periods presented.





Use
of Estimates





The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. The Company evaluates, on an on-going basis, its
estimates and judgments, including those related to revenue recognition, bad
debts, impairment of goodwill and intangible assets, income taxes, contingencies
and litigation. Its estimates are based on historical experience and assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.





Recent
Accounting Pronouncements





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
to measure many financial instruments, and certain other items, at fair value.
SFAS 159 applies to reporting periods beginning after November 15, 2007. The
adoption of SFAS 159 is not expected to have a material impact on the Company’s
financial condition or results of operations.





In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), “Business Combinations” (“Statement 141(R)”) and Financial Accounting
Standards No. 160, “Noncontrolling Interests in Consolidated Financial
Statements” (“Statement 160”). Statements 141(R) and 160 require most
identifiable assets, liabilities, noncontrolling interests and goodwill acquired
in a business combination to be recorded at “full fair value” and require
noncontrolling interests (previously referred to as minority interests) to be
reported as a component of equity.  Both statements are effective for
fiscal years beginning after December 15, 2008.  Statement 141(R) will
be applied to business combinations occurring after the effective
date.  Statement 160 will be applied prospectively to all
noncontrolling interests, including any that arose before the effective
date.  The Company has not determined the effect, if any, the adoption
of Statements 141(R) and 160 will have on the Company’s financial position or
results of operations.




3.  Property
and Equipment





Property
and equipment consist of the following:





December
      29,
              2007
            
            
            December
      20,
              2006Software
      and computer equipment
            
            $
            252,271
            
            
            $
            83,228252,271
            
            
            
            83,228Less
      accumulated depreciation
            
            
            (49,784
            )
            
            
            (12,713
            )202,487
            
            
            
            70,515





Depreciation
expense included as a charge to income was $37,071, $11,993 and $720 for the
years ended December 29, 2007, December 30, 2006 and December 31, 2005,
respectively.





4.  Acquisition
of EnergyConnect, Inc.





On
October 13, 2005, the Company acquired EnergyConnect, Inc. (ECI) in exchange for
27,365,305 shares of the Company’s common stock, 19,695,432 warrants to purchase
shares of the Company’s common stock and 3,260,940 stock options to purchase the
Company’s common shares.  The shares of common stock issued in
conjunction with the merger were not registered under the Securities Act of
1933. The acquisition of ECI was accounted for using the purchase method in
accordance with SFAS 141, “Business Combinations.”  The results of
operations for ECI have been included in the Consolidated Statements of
Operations since the date of acquisition.





41
 Index





Through
EnergyConnect’s energy automation software systems, we have the capability to
develop and provide solutions and infrastructure for the electric energy supply
chain. ECI’s energy automation is a suite of products that deliver new
energy-related revenues to energy consumers and major benefits to the electric
grid.  It’s anticipated that a portion of ECI’s services will drive
additional growth in CEI.





The value
of the Company’s common stock issued as a part of the acquisition was determined
based on the average price of the Company's common stock for several days before
and after the acquisition of ECI. The fair value of employee stock options
issued in conjunction with this acquisition has been included in the
determination of the purchase price.  The fair value of such options
was determined using the Black-Scholes model.  The components of the
purchase price were as follows:





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





In
accordance with Financial Accounting Standard (SFAS) No. 141, Business
Combinations, the total purchase price was allocated to the estimated fair value
of assets acquired and liabilities assumed. The estimate of fair value of the
assets acquired was based on management’s and an independent appraiser’s
estimates. The total purchase price was allocated to the assets and liabilities
acquired as follows:





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





The
intangible asset of $2,390,667 at the date of acquisition consisted of developed
technology that is currently used within ECI.  The intangible asset
acquired has an estimated useful life of ten years, and as such will be
amortized monthly, over that period.  Goodwill of $106,544,871
represented the excess of the purchase price over the fair value of the net
tangible and intangible assets acquired.  At December 30, 2006, it was
determined in an independent valuation that the goodwill generated in this
transaction was impaired.  The Company decided to write off
approximately $77,191,344 of this goodwill. The write-off of the goodwill and
the amortization of the intangible assets are included in operating expenses in
the consolidated statement of operations.  The Company tested the
value of the goodwill at December 29, 2007 and concluded that there was no
further impairment of the goodwill asset in ECI during the twelve months ended
December 29, 2007.





The
following unaudited proforma information presents a summary of the consolidated
results of operations of the Company assuming the acquisition of ECI occurred on
the first day of 2005.  The following information is
unaudited.





Year
      EndedDecember
      31,2005(unaudited)Sales
            
            
            
            
            $
            1,172,783Net
      loss
            
            
            *
            
            
            $
            (79,786,072
            )Basic
      and diluted net loss per share
            
            
            
            
            
            $
            (1.64
            )





* This
amount includes a charge of $77,191,344 for the write-off of impaired goodwill
at December 30, 2006.





42
 Index





5.
Acquisition and Divestiture of Christenson Electric, Inc.





On July
20, 2005, the Company acquired Christenson Electric, Inc. (CEI) in exchange for
2,000,000 shares of the Company’s common stock and the assumption of certain
liabilities within CEI.  The shares of common stock issued in
conjunction with the merger were not registered under the Securities Act of
1933. The acquisition of CEI was accounted for using the purchase method in
accordance with SFAS 141, “Business Combinations.”  The results of
operations for CEI have been included in the Consolidated Statements of
Operations since the date of acquisition.





CEI
provides services to utilities and other energy related
companies.  Through its work on alternative energy projects such as
wind farms and solar farms, CEI has been at the forefront of the current boom in
building the alternative energy distribution infrastructure.  CEI will
continue its historic business of wind farm construction and electrical
maintenance and construction of substation distribution and transmission
facilities across the United States. CEI also provides services to Bonneville
Power Administration and other major utilities under long-standing contractual
relationships.





The value
of the Company’s common stock issued as a part of the acquisition was determined
based on the average price of the Company's common stock for several days before
the acquisition of CEI. The components of the purchase price were as
follows:





Common
      stock
            
            $
            1,280,000Direct
      acquisition costs
            
            
            348,519Total
      purchase price
            
            $
            1,628,519





In
accordance with Financial Accounting Standard (SFAS) No. 141, Business
Combinations, the total purchase price was allocated to the estimated fair value
of assets acquired and liabilities assumed. The estimate of fair value of the
assets acquired was based on management’s and an independent appraiser’s
estimates. The total purchase price was allocated to the assets and liabilities
acquired as follows:





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





The
Company had an independent purchase allocation performed as of the acquisition
date. The acquisition of CEI resulted in the valuation of CEI’s Christenson name
and customer lists/relationships.  Total CEI identifiable intangible
assets acquired and their carrying values at December 30, 2006 are:





Weighted
      AverageGross
      Carrying
            
            
            Accumulated
            
            
            
            
            
            Residual
            
            
            AmortizationAmount
            
            
            Amortization
            
            
            Net
            
            
            Value
            
            
            Period
      (Years)Amortized
      Identifiable Intangible Assets:Christenson
      Velagio customer lists
            
            $
            663,305
            
            
            $
            (351,560
            )
            
            $
            311,745
            
            
            $
            -
            
            
            
            6.0Christenson
      Electric customer relationships
            
            
            1,687,335
            
            
            
            (235,875
            )
            
            
            1,451,460
            
            
            
            -
            
            
            
            10.0Total
      Amortized Identifiable Intangible Assets
            
            
            2,350,640
            
            
            
            (587,435
            )
            
            
            1,763,205
            
            
            
            -Unamortized
      Identifiable Intangible Assets:Christenson
      Velagio trade name
            
            
            872,771
            
            
            
            -
            
            
            
            872,771Christenson
      Electric trade name
            
            
            758,356
            
            
            
            -
            
            
            
            758,356Total
      Unamortized Identifiable Intangible Assets
            
            
            1,631,127
            
            
            
            -
            
            
            
            1,631,127Total
            
            $
            3,981,767
            
            
            $
            (587,435
            )
            
            $
            3,394,332





43
 Index





As a
result of the acquisition, the Company valued CEI and CEI’s Christenson goodwill
totaling $6,623,520 at December 30, 2006.  The Company has adopted
SFAS No. 142, Goodwill and Other Intangible Assets, whereby the Company
periodically test its intangible assets for impairment. On an annual basis, and
when there is reason to suspect that their values have been diminished or
impaired, these assets are tested for impairment, and write-downs will be
included in results from operations.





The
Company’s trade name is considered to have an undeterminable life, and as such
will not be amortized. Instead, the trade name will be tested annually for
impairment. The customer lists were determined to have a six-year
life.  The customer relationship was determined to have a ten-year
life.





On
November 29, 2007, our board of directors signed an agreement to sell all of the
shares of our wholly-owned subsidiary Christenson Electric, Inc. to a
corporation formed by the management of CEI, for $1,650,000 in cash and the
assumption of approximately $7.5 million in term and revolving debt (subject to
adjustments for subsequent changes).  The agreement was approved by
our shareholders in a vote on March 10, 2008.





At
December 29, 2007, it was determined that the value of the CEI intangibles and
goodwill was impaired, total net carrying values of the intangibles and
goodwill, $9,728,234, was charged against CEI earnings and included in the
operation result of the discontinued operations in the consolidated financial
statements.





The
results of operations of Christenson are presented as discontinued operations in
the financial statements.  The following table presents selected
financial data for the three years ended December 29, 2007, December 30, 2006
and December 31, 2005.





December
      29,
              2007
            
            
            December
      30,
              2006
            
            
            December
      31,
              2005Statement
      of Operations:Sales
            
            
            
            
            $
            56,841,954
            
            
            
            72,938,719
            
            
            
            56,762,252Gross
      profit
            
            
            
            
            
            10,264,104
            
            
            
            9,109,717
            
            
            
            9,961,302Operating
      expenses
            
            
            
            
            
            19,226,241
            
            
            
            8,655,227
            
            
            
            7,884,771Net
      income (loss)
            
            
            
            
            
            *
            (9,694,727
            )
            
            
            (745,493
            )
            
            
            801,410Balance
      Sheet:Cash
            
            
            
            
            
            
            524,722
            
            
            
            2,354,916Accounts
      receivable
            
            
            
            
            
            
            9,155,773
            
            
            
            9,006,793Total
      assets
            
            
            
            
            
            
            13,637,623
            
            
            
            24,966,395Accounts
      payable
            
            
            
            
            
            
            2,811,194
            
            
            
            3,403,331Operating
      line of credit
            
            
            
            
            
            
            5,970,612
            
            
            
            3,710,905Total
      liabilities
            
            
            
            
            
            $
            13,610,734
            
            
            
            11,701,520


*  This
loss includes a write-off of $9,728,234 from the impairment of goodwill and
intangibles in Christenson.  Excluding that charge, Christenson had
net income of $33,507 for the twelve months ended December 29,
2007.





SoftBoard





On
September 7, 2000, the Company entered into a definitive agreement with
Greensteel, Inc. (Greensteel), a wholly-owned subsidiary of Polyvision
Corporation, for the sale of substantially all of the Company’s assets used in
the SoftBoard operations.  The final payment of $17,068 was received
in February 2006, with a total of, $46,399 received by the Company during the
year ended December 31, 2005, respectively.  These amounts were
recorded as gain on the sale of discontinued operations in the Consolidated
Statements of Operations.





44
 Index





6.  Intangible
Assets and Goodwill





As a
result of our acquisition of ECI we recorded an intangible asset of $2,390,667
at the date of acquisition representing developed technology that is currently
used within ECI.  The intangible asset acquired has an estimated
useful life of ten years, and as such is being amortized monthly, over that
period.  Goodwill of $106,544,871 represented the excess of the
purchase price over the fair value of the net tangible and intangible assets
acquired.  At December 30, 2006, it was determined in an independent
valuation that the goodwill generated in this transaction was
impaired.  The Company decided to write off approximately $77,191,344
of this goodwill. The write-off of the goodwill, and the amortization of the
intangible assets are included in operating expenses in the consolidated
statement of operations.





Intangible
assets consist of the following:





December
      29,
              2007
            
            
            Decembe
      30,
              2006Developed
      technology
            
            $
            2,390,667
            
            
            $
            2,390,6672,390,667
            
            
            
            2,390,667Less
      accumulated depreciation
            
            
            (517,978
            )
            
            
            (278,911
            )1,872,689
            
            
            
            2,111,756





Amortization
of intangible assets included as a charge to income was $239067, $239067 and
$39,844 for the years ended  December 29, 2007, December 30, 2006 and
December 31, 2005, respectively.Based on the
Company’s current intangible assets, amortization expense for the five
succeeding years will be as follows:





AmortizationYear
            
            Expense2008
            
            $
            239,0672009
            
            
            239,0672010
            
            
            239,0672011
            
            
            239,0672012
      and beyond
            
            
            916,421Total
            
            $
            1,872,689





The
Company does not amortize goodwill.  As a result of the acquisition of
ECI, the Company recorded goodwill in the amount of $106,544,871 during
fiscal year 2005 (Note 4). At December 31, 2005, it was determined in an
independent valuation that the goodwill generated in this transaction was
impaired. The Company wrote off $77,191,344 of this goodwill. The write-off of
the goodwill was included in operating expenses in the consolidated statement of
operations. There were no changes in the carrying amount of goodwill for the
years ended December 29, 2007 and December 30, 2006.





Management
judgment is necessary to estimate fair value. We enlisted the assistance of an
independent valuation consultant to determine the values of our intangible
assets and goodwill, both at the dates of acquisition and at specific dates
annually.  Based on various market factors and projections used by
management, actual results could vary significantly from managements'
estimates.





45
 Index





7.  Capital





Common
Stock




We are
authorized to issue up to 225,000,000 shares of common stock, no par value. At
our shareholders’ meeting in June 2006, the shareholders voted to increase to
total common shares authorized from 125,000,000 to 225,000,000
shares.  As of December 29, 2007, there were 83,569,416 shares of
common stock outstanding. Holders of the common stock are entitled to one vote
per share on all matters to be voted upon by the stockholders. Holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of funds legally available therefore. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
non-assessable.





On
October 5, 2007 the company issued 150,000 shares of common stock to an outside
consultant for services to be rendered in the following six-month
period.





During
the year ended December 29, 2007 several shareholders converted shares of Series
3, and Series 4 preferred stock into 2,566,004 shares of the Company’s common
stock.  The Company issued 1,829,507 shares of common stock in
exchange for stock options exercised at $0.27 to $0.59 per
share.    There were no warrants exercised for common stock
in the current year.





On June
29, 2006, the Company entered into a private placement under which it issued
7,500,000 shares of its common stock in exchange for $15,000,000 of cash, before
direct expenses.





During
the fiscal year ended December 30, 2006 several shareholders converted shares of
Series 2, Series 3, and Series 4 preferred stock into 11,186,241 shares of the
Company’s common stock.  The Company issued an aggregate of 3,996,962
shares of common stock in exchange for common stock warrants
exercised.  The exercise prices of the common stock warrants range
from $0.31 to $42 per share.   The Company issued 265,188 shares
of common stock in exchange for stock options exercised at $0.26 to $0.84 per
share. The Company also issued 77,300 shares of common stock in exchange for
settlement of previously incurred debt.  The Company also issued
440,344 shares of common stock in payment of a penalty for delayed registration
under the terms of the private placement in October 2005.





On
October 13, 2005, the Company entered into a merger agreement under which it
issued 27,365,305 shares of its common stock, 19,695,432 warrants to purchase
shares of the Company’s common stock, and stock options to purchase 3,260,940
shares of the Company’s common stock, in exchange for all of the outstanding
shares of EnergyConnect, Inc (Note 4).





On
October 5, 2005, the Company entered into a private placement under which it
issued 5,233,603 shares of its common stock in exchange for $3,276,000 of cash
and the conversion of $158,000 of debt.





On July
20, 2005, the Company acquired Christenson Electric, Inc. (CEI) in exchange for
2,000,000 shares of the Company’s common stock and the assumption of certain
liabilities within CEI (Note 5).





Preferred
Stock




We are
authorized to issue up to 10,000,000 shares of Preferred Stock, no par value.
The 10,000,000 shares of Preferred Stock authorized are undesignated as to
preferences, privileges and restrictions. As the shares are issued, the Board of
Directors must establish a “series” of the shares to be issued and designate the
preferences, privileges and restrictions applicable to that series. As of
December 29, 2007, there were no remaining shares of any Series of preferred
stock.





The terms
of our previously outstanding series’ of preferred stock were as
follows.




Series 2 Preferred
Stock





On
September 26, 2003 the Company issued 3,607,151 shares of Series 2 preferred
stock in conjunction with a private placement at $.42 per share.  On
November 17, 2003, the Company issued 3,333,334 shares of Series 2 preferred
stock in exchange for the conversion of debt. During the year ended December 30,
2006, several of the Series 2 preferred stockholders converted a total of
5,875,241 shares of Series 2 preferred stock into 5,875,241 shares of common
stock.  As of December 29, 2007, all of the shares of Series 2 Preferred
stock had been converted to common.  The terms of the Series 2
preferred stock were as follows.





46
 Index





Dividends.Series 2
preferred stock issued and outstanding were entitled to receive a cash dividend
in the amount of 6.5% of the Issue Price per annum.  The Series 2
preferred stock dividends were to be paid in cash, quarterly, subject to the
declaration of the dividend by the board of directors, if and when the board of
directors deemed advisable.  Any declared but unpaid dividend would
not bear interest and were to be paid out of net profits; if net profits were
not sufficient to pay this dividend, either in whole or in part, then any unpaid
portion of the dividend were to be paid in full out of net profits of the
Corporation in subsequent quarters before any dividends were paid upon shares of
Junior Stock.  No dividends were declared on this series of preferred
shares.





Liquidation
Preference.  In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, except in
certain circumstances, the holders of each share of Series 2 preferred stock
were to be entitled to be paid out of the assets of the Corporation available
for distribution to its shareholders, before any declaration and payment or
setting apart for payment of any amount was to be made in respect of Junior
Stock, an amount equal to the Issue Price and all accrued but unpaid
dividends.





Conversion.  Each
holder of any share(s) of Series 2 preferred stock may, at the holder's option,
convert all or any part of such share(s) from time to time held by the holder
into shares of common stock at any time after the date of
issuance.  Each such share of Series 2 preferred stock shall be
converted into one share of fully-paid and non-assessable shares of common
stock.  Each share of Series 2 preferred stock shall automatically be
converted into shares of common stock on a one-for-one basis immediately upon
the consummation of the Company’s sale of its common stock in a bona fide,
firm commitment, underwritten public offering under the Securities Act of 1933,
as amended, which results in aggregate cash proceeds (before underwriters’
commissions and offering expenses) to the Company of $5,000,000 or
more.  In any event, if not converted to common stock, each share of
Series 2 preferred stock shall automatically be converted into shares of common
stock on a one-for-one basis immediately upon the third anniversary of the date
of issuance of the Series 2 preferred stock.





Voting Rights.  Each
holder of Series 2 preferred stock shall have the right to one vote for each
share of Common Stock into which such Series 2 preferred stock could then be
converted.





Series 3 Preferred
Stock




On April
3, 2004 the Company issued 3,640.803 shares of Series 3 preferred stock at $420
per share in exchange for conversion of $1,529,000 of outstanding debt. During
the year ended December 29, 2007, several of the Series 3 preferred stockholders
converted a total of 2,039.689 shares of Series 3 preferred stock into 2,039,689
shares of common stock.  During the year ended December 30, 2006,
several of the Series 3 preferred stockholders converted a total of 1,445.210
shares of Series 3 preferred stock into 1,445,210 shares of common stock. Each
share of Series 3 preferred stock was convertible into 1,000 shares of the
Company’s common stock. The terms of the Series 3 preferred stock were as
follows.





Dividends. Series 3 preferred
stock issued and outstanding was entitled to receive a cash dividend in the
amount of 6.5% of the issue price per annum. The Series 3 preferred stock
dividends were cumulative and were to be payable in cash, quarterly, subject to
the declaration of the dividend by the board of directors, if and when the board
of directors deems advisable. Any declared but unpaid dividend will not bear
interest and were to be paid out of net profits. If net profits were not
sufficient to pay this dividend, either in whole or in part, then any unpaid
portion of the dividend was to be paid in full out of our net profits in
subsequent quarters before any dividends are paid upon shares of junior
stock.  No dividends were declared on this series of preferred
shares.





Liquidation Preference. In the
event of any liquidation, dissolution or winding up of our company, either
voluntary or involuntary, except in certain circumstances, the holders of each
share of Series 3 preferred stock were entitled to be paid out of our assets
available for distribution to our shareholders, before any declaration and
payment or setting apart for payment of any amount were to be made in respect of
junior stock, an amount equal to the issue price and all accrued but unpaid
dividends.





Conversion. Each holder of any
share(s) of Series 3 preferred stock may, at the holder’s option, convert all or
any part of such share(s) from time to time held by the holder into shares of
common stock at any time after one year from the date of issuance. Each such
share of Series 3 preferred stock shall be convertible into one thousand shares
of fully-paid and non-assessable shares of common stock. Each share of Series 3
preferred stock shall automatically be converted into shares of common stock on
a one-for-one thousand basis immediately upon the consummation of a sale of our
common stock in a bona fide, firm commitment, underwritten public offering under
the Securities Act of 1933, as amended, which results in aggregate cash proceeds
(before underwriters’ commissions and offering expenses) to us of $5,000,000 or
more. In any event, if not converted to common stock, each share of Series 3
preferred stock shall automatically be converted into shares of common stock on
a one-for-one thousand basis immediately upon the third anniversary of the date
of issuance of the Series 3 preferred stock. The Series 3 preferred shares were
originally issued in April 2004.  The Company has recorded a
beneficial conversion feature of $983,017, which represents the difference
between the conversion price and the fair value of the Company’s common stock on
the commitment date, which was also the issuance date.  This
beneficial conversion feature was amortized over the conversion period of one
year.   At December 29, 2007, there was no remaining unamortized
beneficial conversion feature associated with the Series 3 preferred
stock.





47
 Index





Voting Rights.Each holder of Series 3
preferred stock had the right to one vote for each share of Common Stock into
which such Series 3 preferred stock could then be converted.





Series 4 Preferred
Stock




In April
and May 2004, the Company issued 4,605.265 shares of Series 4 preferred stock at
$380 per share in exchange for $1,750,000 in a private placement (Note 10) from
investors, some of which include certain related parties. During the year ended
December 29, 2007, several of the Series 4 preferred stockholders converted a
total of 526.315 shares of Series 4 preferred stock into 526,315 shares of
common stock. During the year ended December 30, 2006, several of the Series 4
preferred stockholders converted a total of 3,865.790 shares of Series 4
preferred stock into 3,865,790 shares of common stock. Each share of Series 4
preferred stock was convertible into 1,000 shares of the Company’s common
stock.   The terms of the Series 4 preferred stock were as
follows.





Dividends.Series 4 preferred stock
issued and outstanding was entitled to receive a cash dividend in the amount of
6.5% of the issue price per annum. The Series 4 preferred stock dividends were
cumulative and were to be payable in cash, quarterly, subject to the declaration
of the dividend by the board of directors, if and when the board of directors
deems advisable. Any declared but unpaid dividend will not bear interest and
were to be paid out of net profits. If net profits were not sufficient to pay
this dividend, either in whole or in part, then any unpaid portion of the
dividend was to be paid in full out of our net profits in subsequent quarters
before any dividends are paid upon shares of junior stock.  No
dividends were declared on this series of preferred shares.





Liquidation Preference. In the
event of any liquidation, dissolution or winding up of our company, either
voluntary or involuntary, except in certain circumstances, the holders of each
share of Series 4 preferred stock were entitled to be paid out of our assets
available for distribution to our shareholders, before any declaration and
payment or setting apart for payment of any amount were to be made in respect of
junior stock, an amount equal to the issue price and all accrued but unpaid
dividends.





Conversion.Each holder of any share(s)
of Series 4 preferred stock may, at the holder’s option, convert all or any part
of such share(s) from time to time held by the holder into shares of common
stock at any time after one year from the date of issuance. Each such share of
Series 4 preferred stock shall be convertible into one thousand shares of
fully-paid and non-assessable shares of common stock. Each share of Series 4
preferred stock shall automatically be converted into shares of common stock on
a one-for-one thousand basis immediately upon the consummation of a sale of our
common stock in a bona fide, firm commitment, underwritten public offering under
the Securities Act of 1933, as amended, which results in aggregate cash proceeds
(before underwriters’ commissions and offering expenses) to us of $5,000,000 or
more. In any event, if not converted to common stock, each share of Series 4
preferred stock shall automatically be converted into shares of common stock on
a one-for-one thousand basis immediately upon the third anniversary of the date
of issuance of the Series 4 preferred stock. The Series 4 preferred shares were
originally issued in April 2004.  The Company has recorded a
beneficial conversion feature of $598,684, which represents the difference
between the conversion price and the fair value of the Company’s common stock on
the commitment date, which was also the issuance date.  This
beneficial conversion feature was amortized over the conversion period of one
year.  At December 29, 2007, there was no remaining unamortized
beneficial conversion feature associated with the Series 4 preferred
stock.





48
 Index





Voting Rights.Each holder of Series 4
preferred stock had the right to one vote for each share of Common Stock into
which such Series 4 preferred stock could then be converted.





8.  Private
Placements





June
30, 2006 private placement





On June
30, 2006, in conjunction with a private placement which resulted in gross
proceeds of $15,000,000, the Company sold 7,500,000 shares of common stock at
$2.00 per share, and issued warrants to purchase up to 5,625,000 shares of
common stock. The warrants have a term of five years and an exercise price of
$3.00 per share. Since the warrants are subject to certain registration rights,
The Company recorded a warrant liability totaling $14,758,004 in accordance with
EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock.” The warrant liability has been
recalculated using the closing price of the Company’s common stock as of
June 30, 2006 of $3.07. The registration rights provide for the Company to
file a registration statement with the Securities and Exchange Commission
(“SEC”) no later that 90 days after the closing of the transaction and have
it declared effective by the SEC no later than 120 days after the closing
of the transaction. The registration statement was filed with the SEC on
July 21, 2006.  The Company valued the warrants using the
Black-Scholes option pricing model, applying a useful life of 5 years, a
risk-free rate of 5.35%, an expected dividend yield of 0%, a volatility of 123%
and a deemed fair value of the common stock of $3.07, which was the closing
market price on June 30, 2006.





At
September 30, 2006, the warrant liability has been recalculated using the
closing price of the Company’s common stock as of September 29, 2006 of
$1.73.  This revaluation from June 30, 2006 resulted in a reduction of
approximately $7,812,000 in the warrant liability and has also has been recorded
as a gain on revaluation of warrant liability in the consolidated statement of
operations in the twelve months ended December 30, 2006.  The
registration statement was declared effective by the SEC on September 29,
2006.





October
5, 2005 private placement





On
October 5, 2005, in conjunction with a private placement which resulted in
gross proceeds of $3,276,000, the Company sold 5,233,603 shares of common stock
at $0.70 per share, and issued warrants to purchase up to 2,944,693 shares of
common stock. The warrants have a term of five years and an exercise price of
$0.90 per share.





Since
these warrants are subject to certain registration rights, the Company recorded
a warrant liability totaling $6,286,919 in accordance with EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.”  The Company valued the warrants
using the Black-Scholes option pricing model, applying a useful life of
5 years, a risk-free rate of 4.06%, an expected dividend yield of 0%, a
volatility of 129% and a deemed fair value of the common stock of $2.37, which
was the closing market price on October 4, 2005. In accordance with SFAS
133 “Accounting for Derivative Instruments and Hedging Activities,” the Company
revalued the warrants as of December 31, 2005 using the Black-Scholes option
pricing model. Assumptions regarding the life and expected dividend yield were
left unchanged, but the Company applied a risk free rate of 4.21%, a volatility
of 128% and a deemed fair value of common stock of $2.50, which was the closing
price of the Company’s common stock on  December 31, 2005. The
difference between the fair value of the warrants on October 5, 2005
and  December 31, 2005 of $503,543 was recorded as a loss on
revaluation of warrant liability in the consolidated statement of operations for
the year ended  December 31, 2005.  At April 1, July 1, and
August 9, 2006, the warrant liability was recalculated using the closing price
of the company’s common stock as of those dates.  This revaluation
from the end of 2005 resulted in a reduction of approximately $507,000 in the
warrant liability and has also has been recorded as a gain on revaluation of
warrant liability in the consolidated statement of operations in the twelve
months ended December 30, 2006.





The
registration rights provided for the Company to file a registration statement
with the Securities and Exchange Commission (“SEC”) no later that 90 days
after the closing of the transaction and have it declared effective by the SEC
no later than 120 days after the closing of the transaction. The
registration statement was filed with the SEC on February 13, 2006. This
filing was declared effective on June 8, 2006.  On August 2, 2006, a
post-effective amendment was filed which suspended the effectiveness of this
registration.  That amendment was declared effective on August 9,
2006.





49
 Index





The
registration rights agreement had a liquidated damages provision that called for
additional shares to be issued to the investors in the event that the
registration statement was not filed and declared effective within a certain
period of time.  The initial registration document was filed 40 days
after the first imposed deadline, and was not declared effective by the SEC
until 116 days later.  In accordance with this liquidated damages
provision the Company issued an additional 440,344 shares of common stock to
these investors.





9.   Repurchase
of Common Stock





On
February 28, 2003, the Company entered into a Stock Purchase and Pledge
Agreement (the “Agreement”) with Steelcase, Inc. (“Steelcase”) to repurchase
951,445 of the Company’s common shares held by Steelcase.  Pursuant to
the terms of the Agreement, the Company repurchased these shares for a base
amount of approximately $209,318, or $0.22 per share, subject to
adjustment.  The Company issued a three-year Promissory Note (the
“Note”) for payment of this amount.  Payments of principal under the
Note were to be made in three equal annual installments of approximately
$69,773, on the first, second and third anniversaries of the date of the
Note.  The Note carried an interest rate of 12%, payable quarterly,
starting on June 1, 2003 until the principal amount of the Note was paid in
full.





The Note
called for a purchase price adjustment if the Note and accrued interest were not
paid according to the terms of the Note. Under this purchase price adjustment,
over the life of the Note, the purchase price was adjusted to approximately
$333,006, or $0.35 per common share.  This feature is considered to be
an embedded derivative option under the provisions of Financial Accounting
Standards No. 133.  Under these provisions a derivative liability was
established at inception in the amount of $14,310 using the Black-Scholes
valuation model.  Changes based on fluctuations in the Company’s stock
price were reflected in the other expense section of the Statement of Operations
in each period that an adjustment was made.  From the date of
inception of this note to the end of the fiscal year, December 31, 2005 this
liability increased by $109,618. The value of this liability as of December 31,
2005 was $123,928, and was reflected as a long term liability on the
Consolidated Balance Sheet.





As of
December 31, 2005, the Company had not made its required September 2004 and
December 2004 quarterly interest payments of approximately $4,200 each
quarter.  On May 15, 2006, the Company settled the amount owed by
releasing 77,300 shares of common stock to Steelcase in exchange for
cancellation of the Note amount then owed, including accrued
interest.  The remaining shares held as security by Steelcase were
returned to the Company, and were retired as treasury stock.





10.  Stock
Options and Warrants





Stock
Incentive  Plan





The
Company has a Stock Incentive Plan (the "Plan").  At December 29, 2007
and December 30, 2006, 9,723,750 and 9,057,577 shares of common stock were
reserved, respectively, for issuance to employees, officers, directors and
outside advisors.  Under the Plan, the options may be granted to
purchase shares of the Company's common stock at fair market value, as
determined by the Company's Board of Directors, at the date of
grant.  The options are exercisable over a period of up to five years
from the date of grant or such shorter term as provided for in the
Plan.  The options become exercisable over periods ranging between one
and four years.





The
following table summarizes the changes in stock options outstanding and the
related prices for the shares of the Company’s common stock issued to employees,
officers and directors of the Company under the Plan.





Options Outstanding
            
            
            Options ExercisableExercise Prices
            
            
            Number
      Outstanding
            
            
            Weighted
      Average Remaining Contractual Life
      (Years)
            
            
            Weighted
      Average Exercise
Price
            
            
            Number
      Exercisable
            
            
            Weighted
      Average Exercise
Price$
            0.26
      - $0.94
            
            
            
            9,272,361
            
            
            
            3.8
            
            
            $
            0.62
            
            
            
            5,623,153
            
            
            $
            0.49$
            1.76
      - $2.70
            
            
            
            451,389
            
            
            
            3.6
            
            
            $
            2.14
            
            
            
            206,597
            
            
            $
            2.219,723,750
            
            
            
            3.7
            
            
            $
            0.69
            
            
            
            5,829,750
            
            
            $
            0.55





50
 Index





A summary
of the status of the Company’s Stock Incentive Plan as of December 29, 2007 and
December 30, 2006 and for the years then ended is presented below:





December
      29, 2007
            
            
            December
      30, 2006Weighted
            
            
            
            
            
            Weightedaverage
            
            
            
            
            
            averageexercise
            
            
            
            
            
            exerciseShares
            
            
            price
            
            
            Shares
            
            
            priceOutstanding
      at beginning of year
            
            
            9,057,577
            
            
            $
            0.54
            
            
            
            7,717,765
            
            
            $
            0.44Granted
      at market price
            
            
            2,707,500
            
            
            
            0.92
            
            
            
            1,385,000
            
            
            
            1.13Granted
      at other than market price
            
            
            
            
            
            
            
            
            
            
            240,000
            
            
            
            0.38Exercised
            
            
            (1,829,507
            )
            
            
            0.35
            
            
            
            (265,188
            )
            
            
            0.38Cancelled
            
            
            (211,820
            )
            
            
            0.41
            
            
            
            (20,000
            )
            
            
            1.25Outstanding
      at end of year
            
            
            9,723,750
            
            
            $
            0.69
            
            
            
            9,057,577
            
            
            $
            0.54Options
      exercisable at year end
            
            
            5,829,750
            
            
            $
            0.55
            
            
            
            6,630,285
            
            
            $
            0.45





The
Company granted 2,706,000 and 1,385,000 options to purchase shares of the
Company’s common stock to employees and directors of the Company, during the
years ended December 29, 2007 and December 30, 2006,
respectively.  These options are forfeited if not exercised within
periods of five to ten years, and vest over periods ranging from immediately to
forty-eight months starting with the month of grant.





On
October 13, 2005, in conjunction with the acquisition of EnergyConnect, the
Company granted 3,260,940 options at $0.32 per share to prior holders of options
in the EnergyConnect, Inc. Incentive Stock Option Plan.  These options
were granted with exercise dates of February 5, 2007 and February 5, 2008. On
February 5, 2007 1,342,740 of the 1,534,560 shares eligible to be exercised,
were exercised. The other 191,820 were not exercised, and therefore were
forfeited. If the remaining 1,726,380 options are not exercised on February 5,
2008, they will expire.





The
weighted average per share value of options granted during the years ended
December 29, 2007 and December 30, 2006
were $1.02 and $0.43 respectively.





The
Company computed the value of all options granted using the Black-Scholes
pricing model as prescribed by SFAS No. 123 and SFAS No. 123(R).  The
following ranges of assumptions were used to calculate the values of options
granted during 2007, 2006 and 2005:





December
      29,
            December
      30,
            December
      31,2007
            2006
            2005Risk-free
      interest rate
            3.42%
      - 4.64%
            4.16%
      - 4.92%
            3.50%
      - 4.45%Expected
      dividend yield
            -
            -
            -Expected
      lives
            5
      years
            5
      years
            5
      yearsExpected
      volatility
            120%
      - 134%
            123%
      - 133%
            121%
      - 134%





The
Company also granted 1,000 options to an outside consultant for services
rendered in 2007. These options granted in 2007 have a 12-month waiting
period before vesting. Compensation expenses charged to operations for stock
options issued to consultants amounted to $0, $105,000, and $244,000 for the
year ended December 29, 2007, December 30, 2006 and December 31, 2005,
respectively.





Common
Stock Warrants




In
connection with an April 2003 common stock private placement, we issued 111,308
warrants to purchase common stock. Each warrant is exercisable into one share of
common stock at $0.40 per share and will expire in 2008. Subsequent to this
private placement, the Company exercised an option to convert $1,400,000 of
outstanding debt into preferred stock that is convertible into shares of common
stock. This exercise, when aggregated with all other outstanding equity
arrangements, resulted in the total number of common shares that could be
required to be delivered to exceed the number of authorized common shares. In
accordance with EITF 00-19, the fair value of the warrants issued in the private
placement must be recorded as a liability in the financial statements using the
Black-Scholes model, and any subsequent changes in the Company’s stock price to
be recorded in earnings. Accordingly, the fair value of these warrants at the
date of issuance was determined to be $19,832. At September 1, 2004, the
Company’s shareholder’s voted to increase the authorized shares available for
issuance or conversion, which cured the situation described above. Accordingly,
the fair value of the warrants on September 1, 2004 was determined to be
$48,976. The warrant liability was reclassified to shareholders’ equity and the
increase from the initial warrant value was recorded in earnings in the fiscal
year ended January 1, 2005. As of December 29, 2007, the warrant holders have
exercised 101,308 warrants in exchange for 101,308 shares of our common stock
and 10,000 warrants remain outstanding.





51
 Index





In
September 2003, in connection with a preferred stock private placement, we
issued 333,334 warrants to purchase common stock. Each warrant is exercisable
into one share of common stock at $0.42 per share and will expire in 2008. In
September 2003, in connection with a preferred stock private placement, the
Company issued 333,334 warrants to purchase common stock.  Each
warrant is exercisable into one share of common stock at $0.42 per share and
will expire in 2008.  Subsequent to this private placement, the
Company exercised an option to convert $1,400,000 of outstanding debt into
preferred stock that is convertible into shares of common stock.  This
exercise, when aggregated with all other outstanding equity arrangements,
resulted in the total number of common shares that could be required to be
delivered to exceed the number of authorized common shares.  In
accordance with EITF 00-19, the fair value of the warrants issued in the private
placement must be recorded as a liability in the financial statements using the
Black-Scholes model, and any subsequent changes in the Company’s stock price to
be recorded in earnings.  Accordingly, the fair value of these
warrants at the date of issuance was determined to be $64,902.  At
September 1, 2004, the Company’s shareholder’s voted to increase the authorized
shares available for issuance or conversion, which cured the situation described
above.  Accordingly, the fair value of the warrants on September 1,
2004 was determined to be $139,000.  The warrant liability was
reclassified to shareholders’ equity and the increase from the initial warrant
value was recorded in earnings in the fiscal year ended January 1,
2005.  As of December 29, 2007, the warrant holders have exercised
183,333 warrants in exchange for 183,333 shares of our common stock and 150,001
warrants remain outstanding.





In
connection with the January 22, 2004 debt issuance by Destination Capital, LLC,
the Company is obligated to issue warrants to purchase the Company’s common
stock.  According to the terms of the debt issuance, warrants in the
amount of one percent of the Company’s fully diluted common stock will be issued
to the debt holders on the first day of each calendar month that the debt is
outstanding.  The Company repaid this debt in April 2004, and
accordingly is obligated to issue 1,403,547 warrants, which is equivalent to 4%
of the fully diluted common stock outstanding under the terms outlined in that
agreement.  Each warrant is exercisable into one share of common stock
at $0.31 per share, subject to changes specified in the debt agreement, and will
expire in 2008.  Prior to this debt issuance, the Company exercised an
option to convert $1,400,000 of outstanding debt into preferred stock that is
convertible into shares of common stock.  This exercise, when
aggregated with all other outstanding equity arrangements, resulted in the total
number of common shares that could be required to be delivered to exceed the
number of authorized common shares.  In accordance with EITF 00-19,
the fair value of the warrants issued in connection with the debt issuance must
be recorded as a liability for warrant settlement in the financial statements
using the Black-Scholes model, and any subsequent changes in the Company’s stock
price to be recorded in earnings.  Accordingly, the aggregate fair
value of these warrants, on the date each of the obligations to issue warrants
arose, was determined to be $701,824.  At September 1, 2004, the
Company’s shareholder’s voted to increase the authorized shares available for
issuance or conversion, which cured the situation described
above.  Accordingly, the fair value of the warrants on September 1,
2004 was determined to be $780,373.  The warrant liability was
reclassified to shareholders’ equity and the increase from the initial warrant
value was recorded in earnings in the fiscal year ended January 1,
2005.  As of December 29, 2007, the warrant holders have exercised
1,403,546 warrants in exchange for 1,226,374 shares of our common stock and no
warrants remain outstanding.





In
connection with the August 24, 2004 debt issuance by Destination Capital, LLC,
the Company is obligated to issue warrants to purchase the Company’s common
stock.  According to the terms of the debt issuance, warrants in the
amount of 12.5% percent of the loan balance, outstanding on the first day of
each month, will be issued to the debt holders for each calendar month that the
debt is outstanding.  Each warrant is exercisable into one share of
common stock at the lesser of $0.38 per share or the price applicable to any
shares, warrants or options issued (other than options issued to employees or
directors) while the loan is outstanding, and will expire in
2009.  Prior to this debt issuance, the Company exercised an option to
convert $1,400,000 of outstanding debt into preferred stock that is convertible
into shares of common stock.  This exercise, when aggregated with all
other outstanding equity arrangements, resulted in the total number of common
shares that could be required to be delivered to exceed the number of authorized
common shares.  In accordance with EITF 00-19, the fair value of the
37,500 warrants initially issued in connection with the debt issuance must be
recorded as a liability for warrant settlement in the financial statements using
the Black-Scholes model, and any subsequent changes in the Company’s stock price
to be recorded in earnings.  Accordingly, the aggregate fair value of
these warrants, issued prior to September 1, 2004, was determined to be
$17,513.  At September 1, 2004, the Company’s shareholder’s voted to
increase the authorized shares available for issuance or conversion, which cured
the situation described above.  Accordingly, the fair value of the
warrants on September 1, 2004 was determined to be $20,776.  The
warrant liability was reclassified to shareholders’ equity and the increase from
the initial warrant value was recorded in earnings in the fiscal year ended
January 1, 2005.  As of December 29, 2007, the warrant holders have
exercised 1,309,616 in exchange for 1,170,841 shares of our common stock, and
316,426 warrants remain outstanding.





52
 Index





On
September 10, 2004, the Company entered into a Master Vehicle Lease
Termination Agreement with CLLLC, under which the Company terminated its
previous master vehicle lease agreement with CLLLC. Under the terms of this
termination agreement, the Company was released from its obligation under the
previous master vehicle lease agreement. In consideration for this release the
Company issued 1,000,000 warrants to purchase the Company’s common shares, which
were valued at $515,000 using the Black Scholes model. This warrant value was
recorded in the Company’s consolidated balance sheet as common stock warrants,
with a corresponding expense recorded in the Company’s consolidated statement of
operations in the third quarter of 2004. As of December 29, 2007, the holders of
these warrants exercised 1,000,000 warrants in exchange for 889,648 shares of
the Company’s common stock.





On
October 5, 2005, in conjunction with a private placement which resulted in gross
proceeds of $3,276,000 (Note 8), the Company sold 5,233,603 shares of common
stock at $0.70 per share, and issued warrants to purchase up to 2,944,693 shares
of common stock.  The warrants have a term of five years and an
exercise price of $0.90 per share.  As of December 29, 2007, the
warrant holders have exercised 192,370 warrants, for 180,409 shares of our
common stock, and 2,752,323 warrants remain outstanding.





On
October 13, 2005, the Company issued an aggregate of 19,695,432 warrants in
connection with acquisition of acquired EnergyConnect, Inc. The Company valued
the warrants using the Black-Scholes option pricing model, applying a useful
life of 5 years, a risk-free rate of 4.06%, an expected dividend yield of 0%, a
volatility of 129% and a fair value of the common stock of
$2.17.  Total value of the warrants issued amounted $36,495,391, which
was included in the purchase price of ECI (Note 4). As of December 29, 2007, the
warrant holders have not exercised any of these warrants.





In June
2006, in connection with a common stock private placement, we issued 5,625,000
warrants to purchase common stock (See Note 8).  Each warrant is
exercisable into one share of common stock at $3.00 per share and will expire in
2011.  As of December 29, 2007, the warrant holders have not exercised
any of these warrants.




During
the twelve months ended December 31, 2005 warrant holders exercised
1,815,507 warrants in exchange for 1,079,439 shares of the Company’s common
stock. A portion of these were exercised on a cashless basis, and as a result of
these exercises 736,068 warrants to purchase shares of the Company’s common
stock were forfeited.





During
the twelve months ended December 30, 2006 warrant holders exercised 4,440,667
warrants in exchange for 3,996,962 shares of the Company’s common stock. A
portion of these were exercised on a cashless basis, and as a result of these
exercises 443,705 warrants to purchase shares of the Company’s common stock were
forfeited.





During
the twelve months ended December 29, 2007 no warrant holders exercised warrants
in exchange for shares of the Company’s common stock.  .





11.   Debt





Operating
Line of Credit





The
Company has a loan facility which is an unsecured $120,000 line of credit at
prime plus 3 3⁄4%, due on demand with interest payable monthly.  As of
December 29, 2007 and December 30, 2006, there was $118,456 and $117,454
outstanding, respectively, under this line.  The Company was in
compliance with the terms of this line of credit at December 29,
2007.  The Company had no other term debt or loans outstanding at
December 29, 2007.





53
 Index





12.  Segment
Information





The
continuing operations of this business are comprised of one line of business in
the energy and demand response industry.  Therefore, no segment
information disclosures are provided.





13.  Income
Taxes





The
provision for income taxes for the years ended December 29, 2007, and December
30, 2006 differs from the amount which would be expected as a result of applying
the statutory tax rates to the losses before income taxes due primarily to
changes in the valuation allowance to fully reserve net deferred tax
assets.





As of
December 29, 2007, and December 30, 2006, Microfield had deferred tax assets
primarily consisting of its net operating loss
carryforwards.  However, because of cumulative losses in several
consecutive years, the Company has recorded a full valuation allowance such that
its net deferred tax asset is zero.  The tax benefit recorded at the
statutory rate in Microfield’s pre-tax loss in fiscal years 2007 and 2006 would
have been approximately $5,344,534, and $3,116,927,
respectively.  However, because of recognition of a full valuation
allowance the effective tax rate for the Company was zero in 2007 and
2006.








Deferred
tax assets are comprised of the following components:





December
      29,
              2007
            
            
            December
      30,
              2006Current:Allowance
      for doubtful accounts
            
            $
            74,552
            
            
            $
            74,997Inventory
      allowance
            
            
            23,100
            
            
            
            23,100Audit
      costs
            
            
            48,125
            
            
            
            65,783Other
      allowances
            
            
            13,475
            
            
            
            29,992159,252
            
            
            
            193,872Non-current:Net
      operating loss carry forwards
            
            
            18,982,051
            
            
            
            13,637,517Research
      and development credits
            
            
            101,445
            
            
            
            101,44519,083,496
            
            
            
            13,738,962Total
      deferred tax asset
            
            
            19,242,748
            
            
            
            13,932,834Deferred
      tax asset valuation allowance
            
            
            (19,242,748
            )
            
            
            (13,932,834
            )Net
      deferred tax assets
            
            $
            -
            
            
            $




At
December 29, 2007, the Company had available net operating loss carryforwards of
approximately $49,304,000 for federal income tax purposes. Such carryforwards
may be used to reduce consolidated taxable income, if any, in future years
through their expiration in 2008 to 2027 subject to limitations of Section 382
of the Internal Revenue Code, as amended.  Utilization of net
operating loss carryforwards may be limited due to the ownership changes
resulting from the Company’s initial public offering in 1995 and the Company’s
acquisitions since then.  In addition, the Company has research and
development credits aggregating $101,445 for income tax purposes at December 29,
2008.  Such credits may be used to reduce taxes payable, if any, in
future years through their expiration in 2008 to 2013.





54
 Index





14.  Net
Income (Loss) Per Share





Net
income per share is computed based on the weighted average number of shares of
common stock and potentially dilutive securities assumed to be outstanding
during the period using the treasury stock method. Potentially dilutive
securities consist of stock options, convertible preferred stock and warrants to
purchase common stock.





The most
significant difference between basic and diluted net income per share is that
basic net income per share does not treat potentially dilutive securities such
as preferred stock, stock options and warrants as outstanding.  For
the years ended December 29, 2007 and December 31, 2005, the computation of net
loss per share excludes the effect of stock options and warrants as they were
antidilutive.  There were 9,723,750 options and 28,549,182 warrants
outstanding at December 29, 2007, and 9,057,577 options and 28,549,182 warrants
outstanding at December 30, 2006.





The
following table presents the computation of basic and diluted losses per
share:





Year
      ended
            
            
            Year
      ended
            
            
            Year
      endedDecember
      29,
              2007
            
            
            December
      30,
              2006
            
            
            December
      31,
              2005Net
      income (loss) attributable to common shareholders
            
            $
            (14,035,506
            )
            
            $
            832,960
            
            
            $
            (78,364,253
            )Basic
      and diluted loss per share
            
            $
            (0.17
            )
            
            $
            0.01
            
            
            $
            (2.88
            )Continuing
      operations
            
            $
            (0.05
            )
            
            $
            0.02
            
            
            $
            (2.91
            )Discontinued
      operations
            
            $
            (0.12
            )
            
            $
            (0.01
            )
            
            $
            0.03Basic
      weighted average common shares outstanding
            
            
            82,536,027
            
            
            
            68,347,814
            
            
            
            27,048,127Diluted
      weighted average common shares outstanding
            
            
            82,536,027
            
            
            
            71,374,268
            
            
            
            27,048,127





15.   Commitments
and Contingencies





Manufacturing
and Purchase Commitments





The
Company purchases inventory on an as needed basis.  There are no
purchase commitments for products that the Company uses in the performance of
its services.





Operating
lease commitments





The
Company is party to two facility lease agreements. Following is a schedule of
the Company’s annual operating lease commitments as of December 29, 2007 for the
coming five years.





Year
            
            Amount2008
            
            $
            118,2482009
            
            
            49,3522010
            
            
            -2011
            
            
            -2012
      and beyond
            
            
            -Total
            
            $
            167,600





Rental
expenses charged to operations for the year ended December 29, 2007, December
30, 2006 and December 31, 2005 were $135,571, $95,483 and $10,200,
respectively.





16.   Legal
Proceedings





From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have, individually
or in the aggregate, a material adverse affect on our business, financial
condition or operating results.





55
 Index




17. 
Going Concern Matters
 
 The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.  As shown in the
consolidated financial statements during the year ended December 29, 2007, the
Company incurred net losses of $14,035,506 and generated negative cash flow from
operations in the amount of $2,863,493.  The Company’s current
liabilities exceeded its current assets by $1,123,614 as of December 29,
2007.  These factors among others may indicate that the Company will
be unable to continue as a going concern for a reasonable period of
time.
 
 The
Company's existence is dependent upon management's ability to develop profitable
operations and resolve its liquidity problems.  Management anticipates
the Company will attain profitable status and improve its liquidity through
continued growth, distribution and sale of its products and services, and
additional equity investment in the Company.  The accompanying
consolidated financial statements do not include any adjustments that might
result should the Company be unable to continue as a going concern.
 
 We
presently do not have any available credit, bank financing or other external
sources of liquidity. Due to our brief history and historical operating losses,
our operations have not been a source of liquidity. We will need to obtain
additional capital in order to expand operations and become profitable. In order
to obtain capital, we may need to sell additional shares of our common stock or
borrow funds from private lenders. There can be no assurance that we will be
successful in obtaining additional funding.
 
 We will
still need additional investments in order to continue operations to cash flow
break even. Additional investments are being sought, but we cannot guarantee
that we will be able to obtain such investments. Financing transactions may
include the issuance of equity or debt securities, obtaining credit facilities,
or other financing mechanisms. However, the trading price of our common stock
and the downturn in the U.S. stock and debt markets could make it more difficult
to obtain financing through the issuance of equity or debt securities. Even if
we are able to raise the funds required, it is possible that we could incur
unexpected costs and expenses, fail to collect significant amounts owed to us,
or experience unexpected cash requirements that would force us to seek
alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our
operations.
 
 By
adjusting the Company’s operations and development to the level of
capitalization, management believes it has sufficient capital resources to meet
projected cash flow deficits. However, if during that period or thereafter, the
Company is not successful in generating sufficient liquidity from operations or
in raising sufficient capital resources, on terms acceptable to them, this could
have a material adverse effect on the Company’s business, results of operations
liquidity and financial condition. If operations and cash flows continue to
improve through these efforts, management believes that the Company can continue
to operate.  However, no assurance can be given that management’s
actions will result in profitable operations or the resolution of its liquidity
problems.
 
 18.  Subsequent
Events





Divestiture of Christenson
Electric.





On
November 29, 2007, our board of directors signed an agreement to sell all of the
shares of our wholly-owned subsidiary Christenson Electric, Inc. to a
corporation formed by the management of CEI, for $1,650,000 in cash and the
assumption of approximately $7.5 million in term and revolving debt (subject to
adjustments of subsequent transactions).  The agreement was approved
by our shareholders in a vote on March 10, 2008.




19.  Selected
Quarterly Data (UNAUDITED)




The
following table sets forth selected unaudited quarterly information for the
Company’s year-ended December 29, 2007 and December 30, 2006.





Quarters
      ended in 2007
            
            March
      31
            
            
            June
      30
            
            
            September
      29
            
            
            December
      29Revenue
            
            $
            2,600,000
            
            
            $
            3,117,000
            
            
            $
            4,690,000
            
            
            $
            2,218,000Gross
      Profit
            
            
            432,000
            
            
            
            616,000
            
            
            
            2,446,000
            
            
            
            343,000Provision
      for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Basic
      income (loss) per share
            
            
            (0.02
            )
            
            
            (0.01
            )
            
            
            0.01
            
            
            
            (0.14
            )Diluted
      income (loss) per share
            
            
            (0.02
            )
            
            
            (0.01
            )
            
            
            0.01
            
            
            
            (0.14
            )Quarters
      ended in 2006
            
            April
      1
            
            
            July
      1
            
            
            September
      30
            
            
            December
      30Revenue
            
            
            827,000
            
            
            
            313,000
            
            
            
            943,000
            
            
            
            1,124,000Gross
      Profit
            
            
            (79,000
            )
            
            
            (17,000
            )
            
            
            113,000
            
            
            
            153,000Provision
      for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Basic
      income (loss) per share
            
            
            (0.09
            )
            
            
            0.02
            
            
            
            0.09
            
            
            
            (0.01
            )Diluted
      income (loss) per share
            
            $
            (0.09
            )
            
            $
            0.02
            
            
            $
            0.09
            
            
            $
            (0.01
            )





There was
no allowance for doubtful accounts or any bad debt expense in the continuing
operations for any of the years presented.





56
 Index





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




None.




ITEM 9A.  CONTROLS AND PROCEDURES





Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our principal
executive and financial officers, as appropriate to allow timely decisions
regarding required disclosure.





Evaluation of Disclosure Controls and
Procedures





As of the
end of the period covered by this Annual Report, we carried out an evaluation,
under the supervision and with the participation of our Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”)).  Based on that  evaluation, and the remediation of
material weaknesses described below, our CEO and CFO concluded, as of the end of
such period,  our disclosure controls and procedures were effective in
ensuring that the information required to be filed or submitted under the
Exchange Act is recorded, processed, summarized and reported as specified in the
Securities and Exchange Commission's rules and forms, and accumulated and
communicated to our management, including our CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure.  Our management
has undergone an intensive process of identifying deficiencies with respect to
our disclosure controls and procedures and implementing corrective measures,
which includes the establishment of new internal policies related to financial
reporting.





In
response to these internal control deficiencies identified in prior periods, the
Company dedicated resources to remediate the above mentioned
deficiencies.  The Company did successfully remediate the following
internal control deficiencies in 2006:  accounts reconciliation,
timely closing of monthly books and records, review of accounting
reconciliations, proper training of personnel, fixed asset tracking procedures,
and accounts receivable aging procedures.  The Company continued its
improvement of controls and procedures over revenue recognition, and the cash
disbursement and liability recognition deficiencies in the current fiscal year,
and believes that such deficiencies have been remediated.




Management’s
Annual Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f).  Those rules define internal
control over financial reporting as a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Our internal control over financial reporting
includes those policies and procedures that:


·
                pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;
 
 ·
                provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures are being made
      only in accordance with authorizations of our management and directors;
      and


57
 Index





·
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.





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





A
material weakness is a control deficiency (as defined in PCAOB Auditing Standard
No. 2 and superseded by PCOAB Auditing Standard No. 5), or combination of
control deficiencies, that results in there being more than a remote likelihood
that a material misstatement of the annual or interim financial statements will
not be prevented or detected.




Management’s
assessment of the effectiveness of our internal control over financial reporting
is that our internal controls over financial reporting were effective as of
December 29, 2007.  In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Because of the
corrective actions taken in 2007 resolving material weaknesses described below,
management concluded that our internal control over financial reporting was
effective as of December 29, 2007.
 
 We
identified material weaknesses as of December 30, 2006: 1) Revenue
Recognition - Implementing a consistent application of percent of completion
estimation, implementing accurate project costing controls, as well as
maintaining adequate records of contracts, and 2) Cash Disbursements and
Liability Recognition - Standardizing purchasing policies and procedures,
segregating purchasing duties where appropriate and improving the receipt and
approval function. Management has corrected these material weaknesses and
corrected other significant weaknesses.  The Company will continue to
dedicate significant personnel and financial resources to the ongoing control
maintenance efforts to improve the effectiveness of the internal
controls.


Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 29, 2007 has been audited by RBSM LLP, the Company’s
independent registered public accounting firm, as stated in their report, which
follows.





Changes
in Internal Control over Financial Reporting





Except as
described below, there were no changes in internal controls over financial
reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially effect, our internal
control over financial reporting.




Among the
changes in internal controls that have been implemented in the past several
periods are:




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 been
      completed





•
            Procedures
      instituted to provide for appropriate separation of
  duties





58
 Index





Other


•
            Procedures
      established and personnel assigned to reconcile key accounts on a timely
      basis





•
            Control
      function added to review
reconciliations





•
            Control
      evidence records and procedures for each job
  function





•
            Timely
      and frequent project reviews





•
            Timely
      closing and review of books and
records





•
            Deadlines
      imposed for period end closings




To
correct the material weakness, checklists have been developed delineating tasks,
preparation responsibilities, and review responsibilities targeting specific
completion dates. The checklists provide evidentiary support of work performed
and review. Specific checklists have been developed for non-quarter end months,
quarter end months and the annual close. These checklists were developed and
have been implemented in the 2007 annual close processes and utilized in the
preparation of this Annual Report.





Our
officers have been working with the Board of Directors to address
recommendations from our registered independent public accounting firm regarding
deficiencies in the disclosure controls and procedures. Management expects that
these new procedures will result in disclosure controls and procedures pursuant
to Rule 13a-14 of the Exchange Act, which will timely alert the CEO to
material information relating to our requirements to be included in our Exchange
Act filings.





59
 Index





RBSM
LLP
 CERTIFIED
PUBLIC ACCOUNTANTS
 
 REPORT
OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
 
 
 Board of
Directors
 Microfield
Group, Inc.
 Portland,
Oregon
 
 We have
audited management's assessment, included in the accompanying Management's
Report on Internal Control over Financial Reporting, that Microfield Group,
Inc. and its subsidiaries (the Company) maintained effective internal
control over financial reporting as of December 29, 2007, based on criteria
established inInternal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
 
 A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 In our
opinion, management's assessment that Microfield Group, Inc. and its
wholly-owned subsidiaries maintained effective internal control over financial
reporting as of December 29, 2007, is fairly stated, in all material respects,
based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Also, in our opinion, Microfield Group, Inc. and
its subsidiaries, maintained, in all material respects, effective internal
control over financial reporting as of December 29, 2007, based on criteria
established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets as of December
29, 2007 and December 30, 2006, and the related consolidated statement of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 29, 2007 of Microfield Group, Inc. and its
subsidiaries.  Our report dated March 11, 2008, expressed an
unqualified opinion thereon and included an explanatory paragraph related to the
Company’s ability to continue as a going concern.
 
 
 
 /s/ RBSM
LLP
 
 McLean,
Virginia
 March 11,
2008


60




PART
III





ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS;





The following table sets forth
information regarding our directors and executive officers as of December 29,
2007:





Name
            Age
            PositionsRodney
      M. Boucher
            64
            Chief
      Executive Officer and DirectorRandall
      R. Reed
            51
            Chief
      Financial OfficerGene
      Ameduri
            59
            President
      of ECI and DirectorWilliam
      C. McCormick
            74
            Chairman
      of the Board of DirectorsGary
      D. Conley
            47
            DirectorJohn
      Metcalf
            57
            DirectorKurt
      E. Yeager
            68
            DirectorPhillip
      G. Harris
            59
            Director





Directors
are elected to serve until the next annual meeting of stockholders and until
their successors are elected and qualified. Currently there are six directors on
our board of directors. During 2005, our Directors were not compensated in cash
for their services.  Starting with the February 2006 board meeting,
those directors considered as outside directors, are being compensated $500 for
each board meeting held at the Company’s headquarters or other location where
the director is required to travel.  Each year at the discretion of
the board, directors are awarded a certain number of non-qualified stock
options.  During 2006 three board members were awarded shares for
their service on the board of directors.  These awards are disclosed
in the compensation section below.  Gary Conley was also awarded
50,000 non-qualified options in 2006 for joining the Company’s board of
directors.  Officers are elected by the Board of Directors and serve
until their successors are appointed by the Board of Directors. Biographical
resumes of each officer and director are set forth below.





Rodney M. Boucher joined us
through the acquisition of EnergyConnect in October 2005.  He was
appointed Chief Executive Officer on that date.  Prior to that date
Mr. Boucher was the founder, President and CEO of EnergyConnect, Inc. from its
inception in 1998 until its acquisition by us in October 2005.  Before
forming EnergyConnect Mr. Boucher was Chief Executive Officer of Calpine Power
Services and Senior Vice President of Calpine Corporation from 1995 to
1998.  Prior to that Mr. Boucher served as Chief Operating Officer of
Citizens Power and Light and held a number of senior management positions with
PacifiCorp and United Illuminating Company including Chief Information Officer,
Vice President of Operations, Vice President of Power Resources, and Director of
Engineering.  Mr. Boucher holds an AMP certificate from Harvard
Business School, a MS in electrical engineering from Rensselaer Polytechnic
University and a Bachelor of Science from Oregon State
University.  Mr. Boucher is a member of several non-profit boards and
a senior fellow of the American Leadership Forum.





Randall R. Reed joined us in
September 2005 when he was appointed Chief Financial Officer.  Mr.
Reed provided financial, accounting and SEC consulting for us from September
2002 through September 2005 through his consulting firm Reed Financial Services,
which he operated from January 2001 through September 2005.  From July
1999 to January 2001, Mr. Reed was Chief Financial Officer for Dry, Inc. a
consumer products company.  Mr. Reed was Chief Financial Officer and
Controller of Microfield Graphics, Inc., a publicly traded manufacturer of
technology products from August 1985 to July 1999.  Prior to his
position there he was with Coopers & Lybrand, an international public
accounting firm, from 1981 to 1985. Mr. Reed is presently serving on the Board
of Directors for Bio-Reaction Industries LLC.  Mr. Reed is a
CPA.  Mr. Reed holds a BS in Business Administration from Southern
Oregon University.





Gene Ameduri joined us in
October 2005 through our acquisition of EnergyConnect, Inc.  On that
date he was named President of EnergyConnect.  He joined EnergyConnect
in 2003 as Senior Vice President.  Prior to that, Mr. Ameduri was with
Roth Brothers, Inc., a mechanical contractor.  Roth Brothers is a
subsidiary of First Energy. He was there from 1981 to 2003, and held the office
of Vice President of the Facilities Automation Division among other management
positions.  Mr. Ameduri holds a BS in Engineering from Case Western
Reserve University and an MS in Mechanical Engineering from Youngstown State
University.  Mr. Ameduri is a Registered Professional Engineer in
Ohio, Pennsylvania and Florida.





61
 Index





William C. McCormick joined us
in January 2004 as Interim Chief Executive Officer and resigned that post
in November 2004.  Prior to coming to us, Mr. McCormick was
Chief Executive Officer of Precision Castparts, Corp., a publicly traded
aerospace company, from August 1994 to August 2002. He also served as the
Chairman of the board of directors there from October 1994 to
August 2003. Mr. McCormick joined Precision Castparts in
April 1985. Prior to Precision Castparts, Mr. McCormick spent
32 years at General Electric in various businesses, including GE Aircraft
Engines, Carboloy Systems, Distribution Equipment, and Industrial Electronics.
Mr. McCormick serves on the board of directors of Merix Corporation, a
publicly traded manufacturer of high performance interconnect products. He
serves on the boards of several other “for profit” and non profit companies.
McCormick holds a BS in Mathematics from the University of
Cincinnati.  Mr. McCormick is currently employed by the
Company.





Gary D. Conley was elected as
a director on December 13, 2005.  Mr. Conley is currently the CEO of
SolFocus, a concentrator of solar technology founded to commercialize advanced
concentrator solar technology.  Mr. Conley was CEO of GuideTech, a
manufacturer of semiconductor test equipment from July 2003 to February
2005.  Prior to that, Mr. Conley was Senior Vice President in charge
of the Memory Test Division at Credence Corporation, a manufacturer of
semiconductor test equipment, from May 1993 to November 1996.  Mr.
Conley was President of EPRO, a manufacturer of semiconductor test equipment
from January 1990 to May 1993, at which time the business was sold to
Credence.  Mr. Conley has been an active investor in early stage,
advanced technology companies.  He sits on the boards of several
companies.  Mr. Conley holds a BS degree in Physics from the
University of South Florida.





John P. Metcalf was elected as
a director on June 29, 2007.  Since November 2002, Mr. Metcalf has
been a CFO Partner with Tatum LLC, the largest executive services and consulting
firm in the United States. Mr. Metcalf has 18 years experience as a CFO, most
recently at ESI, a provider of high-technology manufacturing equipment to the
global electronics market. Prior to ESI, Mr. Metcalf served as CFO for
Siltronic, WaferTech, Siltec Corporation, and OKI Semiconductor. Mr. Metcalf
began his career at AMD, where he worked for eleven years in a number of finance
managerial positions including Director and Controller of North American
Operations. Mr. Metcalf also currently serves on the Board of Directors and is
Chairman of the Audit Committee for ParkerVision (NASDAQ:PRKR).





Kurt E. Yeager was elected as
a director on May 10, 2007.  Mr. Yeager has more than 30 years of
experience in the energy industry and energy research and was the past President
and Chief Executive Officer of the Electric Power Research Institute (“EPRI”),
the national collaborative research and development organization for electric
power.  Under Mr. Yeager's leadership, EPRI evolved from a non-profit
electric power research institute into a family of companies encompassing
collaborative and proprietary R&D as well as technical solution applications
for the electricity enterprise in the U.S. and over 40 other
countries.  As CEO, Mr. Yeager also led the electricity
enterprise-wide collaborative development of the landmark Electricity Technology
Roadmap, and the Electricity Sector Framework for the
Future.   Mr. Yeager also served as the director of Energy
R&D Planning for the EPA Office of Research.  Prior to that, he
was with the MITRE Corporation as associate head of the Environmental Systems
Department.





Phillip G. Harris was elected
as a director on October 10, 2007.  Mr. Harris has over thirty years
of energy industry experience.  Most recently, Mr. Harris retired from
his positions as president and chief executive officer of PJM Interconnection
and chairman of the PJM Board.  PJM, the nation’s first fully
functioning regional transmission organization, administers the world’s largest
energy market and operates the world’s largest electricity grid.  Mr.
Harris has served as a member of the North American Electric Reliability
Council’s (NERC) Board of Trustees.  He also is a member of the
National Association of Corporate Directors, serving on its Corporate Advisory
Committee.  In 2005, Mr. Harris was named CEO of the Year by Platts
Global Energy Awards, becoming the first chief executive from his industry to
receive the honor.





Compliance
with Section 16(a) of the Exchange Act





Section 16(a) of
the Securities Exchange Act of 1934 requires our officers and directors, and
persons who own more than ten percent of a registered class of our equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and American Stock Exchange. Officers,
directors and greater than ten percent stockholders are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they
file.




62
 Index





Based on
a review of the copies of such forms received, we believe that during 2007, all
filing requirements applicable to our officers, directors and greater than ten
percent beneficial owners were complied with, except that 3 Forms 4 with respect
to Mr. Stansell, a retired director, were filed late, 2 Forms 4 with respect to
Messrs. Ameduri, Conley, Boucher, Yeager, Reed and McCormick were filed late,
and 1 Form 4 with respect to Mr. Metcalf was filed late.




Audit
Committee





The Audit
Committee consists of Mr. Metcalf, Mr. Yeager and Mr.
Harris.  The Board of Directors has determined that Mr. Metcalf is an
“audit committee financial expert” as defined in SEC rules. The audit committee
held several meetings during fiscal year 2007 coincident with the filing of SEC
quarterly Forms 10-QSB and other press releases involving financial
matters.  On November 29, 2007, the board approved a revised Audit
Committee charter.  On August 21, 2007, Mr. Metcalf was appointed
Chairman of the audit committee.  Mr. Yeager was also appointed to the
audit committee on that date.  Mr. Harris was appointed to the audit
committee on November 29, 2007.





The Audit
Committee oversees the accounting, financial reporting and audit processes;
makes recommendations to the board of directors regarding the selection of
independent auditors; reviews the results and scope of audit and other services
provided by the independent auditors; reviews the accounting principles and
auditing practices and procedures to be used in preparing the Company’s
financial statements; and reviews the Company’s internal controls.





Governance
Committee





On August
21, 2007, the board of directors appointed Mr. Yeager as chairman of the
Governance committee, joining  Mr. Conley, Mr. Yeager, Mr Metcalf and
Mr. McCormick as members of that committee. The current policy requires that the
governance committee consist of at least two Board Members. The governance
committee had several meetings and discussions throughout 2007.  A copy of
our Code of Ethics is available from us by contacting Mr. Bill Munger, c/o
Microfield Group, Inc., 111 SW Columbia St., Suite 480, Portland, Oregon
97201.





Compensation
Committee





Our
compensation committee consisted on Mr. Harris, as Chairman, Mr. Yeager and Mr.
Metcalf as committee members.  All three members were appointed to
their positions on November 29, 2007. The compensation committee had several
meetings during the year and numerous informal meetings and discussions
throughout 2007. The committee determines the compensation level, option grants
and other compensation for our executive officers.




Compensation
Committee Interlocks and Insider Participation




During
our 2007 fiscal year, no member of our compensation committee had a position as
an officer of our company.  None of the members of our compensation
committee had any other relationship with us.




A.   During
the fiscal year ended December 29, 2007, one of our executive officers, Rod
Boucher served as a director on the board of Solfocus, Inc. whose Chief
Executive Officer, Gary Conley sat on the compensation committee of our
company.  At the November 29, 2007 board of directors meeting, Mr.
Conley resigned from the Compensation Committee and was replaced as chairman of
that committee by Mr. Harris.







ITEM
11.  EXECUTIVE COMPENSATION





Compensation
Discussion and Analysis




We
believe our success depends on the continued contributions of our named
executive officers. Personal relationships are very important in our industry.
Our named executive officers are primarily responsible for many of our critical
customer and supplier relationships. The maintenance of these relationships is
critical to ensuring our future success. Therefore, it is important to our
success that we retain the services of these individuals and prevent them from
competing with us should their employment with us terminate.





63
 Index





Our
compensation programs are designed to provide our named executive officers
competitive salaries, short term bonus opportunities, and long term equity
incentives. Our goal is to provide our named executive officers with incentives
that are aligned with the performance of our business and the performance of our
common stock. Our salary amounts are intended to be competitive with similarly
situated companies.




Our
compensation plan consists of the following components: salary, annual incentive
bonus and long term equity incentives. The details of each these components are
described in the tables and narrative below.




Our
compensation plan is aimed to further our belief that that retaining these
officers is imperative to our success.  The long-term equity incentive
plan, under which options are issued, is designed to award activities that
increase the trading price of our common stock. The management incentive bonus
plan is designed to reward increases in our earnings before interest, taxes, and
amortization.




Compensation
Committee Report on Executive Compensation




The
Compensation Committee is comprised of three independent non-employee directors.
The Compensation Committee sets the principles and strategies it serves to guide
the design of our compensation plans and programs. The Compensation Committee
annually evaluates the performance of our CEO and the other named executive
officers. Taking their performance evaluations into consideration, the
Compensation Committee establishes and approves their compensation levels,
including base salary, annual bonuses, and equity incentives. The Compensation
Committee met several times during the year, the last time on November 28, 2007
and considered compensation plans and programs entered into between us, and the
CEO and named executive officers.




Our
Compensation Philosophy and Plans




Our
executive compensation program is designed to attract and retain superior
executive talent, to provide incentives and rewards to executive officers who
will contribute to our long-term success and to closely align the interests of
executives with those of our stockholders. The Compensation Committee reviews
our executive compensation plans and programs through the application of the
business judgment of each of its members. The Compensation Committee uses
discretion and considers an executive’s entire compensation package when setting
each portion of compensation, which is based upon corporate goals and
performance, individual initiatives and performance, and overall market
considerations. The principal elements of our executive compensation program
consist of: (i) annual base salary, (ii) participation in our management
incentive plan that provides for an annual bonus, and (iii) equity incentive
plan.




Base Salaries Annual base
salaries for executive officers are initially determined by evaluating the
responsibilities of the position and the experience and knowledge of the
individual. Also taken into consideration is the competitiveness of the
marketplace for executive talent, including a comparison of base annual salaries
for comparable positions at peer companies.




Stock Incentive Plan. The
2004 Stock Incentive Plan permits the grant of incentive stock options,
non-qualified stock options, restricted stock, restricted stock units,
performance shares, stock appreciation rights (SARS) and other common
stock-based awards to our executive officers. The options and SARS both have an
exercise price equal to the fair market value of our common stock on the grant
date. The options and SARS granted to our CEO and our executive officers on
November 29, 2007 are 2% vested on December 29, 2007. The Compensation Committee
believes that equity incentives help align the interests of the executives with
those of the stockholders and provide incentives for the executives to create
long-term value for our stockholders.




Section 162(m) Section 162(m)
of the Internal Revenue Code, provides that compensation in excess of $1,000,000
paid to the President and CEO and each of our three other most highly
compensated executive officers holding office at the end of any year (except for
our Chief Financial Officer) will not be deductible for federal income tax
purposes unless such compensation satisfies one of the enumerated exceptions set
forth in Section 162(m). The Compensation Committee has reviewed our
compensation plans and programs with regard to the deduction limitation set
forth in Section 162(m). Based on this review, the Compensation Committee
anticipates that the annual bonus, long term incentive plan bonus and gain, if
any, recognized by our CEO and our three other most highly compensated executive
officers (except for our Chief Financial Officer) upon the exercise of stock
options or SARS meet the requirements for deductibility under Section 162(m) of
the Code.





64
 Index





Compensation of the Chief Executive
Officer     As of December 31, 2007, we have not entered
into employment agreements with any of our executive officers. Mr. Boucher is
paid an annual salary of $300,000 and is eligible for an annual bonus if our
financial targets are achieved. The amount of the annual bonus is determined
using a floating percentage of annual base salary based on the level of
attainment of various financial metrics. The Compensation Committee believes
that Mr. Boucher is critical to our future success and that this compensation
package properly aligns his interests with that of our
shareholders.





The
      Compensation Committee:Mr.
      Phil HarrisMr.
      Kurt YeagerMr.
      John Metcalf





The
following table provides certain summary information concerning compensation
awarded to, earned by or paid to our Chief Executive Officer, Chief Financial
Officer and our three other executive officers  whose total annual salary
and bonus exceeded $100,000 (collectively, the “named officers”) for fiscal
years 2007, 2006 and 2005.





SUMMARY
COMPENSATION TABLE





AllOtherOption
            
            
            CompensationName & Principal Position
            
            Year
            
            Salary ($)
            
            
            Awards ($) *
            
            
            ($) (7)
            
            
            Total ($)Rodney M.
      Boucher (1)
            
            2007
            
            
            300,000
            
            
            
            41,430
            
            
            
            12,415
            
            
            
            353,845Chief Executive Officer and
      Director
            
            2006
            
            
            300,000
            
            
            
            2,771
            
            
            
            12,415
            
            
            
            315,1862005
            
            
            62,500
            
            
            
            —
            
            
            
            —
            
            
            
            62,500A. Mark Walter
      (2)
            
            2007
            
            
            208,000
            
            
            
            104,796
            
            
            
            7,200
            
            
            
            319,996President and Former
      Director
            
            2006
            
            
            208,000
            
            
            
            92,150
            
            
            
            7,200
            
            
            
            307,3502005
            
            
            153,939
            
            
            
            67,433
            
            
            
            7,200
            
            
            
            228,572Randall R.
      Reed (3)
            
            2007
            
            
            208,000
            
            
            
            34,349
            
            
            
            
            
            
            
            242,349Chief Financial
      Officer
            
            2006
            
            
            208,000
            
            
            
            19,250
            
            
            
            —
            
            
            
            227,2502005
            
            
            56,000
            
            
            
            4,525
            
            
            
            —
            
            
            
            60,525Gene Ameduri
      (4)
            
            2007
            
            
            200,000
            
            
            
            16,249
            
            
            
            5,736
            
            
            
            221,985President of ECI and
      Director
            
            2006
            
            
            200,000
            
            
            
            1,150
            
            
            
            5,736
            
            
            
            206,8862005
            
            
            41,667
            
            
            
            —
            
            
            
            —
            
            
            
            41,667John
      Stremel (5)
            
            2007
            
            
            180,000
            
            
            
            7,649
            
            
            
            —
            
            
            
            187,649Senior
      Vice President
            
            2006
            
            
            180,000
            
            
            
            501
            
            
            
            —
            
            
            
            180,5012005
            
            
            38,077
            
            
            
            —
            
            
            
            —
            
            
            
            38,077








*
            Amounts
      represented stock-based compensation expense for fiscal year 2007 under
      SFAS 123R as discussed in Note 2, “Stock-Based Compensation” of
      the Notes to Consolidated Financial Statements included elsewhere in this
      annual report.





(1)
            Mr. Boucher was
      appointed our Chief Executive Officer on October 13, 2005 and President of
      Microfield on February 27, 2008.




(2)
            Mr.
      Walter was appointed our President effective November 18, 2004. Prior to
      this appointment he served as our Senior Vice President and Chief
      Operating Officer.  Mr. Walter resigned from his position as
      Microfield’s President on February 27,
2008.




(3)
            Mr.
      Reed was appointed our Chief Financial Officer on September 19,
      2005.




(4)
            Mr.
      Ameduri was appointed President of ECI on October 13,
  2005.




(5)
            Mr.
      Stremel was appointed Senior Vice President on October 13,
      2005.











65
 Index





Employment
Agreements With Named Executive Officers




As of
December 29, 2007, we have not entered into employment agreements with any of
our executive officers.




Grants
of plan-based awards





During
2007, we granted 2,707,500 incentive stock options to purchase Microfield Group,
Inc. common stock under our Stock Incentive Plan 900,000 of which were granted
to the named officers. No other current executive officers received options
exercisable for shares of our Common Stock during fiscal 2007. The following
table sets forth information regarding stock options granted to our named
officers under our Stock Incentive Plan during the fiscal year ended December
29, 2007:





All Other StockAwards:
            
            All Other Option
            
            Exercise or
            
            Grant DateNumber of
            
            Awards: Number of
            
            Base Price of
            
            Fair ValueShares of Stocks
            
            Securities
            
            Option
            
            of Stock andor Units
            
            Underlying Options
            
            Awards
            
            OptionName
            
            Grant Date
            
            (#)
            
            (#)
            
            ($/Sh)
            
            Awards(a)
            
            (b)
            
            (i)
            
            (j)
            
            k
            
            lRod
      Boucher
            
            11/29/07
            
            -
            
            500,000
            
            $    0.94
            
            392,500Randall
      R. Reed
            
            11/29/07
            
            -
            
            150,000
            
            $    0.94
            
            117,750Gene
      Ameduri
            
            11/29/07
            
            -
            
            150,000
            
            $    0.94
            
            117,750John
      Stremel
            
            11/29/07
            
            -
            
            100,000
            
            $    0.94
            
            78,500





Outstanding
equity awards at fiscal year-end





The
following table sets forth information with respect to grants of options to
purchase our common stock under our Stock Incentive Plan to the named officers
as of December 29, 2007.





Number
            
            
            Numberof
            
            
            ofSecurities
            
            
            SecuritiesUnderlying
            
            
            UnderlyingUnexercised
            
            
            Unexercised
            
            
            OptionOptions
            
            
            Options
            
            
            Exercise
            
            Option(#)
            
            
            (#)
            
            
            Price
            
            ExpirationName
            
            Exercisable
            
            
            Unexercisable
            
            
            ($)
            
            DateRodney
      M. Boucher
            
            
            10,417
            
            
            
            489,583
            
            
            $
            0.94
            
            11/29/1263,646
            
            
            
            171,354
            
            
            $
            0.65
            
            11/21/11A.
      Mark Walter
            
            
            26,406
            
            
            
            71,094
            
            
            $
            0.65
            
            11/21/11666,667
            
            
            
            333,333
            
            
            $
            0.35
            
            4/29/1075,000
            
            
            
            25,000
            
            
            $
            0.40
            
            12/3/0997,917
            
            
            
            2,083
            
            
            $
            0.48
            
            1/22/09Randall
      R. Reed
            
            
            3,125
            
            
            
            146,875
            
            
            $
            0.94
            
            11/29/1226,406
            
            
            
            71,094
            
            
            $
            0.65
            
            11/21/1158,333
            
            
            
            41,667
            
            
            $
            0.84
            
            8/23/10Gene
      Ameduri
            
            
            3,125
            
            
            
            146,875
            
            
            $
            0.94
            
            11/29/1226,406
            
            
            
            71,094
            
            
            $
            0.65
            
            11/21/11John
      Stremel
            
            
            2,083
            
            
            
            97,917
            
            
            $
            0.94
            
            11/29/1211,510
            
            
            
            30,990
            
            
            $
            0.65
            
            11/21/11575,460
            
            
            
            -
            
            
            $
            0.32
            
            2/6/08











66
 Index





Director
Compensation




The
following table sets forth summary information concerning the total compensation
paid to our non-employee directors in 2007 for services to our
company.  All option awards were granted from our Stock Incentive
Plan.





Fees Earned
            
            
            Optionor Paid in
            
            
            AwardsCash
            
            
            ($)
            
            
            TotalName
            
            ($)
            
            
            (1)
            
            
            ($)William
      C. McCormick (2)
            
            $
            13,000
            
            
            $
            1,635
            
            
            $
            14,635Gary
      D. Conley (3)
            
            $
            2,000
            
            
            $
            1,227
            
            
            $
            3,227Kurt
      E. Yeager (4)
            
            $
            1,500
            
            
            $
            36,940
            
            
            $
            38,440John
      P. Metcalf (5)
            
            $
            1,000
            
            
            $
            42,904
            
            
            $
            43,904Phillip
      G. Harris (6)
            
            $
            500
            
            
            $
            34,090
            
            
            $
            34,590





(1)
Amounts represented stock-based compensation expense for fiscal year 2007for
stock options granted in 2007 under SFAS 123R as discussed in Note 2,
“Stock-Based Compensation” of the Notes to Consolidated Financial Statements
included elsewhere in this annual report.





(2) Under
our 2004 Stock Incentive Plan, on November 29, 2007, Mr. McCormick was granted a
stock option to purchase 100,000 shares of common stock, which option vests over
48 months. The aggregate grant date fair value of this award is
$78,500.





(3) Under
our 2004 Stock Incentive Plan, on November 29, 2007, Mr. Conley was granted a
stock option to purchase 75,000 shares of common stock, which option vests over
48 months. The aggregate grant date fair value of this award is
$58,875.





(4) Under
our 2004 Stock Incentive Plan, on May 10, 2007, Mr. Yeager was granted a stock
option to purchase 50,000 shares of common stock, which option vests
immediately.   On November 29, 2007 Mr. Yeager was also granted a
stock option to purchase 85,000 shares of common stock, which option vests over
48 months. The aggregate grant date fair value of these awards is
$102,275.





(5) Under
our 2004 Stock Incentive Plan, on June 29, 2007, Mr. Metcalf was granted a stock
option to purchase 50,000 shares of common stock, which option vests
immediately.   On November 29, 2007 Mr. Metcalf was also granted
a stock option to purchase 95,000 shares of common stock, which option vests
over 48 months. The aggregate grant date fair value of these awards is
$115,925.





(6) Under
our 2004 Stock Incentive Plan, on October 10, 2007, Mr. Harris was granted a
stock option to purchase 50,000 shares of common stock, which option vests
immediately.   On November 29, 2007 Mr. Harris was also granted a
stock option to purchase 85,000 shares of common stock, which option vests over
48 months. The aggregate grant date fair value of these awards is
$99,425.





67
 Index





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





The
following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of December 29, 2009 as to (i) each person who
is known by us to own beneficially more than 5% of the outstanding shares of any
class of our common or preferred stock, (ii) each of our directors, (iii) each
of the executive officers named in the Summary Compensation Table below and (iv)
all directors and executive officers as a group. Except as otherwise noted, we
believe the persons listed below have sole investment and voting power with
respect to the


common
Stock owned by them.





Common Stock andCommon Stock EquivalentsEquivalentCommon
            
            
            ApproximateShares
            
            
            VotingFive
      Percent Shareholders, Directors, Director
            
            Beneficially
            
            
            PercentageNominees
      and Certain Executive Officers
            
            Owned (1)
            
            
            (2)(3)
            
            Robert
      J. Jesenik
              5300
      Meadows Rd., Suite 400
              Lake
      Oswego, OR 97035
            
            
            7,570,230
            
            
            
            9.0
            %CEAC
              5300
      Meadows Rd., Suite 400
              Lake
      Oswego, OR 97035
            
            
            4,328,017
            
            
            
            5.2
            %(4)
            
            Rodney
      M. Boucher
              111
      SW Columbia, Suite 400
              Portland,
      OR 97201
            
            
            14,952,504
            
            
            
            16.7
            %(5)
            
            Gene
      Ameduri
              111
      SW Columbia, Suite 400
              Portland,
      OR 97201
            
            
            9,510,355
            
            
            
            10.9
            %(6)
            
            William
      C. McCormick
              111
      SW Columbia, Suite 400
              Portland,
      OR 97201
            
            
            2,863,959
            
            
            
            3.4
            %(7)
            
            A.
      Mark Walter
              111
      SW Columbia, Suite 400
              Portland,
      OR 97201
            
            
            788,219
            
            
            
            *(8)
            
            Randall
      R. Reed
              111
      SW Columbia, Suite 400
              Portland,
      OR 97201
            
            
            102,344
            
            
            
            *(9)
            
            Gary
      D. Conley
              111
      SW Columbia, Suite 400
              Portland,
      OR 97201
            
            
            78,125
            
            
            
            *(10)
            
            Kurt
      E. Yeager
              111
      SW Columbia, Suite 400
              Portland,
      OR 97201
            
            
            54,688
            
            
            
            *(11)
            
            John
      P. Metcalf
              111
      SW Columbia, Suite 400
              Portland,
      OR 97201
            
            
            55,313
            
            
            
            *(12)
            
            Phillip
      G. Harris
              111
      SW Columbia, Suite 400
              Portland,
      OR 97201
            
            
            54,688
            
            
            
            *(13)
            
            All
      directors and executive officers as a group (7 persons)
            
            
            28,570,089
            
            
            
            29.6
            %





*
            Less
      than 1%




(1)
            Shares
      to which the person or group has the right to acquire within 60 days after
      December 29, 2007 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)
            Percentage
      prior to offering is based on 83,569,416 shares of common stock
      outstanding as of December 29,
2007.





68
 Index





(3)
            Includes
      576,463 common equivalent preferred shares outstanding as of December 29,
      2007, and 955,654 warrants convertible into common stock within 60 days
      after December 29, 2007.




(4)
            Includes
      263,158 common equivalent preferred shares outstanding as of December 29,
      2007 and 6,196,058 warrants and options convertible into common stock
      within 60 days after December 29,
2007.




(5)
            Includes
      3,897,712 warrants and options convertible into common stock within 60
      days after December 29, 2007.




(6)
            Includes
      263,158 common equivalent preferred shares outstanding as of December 29,
      2007, and 1,894,758 options convertible into common stock within 60 days
      after December 29, 2007.




(7)
            Includes
      786,719 options convertible into common stock within 60 days after
      December 29, 2007.




(8)
            Includes
      102,344 options convertible into common stock within 60 days after
      December 29, 2007.




(9)
            Includes
      78,125 options convertible into common stock within 60 days after December
      29, 2007.




(10)
            Includes
      54,688 options convertible into common stock within 60 days after December
      29, 2007.




(11)
            Includes
      55,313 options convertible into common stock within 60 days after December
      29, 2007.




(12)
            Includes
      54,688 options convertible into common stock within 60 days after December
      29, 2007.




(13)
            Includes
      526,316 common equivalent preferred shares outstanding as of December 29,
      2007 and 13,120,403 warrants and options convertible into common stock
      within 60 days after December 29,
2007.




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





Our board
of directors has determined that Messrs. Metcalf, Yeager, and Harris are
“independent” as that term is defined in Rule 4200(a) of the Nasdaq listing
standards.




ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
following is a summary of the fees billed to Microfield Group, Inc. by RBSM LLP
and PricewaterhouseCoopers LLP for professional services rendered in connection
with the fiscal years ended, December 29, 2007, December 30, 2006 and December
31, 2005, respectively.





December
      29,
              2007
            
            
            December
      30,
              2006
            
            
            December
      31,
              2005Fee
      TypeAudit
      fees
            
            $
            254,630
            
            
            $
            220,212
            
            
            $
            134,824Audit
      related fees
            
            
            61,260
            
            
            
            54,974
            
            
            
            41,350Tax
      fees
            
            
            17,150
            
            
            
            825
            
            
            
            -All
      other fees
            
            
            -
            
            
            
            -
            
            
            
            -Total
      fees
            
            $
            333,040
            
            
            $
            276,011
            
            
            $
            176,174





Audit
fees consist of billings for professional services rendered for the audit of our
consolidated financial statements and review of the interim consolidated
financial statements included in quarterly reports that are normally provided by
independent accounting firms in connection with regulatory filings, including
audit services performed related to mergers and acquisitions.




AUDIT-RELATED
FEES. Consists of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of Microfield
Group, Inc. financial statements and are not reported under "Audit
Fees."
 
 TAX FEES.
Consists of fees billed for professional services for tax compliance, tax advice
and tax planning.
 
 ALL OTHER
FEES. Consists of fees for services other than the services reported above.
There were no other services provided in fiscal 2007, 2006 and
2005.


69
 Index




Prior to
engagement of our independent auditor, such engagement is approved by our audit
committee. The services provided under this engagement may include audit
services, audit-related services, tax services and other services. Pre-approval
is generally provided for up to one year and any pre-approval is detailed as to
the particular service or category of services and is generally subject to a
specific budget. Pursuant to our Audit Committee Charter, the independent
auditors and management are required to report to our audit committee at least
quarterly regarding the extent of services provided by the independent auditors
in accordance with this pre-approval, and the fees for the services performed to
date. The audit committee may also pre-approve particular services on a
case-by-case basis. All audit-related fees, tax fees and other fees incurred by
us for the year ended December 29, 2007, were approved by our audit
committee.





ITEM
15.  EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES





(a)
            Exhibits
      included herein:





Exhibit
No.





*3.1   Articles
of Incorporation, as amended


*3.2   Bylaws,
as amended




*4.1   See
Article III of Exhibit 3.1 and Articles I and VI of Exhibit 3.2 (1)




*10.1   1986
Stock Option Plan, as amended




*10.3   Form
of Incentive Stock Option Agreement




*10.7   Form
of Representative Warrants




**10.11   Restated
1995 Stock Incentive Plan dated May 11, 1998.




***10.14   Form
of $400,000 Subordinated Promissory Note issued to JMW Capital Partners, Inc.,
dated June 30, 2000.




***10.15   Form
of Stock Purchase Warrants to Purchase Shares of Common Stock of Microfield
Group, Inc. issued to JMW Capital Partners, Inc., dated June 30,
2000.




***10.16   Form
of Registration Rights Agreement between the Company and JMW Capital Partners,
Inc. (now known as Aequitas Capital Management), dated June 30,
2000.




***10.17   Form
of Note and Warrant Purchase Agreement between the Company and JMW Capital
Partners, Inc. (now known as Aequitas Capital Management), dated June 30,
2000.




****10.18   Form
of Asset Purchase Agreement between Greensteel, Inc., and Microfield Group,
Inc., dated September 7, 2000, incorporated by reference to the Company s Proxy
Statement dated October 3, 2000.


*****10.19   Form
of Agreement and Plan of Merger between Microfield Group, Inc., and Innovative
Safety Technologies, LLC. dated September 16, 2002 incorporated by reference to
the Registrants Form 8-K dated September 17, 2002.


******10.20   Form
of Agreement and Plan of Merger between Microfield Group, Inc., Velagio, Inc.,
and Christenson Technology Services, Inc., dated September 16, 2003 incorporated
by reference to the Registrants Form 8-K dated October 1, 2003.


##10.21   Form
of Loan Agreement and Promissory Note dated August 24, 2004, incorporated by
reference to the Registrant’s Form 8-K dated August 30, 2004.


10.22   Microfield
Group, Inc. 2004 Stock Incentive Plan, incorporated by reference to the
Registrant’s Registration Statement on Form SB-2 dated February 13,
2006.


##10.23   Amended
Articles of Incorporation expanding the authorized common shares, incorporated
by reference to the Registrant’s Form 8-K dated September 14, 2004.





70
 Index





10.24   Settlement
Agreement between the Company, Kurt A. Underwood and various other parties,
incorporated by reference to the Registrant’s Registration Statement on Form
SB-2 dated February 13, 2006.


10.25   Form
of Stock Purchase Warrants to purchase Common Stock of Microfield Group, Inc.
issued to ECI stockholders (Incorporated by reference to Exhibit 99.2 to the
Registrant’s Current Report on Form 8-K filed October 19, 2005).


20.01   Form
of Agreement and Plan of Merger between Microfield Group, Inc. and Christenson
Electric, Inc. dated July 20, 2005 incorporated by reference to the Registrant’s
Form 8-K dated July 26, 2005.


20.01   Form
of Agreement and Plan of Merger between Microfield Group, Inc. and
EnergyConnect, Inc. dated October 13, 2005 incorporated by reference to the
Registrant’s Form 8-K dated October 17, 2005.


2.1     
Acquisition Agreement between Microfield Group, Inc. and CEI Acquisition LLC
dated 11/27/07 incorporated by reference to the Registrant’s Form 8-K dated
December 3, 2007.





23.1   Consent of Russell Bedford Stefanou
Mirchandani LLP , Independent Registered Certified Public Accounting Firm, filed
herewith




31.1   Certification of Chief Executive
Officer pursuant to Section 302, of the Sarbanes-Oxley Act of
2002.




31.2   Certification of Chief Financial
Officer pursuant to Section 302, of the Sarbanes-Oxley Act of
2002.




32.1   Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.


32.2   Certification of Chief
Financial  Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002








-------------------





*          
   Incorporated by reference to Exhibits 3.1, 3.2, 4.1, 10.1,
10.3, 10.7, as applicable, to Registrant’s Registration Statement on Form SB-2
(Registration No. 33-918900).





**      
     Incorporated by reference to Exhibit 10.11 to
Registrants Quarterly Report on Form 10-QSB for the three month period ended
July 3, 1999.





***      
   Incorporated by reference to Exhibits 10.14, 10.15, 10.16,
10.17, as applicable, to Registrants Quarterly Report on Form 10-QSB for the
three month period ended July 1, 2000.





****       Incorporated
by reference to Exhibit 10.18 to Registrants Quarterly Report on Form 10-QSB for
the three month period ended September 30, 2000.





*****     Incorporated
by reference to Exhibit 10.19 to Registrants Quarterly Report on Form 10-QSB for
the three month period ended September 28, 2002.





******  
Incorporated by reference to Exhibit 10.20 to Registrants Quarterly Report on
Form 10-QSB for the three month period ended September 27, 2003.





##  Incorporated
by reference to Exhibits 10.21 and 10.22, as applicable, to Registrants
Quarterly Report on Form 10-QSB for the three month period ended October 2,
2004.








(1)     This
exhibit constitutes a management contract, or compensatory plan or
arrangement.





71
 Index





SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Dated:   March
28, 2008





MICROFIELD
      GROUP, INC.By:Rodney
      M. BoucherChief
      Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:





Signature
            
            TitleChief
      Executive Officer and DirectorRodney
      M. Boucher
            
            Date:Chief
      Financial Officer and SecretaryRandall
      R. Reed
            
            Date:DirectorWilliam
      C. McCormick
            
            Date:DirectorGary
      D. Conley
            
            Date:DirectorGene
      Ameduri
            
            Date:DirectorKurt
      E. Yeager
            
            Date:DirectorJohn
      P. Metcalf
            
            Date:DirectorPhillip
      G. Harris
            
            Date:





72
 Index





SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Dated:   March
28, 2008





MICROFIELD
      GROUP, INC.By:
            /s/Rodney M. BoucherRodney
      M. BoucherChief
      Executive Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:





Signature
            
            Title/s/Rodney M. Boucher
            
            Chief
      Executive Officer and DirectorRodney
      M. Boucher
            
            Date:/s/Randall R. Reed
            
            Chief
      Financial Officer and SecretaryRandall
      R. Reed
            
            Date:/s/William C. McCormick
            
            DirectorWilliam
      C. McCormick
            
            Date:/s/Gary D. Conley
            
            DirectorGary
      D. Conley
            
            Date:/s/Gene Ameduri
            
            DirectorGene
      Ameduri
            
            Date:/s/Kurt E. Yeager
            
            DirectorKurt
      E. Yeager
            
            Date:/s/John P. Metcalf
            
            DirectorJohn
      P. Metcalf
            
            Date:/s/Phillip
      G. Harris
            
            DirectorPhillip
      G. Harris
            
            Date:




73