<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D. C. 20549

                                   FORM 1O-KSB

                                 AMENDMENT NO. 1

               [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended January, 2 1999

             [ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

               For the transition period from ________ to ________

                        Commission File Number : 0-26226

                            MICROFIELD GRAPHICS, INC.

                 (Name of small business issuer in its charter)

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


                               7216 SW DURHAM ROAD
                             PORTLAND, OREGON 97224
              (Address of principal executive offices and zip code)
                                 (503) 620-4000
                           (Issuer'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

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]

Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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 the Form
10-KSB or any amendment to this Form 10-KSB. [ ]

Issuer's revenues for its most recent fiscal year were $ 6,646,000.

The aggregate market value of voting stock held by non-affiliates of the
registrant at February 28, 1999 was $7,604,231, computed by reference to the
average bid and asked prices as reported on the Nasdaq SmallCap Market.

The number of shares outstanding of the Registrant's Common Stock as of
February 28, 1999 was 3,686,900 shares.

The index to exhibits appears on page 15 of this document.

                       DOCUMENTS INCORPORATED BY REFERENCE

The issuer has incorporated into Part III of Form 10-KSB, by reference,
portions of its Proxy Statement dated April 19, 1999.

Transitional Small Business Disclosure Format (check one):  Yes [ ]   No [X]


<PAGE>

                            MICROFIELD GRAPHICS, INC.
                                FORM 10-KSB INDEX

                             PART I

<TABLE>
<CAPTION>
                                                                          Page
<S>                                                                       <C>
Item 7.   Financial Statements                                              14
          (Amended to add second paragraph to Report of Independent
          Accountants and Footnote 12 to the financial statements.)
</TABLE>


<PAGE>

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 15, 2000

                                       MICROFIELD GRAPHICS, INC.

                                       By: /s/ JOHN B. CONROY
                                          -----------------------
                                       John B. Conroy
                                       Chairman of the Board, President,
                                       and Chief Executive Officer


<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders of
Microfield Graphics, Inc. (d.b.a. Softboard)


In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Microfield Graphics, Inc. (d.b.a. Softboard) and its subsidiary at January 2,
1999 and January 3, 1998 and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

As more fully described in Note 12, the Company during 1999 experienced
reduced sales and negative cash flows from operations.  Further, the
Company's bank has declared an event of default and entered into a
Forbearance Agreement relating to the Company's existing Loan Agreement.
Accordingly, the Company has concluded that it might not have resources
sufficient to sustain its operations over the next twelve months unless it
can obtain continued and adequate financing on acceptable terms.
Management's plans with respect to these uncertainties are also discussed in
Note 12.

PricewaterhouseCoopers LLP

Portland, Oregon
January 29, 1999, except for Note 11,
  which is as of March 26, 1999,
  and except for Note 12, which is as
  of February 6, 2000.


                                      F-1
<PAGE>

MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
CONSOLIDATED BALANCE SHEET
JANUARY 2, 1999 AND JANUARY 3, 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                     1998                    1997
                                            ASSETS
<S>                                                                             <C>                      <C>
Current assets:
  Cash and cash equivalents                                                     $    739,628             $    909,184
  Accounts receivable, net (Note 3)                                                  797,543                1,027,902
  Inventories (Note 4)                                                               946,103                  712,000
  Prepaid expenses and other                                                         156,627                  216,427
                                                                                -------------            -------------
    Total current assets                                                           2,639,901                2,865,513

Property and equipment, net (Note 5)                                                 379,457                  384,251
Other assets                                                                         226,140                   72,444
                                                                                -------------            -------------
                                                                                $  3,245,498             $  3,322,208
                                                                                -------------            -------------
                                                                                -------------            -------------
                           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Line of credit (Note 6 and Note 12)                                           $    655,000             $  1,000,000
  Current portion of long-term debt (Note 6)                                          83,333                   83,333
  Accounts payable                                                                   532,308                  606,556
  Accrued payroll and payroll taxes                                                  255,698                  193,757
  Unearned income                                                                     56,101                   53,745
  Other accrued liabilities                                                          186,403                  164,483
                                                                                -------------            -------------
    Total current liabilities                                                      1,768,843                2,101,874

Long-term debt, net of current portion (Note 6 and Note 12)                            6,945                   90,278
Other long-term liabilities                                                           77,220                     --
                                                                                -------------            -------------
    Total liabilities                                                              1,853,008                2,192,152
                                                                                -------------            -------------
Commitments and contingencies (Note 8)

Shareholders' equity (Notes 9 and 11):
 Common stock, 25,000,000 shares authorized, 3,686,775 and 3,211,813
   shares issued and outstanding, respectively                                    14,362,698               12,185,527
 Accumulated deficit                                                             (12,970,208)             (11,055,471)
                                                                                -------------            -------------
   Total shareholders' equity                                                      1,392,490                1,130,056
                                                                                -------------            -------------
                                                                                $  3,245,498             $  3,322,208
                                                                                -------------            -------------
                                                                                -------------            -------------

</TABLE>

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


                                       F-2
<PAGE>

MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 2, 1999 AND JANUARY 3, 1998
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                     1998                   1997
<S>                                             <C>                     <C>
Net sales (Note 10)                             $ 6,646,148             $ 5,618,330
Cost of goods sold                                3,893,541               3,140,988
                                                ------------            ------------
     Gross profit                                 2,752,607               2,477,342
                                                ------------            ------------
Operating expenses:
  Research and development                          997,929                 959,680
  Marketing and sales                             2,657,581               2,821,232
  General and administrative                        960,498                 945,764
                                                ------------            ------------
                                                  4,616,008               4,726,676
                                                ------------            ------------
    Loss from operations                         (1,863,401)             (2,249,334)

Other income:
  Interest expense, net                             (50,176)                (23,142)
  Other income                                          346                   4,750
                                                ------------            ------------
    Loss before income taxes                     (1,913,231)             (2,267,726)
Provision for income taxes (Note 7)                  (1,506)                 (2,317)
                                                ------------            ------------
    Net loss                                    $(1,914,737)            $(2,270,043)
                                                ------------            ------------
                                                ------------            ------------
Basic and diluted net loss per share            $      (.54)            $      (.71)
                                                ------------            ------------
                                                ------------            ------------
Shares used in calculation                        3,552,706               3,198,062
                                                ------------            ------------
                                                ------------            ------------
</TABLE>

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


                                      F-3
<PAGE>

MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JANUARY 2, 1999 AND JANUARY 3, 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                              COMMON STOCK                          ACCUMULATED
                                                                       SHARES                 AMOUNT                  DEFICIT
                                                                   -----------             -------------            --------------
<S>                                                                  <C>                   <C>                      <C>
Balance at December 28, 1996                                         3,195,575             $ 12,152,781             $ (8,785,428)
Stock options exercised                                                 11,438                   17,146                        -
Issuance of common stock                                                 4,800                   15,600                        -
Net loss                                                                     -                        -                (2,270,043)
                                                                   -----------             -------------            --------------
Balance at January 3, 1998                                           3,211,813             $ 12,185,527              $(11,055,471)
Stock options exercised                                                124,962                  187,643                         -
Issuance of common stock and warrants, net of related
  expenses                                                             350,000                1,989,528                        -
Net loss                                                                     -                        -               (1,914,737)
                                                                   -----------             -------------            --------------
                                                                   -----------             -------------            --------------
Balance at January 2, 1999                                           3,686,775             $ 14,362,698             $(12,970,208)
                                                                   -----------             -------------            --------------
                                                                   -----------             -------------            --------------
</TABLE>

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


                                      F-4
<PAGE>

MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 2, 1999 AND JANUARY 3, 1998
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                           1998                  1997
<S>                                                                   <C>                      <C>
Cash flows from operating activities:
  Net loss                                                            $(1,914,737)             $(2,270,043)
Adjustments to reconcile loss from continuing operations
 to operating cash flows:
  Depreciation and amortization                                           209,990                  255,174
  Issuance of common stock for compensation                                   -                     15,600
  Changes in assets and liabilities:
    Accounts receivable                                                   230,359                 (250,095)
    Inventories                                                          (234,103)                 285,693
    Prepaid expenses and other                                            (34,692)                  32,448
    Accounts payable                                                      (74,248)                 207,545
    Accrued payroll and payroll taxes                                      61,941                  (15,940)
    Unearned income                                                         2,356                   (7,058)
    Other accrued liabilities                                              99,140                  (18,937)
                                                                      ------------             ------------
    Net cash used in operating activities                              (1,653,994)              (1,765,613)
                                                                      ------------             ------------

Cash flows from investing activities:
   Acquisition of property and equipment, net                            (185,650)                 (78,856)
   Loan to employee                                                       (78,750)                       -
   Purchases of patents and other                                               -                   (3,467)
                                                                      ------------             ------------
     Net cash used in investing activities                               (264,400)                 (82,323)
                                                                      ------------             ------------
Cash flows from financing activities:
  Net borrowings (payments) under line of credit and term
    loan agreement                                                       (345,000)                 923,611
  Net payments on capital lease obligation                                (83,333)                 (51,493)
  Proceeds from exercise of common stock options                          187,643                   17,146
  Proceeds from issuance of common stock                                1,989,528                        -
                                                                      ------------             ------------
    Net cash provided by financing activities                           1,748,838                  889,264
                                                                      ------------             ------------
Net decrease in cash and cash equivalents                                (169,556)                (958,672)
Cash and cash equivalents, beginning of year                              909,184                1,867,856
                                                                      ------------             ------------
Cash and cash equivalents, end of year                                $   739,628              $   909,184
                                                                      ------------             ------------
                                                                      ------------             ------------
Cash paid for:
   Interest                                                           $    94,804              $    69,970
                                                                      ------------             ------------
                                                                      ------------             ------------
   Income taxes                                                       $     1,506              $     2,317
                                                                      ------------             ------------
                                                                      ------------             ------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART of THESE CONSOLIDATED FINANCIAL
STATEMENTS.


                                       F-5

<PAGE>

MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
-------------------------------------------------------------------------------

1.   THE COMPANY AND BASIS OF PRESENTATION

     Microfield Graphics, Inc., an Oregon corporation incorporated in October
     1986, develops, manufactures and markets computer conferencing and
     telecommunications products to facilitate group communications. The
     Company's product lines incorporate a series of digital whiteboards,
     digital whiteboard rear projection systems and interactive plasma
     display systems under the brand name SoftBoard, along with a variety of
     application software packages, supplies and accessories. Information
     written or drawn on the SoftBoard surface is recorded and displayed on a
     personal computer simultaneously and in color using the Company's
     proprietary technology.

     The Company has a wholly owned foreign sales corporation in Barbados.
     Hereafter in these consolidated financial statements, the term "Company"
     refers to Microfield Graphics, Inc. and its subsidiary. The Company's
     primary market is in the United States; however, there are export sales to
     France, the United Kingdom, Japan and other countries. (See export sales in
     Note 10).


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     FISCAL YEAR
     The Company operates on a 52-53 week fiscal year ending on the Saturday
     closest to the last day of December.

     PRINCIPLES OF CONSOLIDATION
     The consolidated financial statements include the accounts of Microfield
     and its wholly owned subsidiary. All significant intercompany transactions
     and balances have been eliminated in consolidation.

     CONSOLIDATED STATEMENT OF CASH FLOWS
     For purposes of the statement of cash flows, the Company considers all
     highly liquid debt instruments purchased with an original maturity of three
     months or less to be cash equivalents. During the year ended January 3,
     1998, the Company issued common stock to resellers and employees, with a
     fair market value of $15,600.

     ACCOUNTS RECEIVABLE
     Accounts receivable at January 2, 1999 and January 3, 1998 are recorded net
     of allowances for uncollectible accounts of $44,553 and $34,553,
     respectively.

     INVENTORIES
     Inventories are stated at the lower of standard cost or market value.
     Standard costs approximate the first-in, first-out method. Inventory costs
     include raw materials, direct labor and allocated overhead.


                                      F-6
<PAGE>

MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
-------------------------------------------------------------------------------

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     PROPERTY AND EQUIPMENT
     Property and equipment are stated at cost and are depreciated using
     accelerated methods over their estimated useful lives of five years.
     Repairs and maintenance are charged to expense as incurred; improvements
     are capitalized. When the Company sells or disposes of assets, the accounts
     are relieved of the related costs and accumulated depreciation and
     resulting gains and losses are reflected in operations.

     RESEARCH AND DEVELOPMENT
     Research and development expenditures are charged to operations as
     incurred.

     REVENUE RECOGNITION
     Revenue is recognized upon shipment of products. Revenue on warranty
     contracts is recognized over the life of the contract.

     INCOME TAXES
     The Company accounts for income taxes using the asset and liability
     approach. 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.

     BASIC AND DILUTED NET LOSS PER SHARE
     The Company adopted SFAS No. 128, "Earnings Per Share," during the year
     ended January 3, 1998. SFAS No. 128 requires disclosure of basic and
     diluted earnings (loss) per share. Basic earnings (loss) per share are
     computed based on the weighted average number of common shares outstanding
     each year. Diluted net loss per share is the same as basic net loss per
     share because the potential effect of the conversion of any outstanding
     stock options is anti-dilutive.

     USE OF ESTIMATES
     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenues and expenses
     during the reporting period. Actual results could differ from those
     estimates.

     FAIR VALUE OF FINANCIAL INSTRUMENTS
     The recorded amounts of cash and cash equivalents, accounts receivable,
     accounts payable, line of credit and accrued liabilities as presented in
     the consolidated financial statements approximate fair value because of the
     short-term maturity of these instruments. The recorded amount of capital
     lease obligations and long-term debt approximates fair value since the
     imputed interest or stated interest approximates currently competitive
     rates.


                                      F-7
<PAGE>

MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
-------------------------------------------------------------------------------

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     COMPREHENSIVE INCOME (LOSS)
     Statement of Financial Accounting Standards No. 130, "Reporting
     Comprehensive Income" (SFAS 130), defines comprehensive income (loss) as
     the changes in equity of a business enterprise during a period that result
     from transactions and other economic events and circumstances from
     non-shareholder sources. Since the Company's only component of
     comprehensive income (loss) is net loss, SFAS 130 imposes no additional
     reporting requirements on the Company.


3.   CONCENTRATION OF CREDIT RISK

     During the year ended January 2, 1999 one customer accounted for
     approximately 38% of net sales. During the year ended January 3, 1998 no
     customer accounted for greater than 10% of net sales. Accounts receivable
     from one customer totaled approximately $210,443 at January 2, 1999, while
     accounts receivable from another customer totaled $277,500 at January 3,
     1998.


4.   INVENTORIES

     Inventories consist of the following:
<TABLE>
<CAPTION>

                                                  January 2,           January 3,
                                                     1999                1998
                                                 -----------          -----------
<S>                                              <C>                  <C>
Raw materials                                    $  607,140           $  515,122
Finished goods                                      338,963              196,878
                                                 -----------          -----------
                                                 $  946,103           $  712,000
                                                 -----------          -----------
                                                 -----------          -----------
</TABLE>

5.  PROPERTY AND EQUIPMENT

    Property and equipment consist of the following:

<TABLE>
<CAPTION>

                                                                   JANUARY 2,             JANUARY 3,
                                                                      1999                   1998
                                                                  -----------            -----------
       <S>                                                        <C>                    <C>
       Furniture, machinery and equipment                         $  986,857             $  805,905
       Capitalized leased assets                                     236,157                236,157
                                                                  -----------            -----------
                                                                   1,223,014              1,042,062
       Less accumulated depreciation and amortization                843,557                657,811
                                                                  -----------            -----------
                                                                  $  379,457             $  384,251
                                                                  -----------            -----------
                                                                  -----------            -----------
</TABLE>

     Accumulated amortization of capitalized leased assets aggregated $236,157
     at January 2, 1999 and January 3, 1998. Such amounts are included in the
     above schedule.


                                      F-8
<PAGE>

MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
-------------------------------------------------------------------------------

6.   DEBT

     At January 2, 1999, the Company had a $2,000,000 line of credit, which
     expires in September 1999. Borrowings under the line of credit are due on
     demand, bear interest payable monthly at prime (7.75% at January 2, 1999),
     and are collateralized by inventories and accounts receivable. As of
     January 2, 1999, borrowings of $655,000 were outstanding under the line.
     Pursuant to the line of credit agreement, the Company is required to comply
     with certain financial covenants, including ratios and minimum net worth.
     At January 2, 1999, the Company was in violation of its covenants with
     respect to its quick ratio and minimum net worth. These covenants have been
     waived by the bank. See Note 12.

     The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>

                                                                                    JANUARY 2,      JANUARY 3,
                                                                                        1999         1998
      <S>                                                                      <C>                <C>
      Term loan payable to bank in monthly installments of
        $7,988, including interest at the prime rate plus .5%
        (8.25% at January 2, 1999), from February 1997 through
        January 2000; all assets purchased with the proceeds
        of this loan are pledged as collateral                                 $      90,278      $  173,611

      Less principal amounts due within one year                                     (83,333)        (83,333)
                                                                               --------------     -----------
      Long-term debt                                                           $       6,945      $   90,278
                                                                               --------------     -----------
</TABLE>

   Remaining maturities on long-term debt are summarized as follows:

<TABLE>
<CAPTION>

      FISCAL YEAR
      -----------
      <S>                          <C>
         1999                      $   83,333
         2000                           6,945
                                   -----------
                                   $   90,278
                                   -----------
</TABLE>

7.   INCOME TAXES

     The provision for income taxes of $1,506 and $2,317 for fiscal years 1998
     and 1997, respectively, consists of minimum payments due and paid to
     various state tax authorities.

     The provision for income taxes for the years ended January 2, 1999 and
     January 3, 1998 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.


                                      F-9
<PAGE>

MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
-------------------------------------------------------------------------------

7.   INCOME TAXES (CONTINUED)

     Deferred tax assets are comprised of the following components:

<TABLE>
<CAPTION>

                                                           JANUARY 2,             JANUARY 3,
                                                              1999                   1998
                                                        ------------             ------------

<S>                                                     <C>                      <C>
Current:
  Allowances for uncollectible accounts                 $    18,560              $    13,255
  Employee benefits                                          31,125                   35,453
  Inventory basis differences                                   689                      738
  Inventory, warranty, and other allowances                  58,577                   55,955
  Unearned revenues                                          21,520                   20,617
                                                        ------------             ------------
                                                            130,471                  126,018
                                                        ------------             ------------
Non-current:
  Intangible assets                                          15,368                    9,678
  Net operating loss carryforwards                        4,702,432                3,946,873
  Research and development credits                          272,471                  290,820
                                                        ------------             ------------
                                                          4,990,271                4,247,371
                                                        ------------             ------------
Total deferred tax asset                                  5,120,742                4,373,389
Deferred tax asset valuation allowance                   (5,120,742)              (4,373,389)
                                                        ------------             ------------
Net deferred tax assets                                 $         -              $         -
                                                        ------------             ------------
                                                        ------------             ------------
</TABLE>

     At January 2, 1999, the Company had available net operating loss
     carryforwards of approximately $12,148,702 for federal income tax purposes.
     Such carryforwards may be used to reduce consolidated taxable income, if
     any, in future years through their expiration in 2003 to 2012. Utilization
     of net operating loss carryforwards may be limited due to the ownership
     changes resulting from the Company's initial public offering in 1995. In
     addition, the Company has research and development credits aggregating
     $272,471 for income tax purposes at January 2, 1999. Such credits may be
     used to reduce taxes payable, if any, in future years through their
     expiration in 2001 to 2012.


                                      F-10
<PAGE>

MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
-------------------------------------------------------------------------------

8.   LEASE COMMITMENTS AND CONTINGENCIES

     The Company leases office space under operating leases which require future
     minimum lease commitments through July 2003 as follows:

<TABLE>
<CAPTION>

     FISCAL YEAR
     -----------
        <S>                                 <C>
        1999                                $   292,272
        2000                                    292,272
        2001                                    306,882
        2002                                    321,492
        2003                                    106,746
                                             ------------
       Total minimum payments required       $ 1,319,664
                                             ------------
                                             ------------
</TABLE>

     Rent expense totaled $355,246 and $345,125 for fiscal years ended 1998 and
1997, respectively.

     A former temporary leased employee filed a complaint in federal district
court alleging gender discrimination and harassment in addition to a state
wrongful constructive discharge claim. The plaintiff has alleged emotional
distress, economic loss and punitive damages totaling $1.4 million. No
members of the Company's management were named in the suit. The Company
believes the complaints are without merit and intends to defend these actions
vigorously.

9.   SHAREHOLDERS' EQUITY

     INCENTIVE STOCK OPTION PLAN
     The Company has Stock Option Plans (the "Plans"). At January 2, 1999 and
     January 3, 1998, 1,005,162 and 1,005,228 shares of common stock were
     reserved for issuance to employees, officers, directors and consultants.
     Under the Plans, 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. The options become
     exercisable over four years.  See Note 12.

     The Company adopted SFAS No. 123, "Accounting for Stock-Based
     Compensation," in 1996. SFAS No. 123 allows companies to choose whether to
     account for stock-based compensation on a fair value method or to continue
     to account for stock-based compensation under the current intrinsic value
     method as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
     Employees." The Company has elected to continue to follow the provisions of
     APB Opinion No. 25.


                                      F-11
<PAGE>

MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
-------------------------------------------------------------------------------

9.   SHAREHOLDERS' EQUITY (CONTINUED)

     A summary of the status of the Company's Stock Option Plans as of January
     2, 1999 and January 3, 1998 and for the years then ended is presented
     below:
<TABLE>
<CAPTION>
                                                      January 2,1999             January 3, 1998
                                             ----------------------------   ---------------------------
                                                              Weighted                       Weighted
                                                               average                        average
                                                              exercise                        exercise
       Performance options                     Shares           price          Shares          price
------------------------------------        ------------     -----------   -----------    --------------
<S>                                            <C>            <C>            <C>             <C>
Outstanding at beginning of year               402,868        $   3.69       289,334         $  4.54
Granted                                        212,500            4.04       195,200            1.58
Exercised                                     (124,962)           1.50       (11,438)           1.47
Forfeited                                      (47,993)           2.07       (70,228)           1.67
                                            -----------                     ----------
                                               442,413                       402,868
                                            -----------                     ----------
                                            -----------                     ----------

Options exercisable at year-end                144,046                       160,062
                                            -----------                     ----------
                                            -----------                     ----------
</TABLE>

<TABLE>
<CAPTION>

                                                      Number of options            Weighted
                                                 -----------------------------  average contractual
           Exercise price                         Outstanding     Exercisable      life remaining
  -------------------------------                -------------   ------------- ---------------------
           <S>                                    <C>             <C>           <C>
            $1.06-1.75                               201,399        117,843         2.6 years
            $2.22-4.06                               241,014         26,203         4.3 years
                                                 -------------   -------------
                                                     442,413        144,046
                                                 -------------   -------------
</TABLE>

     The Company has computed for pro forma disclosure purposes the value of all
     options and warrants granted during 1998 and 1997 using the Black-Scholes
     pricing model as prescribed by SFAS 123 and the following assumptions used
     for grants:
<TABLE>
<CAPTION>
                                                      1998              1997
                                                 --------------    --------------
   <S>                                             <C>              <C>
   Risk-free interest rate                             4.31%            6.38%
   Expected dividend yield                                0%               0%
   Expected lives                                  4.5 years        4.5 years
   Expected volatility                                  102%              60%
</TABLE>

     Adjustments are made for options forfeited prior to vesting.

     Had compensation cost for the Company's Plans been determined based on the
     fair value at the grant dates consistent with the method of SFAS 123, the
     total value of options and warrants granted would be computed as follows:

<TABLE>
<S>                                                                        <C>
Year ended January 2, 1999                                                 $    642,370
Year ended January 3, 1998                                                      372,889
</TABLE>


                                      F-12
<PAGE>

MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
-------------------------------------------------------------------------------

9.   SHAREHOLDERS' EQUITY (CONTINUED)

     Such amounts would be amortized over the vesting period of the options.

     Accordingly, under SFAS 123, the Company's net loss and loss per share
     would have been changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                                                      1998          1997
                                                                 ------------  --------------
     <S>                                          <C>             <C>           <C>
     Net Loss                                     As reported    $(1,914,737)   $ (2,270,043)
                                                  Pro Forma       (2,243,091)     (2,511,565)

     Basic and diluted net loss per share         As reported           (.54)           (.71)
                                                  Pro Forma             (.63)           (.79)
</TABLE>

     The effects of applying SFAS 123 for providing pro forma disclosures for
     1998 and 1997 are not likely to be representative of the effects on
     reported net loss and net loss per share for future years, because options
     vest over several years and additional awards generally are made each year.

     COMMON STOCK WARRANTS
     In connection with its initial public offering in 1995, the Company issued
     110,000 warrants to purchase shares of common stock at an exercise price of
     $7.20 per share; such warrants expire in 2000. In addition, in connection
     with the common stock purchase agreement on March 16, 1998 the Company
     issued 260,000 warrants to purchase shares of common stock at an exercise
     price of $6.75 per share. Such warrants may be exercised beginning March
     1999 and expire in March 2001.


10.  EXPORT SALES

     Export sales aggregated $1,822,000 and $981,000 in 1998 and 1997,
     respectively. Such export sales were made to customers in the following
     countries:

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED
                                                                           JANUARY 2,         JANUARY 3,
                                                                              1999               1998
                                                                         --------------     --------------
 <S>                                                                     <C>                <C>
 Japan                                                                   $     114,000      $     239,000
 United Kingdom                                                                520,000            306,000
 France                                                                        854,000                  -
 Other                                                                         334,000            436,000
                                                                         --------------     --------------
                                                                         $   1,822,000      $     981,000
                                                                         --------------     --------------
                                                                         --------------     --------------
</TABLE>


                                      F-13
<PAGE>

MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
-------------------------------------------------------------------------------

11.  SUBSEQUENT EVENTS

     On March 26, 1999, the Company signed a common stock purchase agreement
     with Steelcase Corporation ("Steelcase") under which Steelcase purchased
     444,445 shares of the Company's common stock for $1,000,001 ($2.25 per
     share) in cash.

12.  SUBSEQUENT EVENTS

     During 1999, the Company experienced significantly reduced sales and
     negative cash flows from operations.  At the end of the second quarter
     of 1999, the Company concluded that it might not have sufficient funds
     to operate for at least the next twelve months.  Management based such
     conclusion on the reduction in sales and resulting losses that occurred
     during the first six months of 1999, coupled with diminishing cash
     resources (cash and cash equivalents, and cash available under its
     operating line of credit).  In response, management restructured its
     operations through a combination of staff reductions, workweek
     reductions, temporary executive salary reductions, and reductions in
     general expense spending levels.  As a result, the Company delayed
     certain product development programs and focused its efforts on
     expanding product offerings based on its current technology.  It is the
     Company's intention to resume its product development programs when and
     if it achieves profitability on a sustainable basis.  However, there can
     be no assurance that the Company will achieve profitability or resume
     its development programs.

     The Company during 1999 was not in compliance with the minimum tangible
     net worth financial covenant of its Loan Agreement with its bank.  As a
     result, the bank on October 15, 1999 delivered a notice of default, and
     the Company subsequently entered into a Forbearance Agreement with the
     bank.  The Forbearance Agreement provides for a reduction in the line of
     credit to $650,000, the elimination of inventory from the collateral
     base over a fourteen month period, an increase in the interest rate from
     prime to prime plus 2.5%, and certain financial covenants with which the
     Company must comply.  The Forbearance Agreement period is through April
     30, 2000.  The balance outstanding under the line of credit agreement
     aggregates $354,000 at January 1, 2000.

     In the event that the Forbearance Agreement is not extended or the Loan
     Agreement is not renewed, the Company's business and financial condition
     could be materially and adversely affected.  Under such circumstances,
     the Company believes that it would not have resources sufficient to fund
     its operations for the next twelve months unless it is able to obtain
     alternative financing on terms acceptable to the Company.

     The Company is exploring alternative means of financing the business.
     However, there can be no assurance that the Company can obtain such
     financing, or that such financing will be on terms acceptable to the
     Company.

     Effective December 20, 1999, the Company repriced all of its outstanding
     stock options.  As a result, the exercise price for all outstanding
     options was reduced to $.22 per share of common stock.

     During February 2000, the Company was named in a class action lawsuit.
     The complaint alleges that the Company and its Chief Executive Officer
     issued a series of false and misleading statements concerning, among
     other things, the Company's purchase agreement with 3M.  The complaint
     alleges that, as a result of these allegedly material misstatements and
     omissions, the Company's stock price was artificially inflated during
     the period from July 23, 1998 through April 2, 1999.  The Company denies
     the allegations and intends to vigorously defend itself.  However, the
     ultimate outcome of the litigation is presently undeterminable.


                                      F-14