sbv2

/s/ RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP

Russell Bedford Stefanou Mirchandani LLP

Certified Public Accountants

As filed with the Securities and Exchange Commission on February 13, 2006

Registration No. 333-

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM SB-2

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

MICROFIELD GROUP, INC.

(Name of small business issuer in its charter)


Oregon (State or other Jurisdiction of Incorporation or Organization)		4911 (Primary Standard Industrial Classification Code Number)		93-0935149 (I.R.S. Employer Identification No.)

1631 NW Thurman, Suite 200
Portland, Oregon 97209
(503) 419-3580
(Address and telephone number of principal executive offices and principal place of business)

Rodney M. Boucher, Chief Executive Officer
MICROFIELD GROUP, INC.
1631 NW Thurman, Suite 200
Portland, Oregon 97209
(503) 419-3580
(Name, address and telephone number of agent for service)

Copies to:
Jeffrey Fessler, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)

APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.

If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: þ

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.

CALCULATION OF REGISTRATION FEE



			Proposed
			maximum		Proposed
			offering		maximum
Title of each class of securities	Amount to be		price per		aggregate		Amount of
to be registered	registered		share (1)		offering price		registration fee
Common Stock, no par value		5,233,603	$	2.67	$	13,973,720	$	1,495
Common Stock, no par value issuable upon exercise of Warrants exercisable at $0.90 per share		2,944,693	$	2.67	$	7,862,330	$	841
Total		8,178,296			$	21,836,050	$	2,336

(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using the average of the high and low price as reported on the Over-The-Counter Bulletin Board on February 7, 2006, which was $2.67 per share.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 13, 2006

MICROFIELD GROUP, INC.
8,178,296 SHARES OF
COMMON STOCK

This prospectus relates to the resale by the selling stockholders of up to 8,178,296 shares of our common stock, consisting of up to 2,944,693 shares issuable upon the exercise of common stock purchase warrants and 5,233,603 shares of common stock. The selling stockholders may sell common stock from time to time in the principal market on which the stock is traded at the prevailing market price or in negotiated transactions. We will pay the expenses of registering these shares.

Our common stock is listed on the Over-The-Counter Bulletin Board under the symbol “MICG”. The last reported sales price per share of our common stock as reported by the Over-The-Counter Bulletin Board on February 9, 2006, was $2.75.

Investing in these securities involves significant risks. See “Risk Factors” beginning on page 3.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is , 2006.

The information in this Prospectus is not complete and may be changed. This Prospectus is included in the Registration Statement that was filed by Microfield Group, Inc. with the Securities and Exchange Commission. The selling stockholders may not sell these securities until the registration statement becomes effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the sale is not permitted.

PROSPECTUS SUMMARY

The following summary highlights selected information contained in this prospectus. This summary does not contain all the information you should consider before investing in the securities. Before making an investment decision, you should read the entire prospectus carefully, including the “risk factors” section, the financial statements and the secured convertible notes to the financial statements.

MICROFIELD GROUP, INC.

We are an energy-related technology and electrical service company. Through our subsidiaries EnergyConnect, Inc., Christenson Velagio, Inc. and Christenson Electric, Inc. we provide the highest quality electrical construction, technology and energy related services. These companies have the ability to deliver the following products and services:

Christenson Velagio

	•		Computer Telephony Integration

	•		Digital Video CCTV Systems and Infrastructure

	•		Telecommunications Systems and Infrastructure

	•		Enterprise Security Systems

	•		Wireless Networking Solutions

	•		Life Safety Systems Design and Installation

	•		Information Technology Network Design & Engineering

	•		Voice/Data Systems and Infrastructure

	•		Electrical Design & Engineering

	•		Lighting Services

	•		Electrical Construction Services

Christenson Electric

	•		Substation Design, Wiring and Installation Services

	•		Wind Farm and Solar Collection Wiring

EnergyConnect

	•		Electricity Redistribution

	•		Energy Consumption Management

	•		Utility Energy Distribution Support Services

Christenson Velagio provides an array of electrical and technology products and services to customers in the Portland and Eugene, Oregon markets and the southwest Washington State markets.

Christenson Electric 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.

Through our subsidiary EnergyConnect, Inc. and EnergyConnect’s energy automation software systems, we have the capability to develop and provide solutions and infrastructure for the electric energy supply chain. EnergyConnect’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 EnergyConnect’s services will drive additional growth in Christenson Velagio.

For the nine months ended October 1, 2005, we generated $37,991,269 in revenues and had a net income of $333,647. For the year ended January 1, 2005, we generated $36,466,618 in revenues and had a net loss of $6,181,683. As a result of our history of losses and our experiencing difficulty in generating sufficient cash flow to meet our obligations and sustain our operations, our auditors, in their report dated April 22, 2005, have expressed substantial doubt about our ability to continue as going concern. Christenson Electric was acquired on July 20, 2005. Therefore the revenue and net loss numbers above only include revenue and expenses from that entity from July 20,

2005 through October 1, 2005. EnergyConnect was acquired on October 13, 2005, therefore the revenue and net income amounts mentioned above do not include any revenue and expenses of EnergyConnect.

Our principal offices are located at 1631 NW Thurman St., Suite 200, Portland, Oregon 97209, 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 prospectus.

The Offering


Common stock offered by selling stockholders	Up to 8,178,296 shares, consisting of the following:

	-	5,233,603 shares of common stock; and

	-	up to 2,944,693 shares of common stock issuable upon the exercise of common stock purchase warrants at an exercise price of $.90 per share.

Use of proceeds	We will not receive any proceeds from the sale of the common stock. The warrants issued to selling stockholders as a part of this transaction contain a cashless exercise provision. If any warrant holders choose to exercise their warrants and do not choose to exercise them on a cashless basis, we will receive the sale price of any common stock we sell to the selling stockholders upon exercise of these warrants. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes.

Over-The-Counter Bulletin Board Symbol	MICG

RISK FACTORS

This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this prospectus. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment.

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 incurred net losses of $6,181,683 for the year ended January 1, 2005 and $6,046,232 for the year ended January 3, 2004. For the nine months ended October 1, 2005, we had a net income of $333,647. We cannot assure you 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. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors. Additionally, as we continue to incur losses, our accumulated deficit will continue to increase, which might make it harder for us to obtain financing in the future. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on us, which could result in reducing or terminating our operations.

If We Are Unable to Obtain Additional Funding Our Business Operations Will be Harmed and If We Do Obtain Additional Financing Our Then Existing Shareholders May Suffer Substantial Dilution.

We will require additional funds to sustain and expand our research and development activities. We anticipate that we will require up to approximately $2,000,000 to fund our anticipated research and development operations for the next twelve months, depending on revenue from operations. Additional capital will be required to effectively support the operations and to otherwise implement our overall business strategy. Even if we do 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 research and development plans. Any additional equity financing may involve substantial dilution to our then existing shareholders.

Our Independent Registered Public Accounting Firm Has Expressed Substantial Doubt About Our Ability to Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future Financing.

In their report dated April 22, 2005, our independent registered public accounting firm stated that our financial statements for the year ended January 1, 2005 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue raised due to our incurring net losses of $6,181,683 and $6,046,232, for the years ended January 1, 2005 and January 3, 2004, respectively. In addition, at January 1, 2005, our current liabilities exceeded our current assets by $3,235,098. 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 obtaining additional funding from the sale of our securities, generating sales or obtaining loans and grants from various financial institutions where possible. Our continued net operating losses increase the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.

Many Of Our Competitors Are Larger and Have Greater Financial and Other Resources than We Do and Those Advantages Could Make It Difficult For Us to Compete With Them.

The electrical products and services industry is extremely competitive and includes several companies that have achieved substantially greater market shares than we have, and 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 should decrease it could have a materially adverse affect on our operating results.

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 improve our:

	•		operations and financial systems;

	•		procedures and controls; and

	•		training and management of our employees.

Our future growth may be attributable to acquisitions of new product lines and new businesses. We expect that future acquisitions, if successfully consummated, will 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 we intend to further 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.

As a result of each of the acquisitions we have been a party to, 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.

If We Are Unable to Retain the Services of Messrs. Boucher and Walter, or If We Are Unable to Successfully Recruit Qualified Managerial and Sales Personnel Having Experience in Business, We May Not Be Able to Continue Our Operations.

Our success depends to a significant extent upon the continued service of Mr. Rodney M. Boucher, our Chief Executive Officer and Mr. A. Mark Walter, our President. We do not have employment agreements with Messrs. Boucher or Walter. Loss of the services of Messrs. Boucher or Walter could have a material adverse effect on our growth, revenues, and prospective business. We do not maintain key-man insurance on the life of Messrs. Boucher or Walter. 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 the continued need for electrical construction and technology services, and to the extent that such growth slows and the need for services curtail , our business may be harmed.

The construction services industry has experienced a drop in demand since 2000 both in the United States and internationally. Recently, however, that trend has reversed in response to a turnaround in the capital markets, renewed growth in the construction industry, passage of favorable energy tax legislation by Congress, and a vibrant real estate market. 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 down, or end users reduce their capital investments in construction related products, our operating results may decline which could cause a decline in our profits.

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. As a result, we believe that period to period comparisons of our results of operations are not a good indication of our future performance. 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:

	•		Construction and energy market conditions and economic conditions generally;

	•		Timing and volume of customers’ specialty construction projects;

	•		The timing and size of construction projects by end users;

	•		Fluctuations in demand for our services;

	•		Changes in our mix of customers’ projects and business activities;

	•		The length of sales cycles;

	•		Adverse weather conditions, particularly during the winter season, could effect our ability to render services in certain regions of the United States;

	•		The ability of certain customers to sustain capital resources to pay their trade accounts receivable balances;

	•		Reductions in the prices of services offered by our competitors; and

	•		Costs of integrating technologies or businesses that we add.

The factors substantially within our control include:

	•		Changes in the actual and estimated costs and time to complete fixed-price, time-certain projects that may result in revenue adjustments for contracts where revenue is recognized under the percentage of completion method;

	•		The timing of expansion into new markets;

	•		Costs incurred to support internal growth and acquisitions;

	•		Fluctuations in operating results caused by acquisitions; and

	•		The timing and payments associated with possible acquisitions.

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.

Failure to properly manage projects may result in costs or claims.

Our engagements often involve large scale, highly complex projects utilizing leading technology. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our customers, and to effectively manage the project and deploy appropriate resources, including third-party contractors, and our own personnel, in a timely manner. Any defects or errors or failure to meet clients’ expectations could result in claims for substantial damages against us. Our contracts generally limit our liability for damages that arise from negligent acts, error, mistakes or omissions in rendering services to our clients. However, we cannot be sure that these contractual provisions will protect us from liability for damages in the event we are sued. In addition, in certain instances, we guarantee customers that we will complete a project by a scheduled date or that the project will achieve certain performance standards. As a result, we often have to make judgments concerning time and labor costs. If the project experiences a problem, we may not be able to recover the additional costs we will incur, which could exceed revenues realized from a project. Finally, if we miscalculate the resources or time we need to complete a project with capped or fixed fees, our operating results could seriously decline.

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 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 work on, 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 failure to comply with, or the imposition of liability under, environmental laws and regulations could result in significant costs.

Our facilities and operations, including fueling and truck maintenance, repair, washing and final-stage construction, are subject to various environmental laws and regulations relating principally to the use, storage and disposal of solid and hazardous wastes and the discharge of pollutants into the air, water and land. Violations of these requirements, or of any permits required for our operations, could result in significant fines or penalties. We are also subject to laws and regulations that can impose liability, sometimes without regard to fault, for investigating or cleaning up contamination, as well as for damages to property or natural resources and for personal injury arising out of such contamination. Such liabilities may also be joint and several, meaning that we could be held responsible for more than our share of the liability involved, or even the entire amount. The presence of environmental contamination could also adversely affect our ongoing operations. In addition, we perform work in wetlands and

other environmentally sensitive areas, as well as in different types of underground environments. In the event we fail to obtain or comply with any permits required for such activities, or such activities cause any environmental damage, we could incur significant liability. We have incurred costs in connection with environmental compliance, remediation and/or monitoring, and we anticipate that we will continue to do so. Discovery of additional contamination for which we are responsible, the enactment of new laws and regulations, or changes in how existing requirements are enforced, could require us to incur additional costs for compliance or subject us to unexpected liabilities.

The electric infrastructure servicing business is subject to seasonal variations, which may cause our operating results to vary significantly from period to period and could cause the market price of our stock to fall.

Due to the fact that a significant portion of our business is performed outdoors, our results of operations are subject to seasonal variations. These seasonal variations affect our core activities of maintaining, upgrading and extending electrical distribution powerlines and not only our storm restoration services. Generally, during the winter months, demand for new work and maintenance services may be lower due to reduced construction activity during inclement weather, while demand for electrical service and repairs may be higher due to damage caused by such weather conditions. As a result, operating results may vary significantly from period to period. If our operating results fall below the public’s or analysts’ expectations in some future period or periods, the market price of our common stock will likely fall in such period or periods.

Employee strikes and other labor-related disruptions may adversely affect our operations.

Our business is labor intensive, requiring large numbers of electricians, installers and other personnel. Subject to seasonality, approximately 85-95% of our workforce is unionized. Strikes or labor disputes with our unionized employees may adversely affect our ability to conduct our business. If we are unable to reach agreement with any of our unionized work groups on future negotiations regarding the terms of their collective bargaining agreements, or if additional segments of our workforce become unionized, we may be subject to work interruptions or stoppages. Any of these events would be disruptive to our operations and could harm our business.

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 our 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.

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.

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. Prior to May 2001 and new management, we were delinquent in our reporting requirements, having failed to file our quarterly and annual reports for the years ended 1998 – 2000 (except the quarterly reports for the first two quarters of 1999). We have also been delinquent in filing recent quarterly and annual reports, the last being our 10-KSB for the year 2004. 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:

	•		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.

FORWARD LOOKING STATEMENTS

We and our representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this prospectus and other filings with the Securities and Exchange Commission, reports to our stockholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements. In addition, other written or oral statements which constitute forward-looking statements may be made by us or on our behalf. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” “forecasts,” “may,” “should,” variations of such words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements. Among the important factors on which such statements are based are assumptions concerning our ability to obtain additional funding, our ability to compete against our competitors, our ability to integrate our acquisitions and our ability to attract and retain key employees.

USE OF PROCEEDS

This prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling stockholders. We will not receive any proceeds from the sale of shares of common stock in this offering. However, we will receive the sale price of any common stock we sell to the selling stockholders upon exercise of the warrants owned by the selling stockholders. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock is traded over-the-counter on the Over the Counter Bulletin Board maintained by the National Association of Securities Dealers under the symbol “MICG”. There is no assurance that the Common Stock will continue to be quoted or that any liquidity exists for our stockholders.

For the periods indicated, the following table sets forth the high and low sale prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.


Year ended 1/1/05	High		Low
First Quarter	$	0.95	$	0.35
Second Quarter	$	0.75	$	0.30
Third Quarter	$	0.69	$	0.31
Fourth Quarter	$	0.51	$	0.30


Year ended 12/31/05	High		Low
First Quarter	$	0.48	$	0.24
Second Quarter	$	0.62	$	0.25
Third Quarter	$	2.60	$	0.50
Fourth Quarter	$	2.68	$	1.46


Year ending 12/31/06
First Quarter (through February 9, 2006)	$	2.96	$	2.32

Holders

As of January 31, 2006, we had 211 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. The transfer agent of our common stock is Mellon Investor Services LLC, 85 Challenger Road, Ridgefield, New Jersey 07660.

Dividends

We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends to stockholders in the foreseeable future. In addition, any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of

operations, capital requirements, and such other factors as the Board of Directors deem relevant.

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

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

	•		discuss our future expectations;

	•		contain projections of our future results of operations or of our 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 prospectus. See “Risk Factors.”

Overview

We specialize in the installation of electrical products and services, and in transactions between consumers of electricity and the wholesale market. Our objective is to leverage our assets and value to successfully build a viable, profitable electrical services and technology infrastructure business.

On October 13, 2005, we acquired, via merger, substantially all of the assets of EnergyConnect, Inc., a Nevada corporation. EnergyConnect merged with and into our wholly owned subsidiary, ECI Acquisition Co., an Oregon corporation, with ECI Acquisition continuing as the surviving corporation and our wholly owned subsidiary. The name of the surviving entity was changed to EnergyConnect, Inc.

As a result of the merger, we issued 27,365,306 shares of our common stock and 19,695,432 common stock purchase warrants exercisable at $2.58 per share to EnergyConnect shareholders in exchange for all the outstanding shares of EnergyConnect. We also granted options to purchase 3,260,940 shares of our common stock at $0.32 per share to the EnergyConnect option holders in connection with the assumption of the EnergyConnect Employee Stock Option Plan.

Pursuant to an Agreement and Plan of Merger dated July 20, 2005 by and between us, CPS Acquisition Co., Christenson Electric, Inc. and CEAC, Inc., an Oregon corporation and sole shareholder of Christenson Electric, Inc., we acquired, substantially all of the assets, of Christenson Electric As part of the purchase price of Christenson Electric we assumed term debt in the amount of $4,786,000 and issued 2,000,000 shares of our common stock to CEAC. The value of the merger was determined based on a share price of $0.64, which was the average closing price for our common stock over the five days ending July 20, 2005. The acquisition closing date was July 20, 2005.

In September 2003, we acquired privately held Velagio and Christenson Technology Services. In December, 2003 the service and technology teams of Velagio and Christenson Technology Services were consolidated into one subsidiary under the name Christenson Velagio, Inc. in order to take full advantage of inherent synergies within the subsidiaries, as well as capture competitive advantage. The newly formed organization conducted business in the electrical services and technology infrastructure sectors.

During 2003, we made the decision to discontinue the operations of Velagio and previously acquired Innovative Safety Technologies, Inc. This decision was made based on the declining sales in these two entities, and the fact that many of the employees whose focus was in sales of these products and services were no longer with us. The net revenue and expenses of those two entities for the years ended January 1, 2005 and January 3, 2004 are reported as “Discontinued Operations” in our consolidated statement of operations. The remaining assets and

liabilities were merged into Christenson Velagio in December 2003 in conjunction with the combination of Velagio, Innovative Safety Technologies and Christenson Technology Services.

Through our subsidiaries Christenson Velagio, Inc., Christenson Electric, Inc and EnergyConnect, Inc., we provide high quality electrical construction, technology and energy related services. These companies have the ability to deliver the following products and services:

Christenson Velagio

	•		Computer Telephony Integration

	•		Digital Video CCTV Systems and Infrastructure

	•		Telecommunications Systems and Infrastructure

	•		Enterprise Security Systems

	•		Wireless Networking Solutions

	•		Life Safety Systems Design and Installation

	•		Information Technology Network Design & Engineering

	•		Voice/Data Systems and Infrastructure

	•		Electrical Design & Engineering

	•		Lighting Services

	•		Electrical Construction Services

Christenson Electric

	•		Substation Design, Wiring and Installation Services

	•		Wind Farm and Solar Collection Wiring

EnergyConnect

	•		Electricity Redistribution

	•		Energy Consumption Management

	•		Utility Energy Distribution Support Services

Christenson Velagio provides an array of electrical and technology products and services to customers in the Portland and Eugene, Oregon markets and the southwest Washington State markets.

Christenson Electric, doing business as Christenson Power Services, engages in electrical construction, primarily high voltage electrical services and contract construction, predominantly on electrical substations, transmission facilities and wind farm power generation projects, primarily in the western region of the United States. Christenson Electric’s customers include electric utilities, industry, and government agencies. Christenson Electric provides new facilities design, design modification, installation, wiring and maintenance from transformers and circuit breakers to complex construction of electrical substation switchyards and transmission yards up to 500,000 volts. In addition, Christenson Electric has been involved in the construction of greater than 10% of the currently operating wind farm power generation projects developed in the United States over the last six years. Christenson Electric also provides docking crews, electricians and other tradesman provided under long-term staffing contracts, to major regional utilities and the Bonneville Power Administration. Individual project contracting is performed under fixed-price, cost-plus-fee, time and material, and unit-price contracts.

Through EnergyConnect’s proprietary technology and services, commercial buildings and other electric energy consumers become integral participants in wholesale electric markets. Participants receive significant new revenue streams and lower costs – with minimal or no change in their local environment. The electric grid benefits through reduced costs, improved reliability and enhanced risk management. It’s anticipated that a portion of EnergyConnect’s services will drive additional growth in Christenson Velagio.

These services and capabilities are expected to provide the substantial majority of our sales in the foreseeable future. Our results will therefore depend on continued and increased market acceptance of these products and our ability to install and service them to meet the needs of our customers. Any reduction in demand for, or increase in competition with respect to these products could have a material adverse effect on our financial condition and results of operations.

Management’s Focus in Evaluating Financial Condition and Operating Performance.

Management meets regularly to review the two main functional organizations within our subsidiaries. These organizations include Operations, which consists of customer solicitation and project work performance, and Finance and Administration, which consists of our administration and support. Based on the kinds of information reviewed, meetings are held daily, weekly and monthly. Following is a list of the most critical information which management examines when evaluating the performance and condition of our company.

Revenue. Sales personnel and project managers are responsible for obtaining work to be performed by us. Revenue is booked daily based on our revenue recognition policy. Where applicable, these bookings are reviewed the following day by our President, the Chief Financial Officer and several of their direct reports. Revenues of EnergyConnect are reviewed by our CEO, EnergyConnect’s President and the EnergyConnect employee in charge of technology. Decisions about various aspects of the business are made, and actions are taken based on the prior day or week’s revenue, and whether or not it met daily and weekly revenue goals and expectations. Monthly customer revenue for all three subsidiaries is also examined, in detail, as a part of a review of our financial statements for the prior month, by our executive team and board of directors.

Expense Control. We have various controls in place to monitor spending. These range from authorization and approvals by the head of each subsidiary and our CFO as well as review of the periodic check runs by the CFO. and reviews of labor efficiency and utilization by the President and our project managers. An organizational team, which is comprised of the President, CFO, several department heads and key employees, meets bi-weekly to review reports that monitor expenses and cost efficiency, among other factors. Additionally, the executive team of Christenson Velagio and Christenson Electric, comprised of our President, CFO and Controller, meets weekly to review those subsidiaries’ operations. All expenses of EnergyConnect are reviewed and approved by the President of EnergyConnect. Each subsidiary’s financial statements are reviewed monthly with the board of directors to oversee monthly spending patterns and expenses as a part of the review of the prior month’s financial statements.

Cash Requirements. We focus on cash daily, through a series of meetings that highlight cash received from borrowings on the prior day’s billings, cash required to fund daily operating needs, cash received from customers and several other factors that impact cash. We review accounts receivable reports, ineligible receivables and accounts payable reports in conjunction with preparing a daily cash flow schedule that projects and tracks all cash sources and uses. Our management and the board of directors use this information in determining cash requirements.

Longer term cash needs are reviewed on a weekly basis by our Chairman, CEO, President, CFO, Controller and the EnergyConnect President. These meetings are used to determine whether we may need to enter into additional financings or debt agreements to satisfy longer term cash requirements.

Customer service. We consider our reputation as one of our most valuable assets. Much of the revenue in our Christenson subsidiaries is based either on repeat business or referrals from our loyal customer base. We review service issues and any customer feedback continually to ensure continued customer satisfaction through timely and high quality work. The same attention to customer needs and satisfaction will be integral to EnergyConnect’s business as that business is built.

Safety. Safety is of utmost importance to us and our employees. Our engineers, electricians and technicians are required to undergo regular educational seminars, which include safety training. We have well defined procedures designed to prevent accidents. Management reviews reports on our safety record, and examines the facts and circumstances surrounding specific accidents to ensure that all procedures were followed, or to modify procedures if needed.

Business Characteristics.

Revenue. We generate revenue by performing electrical service work, technology infrastructure design and installation and through transactions between energy users and the electric power providers. These projects are obtained by our sales force and project managers. These projects come from direct solicitation of work, the bidding process, referrals, regular maintenance relationships and repeat customer projects.

Cash. We generate cash mainly through operations. Cash is borrowed daily from an asset based lender under revolving credit facilities in Christenson Velagio and Christenson Electric. These borrowings are repaid through collections from customers’ accounts. Each subsidiary submits to its lender, daily summaries of customer billings, cash collections, ineligible accounts and the amount of the borrowings requested. The lender approves the submissions and deposits funds directly into each subsidiary’s bank account.

EnergyConnect started invoicing for transactions just prior to its acquisition by us. It is anticipated that its main source of cash will be from operations. This cash, combined with debt financing, if available, will be used to supplement cash from operations until EnergyConnect becomes cash positive on an operating basis.

We have also generated cash through debt issuances and private placements of common and preferred stock. The board of directors reviews both short and long range business plans and projections, and implements funding strategies based on the cash needs produced in the projections. These projections are reviewed quarterly and changes are made if needed.

Opportunities and Risks. Some of the significant business risks we face, among others, include interruption in the flow of materials and supplies, changes in laws that allow for tax credits, interruption of our work force through disagreements with our union, business contraction and expansion caused by the economy, seasonality factors and our general lack of liquidity.

As a part of our regular business planning, we anticipate the effect that these risks may potentially have on our financial condition. Some of the risks are planned for contractually to minimize our liability in cases where we are subject to contract performance. Others are anticipated by forging plans for staff reductions or increases should the economy move drastically in one direction. We also continually look for additional funding sources and cash availability, both by improving operating performance internally and from external debt and equity sources, should our cash be strained by certain factors.

Business Goal Attainment.

When entering into acquisitions, our goal is to realize certain synergies within the resulting organization, save costs from eliminating duplicate processes, and come out of the combination as a breakeven or slightly profitable company. We achieved operating profitability in both the first and second quarters of 2005, produced net income in the third quarter of 2005, and are profitable year-to-date through October 1, 2005. These results mark a turnaround from the unprofitable operations we sustained in the business during 2004 and 2003. Quarterly losses from operations during those periods averaged over $1.2 million per quarter, compared to an average operating profit of just under $455,000 per quarter through the first three quarters of 2005.

Our goals for the fourth quarter of 2005 include maintaining pre tax net profitability, further reducing our negative cash flow, and increasing top line revenue and margins. It’s anticipated that this will be done through a combination of financings, process efficiencies, lease restructurings and general expense cutbacks.

Trends.

A large portion of our business is closely tied to the economy. In a down economy, our work becomes more dependent on repeat business from ongoing customer relationships. When the service, manufacturing and retail industries aren’t expanding, our service projects are more focused toward changes, adds, moves, and fixes within this customer base. We continue to see improvement in the economy at the current time. We experienced a significant increase in revenues (13.4%) in the third quarter in Christenson Velagio compared to the same quarter of 2004, and a sequential increase of revenues (19.5%) over the second quarter of the current year. With the acquisition of Christenson Electric and EnergyConnect, we will experience more seasonality in our revenue base. EnergyConnect is less affected by changes in the economy than our other subsidiaries. Its business is based on energy usage and prices. During periods of higher level energy costs, EnergyConnect may be positively affected by a down economy, in that EnergyConnect may gain more participation in its energy programs as a way for companies to defray some of their energy costs.

In the years prior to 2005, we saw a dramatic downturn in spending for technology infrastructure. This

affected the technology side of our acquired businesses. It is anticipated that as the economy continues to improve, Christenson Velagio will see increasing revenue from the sales of technology products and services. Also, with the passage of the latest energy bill by Congress, Christenson Electric should continue to benefit from alternative energy projects.

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 evaluate, on an on-going basis, 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 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 and allowances;

Accruals for contingent liabilities;

Inventories and reserves for shrinkage and obsolescence;

Bad debt reserves;

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

Significant portions of our revenues are derived from construction and service projects. Revenues from fixed-price, cost-plus-fee, time and material and unit-price contracts are recognized using the percentage-of-completion method of accounting which recognizes income as work on a contract progresses. Recognition of revenues and profits generally are related to costs incurred in providing the services required under the contract. Earned revenue is the amount of cost incurred on the contract in the period plus the proportional amount of gross profit earned during the same period. This method is used because management considers total cost to be the best available measure of completion of construction contracts in progress. Provisions for estimated losses on construction contracts in progress are made in their entirety in the period in which such losses are determined without reference to the percentage complete. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to revenue and costs, and are recognized in the period in which the revisions are determined. Claims for additional revenue are not recognized until the period in which such claims are allowed. Direct contract costs include all direct labor, direct materials and some estimating costs and shop and equipment costs. General and administrative costs are charged to expense as incurred. Revenue from discontinued operations is recognized when persuasive evidence of an arrangement existed, the price was fixed, title had transferred, collection of resulting receivables was probable, no customer acceptance requirements existed and there were no remaining significant obligations.

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.

We adjust inventory for estimated excess and obsolete inventory equal to the difference between the cost of inventory and the estimated fair value based upon assumptions about future demand and market conditions. At October 1, 2005, the allowance for inventory obsolescence was $143,020 and reflects management’s current estimate of potentially obsolete inventory based on these factors. Any significant unanticipated changes in demand or competitive product developments could have a significant impact on the value of our inventory and our reported results. If actual market conditions are less favorable than those projected, additional inventory write-downs and charges against earnings may be required.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Accounts receivable, historical bad debts, customer concentrations, customer creditworthiness, current economic trends, and changes in customer payment terms and practices are analyzed when evaluating the adequacy of the allowance for doubtful accounts. At October 1, 2005, the allowance for doubtful accounts was $195,341. This allowance was determined by reviewing customer accounts and considering each customer’s creditworthiness as of October 1, 2005, and the potential that some of these accounts may be uncollectible. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances and charges against earnings may be required.

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. After the acquisitions of Velagio and Christenson Technology Services in September 2003, management decided to discontinue the operations of Innovative Safety Technologies because that business was not the focus of any of our future plans. Accordingly, net intangible assets of $255,000 were expensed in 2003 under “Loss for discontinued operations” in the consolidated statement of operations.

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.

We tested the trade name value for impairment as of the end of 2004, and the result indicated that the recorded book value of our trade name exceeded its fair value, as determined by undiscounted cash flows. Upon completion of the assessment, we recorded a non-cash impairment charge of $376,000, net of tax, or $0.02 per share at January 1, 2005 to reduce the carrying value of the trade name to its estimated value of $872,771.

During the fourth quarter of 2003, management determined that the goodwill recorded for both Innovative Safety Technologies and Velagio was impaired due to the fact that operations of both of these entities were discontinued. A charge was recorded in 2003 under “Loss from discontinued operations,” in the consolidated statement of operations in the amount of $1,295,000 for Velagio and $250,000 for Innovative Safety Technologies.

Recent Accounting Pronouncements

New Accounting Pronouncements

reasonably estimated. We are required to adopt the provisions of FIN 47 no later than the first quarter of fiscal 2006. We do not expect the adoption of this Interpretation to have a material impact on our consolidated financial position, results of operations or cash flows.

SFAS 154. In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. We do not expect the adoption of this SFAS to have a material impact on our consolidated financial position, results of operations or cash flows.

Results of Operations for the Three and Nine Months Ended October 1, 2005 Compared to the Three and Nine Months Ended October 2, 2004

The financial information presented for the three and nine months ended October 1, 2005 and October 2, 2004, represents activity in our company and our wholly-owned subsidiary, Christenson Velagio for the full period, and from our newly acquired, wholly-owned subsidiary Christenson Electric for the 10 weeks from July 21, 2005 through October 1, 2005. Christenson Electric’s third quarter 2005 revenue and expense comprise approximately 46% and 28% of the consolidated amounts, respectively. Christenson Electric’s year to date 2005 revenue and expense comprise approximately 24% and 12% of the consolidated amounts, respectively. Since there is neither revenue nor expense from Christenson Electric included in the totals for the three and nine months ended October 2, 2004, comparisons between the current quarter and year to date totals, and those from the same periods in 2004, are not meaningful.

Sales. Consolidated revenue for the three months ended October 1, 2005 was $20,074,000 compared to $9,493,000 for the three months ended October 2, 2004, and $9,007,000 for the three months ended July 2, 2005. Revenues in Christenson Velagio and Christenson Electric for the quarter totaled $10,766,000 and $9,307,000, respectively. The increase in revenue within Christenson Velagio between the third quarters of 2005 and 2004 (13.4%) is primarily due to our focused efforts to increase revenues and margins. The increase in revenue between the second and third quarters of 2005 (19.5%), is due to increased sales efforts, a continued improvement in the construction industry, and from seasonal work.

There were sales to one customer that exceeded 10% of total consolidated revenue in the three months ended October 1, 2005. There were no sales to customers that comprised over 10% of our total consolidated revenue for the three months ended October 2, 2004.

Revenue for the nine months ended October 1, 2005 was $37,991,000 compared to $28,329,000 for the nine months ended October 2, 2004. This increase between periods included sales within Christenson Electric of $9,307,000. Sales within Christenson Velagio for the nine months ended October 1, 2005 were $28,684,000. This is a 1.3% increase over sales in the same period of 2004. Sales within Christenson Velagio for the first six months of 2005 were lower than sales for the first six months of 2004 by $935,000. The significant increase in third quarter revenue within Christenson Velagio, helped reverse the negative revenue comparison between 2005 and 2004. We have been more selective in bidding for and accepting new work in the current year in an effort to increase margins. There were no sales to any customers that exceeded 10% of total revenue in the nine months ended October 1, 2005 and October 2, 2004.

Cost of Sales. Cost of sales totaled $16,941,000 (or 84.4% of sales) for the fiscal quarter ended October 1, 2005, compared to $7,804,000 (82.2%) for the same period in 2004. Cost of sales within CVI for the quarter was

$8,580,000 (79.7% of total CVI sales) compared to $7,804,000 (82.2%) within CVI in the same quarter in 2004, and also compared to $7,093,000 (78.8%) within CVI in the second quarter of 2005.

Cost of sales for the nine months ended October 1, 2005 was $31,039,000 (81.7%) compared to $23,234,000 (82.0%) for the nine months ended October 2, 2004. Cost of sales within CVI for the nine months ended October 1, 2005 was $22,678,000 (79.1%) compared to $23,234,000 (82.0%) within CVI over the same period in 2004. Cost of sales includes the cost of labor, products, supplies and overhead used in providing electrical and technology services.

Gross Profit. Gross profit for the three months ended October 1, 2005 was $3,133,000 (or 15.6% of sales) compared to $1,689,000 (17.8%) for the same period in 2004. This decrease in gross margin is due to lower margins produced on the revenue from Christenson Electric. Gross profit within Christenson Velagio was $2,186,000 (20.3%) compared to gross profit of $1,689,000 (17.8%) within Christenson Velagio in the same period in 2004. This improvement is a direct result of our efforts to reach profitability, in part by being more selective of projects on which we bid, or work we accept.

Gross profit for the nine months ended October 1, 2005 was $6,953,000 (18.3%) compared to $5,095,000 (or 18.0%) for the nine months ended October 2, 2004. Gross profit within Christenson Velagio for the nine months ended October 1, 2005 was $6,006,000 (or 20.1%) compared to $5,095,000 (or 18.0%) for the same period in 2004. This improvement is a direct result of our efforts to reach profitability, in part by being more selective of projects on which we bid, or work we accept.

Future gross profit margins will depend on the volume and mix of sales of products and services to our customers, as well as our ability to control costs. It is our goal to sustain higher levels of gross margins through continuing cost reduction efforts and an emphasis on obtaining higher gross margin work projects.

Sales, General and Administrative Expenses(S, G & A). S, G & A expenses were $2,217,000 (or 11.0% of sales) for the three months ended October 1, 2005, compared to $2,424,000 (25.5%) for the three months ended October 2, 2004, a reduction of $207,000. The quarterly amount for 2005 includes $682,000 of expense within Christenson Electric. S, G, & A expense within us and Christenson Velagio totaled $1,777,000 (16.5% of Christenson Velagio sales) compared to $2,424,000 (or 25.5% of Christenson Velagio sales) for the three months ended October 2, 2004. This reduction of $647,000 is primarily due to a decrease in legal expenses and investor relations expense in 2005 compared to the same period in 2004. Sequential quarterly S G & A expenses within us and Christenson Velagio decreased significantly from the fourth quarter 2004 expenses of $2,007,000 and were with a sight increase over the first and second quarter 2005 expenses of $1,594,000, and $1,632,000, respectively. S, G & A expenses are comprised mainly of payroll costs, facilities and equipment rent, outside services, insurance, utilities and depreciation.

S, G & A expenses were $5,467,000 (or 14.4%) for the nine months ended October 1, 2005, compared to $7,648,000 (or 27.0%) for the nine months ended October 2, 2004. Excluding S, G & A expense of $681,000 incurred within Christenson Electric during the three months ended October 1, 2005, S, G & A expense was $4,786,000 within us and Christenson Velagio. The reduction in expense within us and Christenson Velagio of approximately $2.9 million between the first nine month periods of 2005 and 2004 was due primarily to reductions in payroll and payroll related costs of approximately $500,000, lower insurance and bonding costs of approximately $423,000, lower professional fees of approximately $729,000, and lower investor relations cost of approximately $512,000. Included in the reduction of professional fees was the accrual of $395,000 in the nine months ended October 2, 2004 for legal defense costs, the reversal of $120,000 of that accrual in the nine months ended October 1, 2005, and approximately $122,000 lower consulting expense. Investor relations costs in the nine months ended October 2, 2004 included $512,000 of expense from to the value of common stock issued to our investor relations firm.

The level of S, G & A expense for the remainder of 2005 is anticipated to continue to be significantly lower compared to the level incurred in the 2004 due to lower payroll costs, professional fees, and investor relations costs and our continued diligence in keeping costs at reduced levels. We anticipate these expenses will approximate between 15% and 20% of sales for 2005.

Interest Expense. Interest expense was $354,000 for the three months ended October 1, 2005, compared to $464,000 for the three months ended October 2, 2004. Included in interest for the three months ended October 1, 2005 is $121,000 of interest recorded within Christenson Electric under a line of credit established with an asset based lender. The interest expense for the three months ended October 2, 2004 includes $115,000 of interest recorded as a result of the accounting treatment of the issuance of warrants associated with the debt owed to Destination Capital LLC. This expense is a non-cash expense amount. There was no interest charged in the third quarter 2005 from warrant obligations. The feature requiring issuance of warrants from the Destination Capital debt was eliminated with the renegotiation of that obligation on August 1, 2005. Interest expense within us and Christenson Velagio for the three months ended was $259,000 compared to $349,000 in interest expense within us and Christenson Velagio (excluding warrant interest expense) in the three months ended October 2, 2004.

Interest expense was $1,129,000 for the nine months ended October 1, 2005 compared to $1,887,000 for the nine months ended October 2, 2004. This decrease is due in part to the lower costs for the issuance of warrants in connection with the Destination Capital note. We recorded $321,000 and $791,000 in non-cash interest expense under the terms of the note in the nine months ended October 1, 2005 and October 2, 2004, respectively. Excluding the effect of these non-cash interest charges, interest expense was $808,000 and $1,096,000 for the nine months ended October 1, 2005 and October 2, 2004, respectively. Interest expense is also lower due to the fact that our overall interest bearing debt totals were lower in 2005 than they were in 2004, over the same nine month periods.

Derivative income/expense. We incurred $76,000 in derivative expense for the nine months ended October 1, 2005 compared with $161,000 in derivative income for the nine months ended October 2, 2004. This income or expense amount is recorded based on the fluctuations of the Black Scholes value of the derivative liabilities listed on our consolidated balance sheet. The expense is computed using the fair value of our common stock, among other factors, and will produce derivative expense or derivative income as our stock price increases or decreases, respectively.

Gain / Loss From Discontinued Operations. After the acquisitions of Velagio and Christenson Technology Services, we discontinued the operations of both Velagio and Innovative Safety Technologies due to a decline in sales and a decision to focus on the Christenson Technology Services business. Accordingly, the revenue, expenses and other income or losses for Innovative Safety Technologies are condensed and reported as discontinued operations in the consolidated statement of operations. Certain information from those businesses is reported below.

Discontinued operations are comprised of a royalty from the sale of the SoftBoard business, and the reduction in costs of previously discontinued businesses written off subsequent to the discontinuation of those businesses. The SoftBoard business was sold in 2000. As part of the sale price, we receive 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.”

We recorded $149,000 in the three and nine months ended October 2, 2004 in connection with a $116,000 reduction of previously reserved bad debts, and a $33,000 reduction of previously reserved facility rent costs.

Income Taxes. We recorded a provision for income taxes for the three and nine months ended October 1, 2005 which was offset with a tax benefit from loss carryback. No provision for income taxes was recorded in either the three or nine months ended October 2, 2004 due to losses we incurred in those periods. We have provided a full valuation allowance on our net deferred tax asset.

Results of Operations for the Fiscal Year Ended January 1, 2005 Compared to the Fiscal Year Ended January 3, 2004

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
	2004			2003
Net sales		100	%		100	%
Cost of goods sold		83			84
Gross profit		17			16
Sales General & administrative expenses		29			40
Loss from continuing operations		(12	)		(24	)
Other income (expense)		(5	)		(6	)
Loss before income taxes		(17	)		(30	)
Benefit from income taxes		—			—
Loss before discontinued operations		(17	)		(30	)
Discontinued operations		1			(28	)
Net loss		(16	)%		(58	)%

The financial information presented for the year ended January 1, 2005, represents activity in Christenson Velagio for the full twelve months of 2004. Due to the acquisition of Christenson Technology Services and Velagio on September 16, 2003, the financial information presented for the year ended January 3, 2004, represents activity in Velagio and Christenson Technology Services for the three and a half months from the date of their acquisitions to the end of the fiscal year, combined with revenue, other income and S G & A expenses of Innovative Safety Technologies and Microfield Group, Inc. for the year ended January 3, 2004. Due to the disproportionate size of the revenues in 2004 compared to those in 2003, no meaningful comparison can be made between revenue of the two years presented in the accompanying consolidated statements of operations. Comparisons will be made between quarterly revenue and expenses on a consecutive basis in 2004, and also to revenue and expenses for the fourth quarter of 2003.

Sales. Revenue for the fiscal year ended January 1, 2005 was $36,467,000 compared to $10,342,000 for the fiscal year ended January 3, 2004. The revenue amount for the prior fiscal year includes sales of technology products and electrical construction services in Christenson Velagio during the three and a half months from the date of the acquisition to the end of the fiscal year. There were no sales to any one customer that comprised more than 10% of our total sales for the fiscal year 2004 or 2003. Revenues for the first through the fourth quarters of 2004 were $9,191,000, $9,646,000, $9,493,000 and $8,137,000, respectively. These compare to revenue of $9,235,000 in the fourth quarter of 2003. Our revenue is subject to some seasonal influences, with the summer months typically producing the largest revenues of the year. Revenue was down in the fourth quarter of 2004 compared to the previous consecutive quarters, and from the prior year fourth quarter due primarily to a decision we made to forego bidding on larger, less profitable contracts. This shift was made in the summer of 2004 and affected revenue late in the third quarter and during the fourth quarter of 2004.

Cost of Sales. Cost of sales totaled $30,335,000 (or 83% of sales), for the fiscal year ended January 1, 2005, compared to $8,712,000 ( 84%), for the same period in the prior year. All of the current fiscal year’s cost of sales includes the cost of labor, products, supplies and overhead used in providing electrical and technology services in Christenson Velagio. Prior year amounts include those costs from September 16, 2003, the date of acquisition of Christenson Technology Services, to the end of the fiscal year. Cost of sales for the first through the fourth quarters of 2004 were $7,379,000, $7,975,000, $7,804,000 and $7,177,000, respectively. These compare to cost of sales of $7,851,000 in the fourth quarter of 2003.

Gross Profit. Gross profit for the fiscal year ended January 1, 2005 was $6,132,000 (16.8% of sales), compared to $1,630,000 (15.8%), for the fiscal year ended January 3, 2004. Due to the disproportionate size of the gross profit in 2004 compared to those in 2003, no meaningful comparison can be made between gross profits of the two years presented in the accompanying consolidated statements of operations. Gross profit for the first through the fourth quarters of 2004 was $1,812,000, $1,671,000, $1,689,000 and $960,000, respectively. These compare to gross profit of $1,384,000 in the fourth quarter of 2003. Gross profit was down in the fourth quarter of 2004 compared to the previous consecutive quarters due primarily to the move we made to not bid on larger, less profitable work. Gross margin in the fourth quarter of 2004 of 11.8% was lower than gross margins experienced in the first three quarters of 2004 (between 17.3% and 19.8%) due to losses we took on three specific projects in the fourth quarter.

Future gross profits and gross margins will depend on the volume and mix of sales of products and services to our customers, as well as our ability to control costs and efficiently manage our jobs. It is anticipated that as savings are realized from the implementation of continuing cost reduction efforts and higher gross margin work projects are targeted, overall gross profit margins may increase.

Sales, General and Administrative Expenses (S, G & A) . S, G & A expenses were $9,748,000 (or 26.7% of sales), for the fiscal year ended January 1, 2005, compared to $4,104,000 (39.7%), for the fiscal year ended January 3, 2004. The increase in dollar amounts between years is due to a full year of expenses in 2004 compared to three and a half months from the acquisition of Christenson Technology Services on September 16, 2003. The decrease in percentage of S, G & A expenses to sales is due to lower relative payroll costs in the fiscal year ended January 1, 2005 compared to the prior year. S, G & A expenses are comprised mainly of payroll costs, facilities and equipment rent, outside services, insurance, utilities and depreciation. Payroll costs, which include salary, payroll taxes and fringe benefits, totaled $5,533,000 for the fiscal year ended January 1, 2005. These costs totaled $1,476,000, $1,377,000, $1,271,000, and $1,409,000, for the first through the fourth quarters of 2004, respectively. These expenses decreased through the first three quarters due to staff reductions and the elimination of some executive positions. These expenses increased in the fourth quarter due to year end reconciliations in certain accounts.

Total rents for the year ended January 1, 2005 were $490,000, which was primarily comprised of facilities rent. This is compared to $203,000 of rent incurred in the year ended January 3, 2004.

Outside services, professional fees, insurance, utilities and depreciation for the year ended January 1, 2005 totaled $2,866,000, compared to $842,000 for the year ended January 3, 2004. The increase in these expenses is due primarily to having a full year’s expenses in 2004 compared to three and a half months in 2003 from the acquisition of Christenson Technology Services on September 16, 2003. Expenses for the first through the fourth quarter 2004 totaled $1,008,000, $425,000, $894,000 and $539,000, respectively. The first quarter of 2004 included $395,000 in legal expense for anticipated costs in defending a lawsuit filed against us. These expenses decreased through the first two quarters of 2004 due to lower usage of professionals and outside service providers, and to a 50% reduction in telephone and utility costs. These third quarter 2004 costs increased significantly compared to the second quarter due to added investor relations costs. During that quarter, we issued 1,600,000 shares of our common stock to an investor relations firm for services to be rendered for us in the public equity markets. This issuance was recorded in shareholders’ equity at the fair market value of the stock on the date of issuance, and resulted in an expense of $560,000. Of this total, $472,000 was charged to expense in the third quarter of 2004, with the remaining $88,000 charged to expense in the fourth quarter 2004.

Due to new sources of expenses from Christenson Technology Services, and the disproportionate size of the expenses in 2004 compared to those in 2003, no meaningful comparison can be made between expenses of the two years presented in the accompanying consolidated statements of operations.

The level of S, G & A expenses for the 2005 fiscal year is expected to remain level or decrease compared to the level incurred in the year ended January 1, 2005 due to continuing cost reduction efforts. We anticipate these expenses will approximate between 17% and 25% of sales in 2005, compared to 27% in 2004.

Interest Expense . Interest expense was $1,959,000 for the year ended January 1, 2005, compared to $428,000 for the year ended January 3, 2004. The significant increase in interest expense was primarily a result of the charges on warrant liabilities and the increasing values caused by our fluctuating stock price. We did not have a sufficient amount of authorized common shares to issue in the conversion of all common stock equivalents. Several events occurred during 2004 in which warrants to purchase common stock were issued. 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 our stock price to be recorded in earnings. These warrant issuances and subsequent increases in value resulted in non-cash charges to interest expense during the year of $1,087,000. (see non-cash expense table below)

The increase in interest expense between 2003 and 2004 was also a result of the acquisition of Christenson Technology Services in September 2003. In the eight and a half months of 2003 prior to the acquisition of Christenson Technology Services and Velagio, our level of interest bearing debt was significantly lower than the debt level after the acquisition. Therefore, interest was not accruing at the same levels for the full year in 2003 compared to 2004, in which a significant amount of debt existed for the full year. The debt assumed in the acquisition of Christenson Technology Services included an accounts receivable based lending facility under which we incurred $495,000 in interest expense in 2004, and $156,000 in interest expense from September 16, 2003, the

date of the acquisition, to the end of 2003.

Gain / Loss From Discontinued Operation. After the acquisitions of Velagio and Christenson Technology Services, we discontinued the operations of both Velagio and Innovative Safety Technologies due to a decline in sales and a decision to focus on the Christenson Technology Services business. Accordingly, the revenue, expenses and other income or losses for both Velagio and Christenson Technology Services are condensed and reported as discontinued operations in the consolidated statement of operations. Certain information from those businesses is reported below.

We recorded miscellaneous income of $149,000 in the year ended January 1, 2005, from the resolution of certain liabilities that were contained in the balance sheet of Velagio. Discontinued operations also contain a gain of $63,000 on the sale of the SoftBoard business. The SoftBoard business was sold in 2000. As part of the sale price, we receive 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.”

For the fiscal year ended January 3, 2004, sales of Innovative Safety Technologies and Velagio products and services included in discontinued operations totaled $496,000. The cost of sales and gross profit included in discontinued operations for the year ended January 3, 2004 totaled $440,000 and $56,000, respectively.

S, G & A and other expense incurred in Innovative Safety Technologies and Velagio for the year ended January 3, 2004 totaled $2,987,000. Included in this amount is a write down from the impairment of Goodwill, in both Innovative Safety Technologies and Velagio, of $1,546,000. Also included in this amount are charges against earnings of $255,000 for the write off of the remaining value of intangibles acquired in the acquisition of Innovative Safety Technologies in 2002.

Income Taxes. There was no provision for income taxes in 2004 or 2003 due to losses incurred by us in both years. No tax benefit from loss carryback was recorded in either year as there was no income tax paid in the open loss carryback periods. We have provided a full valuation allowance on our net deferred tax asset.

Non-cash Expense Items

Since the acquisition of Christenson Technology Services and Velagio in September of 2003, we have entered into several financings, debt conversions and other transactions where common stock or warrants were issued as a part of the agreements. Many of the issuances resulted in charges to our statement of operations over that period. 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 on our statements of operations for the fiscal years ended January 1, 2005 and January 3, 2004.


	Year ended			Year ended
Non-cash expense item description*	January 1, 2005			January 3, 2004
Stock-based derivative liability re-measurement	$	16,150		$	123,393
Interest expense on warrant issuances and re-measurements		912,402			—
Common stock issued for services		560,000			—
Interest expense on amortization of debt discount		158,869			—
Intangible write-off and amortization		110,556			1,841,189
Gain on disposal of assets and lease termination		(92,137	)		—
Write-down of impaired intangible asset		376,000			—
Unused reserve for legal fees to contest lawsuit		205,568			—
Loss on debt extinguishment		515,000			111,000
Total transactional non-cash income and expense	$	2,762,408		$	2,092,943


*		This table does not include recurring non-cash expenses such as depreciation.

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, borrowings under bank lines of credit and other debt sources. At October 1, 2005, we had cash of approximately $1,416,000, negative working capital of approximately $8,035,000 and our primary source of liquidity consisted of cash and operating lines of credit within our subsidiaries.

Accounts receivable increased to $9,837,000 at October 1, 2005 from $6,241,000 at January 1, 2005. The increase is due to the addition of $3,145,000 of receivables within Christenson Electric, and from increased sales levels within Christenson Velagio during the third quarter. Receivables are net of an allowance for doubtful accounts of $195,000 and $104,000 at October 1, 2005 and January 1, 2005, respectively. We expect these receivables to remain fairly constant as a percentage of sales, decreasing slightly as efficiencies in the billing and collection processes are achieved. At October 1, 2005, one customer had an account balance that was 17% of total outstanding accounts receivable. No other customers had account balances exceeding 10% of total accounts receivable.

Inventory increased to $244,000 at October 1,2005 from $239,000 at January 1, 2005. The increase is due to normal fluctuations in inventory based on sales levels at any point in time. This balance mainly includes inventory used in the electrical services business. We maintain a fleet of trucks and vans which each maintain a certain level of inventory needed to provide timely products and services to our customers. The inventory levels should remain relatively constant, and increase slightly as our revenue increases. These balances are a significant reduction from inventory balances at October 2, 2004 of $420,000 due to write-offs of obsolete inventory and to more closely managed inventory levels.

Property and equipment, net of depreciation, increased to $459,000 at October 1, 2005 compared to $126,000 at January 1, 2005. This increase was due to the net property and equipment of $289,000 purchased in the acquisition of Christenson Electric, plus equipment purchases within Christenson Velagio. We are party to an equipment lease agreement with a related party, under which we lease furniture and fixtures, equipment, computer equipment, and job site tools and equipment. This lease is classified as an operating lease with a monthly payment due of $100,000 ($60,000 starting November 2005). We anticipate spending nominal amounts to acquire fixed assets in the foreseeable future.

Accounts payable increased to $8,323,000 at October 1, 2005 from $3,452,000 at January 1, 2005. This change is due to $4,606,000 of additional payables as a result of the acquisition of Christenson Electric. Payables consist primarily of the costs of inventory, materials and supplies used in the electrical construction services and technology infrastructure services provided by us.

Accrued payroll, payroll taxes and benefits were $2,657,000 at October 1, 2005 compared to $1,297,000 at January 1, 2005. This increase is due to a higher accrued payroll from an increased number of hours worked at the end of the third quarter compared to the end of the year 2004, and to amounts owed for payroll and taxes within the newly acquired Christenson Electric. This liability consists primarily of union and non-union payroll, and payroll withholdings, health and welfare benefits owed to the unions representing our electricians and technicians, and other payroll related obligations. This liability will vary between reporting periods based on the fact that payroll taxes decrease as the tax obligation thresholds for some of the taxes are exceeded. The combined payroll, payroll tax and benefit amounts should fluctuate with our revenues and as such, represents a main cash use of our funds. As revenues increase, the amounts due for these types of expenses will increase as well. These liabilities are normally short-term in nature with most of them being paid within one to six weeks of the expense being incurred.

We have two borrowing facilities with a lender. These bank lines of credit totaled approximately $4,569,000 at October 1, 2005. This is an increase of $176,000 from $4,393,000 outstanding at January 1, 2005, and is due primarily to $99,000 outstanding under the acquired operating line of credit within Christenson Electric. The amount due under the operating line of credit within Christenson Velagio increased to $4,470,000 at October 1, 2005 from $4,393,000 at January 1, 2005. These lending facilities are a primary source of funds for us. Amounts are drawn against them each day based on the amount of eligible revenues that we billed. As receivables are collected daily, those funds are used to pay down the facilities. The facilities in Christenson Velagio and Christenson Electric have limits of $5,000,000 and $2,000,000, respectively, and borrowings are based on 85% of

eligible accounts receivable, and 50% of eligible inventory. As of October 1, 2005, based on eligible receivables, the Company had approximately $1,072,000 of borrowing capacity.

On January 22, 2004, we entered into a Contract of Sale and Security Agreement with Destination Capital LLC under which we agreed to sell up to 15% of our acceptable, eligible accounts receivable to Destination Capital, in exchange for borrowing up to $600,000 from that entity under the terms of a Promissory Note. We borrowed $600,000 under this facility. In April 2004, we raised an additional $1,750,000 through the issuance of Series 4 preferred shares, a portion of which was used to pay off the $600,000 borrowed in January 2004, with the remainder used for our operating capital. In August 2004, we entered into a second borrowing agreement with Destination Capital. Under this loan agreement, we borrowed $1,200,000 to be used for operating capital. On August 1, 2005, we entered into an agreement to split this debt into three separate promissory notes in the amounts of $516,667, $420,000 and $180,000. These notes were then assigned to two related parties, JMW Group and Christenson Leasing. As of October 1, 2005, due to required monthly payments, there was $1,033,000 outstanding under these loans.

We and our subsidiary have suffered recurring losses from ongoing operations and have experienced negative cash flows from continuing operating activities during 2005 and 2004. As of October 1, 2005, we had negative working capital of $8,035,000, total liabilities of $26,212,000 and an accumulated deficit of $29,207,000. We have achieved profitability from continuing operations for both the three and nine months ended October 1, 2005. In spite of this accomplishment, the history of losses, the significant level of debt assumed as a result of the acquisition of Christenson Electric, and liquidity issues raise doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. While, we may not have sufficient resources to satisfy cash requirements for the next twelve months, by adjusting our operations to the level of capitalization and completing the private placement described below on October 5, 2005, we believe we will 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.

On October 5, 2005, we closed a private placement of $3,659,520 of our common stock to certain accredited investors. We sold 5,227,886 shares of common stock to the investors for $0.70 per share. In addition, each investor received a warrant to purchase one share of common stock for every two shares purchased in the private placement. The warrants have a five year term and an exercise price of $0.90 per share. We also entered into a registration rights agreement with the investors, which sets forth certain rights granted to the investors by us with respect to the registration of the resale by the investors of the shares of common stock purchased in the private placement.

We paid a fee to Capstone Investments, our placement agent in the private placement, by issuing 327,886 shares of common stock and a warrant for 491,829 shares of common stock at an exercise price of $0.90 per share.

We may have to seek additional investment capital or debt facilities. Investment capital or debt facilities may be difficult to obtain due to, among other issues, our prior financial performance. There can be no assurance that additional capital will be available or, if available, will be at terms acceptable to us. We are continuing to focus on opportunities to increase revenues and grow margins while reducing monthly expenses in an attempt to turn cash flow positive and achieve pre-tax profitability.

We had no commitments for capital expenditures in material amounts at October 1, 2005.

The independent auditor’s report on our financial statements for the year ended January 1, 2005 states that our recurring losses raise substantial doubts about our ability to continue as a going concern.

Inflation

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

Off-Balance Sheet Arrangements

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

Related Party Transactions

We have has a number of promissory notes, lines of credit and lease obligations owing to related parties. The following table lists the notes and obligations outstanding at October 1, 2005 by related party.

Amount

Related Party

Type of Obligation

Maturity Date

Obligation

Monthly Payment

Christenson Leasing LLC^{(a) (g)}

Note payable^(h)

July 2008

420,000

^(c)11,667

Christenson Leasing LLC^{(a) (g)}

Note payable^(h)

September 2007

500,000

20,833

Christenson Leasing LLC^(a)(g)

T. I. lease

December 2007

186,735

7,940

Christenson Leasing LLC^(a)(g)

Vehicle leases

various

84,161

various

Christenson Leasing LLC^(a)(g)

Equipment lease

December 2007

—

^(f)100,000

JMW Group, LLC^(a)

Note payable

August 2006

423,846

^(c)41,667

JMW Group, LLC^(a)

Note payable^(h)

July 2008

180,000

^(c)5,000

JMW Group, LLC^(a)

Indemnity fees

Open obligation

—

⁽ⁱ⁾10,000

Aequitas Capital Management^(a)

Note payable

April 2006

82,333

various

Aequitas Capital Management^(a)

Note payable

September 2005

157,927

various

Rod Boucher⁽ⁱ⁾

Note payable

September 13, 2008

317,207

11,309

William C. McCormick

Note payable

July 2005

250,000

interest only

Mark Walter

Bond guarantee fees

Open obligation

—

^(b)900

Destination Microfield, LLC^(d)

Vehicle lease

August 2006

—

^(e)29,000

John B. Conroy

Note receivable

September 2005

66,250

—


^(a)		Robert J. Jesenik, a former director and principal shareholder, also owns a significant interest in these entities.

^(b)		This bond guarantee fee is an approximation, and fluctuates based on the total open bond liability.

^(c)		This payment amount is for principal only. An additional amount is due monthly which includes interest at prime plus 10%.

^(d)		William C. McCormick, Chairman of our board of directors, holds a minority ownership interest in this entity.

^(e)		These payments vary over the term of the loan. This amount represents the monthly payment in effect on October 1, 2005.

^(f)		This payment was reduced to $60,000 per month by terms of the reissued note, starting November 1, 2005.

^(g)		William C. McCormick holds a beneficial minority ownership interest in this company.

^(h)		This debt was paid in full in October 2005 in connection with a private placement.

⁽ⁱ⁾		This note represents deferred salaries and expenses payable to Mr. Boucher prior to the acquisition of EnergyConnect.

Terms and conditions of each of the notes and agreements are listed below.

Notes Payable to Destination Capital, LLC

On January 22, 2004, we entered into a Contract of Sale and Security Agreement with Destination Capital LLC (Destination) under which we agreed to sell up to 15% of its acceptable, eligible accounts receivable to Destination, in exchange for borrowing up to $600,000 from that entity under the terms of a Promissory Note. Destination is an entity in which Robert J. Jesenik, a principal shareholder and former director, holds a significant interest. Under the terms of the agreement between us and Destination, we paid interest at the rate of 18% per annum on the amount of the note outstanding, and also issued warrants in the amount of 1% of the fully diluted common shares, per month, for each calendar month in which the Note was outstanding. The warrants have a five-year life and will be issued at the lower of $0.42 or the price of any other common or preferred equity issued in the six months following the date of the agreement. During the 6 month agreement period, we issued incentive stock options at $0.31 per share, therefore the price per share used for these warrants was reduced to $0.31. We initially were obligated to issue warrants to purchase 350,387 common shares at the time this note was issued. The fair value of these warrants was determined to be $155,221 using the Black Scholes pricing model. The assumptions used included a risk free rate of 3.1%, volatility of 152%, fair market value of our stock of $.48 per share and a remaining life of 5 years. The calculated fair value amount was recorded as a debt discount and is being amortized over the six-month term of the debt. This debt was outstanding on February 1, 2004, March 1, 2004 and April 1, 2004 and in accordance with the terms of the note agreement, we are further obligated to issue additional warrants to purchase 1,053,159 shares of our common stock. These warrants were valued using the Black Scholes pricing model. The assumptions used

included risk free rates ranging from of 3.1% to 3.3%, volatility of 152%, remaining lives of 5 years for each warrant issuance, and fair market values of our stock on those three dates of $0.46, $0.60 and $0.62 per share, respectively. The fair value of these warrants in the amount of $780,373 was recorded as interest expense in the consolidated statement of operations for the year ended January 1, 2005. At the date of each of those warrant issuances, we did not have sufficient authorized common shares to effect the exercise of these warrants, accordingly, the fair value of all of these warrants was classified as liability for warrant settlement on the consolidated balance sheet. On September 1, 2004, our shareholders voted to increase our authorized common shares from 25,000,000 to 125,000,000. The fair market values of these warrants were re-measured on that date and reclassified as common stock warrants in the shareholders’ equity section on the balance sheet, with the increase or decrease in their values recorded as an increase or reduction of interest expense in the consolidated statement of operations. The Note was repaid in full during April 2004.

On August 24, 2004 we entered into a Business Loan Agreement with Destination under which we can borrow up to $2,000,000 based on Destination’s discretion and funds availability. Under the terms of the agreement, we pay interest at prime plus 10% (prime plus 12% in the event of a default), with nine monthly interest only payments starting September 24, 2004, and 15 monthly principal payments of $83,333 and accrued interest until maturity. At loan maturity on August 24, 2006, any remaining principal and accrued interest owed is then due and payable. This loan is immediately due if there occurs a default, there is a sale or disposal of all or substantially all of our assets or stock , or if there is a transfer of ownership or beneficial interest, by merger or otherwise, of our stock or our subsidiary. Additionally, we will issue to Destination the number of warrants equal to 12.5% of the value of the loan balance, on the first day of each month the loan is outstanding. These warrants have a five year life and will be issued at the lower of $0.38 or the price applicable to any shares, warrants or options (excluding options granted to employees or directors) issued by us while the loan is outstanding. Beginning August 1, 2004, we were obligated to issue the following warrant amounts based on the outstanding loan balances on the first day of each month.


			Warrants to be
Date	Loan Balance		Issued

August 1, 2004	$	300,000		37,500
September 1, 2004	$	750,000		93,750
October 1, 2004	$	1,200,000		150,000
November 1, 2004	$	1,200,000		150,000
December 1, 2004	$	1,200,000		150,000
January 1, 2005	$	1,200,000		150,000
February 1, 2005	$	1,200,000		150,000
March 1, 2005	$	1,200,000		150,000
April 1, 2005	$	1,200,000		150,000
May 1, 2005	$	1,200,000		150,000
June 1, 2005	$	1,200,000		150,000
July 1, 2005	$	1,158,334		144,792


Total warrants to be issued as of October 1, 2005				1,626,042

We were obligated to issue warrants to purchase 37,500 common shares at the time this note was issued. The fair value of these warrants was determined to be $17,513 using the Black Scholes pricing model. The assumptions used included a risk free rate of 3.8%, volatility of 155%, fair market value of our stock of $.50 per share and a remaining life of 5 years. The calculated fair value amount was recorded as a debt discount and is being amortized over the twenty-four month term of the debt. The warrants issued from September 1, 2004 through July 1, 2005 were also valued using the Black Scholes pricing model. The assumptions used include risk free rates ranging from 3.39% to 4.17%, volatility percentages ranging from 121% to 155%, remaining lives of 5 years for each warrant issuance, and fair market values of our stock ranging from $0.30, to $0.60 per share. At the time these warrant obligations arose, we had sufficient authorized common shares to effect the exercise of these warrants. Accordingly, the fair values of the warrants issued from September 1, 2004 through July 2, 2005, $604,955, were classified as common stock warrants in the shareholders’ equity (deficit) section on the consolidated balance sheet, and expensed as interest expense in the consolidated statement of operations, as they were issued.

On August 1, 2005 the note owed to Destination Capital was replaced by three notes, which were assigned to two related parties, Christenson Leasing Company LLC and JMW Group, LLC. The three notes contain the following terms: $516,667 note payable to JMW with monthly payments of $41,667 plus interest at prime plus 10% beginning August 24, 2005 through August 24, 2006; $180,000 note payable to JMW with monthly payments of $5,000 plus interest at prime plus 10% beginning August 24, 2005 through July 24, 2008; $420,000 note payable to Christenson Leasing with monthly payments of $11,667 plus interest at prime plus 10% beginning August 24, 2005 through July 24, 2008. In October 2005, the note to Christenson Leasing and the smaller of the two notes to JMW were paid in full by Christenson Velagio. Also, as a result of the renegotiation of these notes, the warrant obligation, contained in the business loan agreement was eliminated.

Note Payable to Rod Boucher

On October 13, 2005, as a part of the acquisition of EnergyConnect, we assumed the liabilities of EnergyConnect. Included in the liabilities was a note payable to Rod Boucher. Mr. Boucher became our Chief Executive Officer as of the date of the acquisition. The note represents deferred salary and expenses within EnergyConnect prior to the acquisition by us. The note is in the amount of $317,207, with monthly payments of $11,309, including interest at prime plus 10%, due on the 13^th of each month through September 13, 2008. As of November 30, 2005, no payments had been made on this obligation.

Bond Guarantee Fees

Christenson Velagio

A certain number of Christenson Velagio construction projects require us to maintain a surety bond. The bond surety company requires an additional guarantee for issuance of the bond. We have an agreement with Mark Walter, our president under which at quarter end we pay Walter between $600 and $1,200 per month for his personal guarantee of this bond liability. The guarantee fee is computed as 15% of the open liability under bonds issued for Christenson Velagio.

Christenson Electric

Certain construction projects within Christenson Electric required standby letters of credit. Our chairman of the board of directors has provided two letters of credit in the amounts of $100,000 and $193,000, for which he is paid indemnity fees. Under the $100,000 letter of credit agreement, Mr. McCormick is paid a fee of 15% of the letter of credit amount. Under the $193,000 letter of credit, Mr. McCormick is paid a fee of 15% per annum of the open liability of the issuer of the letter of credit, plus 1% of the gross profit of the job requiring the letter of credit. The open liability fee is calculated and paid monthly.

We also had an unrelated party guarantee a $1 million standby letter of credit issued as security for a large construction job. This party is paid a fee of 15% of the letter of credit amount for providing this security. This agreement also requires a secondary indemnity, should funds be drawn against this letter of credit, the substantial majority of which has been provided by Aequitas Capital Management, a related party. Robert Jesenik, our former director and a principal shareholder, is CEO of Aequitas. Aequitas charges an additional fee of 15% of the letter of credit amount. Aequitas is also indemnified by Christenson Electric should it have to indemnify the primary guarantor.

Tenant improvement lease

On December 30, 2002, Christenson Electric entered into a non-cancelable operating lease agreement with Christenson Leasing, LLC covering $300,000 of leasehold improvements in our facility. The terms of the lease call for monthly payments of $7,500 including interest at 17.3% through December 2007. Christenson Electric was in default under the lease terms, which default was cured in March 2005, with the resumption of payments due under the lease under a modified payment plan arrangement.

JW Assurance and Holding Limited, and JMW Capital Partners, Inc., each a related party. No payments had been made on these lease obligations since September 2002. At July 1, 2005, these entities assigned their interests in the obligation to Aequitas Capital, which we Company consolidated into one promissory note with total principal due of $90,847, interest accruing at 7% per annum, maturing at April 1, 2006, and with $5,047 monthly installment payments and, in addition, a lump sum payment of $50,000 due on October 1, 2005. The payment of $50,000 was not made on October 1, 2005.

Equipment Lease Agreement

On December 31, 2002, Christenson Electric entered into a sale and leaseback agreement with Christenson Leasing, under which it sold machinery and tools, automotive equipment, and office furniture and equipment, not subject to prior liens. The agreement called for payments of $97,255 starting on January 2, 2003 through December 2007. On September 1, 2003, Christenson Velagio’s predecessor, Christenson Technology entered into a sublease agreement with Christenson Electric for use of certain equipment contained in that lease. The equipment consists of various construction vehicles, trailers, miscellaneous construction equipment, office furniture, computer hardware and software. Under the terms of the lease Christenson Velagio paid Christenson Electric $40,000 monthly beginning on September 1, 2003, with the final payment due on December 1, 2007. The lease is accounted for as an operating lease and contains a 10% purchase option at the end of the lease term, December 31, 2007. In 2003, we modified the payment plan to the lessor, under which $10,000 of the monthly lease obligation was be paid to the lessor in an equivalent amount of our Series 3 preferred stock. This arrangement to tender a portion of the payment with preferred stock in lieu of cash, was for the thirteen monthly payments beginning with the December 2003 lease payment, through the payment due in December 2004. Beginning with the payment due in January 2005, the total monthly amount due was paid entirely in cash.

In July 2005, the lease agreement between Christenson Electric and Christenson Leasing was renegotiated, with a portion of the remaining operating lease obligation converted to a $500,000 note payable. In accordance with that agreement, the $100,000 monthly lease payment owed by CEI under the lease was reduced to $60,000 per month starting with the payment due on November 1, 2005. The $500,000 note was paid in full by Christenson Electric in October 2005.

Master Vehicle Lease Agreements

Christenson Velagio

We entered into a new Master Vehicle Lease Agreement, effective September 9, 2004, with Destination Microfield, LLC. Destination Microfield, LLC is partially owned by William C. McCormick. In accordance with the terms of the agreement, we will make twelve monthly payments of $29,000 starting October 5, 2004, twelve monthly payments of $35,000, starting October 5, 2005, and three monthly payments of $45,000 ending on December 9, 2006. This lease is accounted for as an operating lease with equal monthly amounts charged to expense in the consolidated statement of operations over the life of the lease.

Christenson Electric

We, through our subsidiary Christenson Electric is party to an agreement with Christenson Leasing under which Christenson Electric leases its vans and trucks. In accordance with the terms of the agreement, we pay to Christenson Leasing a varying amount each month representing the lease and maintenance costs of those vehicles. The lease is a month to month agreement that is modified with each addition or removal or vehicles.

Real Property Sub Leases

On September 1, 2003, Christenson Velagio entered into seven real property subleases with Christenson Electric for use of buildings, offices and storage yards to house the operations and property of Christenson Velagio. Christenson Electric, as the sublessor, is party to a master property lease with an unrelated party. Christenson Velagio has operating activities in Portland and Eugene, Oregon. The monthly sublease payments totaled $58,625 through November 30, 2004. On November 30, 2004, we terminated our lease with Christenson Electric for space in the Thurman Building and entered into a lease directly with the building owner for a smaller space in the building.

As of January 1, 2005 our total real property lease payments totaled $48,842, of which $675 was on a month-to-month basis. The remaining $48,167 is due on leases with maturity dates between September 2005 and October 2008. The rent per month on the Thurman Building is $31,025.

Administrative Services Agreement

On September 15, 2003, Christenson Technology entered into an administrative services agreement with Christenson Electric for the extension of certain administrative and related services by us to Christenson Electric. Robert J. Jesenik, a former director and principal shareholder, owns a substantial ownership interest in Christenson Electric. Under the terms of the agreement, certain employees provided administrative and related services to Christenson Electric upon reasonable request. The agreement is subject to a 60-day notice period before termination by either party. The monthly payment for these services was determined at the effective date of the agreement to be approximately $35,000, with a provision to be adjusted as needed based on the level of usage of these services by Christenson Electric. During the first quarter of 2005, the payment by Christenson Electric for these services was renegotiated to approximately $12,500 per month as the cost of services to Christenson Electric has been reduced. With the acquisition of Christenson Electric by us on July 20, 2005, the monthly charges by Christenson Velagio were discontinued.

Note receivable

In 1998, John B. Conroy, then our Chairman, CEO and President, entered into a transaction whereby he purchased 45,000 shares of our common stock at $1.75 per share. Mr. Conroy issued a promissory note to us for $78,750 in payment for the shares. On May 17, 2004 the Note was replaced with a new non-recourse note for $66,250 under which the original amount of the note was offset against a $12,500 amount owed by us to Mr. Conroy. The note also acknowledges the outstanding accrued interest due by Mr. Conroy in the amount of $21,937. Additionally, the interest rate of the new promissory note was established at 3.4% per annum, and the due date was extended to August 29, 2006. Mr. Conroy resigned as Chairman, CEO and President on September 16, 2002, and resigned as a director in October 2003. At October 1, 2005, accrued interest receivable under this note totaled $27,932. We have accounted for the $78,750 due from Mr. Conroy as a reduction in common stock equity in prior years. In May 2004, we accounted for the $12,500 amount due to Mr. Conroy and additional $637 of interest adjustment as an increase in common stock equity.

Contractual Obligations and Commitments

The following is a summary of our significant contractual cash obligations for the periods indicated that existed as of October 1, 2005, and is based on information appearing in the notes to consolidated financial statements included elsewhere in this prospectus.


			Less than		1-2		3-5		More than
	Total		1 Year		Years		Years		5 Years
Operating Leases	$	5,421,900	$	2,256,254	$	2,395,598	$	770,048	$	—
Employment and Consulting Agreements		—		—		—		—		—


Total obligations	$	5,421,900	$	2,256,254	$	2,395,598	$	770,048	$	—

We were obligated under a registration rights agreement dated October 5, 2005 to file this registration statement by December 5, 2005. In addition, we were obligated under the registration rights agreement to use our best reasonable efforts to have this registration statement declared effective by the SEC by February 5, 2006. We did not file the registration statement by December 5, 2005 and the registration statement was not declared effective by the SEC by February 5, 2006, therefore for every 30-day period it is not filed and declared effective we must pay an aggregate $65,520 in penalties to the selling stockholders who purchased common stock and warrants in October 2005 or in our sole discretion, issue an aggregate 145,600 shares of common stock to such selling stockholders. As of January 28, 2006, we have accrued $131,040 in financial penalties to such selling stockholders or 291,200 shares of common stock should we decide to satisfy the penalty obligation in shares of our common stock.

BUSINESS

General

We are a energy-related technology and electrical service company. Through our subsidiaries Christenson Velagio, Inc., Christenson Electric, Inc and EnergyConnect, Inc., we provide high quality electrical construction, technology and energy related services. These companies have the ability to deliver the following products and services:

Christenson Velagio

	•		Computer Telephony Integration

	•		Digital Video CCTV Systems and Infrastructure

	•		Telecommunications Systems and Infrastructure

	•		Enterprise Security Systems

	•		Wireless Networking Solutions

	•		Life Safety Systems Design and Installation

	•		Information Technology Network Design & Engineering

	•		Voice/Data Systems and Infrastructure

	•		Electrical Design & Engineering

	•		Lighting Services

	•		Electrical Construction Services

Christenson Electric

	•		Substation Design, Wiring and Installation Services

	•		Wind Farm and Solar Collection Wiring

EnergyConnect

	•		Electricity Redistribution

	•		Energy Consumption Management

	•		Utility Energy Distribution Support Services

Christenson Velagio provides an array of electrical and technology products and services to customers in the Portland and Eugene, Oregon markets and southwest Washington State markets.

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

Through our subsidiary EnergyConnect, Inc. and EnergyConnect’s energy automation software systems, we have the capability to develop and provide solutions and infrastructure for the electric energy supply chain. EnergyConnect’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 is anticipated that a portion of EnergyConnect’s services will drive additional growth in Christenson Velagio.

Recent Acquisitions

As a result of the merger, we issued 27,365,306 shares of our common stock and 19,492,386 common stock

purchase warrants exercisable at $2.58 per share to EnergyConnect shareholders in exchange for all the outstanding shares of EnergyConnect. We also granted options to purchase 3,260,940 shares of our common stock at $0.32 per share to the EnergyConnect option holders in connection with the assumption of the EnergyConnect Employee Stock Option Plan.

Pursuant to an Agreement and Plan of Merger dated July 20, 2005 by and between us, CPS Acquisition Co., Christenson Electric, Inc. and CEAC, Inc., an Oregon corporation and sole shareholder of Christenson Electric, Inc., we acquired, substantially all of the assets, of Christenson Electric. As part of the purchase price of Christenson Electric we assumed term debt in the amount of $4,786,000 and issued 2,000,000 shares of our common stock to CEAC. The value of the merger was determined based on a share price of $0.64, which was the average closing price for our common stock over the five days ending July 20, 2005. The acquisition closing date was July 20, 2005.

Products and Services

We conduct business with the goal of providing organizations with energy, electrical and technology infrastructure products and services. Our main products and services include:

Electrical Design & Construction Services

Since its inception in 1945, the electrical services group that we acquired in September 2003 established its business and the value of its name based on the quality and reliability of their work. Our services include installation of lighting systems, wiring of high-rise buildings, design-build on complex institutional or industrial locations, building control systems and installation of emergency power systems. Our engineers, project managers and field technicians take projects from concept through implementation.

Digital Video CCTV Systems and Infrastructure

Surveillance systems have quickly emerged as a high priority for facilities of all sizes in the private and public sectors due to a number of environmental and social concerns. Christenson Velagio’s knowledge in the design as well as implementation of sophisticated digital systems including cameras, multiplexers, monitoring centers, switching devices and network infrastructure allows us to provide a complete, turnkey source for systems of all sizes and levels of complexity. Christenson Velagio’s engineers and technicians have the capability to design and install state-of-the-art fiber optic networks and switching gear, IP Video Local Area Network (LAN) and Wide Area Network (WAN) architectures, as well as highly sophisticated monitoring stations.

Telecommunications Systems and Infrastructure

Increasing levels of need and flexibility have continued to fuel growth in the area of facilities telephony and IP Telephony systems. Competencies with most major manufacturer’s systems and architectures allows us to provide correct scale and functionality in designs and provide reliability through the installation and maintenance

programs.

Enterprise Security and Life Safety Systems

Our extensive knowledge of access control systems, intrusion alarm systems and fire protection systems, allows Christenson Velagio to provide the highest level of protection available for most sizes of enterprises. Providing a safe working environment, protection of company assets including intellectual property, and reducing liability exposure are critical business needs that are met with our systems. Christenson Velagio’s ability to perform facility audits assists its customers in evaluating site requirements or weaknesses in their existing systems and provides a basis for recommendations. Included in this category of service (beyond physical site security) is our ability to provide IT Network security including firewalls and VPN/Remote access security functions.

Wireless Networking Solutions

Wireless networking solutions is one of the fastest growing segments of communications technology. Our experience with WI-FI Networks, wireless telephony and our capability for on-site assessments enables us to provide complete design and implementation services. The Pacific Northwest has taken a leading position in the implementation of wireless “hot spots” both in the private and public sector. As this high growth area expands, our knowledge and real world experience will assist customers in providing this level of capability to their locations.

Information Technology (IT) Network Design & Engineering

From designing of systems and infrastructure to implementation and maintenance, Christenson Velagio has years of field experience in the design and installation of complex IT network configurations. Whether it is in the form of LANS, WANS, or MANS, switching and routing hardware or high speed Internet access, Christenson Velagio’s employees have the knowledge and expertise in-house to handle any requirement. Our technical support staff capability is well established and has an excellent reputation for technical competency during system installation as well as subsequent service and repair.

Electricity Redistribution

In the current climate of energy and utility deregulation, we have the technology and expertise to take advantage of economies of scale in the purchase of energy from the utility and resale to multiple users within a single location, such as a mall. Because of our potential large scale energy purchasing power, we can purchase energy at low rates and redistribute it to our customers, or we can enable owners of such facilities to provide those services.

Energy Consumption Management and Curtailment and Wholesale Grid Services

We have developed proprietary software that increases the services available from\building energy management systems. We use the software to assist the transfer of building energy requirements from expensive energy times to more cost effective times, thereby reducing the cost of energy and services from the power grid. These actions improve the efficiency of the power grid and result in payments to us for the benefits created on the grid. Building owners, operators, and tenants benefit through payments from us and lower energy costs.

Sales and Distribution

Christenson Velagio and Christenson Electric generate sales through the relationships they have cultivated and the quality work product they have maintained over the 58 year history of the companies. Prior to our acquisitions of Christenson Technology Services and Christenson Electric, in various forms since inception, they have primarily served the Northwest market since 1945. The “Christenson” name has been a key component in building a well established, loyal customer base. Much of our sales are generated by word of mouth or through repeat customer projects. Growth throughout its existence has been achieved by entering into additional markets within the electrical services industry.

EnergyConnect produces revenue through its agreements with both building owners and the power grid

operators. Under our agreements with facilities owners, we use and may install software and other electrical and energy related products that control energy 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.

Personnel from all of our subsidiaries regularly install products and design product configurations for customer sites based on the products and/or services designed by us, ordered by the customer, or according to plans specified by the customer or general contractor. We may also enlist the assistance of various consultants or subcontractors to provide specific services relative to the contract we have with our customer.

We normally deliver products or have products delivered directly to our customers, and then install those products as a part of the services provided to the customer. We do not currently sell any products through distributors, dealers or other resellers as a part of our business.

Customers

We have built relationships with power grid operators through our employees’ years of involvement in the energy industry. There are a limited number of these operators, as they control widely dispersed geographical areas. For example, PJM Interconnection, a regional transmission organization (RTO) and current customer, operates the largest competitive wholesale electricity market in the world. PJM coordinates the movement of electricity in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. As we sign up participating facility owners or management companies in these regional areas, the customer from whom we are paid, remains the same within each region.

EnergyConnect partners with the owners of high volume energy use facilities currently centered in the Midwest and East. These include real estate investment trusts (REITS) that own multiple high rise buildings, industrial users, and organizations that own multiple buildings such as universities. We consider these entities to be participants rather than strictly customers, in that we will pay each participant a portion of the money contracted to be received from the grid operators in exchange for changes in the energy operations of their facility

EnergyConnect’s and Christenson Electric’s customer bases are lists of nationally recognized companies that are on the forefront of power distribution and alternative energy generation.

With the acquisition of Christenson Velagio, we provide electrical and technology products and services for a wide range of end use customers in the western United States. Our customer base changed materially with the acquisitions in September 2003. Our revenues for the eight and a half month period prior to the acquisitions of Christenson Velagio and Velagio, were less than $500,000. Revenues attained in the three and a half months of 2003 after the acquisitions were completed, were in excess of $10 million. Revenues for the year ended January 1, 2005 were in excess of $36 million.

Approximately half of our current revenue base comes as subcontracting work through general contractors. Christenson Velagio’s customers span all major industries, including: government, education, retail, entertainment, finance, health care, manufacturing and transportation. Major end user customers include Evergreen School District, Allied Security, Portland Community College, Legacy, Melvin Mark Properties and Boeing. For the years ended January 1, 2005 and January 3, 2004, no single customer accounted for 10% or more of our revenue.

Acquisitions and Investments

Our strategy is one that focuses on the acquisition and deployment of products and services with strong intellectual property asset value and the potential for significant growth. During 2005 we completed the acquisitions of EnergyConnect Inc. and Christenson Electric, Inc., which both had significant built-in intangible values on which we hope to capitalize. Part of EnergyConnect’s value is contained in the proprietary software that will be used to manage and control energy consumption within its participant base. There is also a tremendous amount of industry knowledge within our employee base that will be drawn upon to achieve the goals that we set for our company. Christenson Electric’s value is derived from its long standing history of excellent electrical services provided

throughout the United States.

During 2003, we completed two acquisitions. In September 2003, we merged with privately held Velagio, Inc. and Christenson Technology Services, Inc. Velagio was a consulting firm that provided outsourced services for the development and implementation of software packages. Christenson Technology Services was an electrical technology and electrical services firm.

In December, 2003 the service and technology teams of Velagio and Christenson Technology Services were consolidated into one subsidiary under the name Christenson Velagio, Inc. in order to take advantage of potential synergies within the subsidiaries. In conjunction with this business rationalization, a new branding campaign for this consolidated structure was launched. A new logo and hallmarks were developed to facilitate a cohesive message to the marketplace that leverages the equity and reputation of the Christenson name in regional markets as well as to communicate the broader array of service and capabilities brought to customers.

During the fourth quarter of 2003, shortly after the acquisitions of Velagio and Christenson Technology Services, we made the decision to discontinue the operations of Innovative Safety Technologies and Velagio. The remaining assets and liabilities were merged into Christenson Velagio in December in conjunction with the combination of Velagio, Innovative Safety Technologies and Christenson Technology Services. We did not make any acquisitions in 2004. On July 20, 2005 we acquired Christenson Electric and on October 13, 2005 we acquired EnergyConnect. Our current acquisition strategy is to evaluate potential acquisition opportunities as they develop.

Competition

Through our subsidiaries, we compete in the electrical services, communications, networking and energy management services markets. The principal competitive factors in the markets in which we compete include price, service, product technology, product performance, the ability to provide a broad range of products and services, conformance to industry standards, union representation of our workforce, market presence, and the ability to design and implement cost beneficial and technologically advanced customer solutions.

The electrical services industry is well established, and we compete mainly on the basis of our excellent reputation for providing reliable, timely, cost effective, first class products and services. A portion of this business is done through the bidding process either directly with the customer or in a subcontracting role with a general contractor. Winning projects depends on several factors including size of the jobs, price, customer service and reputation from prior work completed. Our electricians and technicians are members of the local electrical union. Union representation of our workforce is also a factor in whether we are successful in obtaining work in competitive situations.

In the technology side of the business, the markets in which we compete are constantly changing. While the services provided in bringing new technology to customers remain fairly constant, the technology of the products sold or installed changes continually. This requires that our engineers and technicians remain in touch with new product introductions, and advancing or emerging technologies. Our engineers and technicians are regularly trained regarding safety, new products and technologies, and how to adapt or configure their customers’ applications to take advantage of the new technologies.

EnergyConnect has created a new segment of the wholesale electric market that has existed for many years. Our competitors have made no significant progress in establishing a beachhead in this segment. In addressing its markets, EnergyConnect will attempt to capture a core market share within its targeted participant base, establishing a competitive advantage to later entrants.

Christenson Velagio has many competitors in the electrical services and technology services markets. Some of our major competitors include, Capitol Electric Company, Dynalectric, Electrical Construction Company, Hughes Electrical Contractors, LH Morris, Oregon Electric Group and Tice Electric Company. Some of these companies compete with Christenson Velagio across many of its product lines and service offerings in both the electric services and technology services markets.

Christenson Electric has established a national market presence in the alternative energy field, against a handful of competitors. These competitors are mainly large national service providers such as Rosendon Electric and Alliant Energy. Christenson Electric has several competitors in their high voltage and utility service markets, consisting of several of the companies that compete with Christenson Velagio across their line of business.

The barriers to entry in the markets that we currently serve are relatively low and new companies may be created that compete with our companies in various segments of their markets. Several of our competitors may have greater financial, engineering and technical resources, may be able to compete for “non-union only” work, and may be able to provide a broader range of products and services than us. Our success in competing in these markets depends on its ability to provide timely service and creative technology offerings that provide its customers long-term, cost effective solutions to their electrical and technology service requirements. Any inability to effectively control and manage these competitive factors could have a material adverse effect on our business, operating results and our financial condition.

Manufacturing and Supply

Christenson Velagio and Christenson Electric purchase telecommunication equipment, networking equipment, cabling, wiring and various other equipment and supplies that we use in customer applications, or that we sell and install at customer sites. We rely on various vendors for these products, and do not manufacture any of the products that we sell or install.

The electrical services industry is a mature industry. As such, there are numerous vendors that supply the products that we use in our markets. We purchase supplies from several of these vendors, and have secondary sources for all products that we buy. Our companies have had negative operating cash flows in our businesses during much of the time since they were acquired by us. This negative cash flow has had a measurable impact on our operations, and there is no assurance that the supply of products and materials will continue to be available if our working capital position further deteriorates.

Our goal is to keep our inventory of parts and supplies to a minimum. A fleet of vehicles is leased by us for use by technicians and electricians in servicing customers. Each vehicle has a stock of parts and/or tools used by Christenson Velagio and Christenson Electric employees in their work. The inventory on board the vehicles is kept at a fairly constant level, to match the work flow throughout the year. Each technician and electrician has the authority to order and pick up parts as needed to fulfill job requirements in conjunction with our purchase order policy. Christenson Velagio also maintains a stock of inventory and supplies at its main plant.

The technology services business is subject to rapid technological developments, evolving industry standards, changes in customer requirements, and new product introductions and enhancements. Our future success in this industry depends on our ability to keep pace with these new developments and requirements, and to provide customer solutions using current technology, on a cost-effective and timely basis. Failure to keep pace with these customer requirements, industry standards and technological developments could have a material adverse effect on our results of operations and financial condition.

Our principal suppliers of inventory include Graybar Electric Co., Inc., Anixter, Inc., Platt Electric Supply, Inc., Ronco Communications, Inc., Crescent Electric Supply, Inc., and North Coast Electric, Inc. We generally believe we have good relationships with our current principal vendor base.

We buy products and supplies on both open account and job accounts, up to various limits, specified by each particular vendor. Job accounts can be set up by a vendor for products or supplies used on specific projects. The vendor is protected from our non payment by lien rights. Lien rights give vendors the legal ability to receive payment directly from their creditor’s customer. We do not have a history of having lien rights filed against our jobs. Should our cash situation worsen, vendors could exercise their lien rights against us, which could harm our reputation in the markets where we do business. This could have a material adverse effect on our business, our operating results and financial condition.

We do not have any long-term contracts for the purchase of products or supplies with any of our material

vendors.

Intellectual Property

As a part of the purchase of Innovative Safety Technologies in 2002, we own United States Patent No. 5,288,945. This patent covers the No Tug Plug™ and was issued in February 1994. The patent was purchased by Innovative Safety Technologies in July 2002 from the original inventor. Innovative Safety Technologies was granted the Trademark for the mark “No Tug Plug,” in November, 2002. In November 2003, we made the decision to discontinue the operations of Innovative Safety Technologies. We still own the above mentioned patent and trademark.

Through the September 2003 acquisition of Christenson Technology Services, now known as Christenson Velagio, and through the 2005 acquisition of Christenson Electric we acquired the “Christenson” trade name. The Christenson name employs particular branding and trade dress that makes it highly recognizable. Also in September 2003 through the acquisition of Velagio, we acquired the rights to the Velagio name, which we now use in our subsidiary Christenson Velagio, Inc.

EnergyConnect has filed for patent and copyright protection of its energy management software. This patent has been filed for but not yet approved. We also purchased a significant amount of intangible assets as a part of the acquisition of EnergyConnect. The individual intangible assets and their associated values will be determined with the help of an outside intangibles asset valuation firm.

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 the service excellence, technical knowledge and innovative design abilities of our employees, than upon such protection.

Government Regulation

We are subject to certain local government regulations regarding Uniform Commercial Building Codes. Many projects require inspection by local government building code inspectors. There are no federal regulations related to the business.

Employees

As of January 31, 2006, we had approximately 271 full time employees. Our workforce fluctuates based on the project work flow at any specific point in time. Approximately 213 of our employees are covered by collective bargaining agreements, and we believe our relations with our employees are good.

DESCRIPTION OF PROPERTY

We maintain our principal office at 1631 NW Thurman, Suite 200, Portland, Oregon 97209, and our telephone number is (503) 419-3580. We believe that our current office space and facilities are sufficient to meet our present needs and do not anticipate any difficulty securing alternative or additional space, as needed, on terms acceptable to us. 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 prospectus.

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.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth information regarding our directors and executive officers as of January 31, 2006:


Name	Age	Positions
Rodney M. Boucher	58	Chief Executive Officer and Director
A. Mark Walter	41	President and Director
Randall R. Reed	49	Chief Financial Officer
Gene Ameduri	57	Director
William C. McCormick	72	Director
Michael W. Stansell	62	Director
Gary D. Conley	45	Director

Directors are elected to serve until the next annual meeting of stockholders and until their successors are elected and qualified.

Currently, our Directors are not compensated for their services. 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.. 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 Corportation 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 engineergin 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.

A. Mark Walter joined us in January 2003 when he was appointed President and held various management positions within our wholly owned subsidiary, Christenson Velagio, before his promotion to Senior Vice President and Chief Operating Officer of Christenson Velagio in January 2004. Mr. Walter was appointed President of Christenson Velagio in November 2004, and appointed to the Board of Directors in April 2005. Mr. Walter has 18 years of experience in leading profitable commercial and industrial electrical services businesses. Prior to joining Christenson Velagio, Mr. Walter was Operations Director for Power City Electrical, a regional electrical company, from 1992 to 2002.

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 a CPA.

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.

William C. McCormick joined us in January 2004 as Interim Chief Executive Officer and resigned that post in November 2004 with the appointment of A. Mark Walter as President of Christenson Velagio. 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 and is Chair of the Audit Committee 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.

Michael W. Stansell joined us in November 1985 as Director of Manufacturing and was appointed Vice President, Operations, in January 1987. Mr. Stansell was appointed to our board of directors in November 1999 and served as our President from November 1999 until October 2002. Mr. Stansell was a division manufacturing manager, among other positions, at Tektronix Corporation from August 1965 through October 1985.

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, also 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.

Audit Committee

The Audit Committee currently consists of Messrs. McCormick and Stansell. The Board of Directors has determined that Mr. McCormick is an “audit committee financial expert” as defined in SEC rules. Our Board of Directors has determined that he is independent as that term is defined under applicable SEC rules.

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 our financial statements; and reviews our internal controls.

Governance Committee

The Governance Committee currently consists of Messrs. Boucher and Walter. The Governance Committee oversees corporate policy and ethics.

Compensation Committee

The Compensation Committee currently consists of Messrs. Ameduri and Conley. The Compensation Committee determines the compensation level, option grants and other compensation for our executive officers..

EXECUTIVE COMPENSATION

The following tables set forth certain information regarding our CEO and each of our four most highly-compensated executive officers whose total annual salary and bonus for the year ended January 1, 2005 exceeded $100,000 (the “Named Executive Officers”).


							Other
							Annual		Restricted		Options		LTIP
Name & Principal			Salary		Bonus		Compen-		Stock		SARs		Payouts		All Other
Position	Year		($)		($)		sation ($)		Awards ($)		(#)		($)		Compensation
A. Mark Walter,		2004		117,184		0		0		0		200,000		0	$	7,200
President (1)		2003		89,362		0		0		0		0		0	$	7,200
		2002		0		0		0		0		0		0		0

Gary M. Kapral,		2004		138,462		0		0		0		150,000		0		0
CFO (2)		2003		0		0		0		0		0		0		0
		2002		0		0		0		0		0		0		0

William C. McCormick,		2004		0		0		0		0		1,200,000		0		0
Interim CEO (3)		2003		0		0		0		0		0		0		0
		2002		0		0		0		0		0		0		0

Kurt A. Underwood,		2004		49,012		0		0		0		0		0		0
President and CEO (4)		2003		0		0		0		0		0		0		0
		2002		0		0		0		0		0		0		0


(1)		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.

(2)		Mr. Kapral was appointed our Chief Financial Officer effective May 17, 2004. He left our company in March 2005.

(3)		Mr. McCormick was appointed Interim CEO effective January 21, 2004. He held this position with no cash compensation. He resigned that position effective November 15, 2004 with the appointment of A. Mark Walter as President. Mr. McCormick continued as a director, and in August, 2005 was appointed Chairman of the Board.

(4)		Mr. Underwood was appointed our Chief Executive Officer effective September 16, 2003. He left our company on January 21, 2004.

The Board of Directors, in their discretion, may award stock and stock options to key executives for achieving financing or expenditure guidelines, meeting our business plan objectives, as part of their compensation for employment or for retention purposes.

Employment Agreements

None.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes information about our equity compensation plans as of January 1, 2005.

Number of

securities

remaining

available for

Number of

future issuance

Securities to be

under equity

issued upon

Weighted average

compensation

exercise of

exercise price of

plans (excluding

outstanding

securities

options and

reflected in

warrants

column (a))

Plan category

(a)

(b)

(c)

Equity compensation plans approved by security holders

2,163,049

0.46

8,748,139

Equity compensation plans not approved by security holders

5,645,439

0.37

-0-

Total

7,808,488

0.40

8,748,139

We have a Stock Incentive Plan. At January 1, 2005, 2,163,049 shares of common stock were reserved for issuance to employees, officers and directors to whom options have been granted. Under the Plan, options may be granted to purchase shares of our common stock at fair market value, as determined by our 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 zero and four years.

Options Granted in Fiscal Year 2004

The following table sets forth certain information concerning grants of stock options to the Named Executive Officers during the fiscal year ended January 1, 2005.


Name	Number of Shares Underlying Options Granted	Purchase of Total Options Granted to Employees in Fiscal 2004	Average Exercise Price Per Share	Expiration Date
A. Mark Walter	200,000	38.1%	$0.50	1/09 & 12/09

Gary M. Kapral	150,000	28.6%	$0.37	Expired

Option Exercise and Holdings

The following table provides information concerning the exercise of options during fiscal 2004 and unexercised options held as of the end of the fiscal year with respect to the Named Executive Officers.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES


					Number of
					Securities			Value of
					Underlying			Unexercised
					Unexercised			In-The-Money
	Shares				Options			Options
	Acquired		Value		At FY-End (#)			At FY-End ($) (2)
	On Exercise		Realized		exerciseable/			Exerciseable/				Grant		Expiration
Name	(#)		($) (1)		Unexerciseable			Unexerciseable				Date		Date
A. Mark Walter		—		—		22,917	77,083	$	0	$	0		1/22/04		1/22/09
						—	100,000		—	$	5,000		12/3/04		12/3/09
Gary M. Kapral		—		—		6,250	43,750	$	875	$	6,125		5/17/04		5/17/09
						—	100,000		—	$	5,000		12/3/04		12/3/09
William C. McCormick		—		—		50,000	1,150,000	$	500	$	11,500		11/12/04		11/12/09
Kurt A. Underwood		—		—		—	—		—		—		N/A		N/A


(1)		Market value of the underlying securities at exercise date, minus exercise price of the options.

(2)		Market value of the underlying securities at January 1, 2005, $.45 per share, minus exercise price of the unexercised options.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We have a number of promissory notes, lines of credit and lease obligations owing to related parties. The following table lists the notes and obligations outstanding at October 1, 2005 by related party.

Amount

Related Party

Type of Obligation

Maturity Date

Obligation

Monthly Payment

Christenson Leasing LLC^{(a) (g)}

Note payable^(h)

July 2008

420,000

^(c)11,667

Christenson Leasing LLC^{(a) (g)}

Note payable^(h)

September 2007

500,000

20,833

Christenson Leasing LLC^(a)(g)

T. I. lease

December 2007

186,735

7,940

Christenson Leasing LLC^(a)(g)

Vehicle leases

various

84,161

various

Christenson Leasing LLC^(a)(g)

Equipment lease

December 2007

—

^(f)100,000

JMW Group, LLC^(a)

Note payable

August 2006

423,846

^(c)41,667

JMW Group, LLC^(a)

Note payable^(h)

July 2008

180,000

^(c)5,000

JMW Group, LLC^(a)

Indemnity fees

Open obligation

—

⁽ⁱ⁾10,000

Aequitas Capital Management^(a)

Note payable

April 2006

82,333

various

Aequitas Capital Management^(a)

Note payable

September 2005

157,927

various

Rod Boucher⁽ⁱ⁾

Note payable

September 13, 2008

317,207

11,309

William C. McCormick

Note payable

July 2005

250,000

interest only

Mark Walter

Bond guarantee fees

Open obligation

—

^(b)900

Destination Microfield, LLC^(d)

Vehicle lease

August 2006

—

^(e)29,000

John B. Conroy

Note receivable

September 2005

66,250

—


^(a)		Robert J. Jesenik, a former director and principal shareholder, also owns a significant interest in these entities.

^(b)		This bond guarantee fee is an approximation, and fluctuates based on the total open bond liability.

^(c)		This payment amount is for principal only. An additional amount is due monthly which includes interest at prime plus 10%.

^(d)		William C. McCormick, Chairman of our board of directors, holds a minority ownership interest in this entity.

^(e)		These payments vary over the term of the loan. This amount represents the monthly payment in effect on October 1, 2005.

^(f)		This payment was reduced to $60,000 per month by terms of the reissued note, starting November 1, 2005.

^(g)		William C. McCormick holds a beneficial minority ownership interest in this company.

^(h)		This debt was paid in full in October 2005 in connection with a private placement.

⁽ⁱ⁾		This note represents deferred salaries and expenses payable to Mr. Boucher prior to the acquisition of EnergyConnect.

Terms and conditions of each of the notes and agreements are listed below.

Notes Payable to Destination Capital, LLC

consolidated statement of operations for the year ended January 1, 2005. At the date of each of those warrant issuances, we did not have sufficient authorized common shares to effect the exercise of these warrants, accordingly, the fair value of all of these warrants was classified as liability for warrant settlement on the consolidated balance sheet. On September 1, 2004, our shareholders voted to increase our authorized common shares from 25,000,000 to 125,000,000. The fair market values of these warrants were re-measured on that date and reclassified as common stock warrants in the shareholders’ equity section on the balance sheet, with the increase or decrease in their values recorded as an increase or reduction of interest expense in the consolidated statement of operations. The Note was repaid in full during April 2004.


			Warrants to be
Date	Loan Balance		Issued

August 1, 2004	$	300,000		37,500
September 1, 2004	$	750,000		93,750
October 1, 2004	$	1,200,000		150,000
November 1, 2004	$	1,200,000		150,000
December 1, 2004	$	1,200,000		150,000
January 1, 2005	$	1,200,000		150,000
February 1, 2005	$	1,200,000		150,000
March 1, 2005	$	1,200,000		150,000
April 1, 2005	$	1,200,000		150,000
May 1, 2005	$	1,200,000		150,000
June 1, 2005	$	1,200,000		150,000
July 1, 2005	$	1,158,334		144,792


Total warrants to be issued as of October 1, 2005				1,626,042

prime plus 10% beginning August 24, 2005 through August 24, 2006; $180,000 note payable to JMW with monthly payments of $5,000 plus interest at prime plus 10% beginning August 24, 2005 through July 24, 2008; $420,000 note payable to Christenson Leasing with monthly payments of $11,667 plus interest at prime plus 10% beginning August 24, 2005 through July 24, 2008. In October 2005, the note to Christenson Leasing and the smaller of the two notes to JMW were paid in full by Christenson Velagio. Also, as a result of the renegotiation of these notes, the warrant obligation, contained in the business loan agreement was eliminated.

Note Payable to Rod Boucher

Bond Guarantee Fees

Christenson Velagio

Christenson Electric

We also had an unrelated party guarantee a $1 million standby letter of credit issued as security for a large construction job. This party is paid a fee of 15% of the letter of credit amount for providing this security. This agreement also requires a secondary indemnity, should funds be drawn against this letter of credit, the substantial majority of which has been provided by Aequitas Capital Management, a related party. Robert Jesenik, our former director and a significant shareholder is CEO of Aequitas. Aequitas charges an additional fee of 15% of the letter of credit amount. Aequitas is also indemnified by Christenson Electric should it have to indemnify the primary guarantor.

Tenant improvement lease

On July 1, 2005, Christenson Electric entered into a promissory note with Aequitas Capital Management, a related party, covering certain equipment and furniture previously leased from Jesenik Enterprises, Inc., JW Assurance and Holding Limited, and JMW Capital Partners, Inc., each a related party. No payments had been made on these lease obligations since September 2002. At July 1, 2005, these entities assigned their interests in the obligation to ACM, which we Company consolidated into one promissory note with total principal due of $90,847,

interest accruing at 7% per annum, maturing at April 1, 2006, and with $5,047 monthly installment payments and, in addition, a lump sum payment of $50,000 due on October 1, 2005. The payment of $50,000 was not made on October 1, 2005.

Equipment Lease Agreement

Master Vehicle Lease Agreements

Christenson Velagio

Christenson Electric

Real Property Sub Leases

Administrative Services Agreement

Note receivable

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding beneficial ownership of our common stock as of January 31, 2006:

	•		by each person who is known by us to beneficially own more than 5% of our common stock;

	•		by each of our officers and directors; and

	•		by all of our officers and directors as a group.


NAME AND ADDRESS		NUMBER OF			PERCENTAGE OF
OF OWNER	TITLE OF CLASS	SHARES OWNED(1)			CLASS (2)
Rodney M. Boucher	Common Stock		14,818,025	(3)		23.95	%
1631 N.W. Thurman St, Suite 200 Portland, OR 97209

A. Mark Walter	Common Stock		310,417	(4)		*
1631 N.W. Thurman St, Suite 200 Portland, OR 97209

Gene Ameduri	Common Stock		9,500,199	(5)		16.00	%
1631 N.W. Thurman St, Suite 200 Portland, OR 97209

Randall R. Reed	Common Stock		100,001	(6)		*
1631 N.W. Thurman St, Suite 200 Portland, OR 97209

William C. McCormick	Common Stock		2,015,203	(7)		3.51	%
1631 N.W. Thurman St, Suite 200 Portland, OR 97209

Michael W. Stansell	Common Stock		230,602	(8)		*
1631 N.W. Thurman St, Suite 200 Portland, OR 97209

Gary D. Conley	Common Stock		0			*
1631 N.W. Thurman St, Suite 200 Portland, OR 97209

All Officers and Directors	Common Stock		26,974,447	(9)		39.59	%
As a Group (7 persons)

Energy Fund II, LLC	Common Stock		14,197,577	(10)		23.62	%
805 SW Broadway, Suite 560 Portland, OR 97205

JMW Group, LLC	Common Stock		13,486,208	(11)		22.75	%
805 SW Broadway, Suite 560 Portland, OR 97205

Aequitas Capital Management, Inc.	Common Stock		13,486,208	(12)		22.75	%
805 SW Broadway, Suite 560 Portland, OR 97205

Vincent J. Cushing	Common Stock		9,703,245	(14)		16.28	%
c/o Entwistle & Cappucci, LLP 333 West Wacker Drive, Suite 2070 Chicago, Illinois 60606

Christenson Group, LLC	Common Stock		6,328,017	(14)		10.57	%
805 SW Broadway, Suite 560 Portland, OR 97205

CEAC, Inc	Common Stock		6,328,017	(14)		10.57	%
805 SW Broadway, Suite 560 Portland, OR 97205

Christenson Leasing Co., LLC	Common Stock		3,748,172	(15)		6.32	%
805 SW Broadway, Suite 560 Portland, OR 97205

NAME AND ADDRESS

NUMBER OF

PERCENTAGE OF

OF OWNER

TITLE OF CLASS

SHARES OWNED(1)

CLASS (2)

Destination Capital, LLC

Common Stock

3,748,172

(15)

6.32

805 SW Broadway, Suite 560
Portland, OR 97205


*		Less than 1%

(1)		Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options warrants or preferred stock currently exercisable or convertible, or exercisable or convertible within 60 days of January 31, 2006 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.

(2)		Based upon 55,526,224 shares issued and outstanding on January 31, 2006.

(3)		Includes 263,158 shares underlying currently convertible preferred shares, and 6,091,371 shares underlying currently exercisable warrants.

(4)		Includes 310,417 shares underlying currently exercisable options.

(5)		Includes 3,857,868 shares underlying currently exercisable warrants.

(6)		Includes 100,000 shares underlying currently exercisable options.

(7)		Includes 263,158 shares underlying currently convertible preferred shares, and 1,635,000 shares underlying currently exercisable warrants and options.

(8)		Includes 91,000 shares underlying currently exercisable options.

(9)		Includes 526,316 shares underlying currently convertible preferred shares, and 12,085,655 shares underlying currently exercisable warrants and options.

(10)		Includes 119,050 shares underlying currently convertible preferred shares, and 4,467,005 shares underlying currently exercisable warrants.

(11)		Includes 2,073,333 shares underlying currently convertible preferred shares, and 1,687,387 shares underlying currently exercisable warrants.

(12)		Includes 2,073,333 shares underlying currently convertible preferred shares, and 1,687,387 shares underlying currently exercisable warrants.

(13)		Includes 4,060,914 shares underlying currently exercisable warrants.

(14)		Includes 4,328,017 shares underlying currently convertible preferred shares.
(15)		Includes 3,241,922 shares underlying currently convertible preferred shares, and 506,250 shares underlying currently exercisable warrants.

DESCRIPTION OF SECURITIES

COMMON STOCK

We are authorized to issue up to 125,000,000 shares of common stock, no par value. As of January 31, 2006, there were 55,526,224 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 therefor. 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 nonassessable.

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 January 31, 2006, we had 5,875,241 shares of Series 2 convertible preferred stock issued and outstanding, 3,485 shares of Series 3 convertible preferred stock issued and outstanding and 4,392 shares of Series 4 convertible preferred stock issued and outstanding.

The terms of our outstanding series of preferred stock are as follows.

Series 2 Preferred Stock

Dividends. Series 2 preferred stock issued and outstanding shall be entitled to receive a cash dividend in the amount of 6.5% of the issue price per annum. The Series 2 preferred stock dividends shall 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 will be payable out of net profits. If net profits are not sufficient to pay this dividend, either in whole or in part, then any unpaid portion of the dividend will be paid in full out of our net profits in subsequent quarters before any dividends are paid upon shares of junior stock. Thus far, no dividends have been declared. As of October 1, 2005 there were dividends of approximately $365,109 in arrears.

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 2 preferred stock shall be 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 shall 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 convertible 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 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 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. The Series 2 preferred shares were originally issued in September 2003.

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

Dividends. Series 3 preferred stock issued and outstanding shall be entitled to receive a cash dividend in the amount of 6.5% of the issue price per annum. The Series 3 preferred stock dividends are cumulative and shall 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 will be payable out of net profits. If net profits are not sufficient to pay this dividend, either in whole or in part, then any unpaid portion of the dividend will be paid in full out of our net profits in subsequent quarters before any dividends are paid upon shares of junior stock. If this preferred stock is converted into our common stock, and there exist undeclared dividends on the conversion date, the dividends will remain our obligation, and will be paid when declared and when there are legally available funds to make that payment. Thus far, no dividends have been declared. As of October 1, 2005 there were dividends of approximately $148,778 in arrears.

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 shall be 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 shall 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.

Voting Rights. Each holder of Series 3 preferred stock shall have 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

Dividends. Series 4 preferred stock issued and outstanding shall be entitled to receive a cash dividend in the amount of 6.5% of the issue price per annum. The Series 4 preferred stock dividends are cumulative shall 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 will be payable out of net profits. If net profits are not sufficient to pay this dividend, either in whole or in part, then any unpaid portion of the dividend will be paid in full out of our net profits in subsequent quarters before any dividends are paid upon shares of junior stock. If this preferred stock is converted into our common stock, and there exist undeclared dividends on the conversion date, the dividends will remain our obligation, and will be paid when declared and when there are legally available funds to make that payment. Thus far, no dividends have been declared. As of October 1, 2005 there were dividends of approximately $167,529 in arrears.

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 shall be 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 shall 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.

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

WARRANTS

In connection with debt financing entered into during fiscal year 2000, we issued two stock warrants each to purchase individually 1,033,000 common shares at a price of $0.50 per share and $0.38722 per share, respectively. The warrants had an initial term of 3 years and were to expire in June 30, 2005. On September 15, 2003, we extended the life of a portion of these warrants until June 30, 2007 as partial consideration to satisfy a $150,000 promissory note between Christenson Technology Services, Inc. and Aequitas Capital Management. As of January 31, 2006, the warrant holders have exercised 826,400 warrants and 1,239,600 warrants remain outstanding.

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. As of January 31, 2006, the warrant holders have exercised 33,846 warrants and 77,462 warrants remain outstanding.

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. As of January 31, 2006, the warrant holders have exercised 83,334 warrants and 250,000 warrants remain outstanding.

In connection with the January 22, 2004 debt issuance by Destination Capital, LLC, we issued 1,403,548 warrants. These were subsequently transferred, in total, to five separate recipients. Each of these warrants 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. As of January 31, 2006, the warrant holders have exercised 701,774 warrants and 701,772 warrants remain outstanding.

In connection with the August 24, 2004 debt issuance by Destination Capital, LLC, we issued 1,626,042 warrants. Subsequent to their issuance, 1,481,250 warrants were transferred to two separate recipients. 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. As of January 31, 2006, the warrant holders have not exercised any of these warrants.

On September 10, 2004, we entered into a Master Vehicle Lease Termination Agreement with Christenson Leasing Company, LLC, under which we terminated our previous master vehicle lease agreement with Christenson Leasing Company, LLC. Under the terms of this termination agreement, we were released from our obligation under the previous master vehicle lease agreement. In consideration for this release, we issued 1,000,000 warrants to purchase our common shares. These warrants were subsequently transferred to Destination Microfield, LLC which purchased the fleet of vehicles from Christenson Leasing Company, LLC. William C. McCormick, the Company’s Chairman of the Board of Directors, holds a minority interest in Destination Microfield. Each warrant is exercisable into one share of common stock at $0.38 per share and will expire in 2009. As of January 31, 2006, the warrant holders have not exercised any of these warrants.

In October 2005, in connection with a common stock private placement, we issued 2,452,864 warrants to purchase common stock. Each warrant is exercisable into one share of common stock at $0.90 per share and will expire in 2010. As of January 31, 2006, the warrant holders have not exercised any of these warrants.

In October 2005, in connection with the acquisition of EnergyConnect, Inc., we issued 19,492,386 warrants to purchase common stock. Each warrant is exercisable into one share of common stock at $2.58 per share and will expire in 2010. As of January 31, 2006, the warrant holders have not exercised any of these warrants.

TRANSFER AGENT

Our transfer agent for our common stock is Mellon Investor Services LLC, 85 Challenger Road, Ridgefield, New Jersey 07660.

INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Our Articles of Incorporation, as amended, provide to the fullest extent permitted by Oregon law, our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director’s or officer’s fiduciary duty. The effect of this provision of our Articles of Incorporation, as amended, is to eliminate our rights and our shareholders (through shareholders’ derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our Articles of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers. In addition, we have entered into indemnification agreements with our officers and directors.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act” or “Securities Act”) may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

PLAN OF DISTRIBUTION

The selling stockholders and any of their respective pledgees, donees, assignees and other successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares:

	•		ordinary brokerage transactions and transactions in which the broker-dealer solicits the purchaser;

	•		block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

	•		purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

	•		an exchange distribution in accordance with the rules of the applicable exchange;

	•		privately-negotiated transactions;

	•		short sales that are not violations of the laws and regulations of any state or the United States;

	•		broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

	•		through the writing of options on the shares;

	•		a combination of any such methods of sale; and

	•		any other method permitted pursuant to applicable law.

The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. The selling stockholders shall have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.

The selling stockholders may also engage in short sales against the box, puts and calls and other transactions in our securities or derivatives of our securities and may sell or deliver shares in connection with these trades.

The selling stockholders or their respective pledgees, donees, transferees or other successors in interest, may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that a selling stockholder will attempt to sell shares of common stock in block transactions to market makers or other purchasers at a price per share which may be below the then market price. The selling stockholders cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, the selling stockholders. Vertical Capital Partners, Inc., a registered broker-dealer; Michael Morris, Susan Diamond; Ronald Heineman and Michael Gochman; all of whom are employees of Vertical Capital Partners, are an “underwriter” as that term is defined under the Securities Exchange Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the rules and regulations of such acts. Further, the other selling stockholders and any brokers, dealers or agents, upon effecting the sale of any of the shares offered in this prospectus, may be deemed to be “underwriters.” In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.

We are required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the selling stockholders, but excluding brokerage commissions or underwriter discounts.

The selling stockholders, alternatively, may sell all or any part of the shares offered in this prospectus through an underwriter. No selling stockholder has entered into any agreement with a prospective underwriter and there is no assurance that any such agreement will be entered into.

The selling stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. The selling stockholders and any other persons participating in the sale or distribution of the shares

will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations under such act, including, without limitation, Regulation M. These provisions may restrict certain activities of, and limit the timing of purchases and sales of any of the shares by, the selling stockholders or any other such person. In the event that the selling stockholders are deemed affiliated purchasers or distribution participants within the meaning of Regulation M, then the selling stockholders will not be permitted to engage in short sales of common stock. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. In regards to short sells, the selling stockholder can only cover its short position with the securities they receive from us upon conversion. In addition, if such short sale is deemed to be a stabilizing activity, then the selling stockholder will not be permitted to engage in a short sale of our common stock. All of these limitations may affect the marketability of the shares.

We have agreed to indemnify the selling stockholders, or their transferees or assignees, against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the selling stockholders or their respective pledgees, donees, transferees or other successors in interest, may be required to make in respect of such liabilities.

If the selling stockholders notify us that they have a material arrangement with a broker-dealer for the resale of the common stock, then we would be required to amend the registration statement of which this prospectus is a part, and file a prospectus supplement to describe the agreements between the selling stockholders and the broker-dealer.

SELLING STOCKHOLDERS

The table below sets forth information concerning the resale of the shares of common stock by the selling stockholders. We will not receive any proceeds from the resale of the common stock by the selling stockholders. We will receive proceeds from the exercise of the warrants. Assuming all the shares registered below are sold by the selling stockholders, none of the selling stockholders will continue to own any shares of our common stock.

The following table also sets forth the name of each person who is offering the resale of shares of common stock by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered.

Except for Robert Jesenik, a former director and principal within Christenson Electric prior to its acquisition by us, the selling stockholders do not have and within the past three years have not had any position, office or other material relationship with us or any of our predecessors or affiliates .

For the table set forth below, the following persons have investment and voting control over the shares owned by the respective entities:


Entity		Control Person
Alpha Capital A.G.		Konrad Ackermann
Capozza Family Trust		Steven Capozza
CapStone Investments		Steven Capozza
George Communications, LLC		Chris Barnes
Energy Fund III, LLC		Robert Jesenik
Energy Fund IV, LLC		Robert Jesenik
Nite Capital, LP		Keith A. Goodman
Jim Rippey, Trustee		James Rippey
Sandor Capital Master Fund, L.P.		John S. Lemak
Whalehaven		Evan Schemenauer


	Beneficial Ownership
	Prior to Offering (1)
Name of Selling Security Holder	Shares			Percentage(2)		Shares Offered

Alpha Capital A.G.		642,857	(3)		1.2		642,857
Ann Capozza		321,429	(4)		*		321,429
Capozza Family Trust		107,144	(5)		*		107,144
CapStone Investments		1,462,572	(5a)		2.6		1,462,572
Daniel C. Carroll		11,046	(6)		*		11,046
George Communications, LLC		22,092	(7)		*		22,092
George King		160,715	(8)		*		160,715
Energy Fund III, LLC		1,317,857	(9)		2.4		1,317,857
Energy Fund IV, LLC		1,071,429	(10)		1.9		1,071,429
Steve McClurg		22,092	(7)		*		22,092
John Nash		4,419	(11)		*		4,419
Mark Nicosia		192,857	(12)		*		192,857
Nite Capital, LP		750,000	(13)		1.4		750,000
Robert B. Prag		107,144	(5)		*		107,144
Kevin Pritchard		22,092	(7)		*		22,092
William Purcell		22,092	(7)		*		22,092
Jim Rippey, Trustee		22,092	(7)		*		22,092
Ken Root		42,857	(14)		*		42,857
Tracy Salzwedel		22,092	(7)		*		22,092
Sandor Capital Master Fund, L.P.		645,000	(15)		1.2		645,000
Stan Smith		66,275	(16)		*		66,275
Tavares Williams, Jr.		107,144	(5)		*		107,144
David Walter		53,571	(17)		*		53,571
Whalehaven Capital Fund Limited		642,857	(18)		1.2		642,857
Seth Buechley		338,571	(19)		*		338,571

*		Less than 1%

(1)		Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of January 31, 2006 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.

(2)		Percentage prior to offering is based on 55,526,224 shares of common stock outstanding as of January 31, 2006

(3)		Includes 214,286 shares of common stock underlying warrants.

(4)		Includes 107,143 shares of common stock underlying warrants.

(5)		Includes 35,715 shares of common stock underlying warrants.

(5a)		Includes 706,114 shares of common stock underlying warrants.

(6)		Includes 3,682 shares of common stock underlying warrants.

(7)		Includes 7,364 shares of common stock underlying warrants.

(8)		Includes 53,572 shares of common stock underlying warrants.

(9)		Includes 439,286 shares of common stock underlying warrants. Mr. Jesenik is a former director.

(10)		Includes 357,143 shares of common stock underlying warrants. Mr. Jesenik is a former director.

(11)		Includes 1,473 shares of common stock underlying warrants.

(12)		Includes 64,286 shares of common stock underlying warrants.

(13)		Includes 250,000 shares of common stock underlying warrants.

(13)		Includes 7,364 shares of common stock underlying warrants.

(14)		Includes 14,286 shares of common stock underlying warrants.

(15)		Includes 215,000 shares of common stock underlying warrants.

(16)		Includes 22,092 shares of common stock underlying warrants.

(17)		Includes 17,857 shares of common stock underlying warrants.

(18)		Includes 214,286 shares of common stock underlying warrants.

(19)		Includes 112,857 shares of common stock underlying warrants.

LEGAL MATTERS

Dunn Carney Allen Higgin & Tongue LLP of Portland, Oregon will issue an opinion with respect to the validity of the shares of common stock being offered hereby.

EXPERTS

Russell Bedford Stefanou Mirchandani LLP, independent registered public accounting firm, has audited, as set forth in their report thereon appearing elsewhere herein, our financial statements at January 1, 2005 and for the year then ended that appear in the prospectus.

The financial statements as of January 3, 2004 and for the year then ended included in this Prospectus have been so included in reliance on the report (which contains an explanatory paragraph relating to the Company’s ability to continue as a going concern as described in Note 2 to the financial statements) of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

AVAILABLE INFORMATION

We have filed a registration statement on Form SB-2 under the Securities Act of 1933, as amended, relating to the shares of common stock being offered by this prospectus, and reference is made to such registration statement. This prospectus constitutes the prospectus of Microfield Group, Inc., filed as part of the registration statement, and it does not contain all information in the registration statement, as certain portions have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission.

We are subject to the informational requirements of the Securities Exchange Act of 1934 which requires us to file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information may be inspected at public reference facilities of the SEC at 100 F Street, N.E., Washington D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the

RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
Certified Public Accountants

REPORT OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM

Board of Directors
Microfield Group, Inc.
Portland, Oregon

We have audited the accompanying consolidated balance sheet of Microfield Group, Inc. and its wholly-owned subsidiary (the “Company”) as of January 1, 2005 and the related consolidated statements of operations, deficiency in stockholders’ equity, and cash flows for the year then ended. 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 audit.

We conducted our audit 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 audit 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 subsidiary as of January 1, 2005, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in the Note 2 to the accompanying consolidated financial statements, the Company has suffered recurring losses and is experiencing difficulty in generating sufficient cash flow to meet it obligations and sustain its operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
Russell Bedford Stefanou Mirchandani LLP
Certified Public Accountants

McLean, Virginia
April 22, 2005
(except for Note 20 for which the date is May 11, 2005)

F-3

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Microfield Group, Inc.

In our opinion, the consolidated balance sheet as of January 3, 2004 and the related consolidated statements of operations, of changes in shareholders’ equity (deficit) and of cash flows for the year ended January 3, 2004 present fairly, in all material respects, the financial position, results of operations and cash flows of Microfield Group, Inc. and its subsidiaries (the “Company”) at January 3, 2004 and for the year then ended, in conformity with accounting principles generally accepted in the United States of America. 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 audit. We conducted our audit of these statements 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 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 audit provides a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from continuing operations, and has experienced negative cash flows from continuing operating activities. In addition, the Company may not have sufficient cash resources to meet short-term cash requirements. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As more fully described in Note 18, the Company has entered into debt agreements, lease agreements and an administrative services agreement with entities owned or controlled by a significant shareholder and director.

/s/ PRICEWATERHOUSECOOPERS, LLP
Portland, Oregon
May 19, 2004

F-4

MICROFIELD GROUP, INC.

CONSOLIDATED BALANCE SHEETS

AS OF JANUARY 1, 2005 AND JANUARY 3, 2004


	January 1, 2005			January 3, 2004
Current assets:
Cash and cash equivalents	$	10,992		$	130,533
Accounts receivable, net of allowances of $103,969 and $117,650		6,241,001			5,432,046
Accounts receivable — related parties		178,900			385,122
Inventory, net of allowances (Note 4)		239,328			429,529
Costs in excess of billings (Note 6)		822,656			1,517,226
Other current assets		450,602			125,243

Total current assets		7,943,479			8,019,699

Property and equipment, net (Note 5)		125,777			1,818,415
Intangible assets, net (Note 7 & 8)		1,393,281			1,879,832
Goodwill (Note 7 & 8)		2,276,243			2,299,084
Other assets		36,243			24,480

Total Assets	$	11,775,023		$	14,041,510

Current liabilities:
Cash disbursed in excess of available funds	$	26,125		$	217,781
Accounts payable		3,451,991			3,895,873
Accounts payable – related parties		99,932			424,905
Accrued payroll taxes and benefits		1,297,379			1,274,423
Bank line of credit (Note 14)		4,392,975			4,331,098
Current portion of notes payable (Note 14)		673,968			69,773
Current portion of notes payable – related parties (Notes 14 & 18)		485,500			898,224
Billings in excess of costs (Note 6)		523,919			354,544
Other current liabilities		226,788			175,395

Total current liabilities		11,178,577			11,642,016

Long-term liabilities:
Long term notes payable (Note 14)		412,922			129,211
Long term notes payable – related parties (Notes 14 & 18)		700,635			2,043,923
Derivative liability – notes (Note 12)		41,863			35,599
Liability for warrant settlement (Note 13)		—			182,862

Total long-term liabilities		1,155,420			2,391,595


Commitments and contingencies (Note 19)		—			—
Shareholders’ equity(deficit):
Convertible Series 2 preferred stock, no par value, 10,000,000 shares authorized, 6,821,436 and 6,940,484 shares issued and outstanding (Note 10)		2,765,101			2,815,101
Convertible Series 3 preferred stock, no par value, 10,000,000 shares authorized, 3,641 and 0 shares issued and outstanding, respectively (Note 10)		1,273,667			—
Convertible Series 4 preferred stock, no par value, 10,000,000 shares authorized, 4,605 and 0 shares issued and outstanding, respectively (Note 10)		1,568,834			—
Common stock, no par value, 125,000,000 shares authorized, 18,491,618 and 16,772,570 shares issued and outstanding, respectively		20,707,192			18,502,354
Common stock warrants (Note 13)		2,256,112			468,000
Accumulated deficit		(29,129,880	)		(21,777,556	)

Total shareholders’ equity(deficit)		(558,974	)		7,899

Total liabilities and shareholders’ equity (deficit)	$	11,775,023		$	14,041,510

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

F-5

MICROFIELD GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JANUARY 1, 2005 AND JANUARY 3, 2004


	January 1,			January 3,
	2005			2004
Sales	$	36,466,618		$	10,342,045

Cost of goods sold		30,334,987			8,712,117


Gross profit		6,131,631			1,629,928

Operating expenses
Sales, general and administrative		(9,748,188	)		(4,104,098	)
Write-off of impaired intangible assets (Note 7)		(376,000	)		—
Loss on lease termination (Notes 13 and 15)		(515,000	)		—


Loss from operations		(4,507,557	)		(2,474,170	)


Other income (expense)
Interest income		1,126			3,298
Interest expense		(1,959,104	)		(427,623	)
Loss on debt extinguishment (Note 13)		—			(111,000	)
Derivative expense		(16,150	)		(123,393	)
Gain (loss) on disposal of assets		87,795			—
Other income (expense), net		—			(10,299	)

Total other income (expense)		(1,886,333	)		(669,017	)


Loss before provision for income taxes		(6,393,890	)		(3,143,187	)
Provision for income taxes		—			—

Loss from continuing operations		(6,393,890	)		(3,143,187	)

Discontinued operations:
Gain (loss) on discontinued operations — Velagio and IST (Note 9)		149,380			(2,939,803	)
Gain on sale of discontinued operations — SoftBoard (Note 9)		62,827			36,758

Net loss	$	(6,181,683	)	$	(6,046,232	)


Deemed preferred stock dividend (note 10)		(1,170,641	)		—


Net loss attributable to common shareholders	$	(7,352,324	)	$	(6,046,232	)


Basic and diluted net loss per share from continuing operations (Note 17)	$	(0.37	)	$	(0.31	)

Basic and diluted net income (loss) per share from discontinued Operations (Note 17)	$	0.01		$	(0.28	)

Basic and diluted net loss per share (Note 17)	$	(0.36	)	$	(0.59	)


Basic and diluted net loss per share attributable to common shareholders	$	(0.42	)	$	(0.59	)


Weighted average shares used in per share calculations:
Basic and diluted		17,340,152			10,308,815

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

F-6

Microfield Group, Inc.

Statement of Changes in Shareholders’ Equity (Deficit)

Fiscal Years Ended January 1, 2005 and January 3, 2004


																						Total
	Convertible Series 2				Convertible Series 3		Convertible Series 4												Accumulated			Shareholders’
	Preferred Stock				Preferred Stock		Preferred Stock		Common Stock						Common Stock Warrants				Deficit			Equity (Deficit)
	Shares		Amount		Shares	Amount	Shares	Amount	Shares			Amount			Warrants		Amount

Balance, December 28, 2002										8,224,652		$	16,149,034			2,066,000	$	357,000	$	(15,731,324	)	$	774,710

Common shares repurchased										(951,445	)		(209,318	)									(209,318	)
Common shares issued in private placement										1,113,078			269,549										269,549
Common shares issued upon acquisition of CTS										4,193,142			1,090,217										1,090,217
Common shares and employee stock options issued upon acquisition of Velagio										4,193,143			1,202,872										1,202,872
Re-measurement of warrant value originally issued with debt																		111,000					111,000
Convertible preferred shares issued in private placement, net of issuance costs and liability for warrant settlement		1,785,714	$	667,636																			667,636
Convertible preferred shares issued for retirement of related party debt, net of issuance costs		1,821,437		747,465																			747,465
Convertible preferred shares issued for retirement of related party debt, net of issuance costs		3,333,333		1,400,000																			1,400,000

Net Loss																				(6,046,232	)		(6,046,232	)

F-7


																										Total
	Convertible Series 2						Convertible Series 3				Convertible Series 4												Accumulated			Shareholders’
	Preferred Stock						Preferred Stock				Preferred Stock				Common Stock				Common Stock Warrants				Deficit			Equity (Deficit)
	Shares			Amount			Shares		Amount		Shares		Amount		Shares		Amount		Warrants		Amount

Balance, January 3, 2004		6,940,484		$	2,815,101			—	$	—		—	$	—		16,772,570	$	18,502,354		2,066,000	$	468,000	$	(21,777,556	)	$	7,899

Convertible Series 3 preferred shares issued for retirement of related party debt								3,640.803	$	546,121								983,017									1,529,138

Partial satisfaction of note receivable through reduction of account payable (see Note 15)																		13,137									13,137

Convertible Series 4 preferred shares issued in private placement, net of issuance costs												4,605.265	$	1,125,739				598,684									1,724,423

Conversion of preferred Series 2 shares to common shares		(119,048	)		(50,000	)										119,048		50,000									—

Warrant values recognized upon warrant issuance																				1,693,750		798,988					798,988

Warrant reclassification recorded upon expansion of authorized common shares																				1,885,689		989,124					989,124

Common stock issued for services																1,600,000		560,000									560,000

Amortization of beneficial conversion features (See Note 8)										727,546				443,095										(1,170,641	)		—

Net loss																								(6,181,683	)		(6,181,683	)


Balance January 1, 2005		6,821,436		$	2,765,101			3,640.803	$	1,273,667		4,605.265	$	1,568,834		18,491,618	$	20,707,192		5,645,439	$	2,256,112	$	(29,129,880	)		(558,974	)

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

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

F-8

MICROFIELD GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JANUARY 1, 2005 AND JANUARY 3, 2004


	January 1, 2005			January 3, 2004
Cash Flows From Operating Activities:
Net loss	$	(6,181,683	)	$	(6,046,232	)
Add (deduct):
(Gain) loss on discontinued operations (Note 9)		(149,380	)		2,939,803
(Gain) on sale of discontinued operations (Note 9)		(62,827	)		(36,758	)


Loss from continuing operations		(6,393,890	)		(3,143,187	)
Depreciation on equipment (Note 5)		409,081			215,413
Amortization on intangible assets (Note 8)		110,552			32,244
Amortization of debt discount		158,869			—
Noncash interest expense recorded on warrant issuance		882,522			—
Gain on disposal of fixed assets		(85,795	)		—
Warrants issued with lease termination		515,000			—
Warrants issued for services		560,000			—
Re-measurement of warrants on term extension		—			111,000
Re-measurement of warrant liability		43,409			117,960
Re-measurement of derivative associated with Steelcase note		6,264			35,599
Write down of intangible asset		376,000			—

Changes in current assets and liabilities, net of effect of acquisitions:
Accounts receivable		(808,955	)		(280,582	)
Accounts receivable — related party		206,222			(183,553	)
Inventory		190,201			178,403
Other current assets		(56,359	)		(46,266	)
Costs in excess of billings		694,570			525,721
Other long term assets		52,057			(24,480	)
Cash disbursed in excess of available funds		(191,656	)		—
Accounts payable		(443,882	)		182,451
Accounts payable – related party		(101,618	)		410,636
Billings in excess of cost		169,375			(133,010	)
Other current liabilities		52,632			690,211


Net cash used by continuing operations		(3,655,401	)		(1,311,440	)

Net cash provided (used) by discontinued operations		149,380			(2,939,803	)
Net cash provided (used) by sale of discontinued operations		62,827			36,758
Assets disposed in discontinued operations		—			2,016,492


Net cash used by operating activities		(3,443,194	)		(2,197,993	)


Cash flows from investing activities
Purchases of fixed assets		(117,713	)		(2,000	)
Loan to non-related company		(200,000	)		—
Net cash acquired in mergers with IST, CTS and Velagio		—			621,391

Net cash provided (used) by investing activities		(317,713	)		619,391

Cash flows from financing activities:
Borrowings on line of credit		36,149,231			10,832,886
Repayments on line of credit		(36,087,355	)		(10,185,200	)
Borrowing on Union note payable		958,572			—
Repayments on notes payable		(69,773	)		(11,527	)
Repayments on notes payable — related party		(600,000	)		(97,389	)
Borrowings on note payable — related party		1,800,000			90,000
Repayments on lease obligation		(233,732	)		—
Proceeds from issuance of preferred stock		1,724,423			750,003
Proceeds from issuance of common stock		—			239,381



Net cash provided by financing activities		3,641,366			1,618,154


Net increase (decrease) in cash and cash equivalents		(119,541	)		39,552

Cash and cash equivalents, beginning of period		130,533			90,981

Cash and cash equivalents, end of period	$	10,992		$	130,533


Supplemental schedule of non-cash financing and investing activities:
Common stock issued upon acquisitions (See Notes 7 & 10)	$	—		$	2,293,089
Costs of acquisitions	$	—		$	139,800
Net tangible liabilities acquired from mergers	$	—		$	13,910,104
Net intangible assets acquired in mergers	$	—		$	5,704,548
Common stock issued to settle related party debts — Steven M. Wright	$	—		$	40,000
Repurchase of common stock with issuance of note payable — Steelcase	$	—		$	209,318
Beneficial conversion feature of Series 3 and Series 4 preferred stock	$	1,581,701		$	—
Amortization of beneficial conversion feature	$	1,170,641		$	—
Series 3 preferred stock issued for related party operating lease obligations	$	130,000		$	—

F-9

MICROFIELD GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 1, 2005 AND JANUARY 3, 2004

1. Description of the Business

Microfield Group, Inc. (the “Company”) specializes in the installation of electrical products and services. The Company’s objective is to leverage its assets and value to successfully build a viable, profitable electrical services and technology infrastructure business.

In September 2003, the Company acquired privately held Velagio, Inc. (Velagio) and Christenson Technology Services, Inc. (CTS). In December, 2003 the service and technology teams of Velagio and CTS were consolidated into one subsidiary under the name Christenson Velagio, Inc. (CVI) in order to take full advantage of inherent synergies within the subsidiaries, as well as capture competitive advantage. The organization conducts business in the electrical services and technology infrastructure sectors.

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. Liquidity 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 years ended January 1, 2005 and January 3, 2004, the Company incurred net losses of $6,182,000 and $6,046,000, respectively. The Company’s current liabilities exceeded its current assets by $3,235,000 as of January 1, 2005. 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. The Company has raised approximately $985,000 in cash through issuances of Common Stock and Series 2 Preferred Stock during the year ended January 3, 2004 and $1,750,000 in cash through issuance of Series 4 Preferred Stock during the year ended January 1, 2005. Debt to related parties, in the aggregate amount of approximately $3,695,000 has been converted to equity during the year ended January 1, 2005 and January 3, 2004. Management has been focused on cutting certain expenses, both to improve gross margins and to reduce the monthly overhead costs. While the Company anticipates these losses will continue to decline as a result of cost reduction efforts and fundraising events, recurring losses and liquidity issues raise doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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. Investment capital or debt facilities may be difficult to obtain due, among other issues, to the Company’s inability to meet certain SEC reporting requirements relative to historical financial statements of CTS. There can be no assurance that additional capital will be available or, if available, will be at terms acceptable to the Company. The Company is focusing on opportunities to increase revenues and grow margins while continuing to reduce monthly expenses in an attempt to turn cash flow positive and profitable.

3. 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 January 1, 2005. The Company’s last fiscal year

F-11

was the 53-week period ended January 3, 2004.

Principles of Consolidation

The Consolidated Statements of Operations presented above, contain revenue and expense data of Microfield Group, Inc. for the years ended January 1, 2005 and January 3, 2004. On September 16, 2003, the Company acquired two wholly-owned subsidiaries, Christenson Technology Services, Inc. (CTS) and Velagio, Inc. (Velagio) (see Note 7). The revenue and expense data of CTS is included in the Consolidated Statement of Operations from the acquisition date, September 16, 2003, to the end of the period presented. Revenue and expense data of its subsidiaries, Velagio and Innovative Safety Technologies are included in discontinued operations in the Consolidated Statement of 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.

Advertising Costs

Advertising costs of $40,000 and $27,000 were expensed as incurred in the years ended January 1, 2005 and January 3, 2004, 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. Depreciation of vehicles is computed using the straight-line method over the estimated useful lives of the assets. Estimated lives of three years are used for vehicles. Depreciation of furniture and fixtures is computed using straight line or accelerated declining balance method over the estimated useful lives of the assets. Estimated lives of five to seven years are used for furniture and fixtures.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. At January 1, 2005 and January 3, 2004 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.

The Company currently relies on various sources for key components used in the installation and sales of its products

F-12

and services. None of the Company’s products or supplies used in the performance of its services is from a single source. The inability of any limited source suppliers to fulfill supply and production requirements, could materially impact future operating results.

The Company’s business is concentrated in the electrical services and technology services industry. Its future success depends on the buying patterns of its customers and continued demand by customers for the Company’s products and services. The Company’s success will depend on its ability to maintain its history of first rate quality in designing customer solutions and performing its services, enhancing its existing products and services and to develop and introduce, on a timely basis, successful new products or services.

Revenue and Cost Recognition

Significant portions of the Company’s revenues are derived from construction and service projects. Revenues from fixed-price, cost-plus-fee, time and material and unit-price contracts are recognized using the percentage-of-completion method of accounting which recognizes income as work on a contract progresses. Recognition of revenues and profits generally are related to costs incurred in providing the services required under the contract. Earned revenue is the amount of cost incurred on the contract in the period plus the amount of gross profit earned during the same period. This method is used because management considers total cost to be the best available measure of completion of construction contracts in progress. Provisions for estimated losses on construction contracts in progress are made in their entirety in the period in which such losses are determined without reference to the percentage complete. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to revenue and costs, and are recognized in the period in which the revisions are determined. Claims for additional revenue are not recognized until the period in which such claims are allowed. Direct contract costs include all direct labor, direct materials and some estimating costs and shop and equipment costs. General and administrative costs are charged to expense as incurred. As of January 1, 2005, accounts receivable does not include any retainage that is over one year old. Revenue from discontinued operations was recognized when persuasive evidence of an arrangement existed, the price was fixed, title had transferred, collection of resulting receivables was probable, no customer acceptance requirements existed and there were no remaining significant obligations.

A small portion of the Company’s revenue in for the year ended January 3, 2004 was derived from software consulting and services. Consulting and service revenue consists of strategic advisory, business process re-engineering, design, engineering, software development, systems integration, systems testing and implementation, end user training and post-implementation support activities. Consulting services are generally billed under time and material contracts. Revenue earned from these services is recognized as services are performed. Prior to its acquisition by the Company, Velagio also earned revenue from sales of a software license and the related professional services. During the period since its acquisition by the Company, no revenue from sales of software products has been recognized. Certain “consulting services only” contracts included post contract consumer support (PCS) to assist customers with post-implementation issues. PCS services are generally offered under renewable, fee-based contracts or as part of multiple element arrangements. PCS revenue is deferred and recognized ratably over the contract period. This part of the Company’s business was acquired in the acquisition of Velagio. There were no revenues from software consulting and services for the year ended January 1, 2005. Currently, there are no warranties provided with the purchase of the Company’s constructions and services. In the future, when the company deems warranty reserves are appropriate that such costs will be accrued to reflect anticipated warranty costs.

Impairment of Long-lived Assets

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 long-lived assets that management expects to hold and use is based on the fair value of the asset as estimated using an undiscounted cash flow model. (See Note 8)

The Company measures 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, the Company has 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

F-13

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 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 year ended January 1, 2005 and January 3, 2004, 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

The Company contributes to several Multi-Employer Pension Benefit Plans on behalf of its employees covered by a collective bargaining agreement. During the years ended January 1, 2005 and January 3, 2004, the Company contributed $1,895,000 and $630,000 to these plans, respectively, which was expensed as incurred.

Stock Based Compensation

The Company accounts for its employee and director stock options in accordance with provisions of Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Pro forma disclosures are required under SFAS 123, “Accounting for Stock-Based Compensation” and as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” are presented below. Under this method, no stock based compensation expense has been recognized for stock options issued to employees because the exercise prices of options issued were equal to or greater than the fair value of the underlying shares at the date of grant .

Had compensation cost for the Company’s plan been determined based on the fair value at the grant dates consistent with the method of SFAS No. 123, the total value of options granted would have been $716,224 for the year ended January 1, 2005 and $141,530 for the year ended January 3, 2004. Such amounts would be amortized over the vesting period of the options. The total compensation expense that would have been recognized if the Company had determined such costs based on the fair value method would have been $244,354 and $19,174 for the years ended January 1, 2005 and January 3, 2004, respectively.

Accordingly, under SFAS No. 123, the Company’s net loss and loss per share for the years ended January 1, 2005 and January 3, 2004, would have been changed to the pro forma amounts indicated below:


		January 1,			January 3,
		2005			2004
Net loss	As reported	$	(6,181,683	)	$	(6,046,232	)
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(244,354	)		(19,174	)

Net loss	Pro forma	$	(6,426,037	)	$	(6,065,406	)

F-14


		January 1,			January 3,
		2005			2004
Net loss attributable to common shareholders	Pro forma		(7,596,678	)		(6,065,406	)

Basic and diluted net loss per share	As reported	$	(0.36	)	$	(0.59	)
	Pro forma	$	(0.37	)	$	(0.59	)

Basic and diluted net loss per share attributable to common shareholders	Pro forma	$	($0.44	)	$	(.059	)

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123R (revised 2004), “Share-Based Payment” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”. Statement 123R supersedes APB opinion No. 25, “Accounting for Stock Issued to Employees”, and amends FASB Statement No. 95, “Statement of Cash Flows”. Generally, the approach in Statement 123R is similar to the approach described in Statement 123. However, Statement 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. On April 14, 2005, the SEC amended the effective date of the provisions of this statement. The effect of this amendment by the SEC is that the Company will have to comply with Statement 123R and use the Fair Value based method of accounting no later than the first quarter of 2006. Management has not determined the impact that this statement will have on Company’s consolidated financial statements.

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, sales returns, bad debts, excess inventory, 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

SFAS 123R. On March 31, 2004 the Financial Accounting Standards Board (“FASB”) issued its exposure draft, “Share-Based Payments”, which is a proposed amendment to SFAS 123. The exposure draft would require all share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized in the statement of operations based on their fair value. The FASB issued the final standard in December 2004 that is effective for small business issuers for annual periods beginning after December 15, 2005. The Company has not yet assessed the impact of adopting this new standard.

SFAS 151. In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS 151, Inventory Costs— an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “. . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . .” This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows.

F-15

SFAS 152. In December 2004, the FASB issued SFAS No.152, “Accounting for Real Estate Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67” (“SFAS 152) The amendments made by Statement 152 This Statement amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. with earlier application encouraged. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows.

SFAS 153. On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (“ SFAS 153”). This statement amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, if a nonmonetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. SFAS 153 is effective for nonmonetary transactions in fiscal periods that begin after June 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows.

4. Inventories

Inventories are stated at the lower of first-in, first-out, cost or market value, and consist of the following:


	January 1,			January 3,
	2005			2004
Raw materials	$	47,794		$	73,455
Finished Goods		334,554			513,727


		382,348			587,182
Less allowance for obsolete inventory		( 143,020	)		(157,653	)


	$	239,328		$	429,529

5. Property and Equipment

Property and equipment consist of the following:


	January 1,			January 3,
	2005			2004
Tools and equipment	$	365,323		$	376,027
Software		109,118			—
Furniture		15,500			—
Leasehold Improvements		—			76,716
Vehicles under capital lease (Note 18)		—			1,993,233


		489,941			2,445,976

Less accumulated depreciation and amortization		(364,164	)		(627,561	)


	$	125,777		$	1,818,415

Depreciation expense included as a charge to income was $409,081 and $215,413 for the years ended January 1, 2005 and January 3, 2004, respectively.

F-16

On September 10, 2004, the Company entered into a Master Vehicle Lease Termination Agreement with CLLLC, under which the Company was released from its obligation under the master vehicles lease agreement (Note 18) and vehicles under the capital lease were accordingly excluded from the Company’s property and equipment.

6. Construction Contracts in Progress

Revenues and costs recognized on construction contracts in progress contrast the related billings as follows:


	January 1,			January 3,
	2005			2004
Direct costs to date	$	6,839,044		$	8,712,117
Gross profit to date		1,345,213			1,629,928


Earned contract revenue		8,184,257			10,342,045
Net underbillings within CTS prior to acquisition					1,522,569
Contract billings to date		(7,885,520	)		(10,701,932	)


Net under billings	$	298,737		$	1,162,682

Included in the accompanying consolidated balance sheets under the following captions are:


	January 1,			January 3,
	2005			2004
Costs and estimated earnings in excess of billings	$	822,656		$	1,517,226
Billings in excess of costs and estimated earnings		(523,919	)		(354,544	)


Net under billings	$	298,737		$	1,162,682

7. Acquisitions

Acquisition of Christenson Technology Services, Inc.

On September 16, 2003, the Company acquired Christenson Technology Services, Inc. (CTS) in exchange for 4,193,142 shares of the Company’s common stock. The shares of common stock issued in conjunction with the merger were not registered under the Securities Act of 1933. The acquisition of CTS was accounted for using the purchase method in accordance with SFAS 141, “Business Combinations.” The results of operations for CTS have been included in the Consolidated Statements of Operations since the date of acquisition.

CTS is a combination of Christenson Technology Services, Inc. and Christenson Electrical Services, (CES). These two lines of business sell different products and services, but often support the same customer. CTS provides complete structured voice, video and data cabling solutions, local and wide area network design, enterprise computing services, security solutions and wireless LAN applications.

CES’ core businesses include electrical contracting and support for commercial and high-tech construction of high-rise office towers, hospitals, clean rooms or production areas, custom design and manufacture of energy management systems and industrial control panels, and maintenance of commercial lighting for retail, office, warehouse and industrial work environments.


Common stock	$	1,090,217
Direct acquisition costs		59,984

Total purchase price	$	1,150,201

F-17

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	$	8,221,945
Equipment and other assets		2,003,977
Intangible assets – Trade name		1,248,771
Intangible assets – Customer lists		663,305
Goodwill		2,299,084
Current liabilities		(8,303,952	)
Notes payable		(4,982,929	)


Total	$	1,150,201

The intangible assets of $1,912,076 consist of a trade name and customer lists. These intangible assets acquired have estimated useful lives as follows: Christenson trade name – indeterminate life; customer lists relative to the CTS base of customers — six years. Goodwill of $2,299,084 at the acquisition date represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with SFAS 142, goodwill is not amortized and will be tested for impairment at least annually. The goodwill value was tested for impairment in the fourth quarter of 2004 using both the market value approach and the discounted cash flow approach. In both cases, the goodwill was determined to not be impaired.

The Company tested the trade name value for impairment as of the end 2004, and the result indicated that the recorded book value of trade name exceeded its fair value, as determined by discounted cash flows. Upon completion of the assessment, the Company recorded a non-cash impairment charge of $376,000, net of tax, or $0.02 per share at January 1, 2005 to reduce the carrying value of trade name to its estimated value of $872,771 (Note 8).

Acquisition of Velagio, Inc.

On September 16, 2003, the Company acquired Velagio, Inc. (Velagio) in exchange for 4,193,143 shares of the Company’s common stock and 473,907 employee stock options to purchase the Company’s common shares, of which 412,027 options were fully vested. The shares of common stock issued in conjunction with the merger were not registered under the Securities Act of 1933. The acquisition of Velagio was accounted for using the purchase method in accordance with SFAS 141, “Business Combinations.” The results of operations for Velagio have been included in the Consolidated Statements of Operations since the date of acquisition.

Velagio, Inc. was a business solutions provider that offered a blend of business consulting and information technology integration services. Specifically, Velagio had professional service capabilities in strategic business consulting; business process re-engineering; enterprise application software selections and implementations; commercial software development; and technology infrastructure integration and support services. Velagio had licensed proprietary customer relationship management (CRM) software in the area of sales force automation.

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 Velagio. 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 Company used the following assumptions in calculating the value of these options: Risk free rate – 1.94%; Volatility index – 118%; Divivdend yield: 0%. The components of the purchase price were as follows:


Common stock	$	1,090,217
Option issuance value		112,655
Direct acquisition costs		59,984

Total purchase price		1,262,856

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:

F-18


Cash and other current assets	$	224,166
Equipment and other assets		53,298
Goodwill		1,295,366
Current liabilities		(309,974	)


Total	$	1,262,856

Goodwill of $1,295,366 represented the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. At January 3, 2004, it was the Company’s view that the goodwill generated in this transaction was impaired. The Company decided to write off this goodwill due to the fact that separations of nearly all of the former Velagio employees have left few intangible assets from the acquisition and no further identifiable Velagio product or market. New Microfield management, who joined in February, further concentrated on improving the electrical businesses with no intention of re-establishing the enterprise software development business. The write-off of the goodwill, and the financial results of Velagio since its acquisition are included discontinued operations in the consolidated statement of operations.

The following unaudited proforma information presents a summary of the consolidated results of operations of the Company assuming the acquisitions of CTS, Velagio and IST occurred on the first day of 2004. In the course of trying to complete the audit of GAAP compliant financial statements related to its Form 8-K/A filing, the Company’s independent registered public accounting firm and management identified certain material internal control weaknesses within the operations of CTS in the areas of: revenue recognition; cash disbursements; inventory accounting; and document control. The Company’s management concluded that fully compliant GAAP financial statements of CTS for FY 2002 and FY 2001 could not be prepared. In addition, the Company’s independent registered public accounting firm concluded that they could not complete an audit nor render an audit opinion on the FY 2002 and FY 2001 historical financial statements of CTS. Given the significance of CTS, and for the purpose of informing shareholders and prospective investors, the Company has prepared the following summary proforma with the best information available, which management believes fairly represents the unaudited proforma results of operations of the combined Company for the periods presented. The following information is unaudited.


	Year Ended
	January 3,
	2004
	(unaudited)
Sales	$	45,788,658


Net loss	$	(8,798,364	)


Basic and diluted net loss per share	$	(.85	)

Prior to the end of the year 2003, the Company’s management decided to discontinue the operations of IST and Velagio, and concentrate on the operations of the newly merged subsidiary CVI.

8. Intangible Assets and Goodwill

The Company amortizes its intangible assets on a straight-line basis. The Company’s acquisition of CTS resulted in the valuation of CTS’ Christenson name and customer lists as intangible assets. The Company’s trade name is considered to have an undeterminable life, and as such will not be amortized. Instead, the trade name is tested annually for impairment, with any impairment charged against earnings in the Company’s consolidated statement of earnings. It was determined that the value of the trade name on the balance sheet of the Company as of January 1, 2005 was partially impaired. An expense of $376,000 was charged against earnings for the year ended January 1, 2005 (see Note 7).

The customer lists were determined to have a six-year life. Shortly after the acquisition of IST, the Company elected to eliminate further investment in its IOS product line. As of the end of the quarter ended September 27, 2003, the intangible value of the IOS product line was written off. Due to management’s decision to discontinue the operations of Velagio and IST at January 3, 2004, it was determined by the Company that the intangibles of Velagio and IST were impaired. The write-off of the intangible assets was included as part of discontinued operations in the

F-19

consolidated statement of operations.

Intangible assets consist of the following:


	January 1,			January 3,
	2005			2004
Christenson trade name	$	872,771			1,248,771
Christenson customer lists		663,305			663,305


		1,536,076			1,912,076
Less accumulated depreciation and amortization		(142,795	)		(32,244	)


	$	1,393,281		$	1,879,832

Amortization of intangible assets included as a charge to income was $110,552 and $32,244 for the years ended January 1, 2005 and January 3, 2004, respectively. Based on the Company’s current intangible assets, amortization expense for the five succeeding years will be as follows:


	Amortization
Year	Expense
2005	$	110,551
2006		110,551
2007		110,551
2008		110,551
2009		78,306

Total		520,510

The Company does not amortize goodwill. As a result of the acquisitions of CTS, Velagio and IST, the Company recorded goodwill in the amount of $3,792,472 during fiscal year 2003. Due to management’s decision to discontinue the operations of Velagio and IST prior to January 3, 2004, it was determined by the Company that the goodwill of Velagio and IST were impaired. The write-off of the intangible assets was included as part of discontinued operations in the consolidated statement of operations. The changes in the carrying amount of goodwill for the years ended January 1, 2005 and January 3, 2004 are recorded below.


	January 1,			January 3,
	2005			2004
Beginning goodwill balance	$	2,299,084		$	250,490

Goodwill recorded upon acquisition of Velagio		—			1,295,366
Goodwill recorded upon acquisition of CTS		—			2,497,106
Adjustments to goodwill for reduction of pre-acquisition expenses		(22,841	)		(198,022	)
Goodwill write off due to impairment					(1,545,856	)


Ending goodwill balance	$	2,276,243		$	2,299,084

Considerable management judgment is necessary to estimate fair value. Accordingly, actual results could vary significantly from managements’ estimates.

9. Discontinued Operations

Velagio and IST

During the fourth quarter of 2003, management determined that the previous operations of Velagio and IST should be discontinued. After the acquisition of Velagio and CTS on September 16, 2003, management decided to focus on the electrical construction services and technology infrastructure products and services business acquired with CTS.

F-20

As a result of expense cuts made after the acquisitions, all of the previous employees of Velagio and IST were either refocused in areas within the Company that supported the electrical and technology side of the business, or separated from the Company. The only items listed as discontinued operations in the statement of operations in 2004 related to prior operations of Velagio and IST were the reversal of previously unresolved liability reserves.

Sales of Velagio from September 16, 2003, the date of the acquisition, to January 3, 2004, were approximately $154,000. The net loss of Velagio for this period was $1,794,000, of which $1,295,000 was from the write-off of goodwill recorded upon its acquisition. Sales of IST for the years ended January 3, 2004 were approximately $458,000. The net loss of IST for the period ended January 3, 2004 was approximately $1,146,000. The loss of IST in fiscal year 2003 included a write-off of goodwill and intangible assets of approximately $515,000.

Discontinued operations accounting treatment has been applied to the Velagio and IST operations. The revenues, operating expenses and other income and losses of both Velagio and IST are reported as “loss from discontinued operations” for all periods presented to reflect the reclassification of these operations as discontinued. Also, cash flows from the Velagio and IST operations are reported as “net cash provided by (used in) discontinued operations” whether associated with operating, investing or financing activities.

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 terms of the asset sale called for Greensteel to pay the Company up to $3,500,000, with $2,000,000 payable at the closing of the transaction and up to an additional $1,500,000 in contingent earn-out payments based on net sales of the Company’s SoftBoard products over a five-year period. Shareholders approved the agreement and the transaction was finalized on October 24, 2000 and resulted in a gain of $1,221,852.

A total of $62,827 and $36,758 in contingent earn-out payments were received by the Company during the year ended January 1, 2005 and January 3, 2004, respectively. These amounts were recorded as gain on the sale of discontinued operations in the Consolidated Statements of Operations.

As a result of shareholder approval of the Greensteel agreement, discontinued operations accounting treatment has been applied to the SoftBoard operation. Accordingly, the net gain incurred from the Softboard operations is reported in gain from discontinued operations for all periods presented to reflect the reclassification of these operations as discontinued. Also, cash flows from the Softboard operations are reported as “net cash provided by (used in) discontinued operations” whether associated with operating, investing or financing activities.

10. Capital Stock

The Company has authorized 10,000,000 shares of Series 2 Preferred stock, no par value. As of January 1, 2005 and January 3, 2004, the Company has 6,821,436 and 6,940,484 shares of Series 2 preferred stock issued and outstanding. The Company has authorized 10,000,000 shares of Series 3 Preferred stock, no par value. As of January 1, 2005, the Company has 3,641 shares of Series 3 preferred stock issued and outstanding. The Company had no Series 3 preferred stock issued and outstanding at January 3, 2004. The Company has authorized 10,000,000 shares of Series 4 Preferred stock, no par value. As of January 1, 2005, the Company has 4,065 shares of Series 4 preferred stock issued and outstanding. The Company had no Series 4 preferred stock issued and outstanding at January 3, 2004. The Company has authorized 125,000,000 shares of Common Stock, no par value. As of January 1, 2005 and January 3, 2004, the Company has 18,491,618 and 16,772,570 shares of common stock issued and outstanding. This number does not include 951,455 shares registered in Issuer’s name and pledged to secure a liability.

Series 2 Preferred Stock

F-21

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 (Note 11). 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 January 1, 2005, one of the Series 2 preferred stockholders converted 119,048 shares of Series 2 preferred stock into 119,048 shares of common stock. The terms of the Series 2 preferred stock are as follows.

Dividends. Series 2 preferred stock issued and outstanding shall be entitled to receive a cash dividend in the amount of 6.5% of the Issue Price per annum. The Series 2 preferred stock dividends shall 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 will be payable out of net profits; if net profits are not sufficient to pay this dividend, either in whole or in part, then any unpaid portion of the dividend will be paid in full out of net profits of the Corporation in subsequent quarters before any dividends are paid upon shares of Junior Stock. Thus far, no dividends have been declared. As of January 1, 2005 there were dividends of approximately $227,000 in arrears.

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 shall 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 shall 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. The terms of the Series 3 preferred stock are as follows.

Dividends. Series 3 preferred stock issued and outstanding shall be entitled to receive a cash dividend in the amount of 6.5% of the Issue Price per annum. The Series 3 preferred stock dividends are cumulative and shall 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 will be payable out of net profits; if net profits are not sufficient to pay this dividend, either in whole or in part, then any unpaid portion of the dividend will be paid in full out of net profits of the Corporation in subsequent quarters before any dividends are paid upon shares of Junior Stock. If this preferred stock is converted into the Company’s common stock, and there exist undeclared dividends on the conversion date, the dividends will remain an obligation of the Company, and will be paid when declared and when there are legally available funds to make that payment. Thus far, no dividends have been declared. As of January 1, 2005 there were $74,614 of undeclared dividends in arrears.

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 3 preferred stock shall 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 shall be made in respect of Junior Stock, an amount equal to the Issue Price and all accrued but unpaid dividends.

F-22

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 converted 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 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 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 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 is being amortized over the conversion period of one year. At January 1, 2005, there remains $255,471 of unamortized beneficial conversion feature associated with the Series 3 preferred stock.

Voting Rights. Each holder of Series 3 preferred stock shall have 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 11) from investors, some of which include certain related parties. The terms of the Series 4 preferred stock are as follows.

Dividends. Series 4 preferred stock issued and outstanding shall be entitled to receive a cash dividend in the amount of 6.5% of the Issue Price per annum. The Series 4 preferred stock dividends are cumulative shall 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 will be payable out of net profits; if net profits are not sufficient to pay this dividend, either in whole or in part, then any unpaid portion of the dividend will be paid in full out of net profits of the Corporation in subsequent quarters before any dividends are paid upon shares of Junior Stock. If this preferred stock is converted into the Company’s common stock, and there exist undeclared dividends on the conversion date, the dividends will remain an obligation of the Company, and will be paid when declared and when there are legally available funds to make that payment. Thus far, no dividends have been declared. As of January 1, 2005 there were $83,521 of undeclared dividends in arrears.

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 4 preferred stock shall 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 shall 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 converted 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 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 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 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 is being amortized over the conversion period of one year. At January 1, 2005, there remains $155,589 of unamortized beneficial conversion feature associated with the Series 4 preferred stock.

F-23

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

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 (Note 12). During April and May 2003 the Company issued 1,113,078 shares of restricted common stock in conjunction with a private placement at $.26 per share (Note 11). Net proceeds received amounted to $269,549. On September 16, 2003, the Company acquired Christenson Technology Services, Inc. (CTS) in exchange for 4,193,142 shares of the Company’s common stock, valued at $1,090,217 (Note 7).

On September 16, 2003, the Company acquired Velagio, Inc. (Velagio) in exchange for 4,193,143 shares of the Company’s common stock, valued at $1,202,872 (Note 7). On July 28, 2004, The Company issued an aggregate of 1,600,000 shares of common stock to a consultant in exchange for $560,000 of services rendered, which approximated the fair value of the shares issued during the period services were completed and rendered. Compensation costs of $560,000 were charged to operations during the year ended January 1, 2005. In October 2004, one of the Series 2 preferred stockholders converted 119,048 shares of Series 2 preferred stock into 119,048 shares of common stock.

11. Private Placements

During April and May 2003 the Company issued 1,113,078 shares of restricted common stock in conjunction with a private placement at $.26 per share. The private placement included an issuance of 111,308 warrants for the purchase of common stock which are exercisable at a purchase price of $.40 per share with a 3-year term. Of the total capital raised, $50,000 was converted from a $40,000 note payable and a $10,000 miscellaneous payable, both owed to Steven M. Wright, a Director of the Company and a member of senior management. These payables arose from cash that had been previously advanced by him to the Company. The shares issued in the private placement were issued at a discount, were not registered and are restricted from sale for at least one year pursuant to federal securities laws. R. Patrick Hanlin, Chairman of the Board and Steven M. Wright, President & CEO at that time, both purchased additional shares in the private placement.

Prior to the Company’s acquisitions of CTS and Velagio on September 16, 2003, the Company entered into subscription agreements to issue 3,607,151 shares of restricted, Series 2 preferred stock at $0.42 per share (Note10). The subscription agreements were contingent upon the closing of the Company’s acquisitions of CTS and Velagio. The funding of the subscriptions occurred on or near October 3, 2003. In total, the Company received net proceeds from the private placement of approximately $715,000 in cash and $765,000 in debt conversion. Issuance costs relative to the private placement were approximately $35,000. These shares of stock are not registered under the Securities Act of 1933 and must be held for the time required by Rule 144 promulgated under the Securities Act. The private placement included an issuance of 333,335 warrants for the purchase of common stock, which are exercisable at a purchase price of $.42 per share with a 5-year term. Each investor was awarded one warrant for every $3 invested in the private placement. The proceeds from the offering were allocated between the Series 2 preferred stock and the warrants issued in the transaction. The Black Scholes valuation method was used to determine the value of the warrants (Note 13). The Company used the following assumptions in calculating the value of these warrants at issuance: Risk free rate – 1.94%; Volatility index – 118%; Stock price on September 30, 2003: $0.30 per share.

In April 2004, 4,605.265 shares of Series 4 preferred stock were issued at $380 per share in conjunction with a $1,750,000 private placement. Each of these shares of preferred stock is convertible into 1,000 shares of the Company’s common stock (Note 10).

12. Repurchase of Common Stock

F-24

$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 will 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 carries an interest rate of 12%, payable quarterly, starting on June 1, 2003 until the principal amount of the Note is paid in full.

If the Note and accrued interest are paid according to the terms of the Note, on the third anniversary date of the Note the parties shall calculate a new purchase price based on the average market closing price of the Company’s common stock for the 180 days prior to the third anniversary date. If the average market closing price per common share over this 180 day period is less than $0.22 per common share, then the purchase price payable under the Agreement will remain at $209,318 or $0.22 per common share. If the average market closing price per share over this 180 day period is greater than $0.22 per common share, then the purchase price payable under the Agreement will be increased by an amount equal to the excess of this 180 day average market closing price per common share over $0.22 per common share, times 951,445 shares. However, under this purchase price adjustment, the maximum purchase price paid will not exceed 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 are reflected in the other expense section of the Statement of Operations. From the date of inception of this note to the end of the fiscal year, January 1, 2005 this liability increased by $27,553, and the value of this liability as of January 1, 2005 was $41,863, and is reflected as a long term liability on the Consolidated Balance Sheet.

For purposes of all purchase price adjustments under the Agreement, the number of common shares and per share amounts are subject to adjustments to give effect to stock splits, dividends, reorganizations, recapitalizations and other similar transactions occurring after the date of the Agreement.

As of January 1, 2005, the Company had not made its required September 2004 and December 2004 quarterly interest payments of approximately $4,200 each quarter. As of January 1, 2005 interest payable on this note totaled approximately $9,800. As of the date of this report, the Company had not made its required February 28, 2005 annual principal payment of $69,773 and quarterly interest payments. Total interest due and payable on this note as of April 1, 2005, is approximately $13,955. The Company is accordingly in default under the terms of the note agreement.

13. Stock Options and Warrants

Stock Incentive Plan

The Company has a Stock Incentive Plan (the “Plan”). At January 1, 2005 and January 3, 2004, 2,163,049 and 688,936 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 Exercisable
			Weighted Average		Weighted				Weighted
Exercise	Number		Remaining Contractual		Average		Number		Average
Prices	Outstanding		Life (Years)		Exercise Price		Exercisable		Exercise Price
$0.04 - $0.05		16,000		1.9		$ 0.04		16,000		$ 0.04
$0.31 - $0.60		2,120,661		4.9		$ 0.44		809,322		$ 0.47
$1.76 - $2.70		26,388		6.1		$ 2.27		25,457		$ 2.28

		2,163,049		4.9		$ 0.46		850,779		$ 0.52

F-25

A summary of the status of the Company’s Stock Incentive Plan as of January 1, 2005 and January 3, 2004 and for the years then ended is presented below:


	January 1, 2005					January 3, 2004
				Weighted					Weighted
				average					average
				exercise					exercise
	Shares			price		Shares			price
Outstanding at beginning of year		688,936		$	.84		261,188		$	.39
Granted at market price		1,869,188			.43		95,000			.42
Granted at greater than market price		—			—		473,907			1.05
Exercised		—			—		—
Cancelled		(395,075	)		.96		(141,159	)


Outstanding at end of year		2,163,049		$	.46		688,936		$	.84

Options exercisable at year end		850,779		$	.52		474,719		$	1.02

The Company granted 1,869,188 and 95,000 options to purchase shares of the Company’s common stock to employees and directors of the Company, during the years ended January 1, 2005 and January 3, 2004, 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. These totals do not include options granted to Velagio employees and other parties in connection with the acquisition of Velagio in the year ended January 3, 2004 .

On September 16, 2003, in conjunction with the acquisition of Velagio, the Company granted 473,907 options to prior holders of options in the Velagio, Inc. Incentive Stock Option Plan. The number of options granted was calculated based on a conversion rate that gave the holders of 10,000 options to purchase Velagio common stock, options to purchase 851 shares of Microfield Group, Inc. common stock. These options were granted with credit for 25%, 50%, 75% or 100% vesting based on the grant date of their original Velagio options. These options have a ten-year expiration starting on the date of their original Velagio option grant, and vest at 25% per year.

The weighted average per share value of options granted during the years ended January 1, 2005 and January 3, 2004 was $0.43 and $0.94, respectively.

The Company has computed for pro forma disclosure purposes the value of all options granted during fiscal years 2004 and 2003 using the Black-Scholes pricing model as prescribed by SFAS No. 123 (see note 3). The following ranges of assumptions were used to calculate the values of options granted during 2004 and 2003:


	For the year ended
	January 1,		January 3,
	2005		2004
Risk-free interest rate		3.10% - 3.97%		2.12%
Expected dividend yield		—		—
Expected lives	5-10 years		5-10 years
Expected volatility		151% - 155%		123%

Common Stock Warrants

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September 15, 2003, the Company extended the life of these warrants until June 30, 2007 as partial consideration to satisfy a $150,000 promissory note between CTS and JMW Capital Partners, Inc. (now known as Aequitas Capital Management). In accordance with FIN 44, the fair value of the warrants on the date of the settlement of the $150,000 promissory note between CTS and JMW Capital Partners, Inc. was determined to be $468,000. The difference of $111,000 between the initial fair value and the fair value at the date of the extension was recorded as equity and a loss on debt extinguishment.

In connection with an April 2003 common stock private placement, the Company 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 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 (Note 10). 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 connection with the January 22, 2004 debt issuance by Destination Capital, LLC (see Notes 14 and 18), 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 connection with the August 24, 2004 debt issuance by Destination Capital, LLC (see Notes 14 and 18), 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

F-27

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.

For the months from September 1, to January 1, 2005, according to the terms of the warrant provision of the August 24, 2004 debt agreement, the Company is obligated to issue 693,750 additional warrants. The value of these warrants of $283,988 was added to shareholders’ equity on the consolidated balance sheet, with a corresponding expense charged to interest expense in the consolidated statement of operations.

On September 10, 2004, the Company entered into a Master Vehicle Lease Termination Agreement with CLLLC (see Note 18), 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. Each warrant is exercisable into one share of common stock at $0.38 per share and will expire in 2009. These warrants 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.

14. Debt

Operating Line of Credit

As of January 1, 2005, the Company has a $5,000,000 credit facility, which expires in January 2006. Borrowings under the line of credit are due on demand, bear interest payable weekly at prime plus 6 1/2% and are collateralized by accounts receivable. The borrowing base is limited by certain factors such as length of collection cycle, subordination of collateral position on bonded work and other credit related factors. Subject to these limitations, the Company had $607,025 available borrowing capacity at January 1, 2005. As of January 1, 2005, borrowings of $4,392,975 were outstanding under the facility. The Company was in compliance with the terms of the borrowing facility at January 1, 2005.

Long Term Debt

The Company had several notes payable outstanding at January 1, 2005. The total amount of the notes and their terms are summarized below.


	January 1,		January 3,
	2005		2004
Steven M. Wright unsecured promissory note, interest at 10%, due September 1, 2003. This note and accrued interest of $4,480 was converted to 117.81 shares of Series 3 preferred stock on April 2, 2004. (See Note 10)	$	—	$	45,000

R. Patrick Hanlin, unsecured advance paid to a creditor of the Company on November 5, 2003. No terms were negotiated. This debt was converted to 38.095 shares of Series 3 preferred stock on April 2, 2004. (See Note 10)		—		16,000

F-28


	January 1,			January 3,
	2005			2004
Christenson Leasing Company, LLC (CLLLC) subordinated promissory note, six monthly interest only payments beginning November 15, 2003, payments of $18,355 including interest at 12% beginning June 15, 2004, amortized over five years, due and payable in full on October 15, 2005. This debt and accrued interest of $52,350 was converted to 2,088.924 shares of Series 3 preferred stock on April 2, 2004. (See Note 10)		—			825,000

Various subordinated notes payable to Robert Jesenik dba Jesenik Enterprises ($23,217), Christenson Leasing Company, LLC ($23,217), JW Assurance and Holding Limited ($33,168), interest only payments due January 17, 2004, sixteen quarterly payments totaling $6,337 beginning April 15, 2004 including interest at 12% until paid in full. This debt and accrued interest of $11,358 was converted to 216.571 shares of Series 3 preferred stock on April 2, 2004. (See Note 10)		—			79,602

Steelcase, Inc. promissory note, quarterly interest only payments at 12% per annum beginning June 1, 2003. Annual principal payments of $69,773, second payment due and payable February 28, 2005, collateralized by 951,445 shares of the Company’s common stock (reduced by derivative allocation of $5,562). (See Note 12) The Company is in default under the terms of the note agreement.		133,984			198,984

Various subordinated notes payable to Robert Jesenik dba Jesenik Enterprises, Christenson Leasing Company LLC, JW Assurance and Holding Limited, JMW Capital Partners, Inc. (now known as Aequitas Capital Management),, interest only payment due January 17, 2004, sixteen quarterly payments of $4,036 beginning April 15, 2004 including interest at 12% until paid in full. This debt and accrued interest of $7,105 was converted to 137.630 shares of Series 3 preferred stock on April 2, 2004. (See Note 10)		—			50,700

Christenson Leasing Company, LLC capital equipment lease, thirty six monthly payments of approximately $70,000 including interest at 25.04% beginning September 1, 2003, amortized over three years, due and payable in full on August 1, 2006. This lease obligation was terminated on September 10, 2004. (See Note 18)		—			1,925,845

Oregon-SW Washington Electrical Trust Funds (comprised of several union benefits funds and pension trusts) promissory note in the amount of $952,907 payable monthly in payment amounts ranging from $25,000 per month to $75,000 per month including interest at 7% per annum, due and payable in full by September 1, 2006.		952,907			—

Destination Capital, LLC business loan agreement, net of debt discount of $16,054, nine monthly payments of interest only, starting September 24, 2004, with fifteen monthly payments of principal and interest of $83,333, thereafter. Interest accrued at prime plus 10%. (See Note 18)		1,186,135			—



Total debt		2,273,026			3,141,131
Less current portion		(1,159,469	)		(967,997	)


Long term debt	$	1,113,557		$	2,173,134

Aggregate maturities of long-term debt as of January 1, 2005 are as follows:

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Fiscal Year	Amount
2005		1,159,469
2006		1,113,557
2007		—
2008		—
2009 and after		—

	$	2,273,026

15. Segment Information

During the fiscal years ended January 1, 2005 and January 3, 2004, the Company’s operations comprised of electrical construction services and information technology in the areas of voice, data, video, and life safety.

The Company is managed as one specific line of business including electrical construction services. The Company’s management makes financial decisions and allocates resources based on the information it receives from its internal management system. The Company’s management relies on the internal management system to provide sales, cost and asset information for the business as a whole.

All of the Company’s assets as of January 1, 2005 and January 3, 2004, were attributable to U.S. operations. For both years, no single customer accounted for 10% or more of the Company’s net sales.

16. Income Taxes

The provision for income taxes for the years ended January 1, 2005 and January 3, 2004 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 January 1, 2005 and January 3, 2004, 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 2004 and 2003 would have been approximately $2,138,842 and $2,192,457, respectively. However, because of recognition of a full valuation allowance the effective tax rate for the Company was zero in both 2004 and 2003.

Deferred tax assets are comprised of the following components:


	January 1, 2005			January 3, 2004
Current:
Allowance for doubtful accounts	$	40,028		$	45,295
Employee benefits		65,396			57,826
Start-up costs		31,486			31,486
Inventory allowance		55,063			60,696
Other allowances		41,840			9,299

		233,813			204,602

Non-current:
Net operating loss carryforwards		10,066,451			7,916,244
Start-up costs		31,486			62,972
Research and development credits		143,245			145,045

		10,241,182			8,124,261


Total deferred tax asset		10,474,995			8,328,863

Deferred tax asset valuation allowance		(10,474,995	)		(8,328,863	)


Net deferred tax assets	$	—		$	—

F-30

At January 1, 2005, the Company had available net operating loss carryforwards of approximately $26,000,000 for federal income tax purposes. Such carryforwards may be used to reduce consolidated taxable income, if any, in future years through their expiration in 2005 to 2024 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 acquisition of CTS, Velagio and IST. In addition, the Company has research and development credits aggregating $143,245 for income tax purposes at January 1, 2005. Such credits may be used to reduce taxes payable, if any, in future years through their expiration in 2005 to 2013.

17. 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 all periods presented, the computation of net loss per share excludes the effect of stock options and warrants as they were antidilutive. There were 2,163,049 options and 5,645,439 warrants outstanding at January 1, 2005, and 688,936 options and 2,510,643 warrants outstanding at January 3, 2004.

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


	Year ended			Year ended
	January 1, 2005			January 3, 2004
Net loss available for common shareholders	$	(7,352,324	)	$	(6,046,232	)

Basic and fully diluted loss per share	$	(0.36	)	$	(0.59	)

Continuing operations	$	(0.37	)	$	(0.31	)

Discontinued operations	$	0.01		$	(0.28	)

Weighted average common shares outstanding		17,340,152			10,308,815

18. Related Party Transactions

The Company has a number of promissory notes, lines of credit and lease obligations owing to related parties. The following table lists the notes and obligations outstanding at January 1, 2005 by related party.


			Amount of	Monthly
Related Party	Type of Obligation	Maturity Date	Obligation	Payment

Destination Capital, LLC^(a)	Loan agreement	July 24, 2006	$ 1,200,000	$ ^(d)14,550
CEAC^(a)	Bond guarantee fees^(c)	open	—	^{(c) (b)}2,400
CEI^(a)	Equipment lease	December 1, 2007	—	40,000
Destination Microfield, LLC^(e)	Vehicle operating lease	August 1, 2006	—	^(f)29,000
CEI^(a)	Real property leases	October 31, 2008	—	48,842
John B. Conroy	Note receivable	September 16, 2005	66,250	—


^(a)		Robert J. Jesenik, a director and significant shareholder of the Company, also owns a significant interest in these entities. Mr. Jesenik is also President of each of the entities designated by this footnote.

^(b)		This lease payment and bond guarantee fee are approximations, and may fluctuate based on several factors including the dollar value of jobs under bond at any particular time.

^(c)		A. Mark Walter, an officer, participates in the guarantee of these bonds, and is paid a portion of this fee.

^(d)		This payment represents an interest only monthly payment amount in effect at January 1, 2005. This payment changes to $83,333 on June 24, 2005 and is for payment of principal and interest.

^(e)		William C. McCormick, a director and former interim CEO, holds a minority ownership interest in this entity.

^(f)		These payments vary over the term of the loan. These amounts represent the monthly payment in effect on January 1, 2005.

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Terms and conditions of each of the notes and agreements are listed below.

Notes payable to Destination Capital, LLC

On January 22, 2004, the Company entered into a Contract of Sale and Security Agreement with Destination Capital LLC (Destination) under which the Company agreed to sell up to 15% of its acceptable, eligible accounts receivable to Destination, in exchange for borrowing up to $600,000 from that entity under the terms of a Promissory Note. Destination is an entity in which Robert J. Jesenik, a shareholder and director of the Company, holds a significant interest. Under the terms of the agreement between the Company and Destination, the Company paid interest at the rate of 18% per annum on the amount of the note outstanding, and also issued warrants in the amount of 1% of the fully diluted common shares, per month, for each calendar month in which the Note was outstanding. The warrants have a five-year life and will be issued at the lower of $0.42 or the price of any other common or preferred equity issued in the six months following the date of the agreement. During the 6 month agreement period, the Company issued incentive stock options at $0.31 per share, therefore the price per share used for these warrants was reduced to $0.31. The Company initially was obligated to issue warrants to purchase 350,387 common shares at the time this note was issued. The fair value of these warrants was determined to be $155,221 using the Black Scholes pricing model. The assumptions used included a risk free rate of 3.1%, volatility of 152%, fair market value of the Company’s stock of $.48 per share and a remaining life of 5 years. The calculated fair value amount was recorded as a debt discount and is being amortized over the six-month term of the debt. This debt was outstanding on February 1, 2004, March 1, 2004 and April 1, 2004 and in accordance with the terms of the note agreement, the Company is further obligated to issue additional warrants to purchase 1,053,159 shares of the Company’s common stock. These warrants were valued using the Black Scholes pricing model. The assumptions used included risk free rates ranging from of 3.1% to 3.3%, volatility of 152%, remaining lives of 5 years for each warrant issuance, and fair market values of the Company’s stock on those three dates of $0.46, $0.60 and $0.62 per share, respectively. The fair value of these warrants in the amount of $780,372 has been recorded as interest expense in the consolidated statement of operations for the year ended January 1, 2005. At the date of each of those warrant issuances, the Company did not have sufficient authorized common shares to effect the exercise of these warrants, accordingly, the fair value of all of these warrants was classified as liability for warrant settlement on the consolidated balance sheet. On September 1, 2004, the Company’s shareholders voted to increase the Company’s authorized common shares from 25,000,000 to 125,000,000. The fair market values of these warrants were re-measured on that date and reclassified as common stock warrants in the shareholders’ equity section on the balance sheet, with the increase or decrease in their values recorded as an increase or reduction of interest expense in the consolidated statement of operations (Note 13). The Note was repaid in full during April 2004.

On August 24, 2004 the Company entered into a Business Loan Agreement with Destination under which the Company can borrow up to $2,000,000 based on Destination’s discretion and funds availability (Note 14). Under the terms of the agreement, the Company pays interest at prime plus 10% (prime plus 12% in the event of a default), with nine monthly interest only payments starting September 24, 2004, and 15 monthly principal payments of $83,333 and accrued interest until maturity. At loan maturity on August 24, 2006, any remaining principal and accrued interest owed is then due and payable. This loan is immediately due if there occurs a default, there is a sale or disposal of all or substantially all of the assets or stock of the Company, or if there is a transfer of ownership or beneficial interest, by merger or otherwise, of the stock of the Company or its subsidiary. Additionally, the Company will issue to Destination the number of warrants equal to 12.5% of the value of the loan balance, on the first day of each month the loan is outstanding. If the loan is initially drawn up to $1,250,000, and paid according to the terms of the agreement, this will result in the issuance of approximately 2.5 million warrants to Destination. These warrants have a five year life and will be issued at the lower of $0.38 or the price applicable to any shares, warrants or options (excluding options granted to employees or directors) issued by the Company while the loan is outstanding (Note 13). Beginning August 1, 2004, the Company was obligated to issue the following warrant amounts based on the outstanding loan balances on the first day of each month.


			Warrants to be
Date	Loan Balance		Issued

August 1, 2004	$	300,000		37,500
September 1, 2004	$	750,000		93,750
October 1, 2004	$	1,200,000		150,000
November 1, 2004	$	1,200,000		150,000
December 1, 2004	$	1,200,000		150,000
January 1, 2005	$	1,200,000		150,000


Total warrants to be issued as of January 1, 2005				731,250

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The Company initially was obligated to issue warrants to purchase 37,500 common shares at the time this note was issued. The fair value of these warrants was determined to be $17,513 using the Black Scholes pricing model. The assumptions used included a risk free rate of 3.8%, volatility of 155%, fair market value of the Company’s stock of $.50 per share and a remaining life of 5 years. The calculated fair value amount was recorded as a debt discount and is being amortized over the twenty-four month term of the debt. The warrants issued on September 1, 2004 through January 1, 2005 were also valued using the Black Scholes pricing model. The assumptions used include risk free rates ranging from 3.39% to 3.71%, volatility of approximately 155%, remaining lives of 5 years for each warrant issuance, and fair market values of the Company’s stock ranging from $0.35, to $0.59 per share. At the time these warrant obligations arose, the Company had sufficient authorized common shares to effect the exercise of these warrants. Accordingly, the fair values of the warrants issued from September 1, 2004 through January 1, 2005 of $283,988, were classified as common stock warrants in the shareholders’ equity (deficit) section on the consolidated balance sheet, and expensed as interest expense in the consolidated statement of operations, as they were issued.

Note payable to Steven M. Wright

On June 10, 2003, Steven M. Wright, the Company’s Chief Executive Officer at that time, advanced the Company $50,000 under a line of credit promissory note (Note 14) for working capital purposes. The note carried an interest rate of 10% and was due and payable on September 1, 2003. As of January 3, 2004, $5,000 of this note had been repaid with the remaining balance still outstanding. The remaining note balance and accrued interest of $4,480 was converted to 117.81 shares of Series 3 preferred stock on April 2, 2004 (Note 10).

Notes payable to entities controlled by Robert J. Jesenik

On September 16, 2003, as part of the purchase price for the acquisition of CTS, the Company assumed various long-term notes payable to several entities in which Robert J. Jesenik, a Director of the Company and significant shareholder, has significant ownership interests. A portion of these debts were converted to equity as a part of the Company’s Series 2 preferred stock private placement in 2003. The remaining amounts due plus accrued interest were converted to equity on April 2, 2004 as listed below.

On September 15, 2003, the Company, CTS and JMW Capital Partners, Inc. (JMW) entered into an Agreement to Satisfy Obligations. JMW is an investment banking company in which Robert J. Jesenik, a Director and significant Shareholder, owns a significant ownership interest. Under this agreement CTS acknowledged debt in the amount of $149,000 owed to JMW. This debt arose within CTS prior to the acquisition by the Company and was used for operating activities. After consummation of the acquisition of CTS by the Company and upon issuance of preferred shares in conjunction with the Series 2 preferred stock private placement, the Company converted the note payable to JMW into 357,143 shares of the Company’s Series 2 preferred stock.

On September 15, 2003, the Company, CTS and Christenson Electric, Inc. (CEI) entered into an Agreement to Consolidate, Amend and Satisfy Obligations. CEI is an electrical services company in which Robert J. Jesenik, a Director and significant Shareholder, owns a substantial ownership interest. Under this agreement CTS acknowledged debts of $1.5 million and $265,000 owed to CEI. These debts arose within CTS prior to the acquisition by the Company, and relate to the purchase of Christenson Electrical Services’ inventory and customer lists by CTS. This was a transaction between entities under common control. After consummation of the acquisition of CTS by the Company and upon issuance of preferred shares in conjunction with the Series 2 preferred stock private placement, the Company converted $365,000 of the two notes payable to CEI into 869,048 shares of Series 2 preferred stock.

On September 15, 2003, CTS executed a new Subordinated Amended and Restated Promissory Note for the remaining $1,400,000 due to CEI. On November 17, 2003 the Company converted the note payable to 3,333,333 shares of Series 2 preferred stock. There was no interest accrued or paid on this note, according to its terms.

On September 15, 2003, CTS executed an Amended and Restated Promissory Note in the amount of $825,000 due to Christenson Leasing Company, LLC (CLC). CLC is an equipment leasing company in which Robert J. Jesenik, a Director and significant shareholder, holds a substantial ownership interest. This debt arose within CTS prior to the acquisition by the Company. Under this note, six interest only payments were due monthly beginning on November 15, 2003. Thereafter, payments of $18,355 were to be due monthly beginning on June 15, 2004, with a balloon

F-33

payment of $666,889 due and payable on October 15, 2005. Interest on this note accrued at 12% per annum beginning on September 15, 2003. This note and accrued interest was converted to 2,088.924 shares of Series 3 preferred on April 2, 2004 (Note 14).

On January 17, 2003, CTS executed separate promissory notes with JMW, CLC, Robert Jesenik dba Jesenik Enterprises and JW Assurance and Holding Limited for the purchase of the undivided interests in certain assets previously leased by CTS. Robert J. Jesenik, a Director and significant shareholder, owns a substantial ownership interest in all of the above named entities. An interest only payment was due on January 17, 2004. Thereafter, payments totaling $6,337 were due quarterly beginning on April 17, 2004. Interest on these notes accrues at 12% per annum beginning on January 17, 2003. As of January 3, 2004, $79,602 was outstanding under these notes. These notes were converted to 216.571 shares of Series 3 preferred stock on April 2, 2004 (Note 14).

On January 17, 2003, CTS executed separate promissory notes with JMW, CLC, Robert Jesenik dba Jesenik Enterprises and JW Assurance and Holding Limited in payment of certain past due rent amounts due from CTS under an asset lease. Robert J. Jesenik, a Director and significant shareholder, owns a substantial ownership interest in all of the above named entities. An interest only payment was due on January 17, 2004. Thereafter, payments totaling $4,036 were due quarterly beginning on April 17, 2004. Interest on these notes accrued at 12% per annum beginning on January 17, 2003. As of January 3, 2004, $50,700 was outstanding under these notes. These notes and accrued interest were converted to 216.571 shares of Series 3 preferred stock on April 2, 2004 (Note 14).

On April 2, 2004, approximately $118,000 of interest, payable to entities in which Mr. Jesenik has a significant interest under the notes and agreements listed above, was converted to 280.952 shares of Series 3 preferred stock (Note 10). As of January 1, 2005 no interest is payable to entities in which Mr. Jesenik has a significant interest.

Bond Guarantee Fees

A certain number of CTS construction projects require the Company to maintain a surety bond. The bond surety company requires an additional guarantee for issuance of the bond. The Company has separate agreements with CEAC, Inc. (CEAC) and A. Mark Walter individually, President of CVI, under which at quarter end paid CEAC and Mr. Walter each approximately $1,200 per month for their guarantee of this bond liability. CEAC holds a substantial ownership interest in CEI. Robert J. Jesenik, a Director and significant Shareholder, owns a substantial ownership interest in CEAC. The guarantee fee is computed as 15% (annualized) of the open liability under bonds issued for CTS and indemnified by certain shareholders of CEAC.

Equipment Lease Agreement

On September 1, 2003, CTS entered into an agreement with CEI for use of certain equipment leased by CEI from an outside party. Robert J. Jesenik, a Director and significant Shareholder, owns a substantial ownership interest in CEI. The equipment consists of various construction vehicles, trailers, miscellaneous construction equipment, office furniture, computer hardware and software. Under the terms of the lease CTS pays CEI $40,000 monthly beginning on September 1, 2003, with the final payment due on December 1, 2007. The lease is accounted for as an operating lease and contains a 10% purchase option at the end of the lease term, December 31, 2007. At January 3, 2004, the Company was past due on payments totaling $125,000. The Company reached agreement on a payment plan to the lessor, under which $10,000 of the monthly lease obligation was paid to the lessor in an equivalent amount of the Company’s Series 3 preferred stock (Note 10). This arrangement tendering a portion of the payment with preferred stock in lieu of cash, is for the thirteen monthly payments beginning with the December 2003 lease payment, through the payment due in December 2004. Beginning with the payment due in January 2005, the total monthly amount due is scheduled to be paid entirely in cash. At January 1, 2005, the Company was past due on payments totaling approximately $25,000.

Master Vehicle Lease Agreement

On September 1, 2003 CTS entered into a master vehicle lease agreement with Christenson Leasing Company LLC (“CLLLC”), for use of certain vehicles used in its construction business. CLLLC is an equipment leasing company in which Robert J. Jesenik, a Director and significant Shareholder, holds a substantial ownership interest. Under the terms of the lease, CTS paid CLLLC $84,777 monthly beginning on September 1, 2003, with the final payment due August 1, 2006. The lease contained a renewal provision under which it had the option, at the end of the lease term, to purchase or return the vehicles, or to renew the lease for an additional 12 months. The lease payment was to remain fixed unless the 30-day Commercial Paper Rate as published in the Wall Street Journal exceeds 2.00%. If

F-34

that occurs, the lessor has the option to increase the lease payment. This lease was accounted for as a capital lease. On September 1, 2003 prior to the acquisition of CTS, $1,993,233 was recorded as cost of the vehicles leased with the same amount recorded as debt owed under the lease as of that date (Notes 5 and 14). At January 3, 2004, the Company was past due on payments totaling $271,720. On January 3, 2004, the Company amended the agreement with the lessor under which the monthly payments were reduced to approximately $70,000 per month, with $15,250 of the monthly lease obligation being paid to the lessor in an equivalent amount of the Company’s Series 3 preferred stock (Note 10). The Series 3 preferred stock tendered in conjunction with this payment reduction, was all issued on April 2, 2004. This reduction resulted in a decrease in interest rate on this lease from 32.22% to 25.04% per annum. This arrangement tendering a portion of the payment with preferred stock in lieu of cash is for the twelve monthly payments in 2004.

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, a risk free rate of 3.5%, volatility of 154%, fair market value of the stock of $0.55, and a five year life. 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 (Note 13).

The Company entered into a new Master Vehicle Lease Agreement, effective September 9, 2004, with Destination Microfield, LLC. Destination Microfield, LLC is partially owned by William C. McCormick, interim CEO for the Company. In accordance with the terms of the agreement, the Company will make twelve monthly payments of $29,000 starting October 5, 2004, twelve monthly payments of $35,000, starting October 5, 2005, and three monthly payments of $45,000 ending on December 9, 2006. This lease is accounted for as an operating lease with equal monthly amounts charged to expense in the consolidated statement of operations over the life of the lease.

Real Property Leases

On September 1, 2003, CTS entered into seven real property subleases with CEI for use of buildings, offices and storage yards to house the operations and property of CTS. Robert J. Jesenik, a Director and significant Shareholder, owns a substantial ownership interest in CEI. CTS has operating activities in Portland and Eugene, Oregon. The monthly sublease payments totaled $58,625 through November 30, 2004. On November 30, 2004, the Company terminated its lease with CEI for space in the Thurman Building and entered into a lease directly with the building owner for a smaller space in the building. As of January 1, 2005 the Company’s total real property lease payments totaled $48,842, of which $675 was on a month-to-month basis. The remaining $48,167 is due on leases with maturity dates between September 2005 and October 2008. The rent per month on the Thurman Building is $31,025. The annual rent obligations from January 1, 2005, for each property are listed in the table below.


Location	Maturity		2005		2006		2007		2008		2009

Thurman Building		10/31/08	$	372,297	$	372,297	$	372,297	$	310,247		—
Swan Island		11/30/05		78,355		—		—		—		—
Eugene		09/30/05		76,077		—		—		—		—
Crown Plaza Office		7/31/07		18,795		18,795		12,530		—		—
Pope Storage		*		—		—		—		—		—
Montgomery Park Storage		*		—		—		—		—		—

Total			$	545,524	$	391,092	$	384,827	$	310,247		—


*		Month-to-Month

Administrative Services Agreement

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notice period before termination by either party. The monthly payment for these services was determined at the effective date of the agreement to be approximately $35,000, with a provision to be adjusted as needed based on the level of usage of these services by CEI. During the first quarter of 2004, the payment by CEI for these services was renegotiated to $15,000 per month as the cost of services to CEI has been reduced. This amount remained at $15,000 through July of 2004, at which time the Company discontinued billing CEI for these services. Charges from CVI to CEI for these services resumed in January 2005.

Note Receivable

In 1998, John B. Conroy, then the Company’s Chairman, CEO and President, entered into a transaction whereby he purchased 45,000 shares of the Company’s common stock at $1.75 per share. Mr. Conroy issued a promissory note to the Company for $78,750 in payment for the shares. On May 17, 2004 the Note was replaced with a new non-recourse note for $66,250 under which the original amount of the note was offset against a $12,500 amount owed by the Company to Mr. Conroy. The note also acknowledges the outstanding accrued interest due by Mr. Conroy in the amount of $21,937. Additionally, the interest rate of the new promissory note was established at 3.4% per annum, and the due date was extended to August 29, 2006. Mr. Conroy resigned as Chairman, CEO and President on September 16, 2002, and resigned as a director in October 2003. At January 1, 2005, accrued interest receivable under this note totaled $26,243. The Company has accounted for the $78,750 due from Mr. Conroy as a reduction in common stock equity in prior years. In May 2004, the Company accounted for the $12,500 amount due to Mr. Conroy and additional $637 of interest adjustment as an increase in common stock equity.

Unsecured Payable

On November 5, 2003, R. Patrick Hanlin, Chairman of the Company’s board of directors, advanced $16,000 to the Company in the form of a payment directly to one of the Company’s creditors. The advance was unsecured and did not carry an interest rate or have any stated due date. On April 2, 2004 this debt was converted to approximately 38 shares of the Company’s Series 3 preferred stock (Note 10). These shares of Series 3 preferred stock are convertible into 38,095 shares of the Company’s common stock at the option of the shareholder.

19. Commitments and Contingencies

Manufacturing and Purchase Commitments

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

Operating lease commitments

The Company is party to a number of operating lease agreements, many of which are included in Note 18 above. Following is a schedule of the Company’s annual operating lease commitments for the coming five years.


Year	Amount
2005	$	1,391,524
2006		1,321,092
2007		864,827
2008		310,247
2009 and beyond		—

Rental expenses charged to operations for the year ended January 1, 2005 and January 3, 2004 were $490,337 and $269,657, respectively.

Employment and Consulting Agreements

The Company has an employment agreement with the Company’s President. In addition to salary and benefit provisions, the agreement includes defined commitments should the employee terminate the employment with or without cause.

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20. Subsequent Events

Lawsuit settlement

In March, 2004, Kurt Underwood (former President/CEO of Microfield Group, Inc.) filed a lawsuit in Multnomah County Circuit Court, Portland, Oregon under case number 0403-02370 against Robert J. Jesenik, JMW Capital Partners, Inc., Destination Capital, LLC, Microfield Group, Inc., Christenson Electric, Inc., Steven M. Wright, Andrew S. Craig, Thomas A. Sidley, R. Patrick Hanlin, Michael Stansell, Brian A. Oliver, Brian N. Christopher, Kevin D. Robertson, Christenson Group, LLC, and Christenson Velagio, Inc. The lawsuit alleged that the Defendants violated Oregon securities law and Oregon common law in connection with the following transactions (which closed simultaneously in September 2003): (1) the merger of CTS Acquisition Co. (a wholly-owned subsidiary of the Company) with and into Christenson Technology Services, Inc.; and (2) the merger of VSI Acquisition Co. (A wholly-owned subsidiary of the Company) with and into Velagio, Inc. In addition, the lawsuit alleged that Mr. Underwood was terminated as an employee entitling him to severance pay. The lawsuit sought damages of approximately $1.4 million.

On May 27, 2004, the Company, certain executives, board members and related companies filed two separate answers, affirmative defenses, and counterclaims against Mr. Underwood in Multnomah County Circuit Court alleging violations of Oregon Securities law and Oregon common law in connection with the above named transactions. In addition, the countersuit alleged that Mr. Underwood was terminated by the Company for good cause. The lawsuit sought damages of not less than $2.5 million and return of the 3.4 million shares of Microfield stock held by Mr. Underwood in exchange for the return of the shares of Velagio stock held by the Company.

On May 11, 2005 the Company and Mr. Underwood entered into a Settlement Agreement under which both parties agreed to drop their respective lawsuits. The Settlement Agreement provides that the Company and certain defendants will jointly and severally purchase Mr. Underwood’s Microfield Stock for the aggregate purchase price of $362,500. The purchase price will be allocated as follows: $50,000 to the purchase of Mr. Underwood’s 119,050 Series 2 preferred shares and the balance to the purchase of Mr. Underwood’s 3,404,958 common shares. Additionally, the Settlement Agreement terminates Mr. Underwood’s Microfield Warrant. Payment under the Settlement Agreement must occur no later than August 1, 2005 at 1:00 p.m. Pacific standard time.

F-37

MICROFIELD GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


	October 1,			January 1,
	2005			2005
Current assets:
Cash and cash equivalents	$	1,415,975		$	10,992
Accounts receivable, net of allowances of $195,341 and $103,969		9,836,902			6,241,001
Accounts receivable — related parties		90,173			178,900
Inventory, net of allowances		244,070			239,328
Costs in excess of billings		3,709,784			822,656
Other current assets		888,055			450,602

Total current assets		16,184,959			7,943,479
Property and equipment, net		458,836			125,777
Intangible assets, net		2,218,306			1,393,281
Goodwill		8,410,574			2,276,243
Other assets		315,002			36,243

	$	27,587,677		$	11,775,023

Current liabilities:
Cash overdraft	$	1,296,295		$	26,125
Accounts payable		8,322,756			3,451,991
Accounts payable — related parties		70,266			99,932
Accrued payroll taxes and benefits		2,656,633			1,297,379
Bank line of credit (Note 5)		4,568,515			4,392,975
Current portion of notes payable (Note 5)		1,424,363			673,968
Current portion of notes payable — related parties (Note 5)		2,092,945			485,500
Billings in excess of costs		1,355,212			523,919
Other current liabilities		2,433,280			226,788

Total current liabilities		24,220,265			11,178,577

Long-term liabilities:
Long term notes payable (Note 5)		1,683,333			412,922
Long term notes payable — related parties (Note 5)		194,246			700,635
Derivative liability — notes (Note 5)		114,172			41,863

Total long-term liabilities		1,991,751			1,155,420

Commitments and contingencies		—			—
Shareholders’ equity (deficit): (Notes 2 & 3)
Convertible Series 2 preferred stock, no par value, 10,000,000 shares authorized, 6,642,865 and 6,821,436 shares issued and outstanding at October 1, 2005 and January 1, 2005, respectively		2,765,101			2,765,101
Convertible Series 3 preferred stock, no par value, 10,000,000 shares authorized, 3,603 and 3,641 shares issued and outstanding at October 1, 2005 and January 1, 2005, respectively		1,529,138			1,273,667
Convertible Series 4 preferred stock, no par value, 10,000,000 shares authorized, 4,392 and 4,605 shares issued and outstanding at October 1, 2005 and January 1, 2005, respectively		1,703,424			1,568,834
Common stock, no par value, 125,000,000 shares authorized, 21,177,468 and 18,491,618 shares issued and outstanding at October 1, 2005 and January 1, 2005, respectively		22,195,411			20,707,192
Common stock warrants		2,389,879			2,256,112
Accumulated deficit		(29,207,292	)		(29,129,880	)

Total shareholders’ equity (deficit)		1,375,661			(558,974	)

	$	27,587,677		$	11,775,023

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

F-38

MICROFIELD GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)


	Three months ended						Nine months ended
	October 1,			October 2,			October 1,			October 2,
	2005			2004			2005			2004
Sales	$	20,073,679		$	9,492,769		$	37,991,269		$	28,329,387
Cost of goods sold		16,941,159			7,804,233			31,038,688			23,233,916

Gross profit		3,132,520			1,688,536			6,952,581			5,095,471
Operating expenses
Sales, general and administrative		2,217,364			2,423,658			5,467,267			7,648,759


Income (loss) from operations		915,156			(735,122	)		1,485,314			(2,553,288	)

Other income (expense)
Interest expense		(354,347	)		(464,415	)		(1,128,619	)		(1,886,586	)
Gain on extinguishment of debt		—			—			10,543			—
Loss on lease termination		—			(515,000	)					(515,000	)
Derivative income (expense)		(43,817	)		(13,212	)		(75,888	)		161,050
Other income, net					2,000			(2,413	)		2,000


Income(loss) before provision for income taxes		516,992			(1,725,749	)		288,937			(4,791,824	)

Provision for income taxes		—			—			—			—


Income (loss) from continuing operations		516,992			(1,725,749	)		288,937			(4,791,824	)

Discontinued operations:
Income (loss) on discontinued operations		—			149,380			—			149,380
Gain on sale of discontinued operations		19,648			24,555			44,710			62,827


Net income (loss)	$	536,640		$	(1,551,814	)	$	333,647		$	(4,579,617	)


Deemed preferred stock dividend (See Note 8)		—			(390,125	)		(411,059	)		(770,186	)


Net income (loss) attributable to common shareholders	$	536,640		$	(1,941,939	)	$	(77,412	)	$	(5,349,803	)


Net income (loss) per common share
Basic	$	0.03		$	(0.11	)	$	(0.00	)	$	(0.32	)

Diluted	$	0.01		$	(0.11	)	$	(0.00	)	$	(0.32	)


Shares used in per share calculations
Basic		20,578,116			17,387,955			19,209,011			16,977,698

Diluted		43,127,020			17,387,955			19,209,011			16,977,698


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

F-39

MICROFIELD GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	October 1,			October 2,
	2005			2004
Cash Flows From Operating Activities:

Net cash provided by (used by) operating activities		2,004,448			(3,186,441	)
Net cash provided by (used by) investing activities		33,146			(118,166	)
Net cash provided by (used by) financing activities		(632,611	)		3,495,670



Net increase in cash and cash equivalents		1,404,983			191,063

Cash and cash equivalents, beginning of period		10,992			130,533
Cash and cash equivalents, end of period	$	1,415,975		$	321,596


Supplemental schedule of non-cash financing and investing activities:
Conversion of notes payable-related party to preferred stock	$	—		$	1,188,919
Conversion of note payable-related party to common stock	$	—		$	—
Series 3 preferred stock issued for future related party operating lease obligations	$	—		$	130,000
Conversion of account payable-related party to preferred stock	$	—		$	210,219
Conversion of account payable-related party to common stock	$	—		$	—
Beneficial conversion feature of Series 3 and Series 4 preferred stock	$	—		$	1,581,701
Valuation of warrants issued with related party debt	$	—		$	155,221
Reduction of note receivable secured by common stock	$	—		$	13,137
Conversion of derivative liabilities to shareholders’ equity	$	—		$	989,124
Amortization of beneficial conversion feature	$	411,059		$	770,186
Acquisition of CEI:
Assets purchased	$	4,610,103		$	—
Goodwill	$	5,933,888		$	—
Liabilities assumed	$	(8,915,472	)	$	—
Common stock issued	$	(1,280,000	)	$	—
Direct acquisition costs	$	(348,519	)	$	—
Cash paid for acquisition	$	—		$	—

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

F-40

MICROFIELD GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 1, 2005
(Unaudited)

1. Description of the Business

General

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results from operations for the three- and nine-month periods ended October 1, 2005, are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated January 1, 2005 financial statements and footnotes thereto included in the Company’s SEC Form 10-KSB.

Business and Basis of Presentation

Microfield Group, Inc. (the “Company” or “Microfield”) through its subsidiaries Christenson Velagio, Inc. (“CVI”) and Christenson Electric, Inc. (CEI) specializes in the installation of electrical products and services. The Company’s objective is to leverage its assets and value to successfully build a viable, profitable electrical services and technology infrastructure business.

The condensed consolidated financial statements include the accounts of Microfield and its wholly owned subsidiaries, CVI and CEI. (collectively the “Company”). All significant intercompany 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. Operations of the company’s CEI subsidiary began in 1945. The Company’s headquarters are located in Portland, Oregon.

Reclassification

Certain reclassifications have been made to conform to prior periods’ data to the current presentation. These reclassifications had no effect on reported losses.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. At October 1, 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. There were sales to one customer that were 17% of total sales during the three months ended October 1, 2005.

The Company currently relies on various sources for key components used in the installation and sales of its

F-41

products and services. None of the Company’s products or supplies used in the performance of its services is from a single source. The inability of any limited source suppliers to fulfill supply and production requirements, could materially impact future operating results.

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 31, 2005. The Company’s last fiscal year was the 53-week period ended January 1, 2005. The Company’s third fiscal quarters in fiscal 2005 and 2004 were the 13-week periods ended October 1, 2005 and October 2, 2004, respectively.

Stock Based Compensation

The Company accounts for its employee and director stock options in accordance with provisions of Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Pro forma disclosures as required under SFAS 123, “Accounting for Stock-Based Compensation” and as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” are presented below. Under this method, no stock based compensation expense has been recognized for stock options issued to employees because the exercise prices of options issued were equal to or greater than the fair value of the underlying shares at the date of grant .

Had compensation cost for the Company’s plan been determined based on the fair value at the grant dates consistent with the method of SFAS No. 123, the total value of options granted would have been $668,070 and $993,250 during the three and nine months ended October 1, 2005, and $151,695and $159,674 during the three and nine months ended October 2, 2004, respectively. Such amounts would be amortized over the vesting period of the options. The total compensation expense that would have been recognized if the Company had determined such costs based on the fair value method would have been $120,737 and $325,346 for the three and nine months ended October 1, 2005, and $(9,054) and $14,072 for the three and nine months ended October 2, 2004, respectively.

Accordingly, under SFAS No. 123, the Company’s net loss and loss per share for the three and nine months ended October 1, 2005 and October 2, 2004, would have been changed to the pro forma amounts indicated below:


	Three Months Ended						Nine Months Ended
	October 1,			October 2,			October 1,			October 2,
	2005			2004			2005			2004
Net income (loss) attributable to common shareholders, as reported	$	536,640		$	(1,941,939	)	$	(77,412	)	$	(5,349,803	)
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(120,737	)		9,054			(325,346	)		(14,072	)


Pro forma net income (loss)	$	415,903		$	(1,932,885	)	$	(402,758	)	$	(5,363,875	)


Net income (loss) per common share:
Basic, as reported	$	0.03			(0.11	)		(0.00	)		(0.32	)
Diluted, as reported	$	0.01			(0.11	)		(0.00	)		(0.32	)
Basic, pro forma	$	0.02			(0.11	)		(0.02	)		(0.32	)
Diluted, pro forma	$	0.01			(0.11	)		(0.02	)		(0.32	)

F-42

New Accounting Pronouncements

FIN 47. In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143,” which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. The Company is required to adopt the provisions of FIN 47 no later than the first quarter of fiscal 2006. The Company does not expect the adoption of this Interpretation to have a material impact on its consolidated financial position, results of operations or cash flows.

SFAS 154. In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The Company does not expect the adoption of this SFAS to have a material impact on its consolidated financial position, results of operations or cash flows.

2. Capital Stock

The Company has authorized 10,000,000 shares of Preferred stock, no par value. As of October 1, 2005 and January 1, 2005, the Company had 6,642,865 and 6,821,436 shares of Series 2 preferred stock issued and outstanding, respectively. As of October 1, 2005 and January 1, 2005, the Company had 3,603 and 3,641 shares of Series 3 preferred stock issued and outstanding, respectively. As of October 1, 2005 and January 1, 2005, the Company had 4,392 and 4,605 shares of Series 4 preferred stock issued and outstanding, respectively. The Company has authorized 125,000,000 shares of Common Stock, no par value. As of October 1, 2005 and January 1, 2005, the Company had 21,177,468 and 18,491,618 shares of common stock issued and outstanding, respectively. This number does not include 951,455 shares registered in Issuer’s name and pledged to secure a liability.

Series 2 Preferred Stock

The terms of the Series 2 preferred stock are as follows.

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Dividends. Series 2 preferred stock issued and outstanding shall be entitled to receive a cash dividend in the amount of 6.5% of the Issue Price per annum. The Series 2 preferred stock dividends shall 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 will be payable out of net profits; if net profits are not sufficient to pay this dividend, either in whole or in part, then any unpaid portion of the dividend will be paid in full out of net profits of the Corporation in subsequent quarters before any dividends are paid upon shares of Junior Stock. Thus far, no dividends have been declared. As of October 1, 2005 there were dividends of approximately $365,109 in arrears.

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

The terms of the Series 3 preferred stock are as follows.

Dividends. Series 3 preferred stock issued and outstanding shall be entitled to receive a cash dividend in the amount of 6.5% of the Issue Price per annum. The Series 3 preferred stock dividends are cumulative and shall 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 will be payable out of net profits; if net profits are not sufficient to pay this dividend, either in whole or in part, then any unpaid portion of the dividend will be paid in full out of net profits of the Corporation in subsequent quarters before any dividends are paid upon shares of Junior Stock. If this preferred stock is converted into the Company’s common stock, and there exist undeclared dividends on the conversion date, the dividends will remain an obligation of the Company, and will be paid when declared and when there are legally available funds to make that payment. Thus far, no dividends have been declared. As of October 1, 2005 there was $148,778 of undeclared dividends in arrears.

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preferred stock shall automatically be converted into shares of common stock on a one-for-one thousand 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 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 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 October 1, 2005, the beneficial conversion feature associated with the Series 3 preferred stock was fully amortized.

Voting Rights. Each holder of Series 3 preferred stock shall have 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

The terms of the Series 4 preferred stock are as follows.

Dividends. Series 4 preferred stock issued and outstanding shall be entitled to receive a cash dividend in the amount of 6.5% of the Issue Price per annum. The Series 4 preferred stock dividends are cumulative and shall 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 will be payable out of net profits; if net profits are not sufficient to pay this dividend, either in whole or in part, then any unpaid portion of the dividend will be paid in full out of net profits of the Corporation in subsequent quarters before any dividends are paid upon shares of Junior Stock. If this preferred stock is converted into the Company’s common stock, and there exist undeclared dividends on the conversion date, the dividends will remain an obligation of the Company, and will be paid when declared and when there are legally available funds to make that payment. Thus far, no dividends have been declared. As of October 1, 2005 there was $167,529 of undeclared dividends in arrears.

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 converted 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 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 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 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 October 1, 2005, the beneficial conversion feature associated with the Series 4 preferred stock was fully amortized.

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

Common Stock

During the nine months period ended October 1, 2005, the Company issued an aggregate of 2,685,849 shares of the Company’s common stock. In connection with the acquisition of Christenson Electric, Inc. on July 20, 2005, the Company issued 2,000,000 shares of its common stock. (see Note 4) The Company also issued 256,025 shares of common stock upon the exercise of 853,067 warrants, 826,400 of which were exercised on a cashless basis. Additionally, during the nine months ended October 1, 2005, the Company issued an aggregate of 429,824 shares of common stock in exchange for conversion of 178,571 shares of Series 2 preferred stock, 38.095 shares of Series 3 preferred stock at $420 per share, and 213.158 shares of Series 4 Preferred Stock at $380 per preferred share.

3. Stock Options and Warrants

Stock Incentive Plan

The Company has a Stock Incentive Plan (the “Plan”). At October 1, 2005 and October 2, 2004, 4,346,825 and 812,890 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 from zero to four years.

A total of 1,170,000 and 2,370,000 options to purchase shares of the Company’s common stock were granted to employees and directors of the Company during the three and nine months ended October 1, 2005, respectively. The options issued during the three months ended October 1, 2005 are forfeited if not exercised within five years, and 1,000,000 of these options vest ratably over twenty-four months starting with the month of grant. The remaining 170,000 options vest over 48 months from the date of grant. The weighted average per share value of the options granted in the third quarter of 2005 was $0.66.


	Options Outstanding						Options Exercisable
			Weighted Average		Weighted				Weighted
			Remaining		Average				Average
Exercise	Number		Contractual Life		Exercise		Number		Exercise
Prices	Outstanding		(Years)		Price		Exercisable		Price
$ 0.04 — $0.05		16,000		1.33	$	0.04		16,000	$	0.04
$ 0.31 — $0.66		4,304,436		4.17	$	0.47		1,737,412	$	0.43
$ 1.76 — $2.70		26,388		4.60	$	2.27		26,388	$	2.27

		4,346,824		4.08	$	0.48		1,779,800	$	0.46

Transactions involving stock options issued are summarized as follows:


			Weighted Average
	Number of Shares		Price Per Share
Outstanding at January 3, 2004		688,936	$	0.84
Granted		1,919,188		0.43
Exercised		—		—

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				Weighted Average
	Number of Shares			Price Per Share
Cancelled or expired		(445,075	)		0.96

Outstanding at January 1, 2005		2,163,049		$	0.46

Granted		2,370,000			0.50
Exercised		—			—
Cancelled or expired		(186,225	)		0.39

Outstanding at October 1, 2005		4,346,824		$	0.48

The Company has computed for pro forma disclosure purposes the value of all options granted during fiscal quarters in 2005 and 2004 using the Black-Scholes pricing model as prescribed by SFAS No. 123. The following assumptions were used to calculate the value of options granted during the third quarter of 2005:


Risk-free interest rate		3.91	%
Expected dividend yield		—
Expected life	5 years
Expected volatility		129	%

Common Stock Warrants

In connection with debt financing entered into during fiscal year 2000, the Company issued two stock warrants each to purchase individually 1,033,000 common shares at a price of $0.50 per share and $0.38722 per share, respectively. The warrants had an initial term of 3 years and were to expire in June 30, 2005. Proceeds from the debt were allocated between the debt and warrants based on the fair value of the warrants issued using the Black-Scholes model. The combined value assigned to the warrants when they were issued was approximately $357,000 and was initially recorded as debt discount and recognized as interest expense over the life of the debt. On September 15, 2003, the Company extended the life of a portion of these warrants until June 30, 2007 as partial consideration to satisfy a $150,000 promissory note between CTS and Aequitas Capital Management (“Aequitas,” formerly known as JMW Capital Partners, Inc). In accordance with FIN 44, the fair value of the warrants on the date of the settlement of the $150,000 promissory note between CTS and Aequitas was determined to be $468,000. The difference of $110,000 between the initial fair value and the fair value at the date of the extension was recorded as equity and a loss on debt extinguishment. During the period ended October 1, 2005, the warrant holder exercised 826,400 warrants in exchange for 229,358 shares of the Company’s common stock (Note 2).

In connection with an April 2003 common stock private placement, the Company 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 the end of each quarter the increase or decrease in derivative value was recorded in earnings in the consolidated statement of operations. 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 prior quarter end warrant value was recorded in earnings.

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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 the end of each quarter the increase or decrease in derivative value was recorded in earnings in the consolidated statement of operations. 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 prior quarter end warrant value was recorded in earnings.

In connection with the January 22, 2004 debt issuance by Destination Capital, LLC (see Note 5), 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 1,403,548 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 the end of each quarter the increase or decrease in derivative value was recorded in earnings in the consolidated statement of operations. 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 prior quarter end warrant value was recorded in earnings.

In connection with the August 24, 2004 debt issuance by Destination Capital, LLC (see Note 5), 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 the end of each quarter the increase or decrease in derivative value was recorded in earnings in the consolidated statement of operations. 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 $20,775. The warrant liability was reclassified to shareholders’ equity and the increase from the prior quarter end warrant value was recorded in earnings.

For the months from September 1, 2004 to July 2, 2005, according to the terms of the warrant provision of the August 24, 2004 debt agreement, the Company is obligated to issue 1,588,542 additional warrants. The

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value of these warrants of $604,955 was added to shareholders’ equity on the consolidated balance sheet, with a corresponding expense charged to interest expense in the consolidated statement of operations. This included a charge against earnings of $320,967 associated with an aggregate of 894,792 warrants, that the Company was obligated to issue during the first six months of fiscal year, 2005. On August 1, 2005, the Company re-negotiated the debt obligation with Destination Capital LLC, and eliminated the warrant provision previously contained in the note. There was no interest expense associated with this note charged against the Company’s statement of operations after July 1, 2005.

On September 10, 2004, the Company entered into a Master Vehicle Lease Termination Agreement with CLLLC (see Note 6), 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.

4. Acquisition

Acquisition 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. 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, also known as Christenson Power Services (CPS) provides electrical service work on substations, transmission facilities and generation facilities including wind farms. CPS customers include electric utilities, independent power producers, industry, and government agencies. CPS provides new facilities design, design modification, installation, wiring and maintenance from transformers and circuit breakers to complex construction of substation switchyards and transmission yards up to 500,000 volts. CPS has been involved in the construction of approximately 10% of all the new wind-farms developed in the United States over the last six years. CPS also provides “dock crews” to major regional utilities and the Bonneville Power Administration. Dock crews are electricians and other tradesman provided under long-term staffing contracts.


Common stock	$	1,280,000
Direct acquisition costs		348,519

Total 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 estimates. The total purchase price was allocated to the assets and liabilities acquired as follows:

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Cash and other current assets	$	3,420,300
Equipment and other assets		317,032
Intangible assets – Trade name		872,771
Goodwill		5,933,888
Current liabilities		(7,045,851	)
Notes payable		(1,869,621	)


Total	$	1,628,519

The trade name intangible asset acquired has an indeterminate estimated useful life, and as such will not be amortized. Goodwill of $5,933,888 represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with SFAS 142, goodwill is not amortized and will be tested for impairment at least annually.

5. Debt

Operating Line of Credit

As of October 1, 2005, the Company has a $5,000,000 credit facility. This credit facility expires in January 2006. In most prior years, this facility has been renewed annually. There can be no assurance that this facility will be renewed. Borrowings under the line of credit are due on demand, bear interest payable weekly at prime plus 6 1/2% and are collateralized by accounts receivable. The borrowing base is limited by certain factors such as length of collection cycle, subordination of collateral position on bonded work and other credit related factors. Subject to these limitations, the Company had no available borrowing capacity at October 1, 2005. As of October 1, 2005 and January 1, 2005, borrowings of $4,568,515 and $4,392,975, respectively, were outstanding under the facility. The Company was in compliance with the terms of the borrowing facility at quarter end.

Long Term Debt

The Company had notes payable outstanding at October 1, 2005 and January 1, 2005. The total amount of these debts and their terms are summarized below.


	October 1,		January 1,
	2005		2005
Steelcase, Inc. promissory note, quarterly interest-only payments at 12% per annum beginning June 1, 2003. Annual principal payments of $69,773, second payment due February 28, 2005, third payment due and payable February 28, 2006, collateralized by 951,445 shares of the Company’s common stock (reduced by derivative allocation of $4,369) The Company is currently in default under the terms of the Note Agreement.	$	137,562	$	133,983
Techni-Cal Enterprises, Inc. Promissory Note effective July 8, 2005 in the amount of $220,000 with a $40,000 principal payment due at signing, monthly principal payments of $5,000 due beginning August 1, 2005 through July 1, 2006, and monthly principal payments of $10,000 beginning August 1, 2006 through July 1, 2007. This is a non-interest bearing Note.		170,000

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	October 1,		January 1,
	2005		2005
Oregon-SW Washington Electrical Trust Funds (comprised of several union benefits funds and pension trusts) promissory note in the amount of $952,907 payable monthly in payment amounts ranging from $25,000 per month to $75,000 per month including interest at 7% per annum, due and payable in full by September 1, 2006.		504,700		952,907
Umpqua Bank, twelve monthly payments of $5,553.25 in remaining principal due, including interest at 8.25% per annum, beginning on or before January 3, 2005, with the principal balance calculated on a sixty month amortization. The full remaining balance is due on or before December 31, 2005.		284,250
Oregon-SW Washington Electrical Trust Funds (comprised of several union benefits funds and pension trusts) promissory note in the amount of $188,012.11 payable monthly at $32,441.18 per month, including interest at 12% per annum, due and payable in full by February 25, 2006.		156,422
Christenson Leasing Company, LLC Motor Vehicle Capital Lease agreement effective March 21, 2005 and April 1, 2005 for 1999 International and Ford F-350, respectively. The lease terms are 36 months and 50 months, respectively, with payments due on the 24^th of each month beginning in April 2005. The monthly payments vary by vehicle over the length of the lease from $1,800 to $2,000 and $700 to $800, respectively. The interest rate is 3.625% and 3.875% per annum, respectively.		84,161
William C. McCormick Promissory Note effective January 28, 2005 in the amount of $250,000. Interest payments of 15% per annum are due on the 28^th day of each month with the entire balance of the Note to be paid in full on July 28, 2005. Final payment of this note is past due.		250,000
Christenson Leasing Company, LLC First Addendum to Tenant Improvements Capital Lease agreement effective March 1, 2005. Principal and Interest payments of $7,940 are due on the first day of each month beginning March 2005 and lasting through December 2007. The interest rate is 12% per annum.		186,735
Christenson Leasing Company, LLC Fourth Addendum to Asset Leaseback Promissory Note effective June 20, 2005 in the amount of $500,000. Interest is 10% plus the US Bank prime rate due the first day of each month beginning August 2005 and ending September 2007. Monthly principal payments of $20,833.33 are due on the first day of each month beginning October 2005 and ending September 2007.		500,000
Aequitas Capital Management, Inc. Promissory Note effective July 5, 2005 in the amount of $90,847. Principal and interest payments of $5,047.05 are due on the first day of each month beginning in August 2005 and ending April 2006. An additional principal payment of $50,000 is due on October 1, 2005. The interest rate on this Note is 7% per annum.		82,333
Destination Capital, LLC business loan agreement, net of debt discount, nine monthly payments of interest only, starting September 24, 2004, with fifteen monthly payments of principal and interest of $83,333, thereafter. Interest accrued at prime plus 10%.		—		1,186,135

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	October 1,			January 1,
	2005			2005
JMW Group, Inc. notes payable, net of debt discount of $7,298, monthly principal payments of $41,667 plus interest at prime plus 10%, starting August 24, 2005, through August 24, 2006.		606,035
Christenson Leasing Company, LLC note payable, thirty-six monthly principal payments of $11,667 plus interest at prime plus 10%, starting August 24, 2005, through July 24, 2008.		420,000		—
Aequitas Capital Management, Inc. note payable effective July 5, 2005 in the amount of $214,413. The Note is in arrears.		157,927
US Bank Term Loan Note effective July 21, 2005 in the amount of $1,900,000. Monthly interest payments of the Prime Rate plus 1.5% are due on the first day of each month beginning in August 2005 through July 2008. Principal payments of $22,619 are due on the first day of each month beginning on August 2005 through July 2008.		1,854,762


Total debt		5,394,887			2,273,025
Less current portion		(3,517,308	)		(1,159,468	)


Long term debt	$	1,877,579		$	1,113,557

6. Related Party Transactions

The Company has a number of promissory notes, lines of credit and lease obligations owing to related parties. The following table lists the notes and obligations outstanding at October 1, 2005 by related party.

Related Party

Type of Obligation

Maturity Date

Amount of Obligation

Monthly Payment

Christenson Leasing LLC^{(a) (g)}

Note payable^(h)

July 2008

420,000

^(c)11,667

Christenson Leasing LLC^{(a) (g)}

Note payable^(h)

September 2007

500,000

20,833

Christenson Leasing LLC^(a)(g)

T. I. lease

December 2007

186,735

7,940

Christenson Leasing LLC^(a)(g)

Vehicle leases

various

84,161

various

Christenson Leasing LLC^(a)(g)

Equipment lease

December 2007

—

^(f)100,000

JMW Group, LLC^(a)

Note payable

August 2006

423,846

^(c)41,667

JMW Group, LLC^(a)

Note payable^(h)

July 2008

180,000

^(c)5,000

JMW Group, LLC^(a)

Indemnity fees

Open obligation

—

⁽ⁱ⁾10,000

Aequitas Capital Management^(a)

Note payable

April 2006

82,333

various

Aequitas Capital Management^(a)

Note payable

September 2005

157,927

various

Pat Terrell^(j)

Indemnity fees

Open obligation

—

⁽ⁱ⁾10,000

William C. McCormick

Note payable

July 2005

250,000

interest only

Mark Walter

Bond guarantee fees

Open obligation

—

^(b)900

Destination Microfield, LLC^(d)

Vehicle lease

August 2006

—

^(e)29,000

John B. Conroy

Note receivable

September 2005

66,250

—


^(a)		Robert J. Jesenik, a director and significant shareholder of the Company, also owns a significant interest in these entities.

^(b)		This bond guarantee fee is an approximation, and fluctuates based on the total open bond liability .

^(c)		This payment amount is for principal only. An additional amount is due monthly which includes interest at prime plus 10%.

^(d)		William C. McCormick, Chairman of the Company’s board of directors, holds a minority ownership interest in this entity.

^(e)		These payments vary over the term of the loan. This amount represents the monthly payment in effect on October 1, 2005.

^(f)		This payment was reduced to $60,000 per month by terms of the reissued note, starting November 1, 2005.

^(g)		William C. McCormick holds a beneficial minority ownership interest in this company.

^(h)		This debt was paid in full in October 2005 in connection with a private placement.

⁽ⁱ⁾		This monthly payment amount is after a $30,000 up front payment on the total $150,000 obligation.

^(j)		Pat Terrell holds a beneficial minority ownership interest in JMW Group, LLC.

Terms and conditions of each of the notes and agreements are listed below.

F-52

Notes Payable to Destination Capital, LLC

On January 22, 2004, the Company entered into a Contract of Sale and Security Agreement with Destination Capital LLC (Destination) under which the Company agreed to sell up to 15% of its acceptable, eligible accounts receivable to Destination, in exchange for borrowing up to $600,000 from that entity under the terms of a Promissory Note. Destination is an entity in which Robert J. Jesenik, a shareholder and director of the Company, holds a significant interest. Under the terms of the agreement between the Company and Destination, the Company paid interest at the rate of 18% per annum on the amount of the note outstanding, and also issued warrants in the amount of 1% of the fully diluted common shares, per month, for each calendar month in which the Note was outstanding. The warrants have a five-year life and will be issued at the lower of $0.42 or the price of any other common or preferred equity issued in the six months following the date of the agreement. During the 6 month agreement period, the Company issued incentive stock options at $0.31 per share, therefore the price per share used for these warrants was reduced to $0.31. The Company initially was obligated to issue warrants to purchase 350,387 common shares at the time this note was issued. The fair value of these warrants was determined to be $155,221 using the Black Scholes pricing model. The assumptions used included a risk free rate of 3.1%, volatility of 152%, fair market value of the Company’s stock of $.48 per share and a remaining life of 5 years. The calculated fair value amount was recorded as a debt discount and is being amortized over the six-month term of the debt. This debt was outstanding on February 1, 2004, March 1, 2004 and April 1, 2004 and in accordance with the terms of the note agreement, the Company is further obligated to issue additional warrants to purchase 1,053,159 shares of the Company’s common stock. These warrants were valued using the Black Scholes pricing model. The assumptions used included risk free rates ranging from of 3.1% to 3.3%, volatility of 152%, remaining lives of 5 years for each warrant issuance, and fair market values of the Company’s stock on those three dates of $0.46, $0.60 and $0.62 per share, respectively. The fair value of these warrants in the amount of $780,373 was recorded as interest expense in the consolidated statement of operations for the year ended January 1, 2005. At the date of each of those warrant issuances, the Company did not have sufficient authorized common shares to effect the exercise of these warrants, accordingly, the fair value of all of these warrants was classified as liability for warrant settlement on the consolidated balance sheet. On September 1, 2004, the Company’s shareholders voted to increase the Company’s authorized common shares from 25,000,000 to 125,000,000. The fair market values of these warrants were re-measured on that date and reclassified as common stock warrants in the shareholders’ equity section on the balance sheet, with the increase or decrease in their values recorded as an increase or reduction of interest expense in the consolidated statement of operations. The Note was repaid in full during April 2004.

On August 24, 2004 the Company entered into a Business Loan Agreement with Destination under which the Company can borrow up to $2,000,000 based on Destination’s discretion and funds availability. Under the terms of the agreement, the Company pays interest at prime plus 10% (prime plus 12% in the event of a default), with nine monthly interest only payments starting September 24, 2004, and 15 monthly principal payments of $83,333 and accrued interest until maturity. At loan maturity on August 24, 2006, any remaining principal and accrued interest owed is then due and payable. This loan is immediately due if there occurs a default, there is a sale or disposal of all or substantially all of the assets or stock of the Company, or if there is a transfer of ownership or beneficial interest, by merger or otherwise, of the stock of the Company or its subsidiary. Additionally, the Company will issue to Destination the number of warrants equal to 12.5% of the value of the loan balance, on the first day of each month the loan is outstanding. These warrants have a five year life and will be issued at the lower of $0.38 or the price applicable to any shares, warrants or options (excluding options granted to employees or directors) issued by the Company while the loan is outstanding. Beginning August 1, 2004, the Company was obligated to issue the following warrant amounts based on the outstanding loan balances on the first day of each month.


			Warrants to be
Date	Loan Balance		Issued

August 1, 2004	$	300,000		37,500
September 1, 2004	$	750,000		93,750
October 1, 2004	$	1,200,000		150,000

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			Warrants to be
Date	Loan Balance		Issued

November 1, 2004	$	1,200,000		150,000
December 1, 2004	$	1,200,000		150,000
January 1, 2005	$	1,200,000		150,000
February 1, 2005	$	1,200,000		150,000
March 1, 2005	$	1,200,000		150,000
April 1, 2005	$	1,200,000		150,000
May 1, 2005	$	1,200,000		150,000
June 1, 2005	$	1,200,000		150,000
July 1, 2005	$	1,158,334		144,792


Total warrants to be issued as of October 1, 2005				1,626,042

The Company initially was obligated to issue warrants to purchase 37,500 common shares at the time this note was issued. The fair value of these warrants was determined to be $17,513 using the Black Scholes pricing model. The assumptions used included a risk free rate of 3.8%, volatility of 155%, fair market value of the Company’s stock of $.50 per share and a remaining life of 5 years. The calculated fair value amount was recorded as a debt discount and is being amortized over the twenty-four month term of the debt. The warrants issued from September 1, 2004 through July 1, 2005 were also valued using the Black Scholes pricing model. The assumptions used include risk free rates ranging from 3.39% to 4.17%, volatility percentages ranging from 121% to 155%, remaining lives of 5 years for each warrant issuance, and fair market values of the Company’s stock ranging from $0.30, to $0.60 per share. At the time these warrant obligations arose, the Company had sufficient authorized common shares to effect the exercise of these warrants. Accordingly, the fair values of the warrants issued from September 1, 2004 through July 2, 2005, $604,955, were classified as common stock warrants in the shareholders’ equity (deficit) section on the consolidated balance sheet, and expensed as interest expense in the consolidated statement of operations, as they were issued.

On August 1, 2005 the note owed to Destination Capital was replaced by three notes, which were assigned to two related parties, Christenson Leasing Company LLC (CLC) and JMW Group, LLC (JMW). The three notes contain the following terms: $516,667 note payable to JMW with monthly payments of $41,667 plus interest at prime plus 10% beginning August 24, 2005 through August 24, 2006; $180,000 note payable to JMW with monthly payments of $5,000 plus interest at prime plus 10% beginning August 24, 2005 through July 24, 2008; $420,000 note payable to CLC with monthly payments of $11,667 plus interest at prime plus 10% beginning August 24, 2005 through July 24, 2008. In October 2005, the note to CLC and the smaller of the two notes to JMW were paid in full by CVI. Also, as a result of the renegotiation of these notes, the warrant obligation, contained in the business loan agreement was eliminated.

Bond Guarantee Fees

Christenson Velagio

A certain number of CVI construction projects require the Company to maintain a surety bond. The bond surety company requires an additional guarantee for issuance of the bond. The Company has an agreement with Mark Walter, the Company’s president under which at quarter end the Company pays Walter between $600 and $1,200 per month for his personal guarantee of this bond liability. The guarantee fee is computed as 15% of the open liability under bonds issued for CVI.

Christenson Electric

Certain construction projects within CEI required a standby letters of credit. The Company’s chairman of the board of directors has provided two letters of credit in the amounts of $100,000 and $193,000, for which he is paid indemnity fees. Under the $100,000 letter of credit agreement, Mr. McCormick is paid a fee of 15% of the letter of credit amount. Under the $193,000 letter of credit, Mr. McCormick is paid a fee of 15% per annum of the open liability of the issuer of the letter of credit, plus 1% of the gross profit of the job requiring the letter of credit. The open liability fee is calculated and paid monthly.

The Company also had a related party guarantee a $1 million standby letter of credit issued as security for a large construction job. The related party is paid a fee of 15% of the letter of credit amount for providing

F-54

this security. This agreement also requires a secondary indemnity, should funds be drawn against this letter of credit, the substantial majority of which has been provided by Aequitas, a related party, for an additional fee of 15% of the letter of credit amount. Aequitas is also indemnified by CEI should it have to indemnify the primary guarantor.

Tenant improvement lease

On December 30, 2002, CEI entered into a non-cancelable operating lease agreement with Christenson Leasing, LLC (CLC) covering $300,000 of leasehold improvements in the Company’s facility. The terms of the lease call for monthly payments of $7,500 including interest at 17.3% through December 2007. CEI was in default under the lease terms, which default was cured in March 2005, with the resumption of payments due under the lease under a modified payment plan arrangement.

On July 1, 2005, CEI entered into a promissory note with Aequitas Capital Management (ACM), a related party, covering certain equipment and furniture previously leased from Jesenik Enterprises, Inc., JW Assurance and Holding Limited, and JMW Capital Partners, Inc., each a related party. No payments had been made on these lease obligations since September 2002. At July 1, 2005, these entities assigned their interests in the obligation to ACM, which the Company consolidated into one promissory note with total principal due of $90,847, interest accruing at 7% per annum, maturing at April 1, 2006, and with $5,047 monthly installment payments and, in addition, a lump sum payment of $50,000 due on October 1, 2005. The payment of $50,000 was not made on October 1, 2005.

Equipment Lease Agreement

On December 31, 2002, CEI entered into a sale and leaseback agreement with CLC, under which it sold machinery and tools, automotive equipment, and office furniture and equipment, not subject to prior liens. The agreement called for payments of $97,255 starting on January 2, 2003 through December 2007. On September 1, 2003, CVI’s predecessor, CTS entered into a sublease agreement with CEI for use of certain equipment contained in that lease. The equipment consists of various construction vehicles, trailers, miscellaneous construction equipment, office furniture, computer hardware and software. Under the terms of the lease CVI paid CEI $40,000 monthly beginning on September 1, 2003, with the final payment due on December 1, 2007. The lease is accounted for as an operating lease and contains a 10% purchase option at the end of the lease term, December 31, 2007. In 2003, the Company modified the payment plan to the lessor, under which $10,000 of the monthly lease obligation was be paid to the lessor in an equivalent amount of the Company’s Series 3 preferred stock. This arrangement to tender a portion of the payment with preferred stock in lieu of cash, was for the thirteen monthly payments beginning with the December 2003 lease payment, through the payment due in December 2004. Beginning with the payment due in January 2005, the total monthly amount due was paid entirely in cash.

In July 2005, the lease agreement between CEI and CLC was renegotiated, with a portion of the remaining operating lease obligation converted to a $500,000 note payable. In accordance with that agreement, the $100,000 monthly lease payment owed by CEI under the lease was reduced to $60,000 per month starting with the payment due on November 1, 2005. The $500,000 note was paid in full by CEI in October 2005.

Master Vehicle Lease Agreements

Christenson Velagio

The Company entered into a new Master Vehicle Lease Agreement, effective September 9, 2004, with Destination Microfield, LLC. Destination Microfield, LLC is partially owned by William C. McCormick. In accordance with the terms of the agreement, the Company will make twelve monthly payments of $29,000 starting October 5, 2004, twelve monthly payments of $35,000, starting October 5, 2005, and three monthly payments of $45,000 ending on December 9, 2006. This lease is accounted for as an operating lease with equal monthly amounts charged to expense in the consolidated statement of operations over the life of the lease.

Christenson Electric

F-55

The Company, through its subsidiary CEI is party to an agreement with CLC under which CEI leases its vans and trucks. In accordance with the terms of the agreement, the Company pays to CLC a varying amount each month representing the lease and maintenance costs of those vehicles. The lease is a month to month agreement that is modified with each addition or removal or vehicles.

Real Property Sub Leases

On September 1, 2003, CVI entered into seven real property subleases with CEI for use of buildings, offices and storage yards to house the operations and property of CVI. CEI, as the sublessor, is party to a master property lease with an unrelated party. CVI has operating activities in Portland and Eugene, Oregon. The monthly sublease payments totaled $58,625 through November 30, 2004. On November 30, 2004, the Company terminated its lease with CEI for space in the Thurman Building and entered into a lease directly with the building owner for a smaller space in the building. As of January 1, 2005 the Company’s total real property lease payments totaled $48,842, of which $675 was on a month-to-month basis. The remaining $48,167 is due on leases with maturity dates between September 2005 and October 2008. The rent per month on the Thurman Building is $31,025.

Administrative Services Agreement

On September 15, 2003, CTS entered into an administrative services agreement with CEI for the extension of certain administrative and related services by the Company to CEI. Robert J. Jesenik, a Director and Significant shareholder, owns a substantial ownership interest in CEI. Under the terms of the agreement, certain employees provided administrative and related services to CEI upon reasonable request. The agreement is subject to a 60-day notice period before termination by either party. The monthly payment for these services was determined at the effective date of the agreement to be approximately $35,000, with a provision to be adjusted as needed based on the level of usage of these services by CEI. During the first quarter of 2005, the payment by CEI for these services was renegotiated to approximately $12,500 per month as the cost of services to CEI has been reduced. With the acquisition of CEI by Microfield on July 20, 2005, the monthly charges by CVI were discontinued.

Note receivable

In 1998, John B. Conroy, then the Company’s Chairman, CEO and President, entered into a transaction whereby he purchased 45,000 shares of the Company’s common stock at $1.75 per share. Mr. Conroy issued a promissory note to the Company for $78,750 in payment for the shares. On May 17, 2004 the Note was replaced with a new non-recourse note for $66,250 under which the original amount of the note was offset against a $12,500 amount owed by the Company to Mr. Conroy. The note also acknowledges the outstanding accrued interest due by Mr. Conroy in the amount of $21,937. Additionally, the interest rate of the new promissory note was established at 3.4% per annum, and the due date was extended to August 29, 2006. Mr. Conroy resigned as Chairman, CEO and President on September 16, 2002, and resigned as a director in October 2003. At October 1, 2005, accrued interest receivable under this note totaled $27,932. The Company has accounted for the $78,750 due from Mr. Conroy as a reduction in common stock equity in prior years. In May 2004, the Company accounted for the $12,500 amount due to Mr. Conroy and additional $637 of interest adjustment as an increase in common stock equity.

6. Legal Proceedings

Shareholder lawsuit and settlement

F-56

Oregon securities law and Oregon common law in connection with the following transactions (which closed simultaneously in September 2003): (1) the merger of CTS Acquisition Co. (a wholly-owned subsidiary of the Company) with and into Christenson Technology Services, Inc.; and (2) the merger of VSI Acquisition Co. (A wholly-owned subsidiary of the Company) with and into Velagio, Inc. In addition, the lawsuit alleged that Mr. Underwood was terminated as an employee entitling him to severance pay. The lawsuit sought damages of approximately $1.4 million.

On May 11, 2005 the Company and Mr. Underwood entered into a Settlement Agreement under which both parties agreed to drop their respective lawsuits. The Settlement Agreement provides that the Company and certain defendants will jointly and severally purchase Mr. Underwood’s Microfield Stock for the aggregate purchase price of $362,500. The purchase price will be allocated as follows: $50,000 to the purchase of Mr. Underwood’s 119,050 Series 2 preferred shares and the balance to the purchase of Mr. Underwood’s 3,404,958 common shares. Additionally, the Settlement Agreement terminates Mr. Underwood’s Microfield Warrant. Payment under the Settlement Agreement occurred as scheduled on August 1, 2005. Microfield assigned its right to purchase these shares to Energy Fund II.

7. Subsequent Events

On October 5, 2005, the Company completed a private placement in the amount of $3,434,000 in exchange for 4,905,717 shares of the Company’s common stock. The Company also issued an additional 327,886 common shares in payment of a $229,520 fee charged by an investment advisor in the transaction. As a part of the private placement, the Company was required to pay $1.1 million to JMW Group, LLC and Christenson Leasing, LLC, both related parties, to reduce debt within the Company’s subsidiaries.

On October 13, 2005, the Company entered into an agreement to purchase all the outstanding shares of EnergyConnect, Inc. (ECI) in exchange for 27,365,305 shares of the Company’s common stock at $2.34 per common share, issuance of 19,492,386 warrants to purchase the Company’s common shares at $2.58 per share, and issuance of 3,260,940 options to purchase the company’s common stock at $0.32 per share. The transaction was valued at approximately $107 million. ECI provides energy consumption curtailment services through implementation of proprietary software with participants’ building energy management systems. As a result of the transaction, ECI is a wholly-owned subsidiary of Microfield Group, Inc.

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Pro Forma Condensed Combined Statements of Operations
for the year ended January 1, 2005 for Microfield Group,
for the year ended October 31, 2004 for Christenson Electric, and
for the year ended December 31, 2004 for EnergyConnect


														Pro Forma
				Christenson						Pro Forma				Balances
	Microfield Group			Electric			EnergyConnect			Adjustments			Reference	(unaudited)


Sales	$	36,466,618		$	11,206,002		$	75,594		$	(417,115	)	Note 3	$	47,331,099
Cost of sales		30,334,987			9,387,502			—			(354,548	)	Note 3		39,367,941


Gross profit		6,131,631			1,818,499			75,594			(62,567	)	Note 3		7,963,157


Operating expenses:
Sales, general and administrative		9,748,188			4,274,510			938,565							14,961,263
Write-off of impaired intangible assets		376,000			340,470			—							716,470
Loss on lease termination		515,000			—			—							515,000


Total operating expenses		10,639,188			4,614,980			938,565							16,192,733


Income (loss) from operations		(4,507,557	)		(2,796,481	)		(862,971	)		(62,567	)			(8,229,576	)

Other income (expense)		(1,886,333	)		(752,835	)		(40	)						(2,639,208	)


Loss from continuing operations	$	(6,393,890	)	$	(3,549,316	)	$	(863,011	)	$	(62,567	)		$	(10,868,784	)


Basic and diluted net loss per share	$	(0.37	)											$	(0.56	)


Weighted average shares used in per share calculations:
Basic and fully diluted		17,340,152									29,365,305				46,705,457

F-58

Unaudited Pro Forma Condensed Combined Statements of Operations
For the nine months ended October 1, 2005 for Microfield Group, Inc.,
the seven and a half months ended July 20, 2005 for Christenson Electric, Inc.
and the nine months ended September 30, 2005 for EnergyConnect, Inc.


														Pro Forma
				Christenson						Pro Forma				Balances
	Microfield Group			Electric			EnergyConnect			Adjustments			Reference	(unaudited)


Sales	$	37,991,269			11,131,316		$	244,825			(765,380	)	Note 3	$	48,602,030
Cost of sales		31,038,688			9,471,228			153,318			(610,666	)	Note 3		40,052,568


Gross profit		6,952,581			1,660,088			91,507			(154,714	)			8,549,462

Operating expenses:
Sales, general and administrative expense		5,467,267			1,524,587			1,566,741			—				8,558,595


Income/(loss) from operations		1,485,314			135,501			(1,475,234	)		(154,714	)			(9,133	)

Other income (expense), net		(1,196,377	)		(154,235	)		388,309			—				(962,303	)


Loss from continuing operations	$	288,937			(18,734	)	$	(1,086,925	)		(154,714	)		$	(971,436	)


Basic and diluted loss from continuing operations per share	$	0.01												$	(0.02	)


Weighted average shares used in per share calculations:
Basic and fully diluted		19,209,011			2,000,000			27,365,305			(512,820	)	Note 1		48,061,496

F-59

Unaudited Pro Forma Condensed Combined Balance Sheet
As of October 1, 2005 for Microfield Group, Inc.
and as of September 30, 2005 for ECI


							Pro Forma				Pro Forma Balances
	Microfield Group*			ECI			Adjustments				(unaudited)
Assets
Current assets
Cash	$	1,415,975		$	48,997						$	1,464,972
Accounts receivable		9,927,075			47,827							9,974,902
Other current assets		4,841,909			21,845							4,863,754

Total current assets		16,184,959			118,669							16,303,628

Equipment, net		458,836			1,449							460,285
Intangibles, net		2,218,306			33,977		$	108,127,403		Note 2		110,379,686
Goodwill		8,410,574			—							8,410,574
Other assets		315,002			—							315,002


Total Assets	$	27,587,677		$	154,095		$	108,127,403			$	135,869,175


Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	8,393,022		$	627,215						$	9,020,237
Line of credit		4,568,515			117,454							4,685,969
Current portion of notes payable		3,517,308			—							3,517,308
Other current liabilities		7,741,420			189,124							7,930,544

Total current liabilities		24,220,265			933,793							25,154,058

Long term liabilities		1,991,751			226,789							2,218,540

Total liabilities		26,212,016			1,160,582							27,372,598


Shareholders’ Equity (Deficit)
Convertible Series 2 preferred stock, no par value, 10,000,000 shares authorized 6,642,865 shares issued and outstanding		2,765,101										2,765,101
Convertible Series 3 preferred stock, no par value, 10,000,000 shares authorized 3,603 shares issued and outstanding		1,529,138										1,529,138
Convertible Series 4 preferred stock, no par value, 10,000,000 shares authorized 4,392 shares issued and outstanding		1,703,424										1,703,424
Common stock, no par value, 125,000,000 shares authorized, 21,177,468 issued and outstanding as of October 1, 2005.		22,195,411					$	107,120,916		Note 2		129,316,327
Common stock warrants		2,389,879										2,389,879
Common stock — 2,500 shares of no par value authorized, 143 shares issued and outstanding at September 30, 2005					1,491,968			(1,491,968	)	Note 2		—
Accumulated deficit		(29,207,292	)		(2,498,455	)		2,498,455		Note 2		(29,207,292	)

Shareholders’ Equity (Deficit)		1,375,661			(1,006,487	)		108,127,403				108,496,577


Total Liabilities and Shareholders’ Equity (Deficit)	$	27,587,677		$	154,095		$	108,127,403			$	135,869,175

*The balance sheet amounts for Christenson Electric, Inc. are consolidated with Microfield Group, Inc.’s balance sheet numbers as CEI was acquired prior to this balance sheet date.

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

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

On July 20, 2005, Microfield completed the acquisition of Christenson Electric, Inc. for 2,000,000 shares of Microfield common stock valued at approximately $1,280,000, without acquisition costs. On October 13, 2005, Microfield completed the acquisition of EnergyConnect, Inc. for 27,365,205 shares of Microfield common stock valued at approximately $64,035,000, 19,695,432 warrants to purchase Microfield’s common stock valued at $36,119,000, and 3,260,940 options to purchase Microfield common stock valued at $6,770,000. The total purchase price not including direct acquisition costs of approximately $197,000 was $106,924,000. Shares included in Microfield’s weighted average total at October 1, 2005 as a result of the acquisition of CEI were eliminated. The weighted average shares applicable to the acquisition are included in the pro forma weighted average share totals as if they were outstanding as of January 4, 2004.

The purchase method of accounting has been used in the preparation of the accompanying unaudited pro forma condensed combined statements of operations. Under this method of accounting, the purchase consideration is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed according to their respective fair values, with the excess purchase consideration being recorded as goodwill and other intangible assets. For the purposes of pro forma adjustments, Microfield has followed Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Intangible Assets.”

The pro forma condensed combined statements of operations are presented combining Microfield’s condensed consolidated statement of operations for the fiscal year ended January 1, 2005 with the statements of operations for both CEI and ECI for their 2004 fiscal year periods. Also presented are the unaudited pro forma condensed combined statements of operations combining Microfield's unaudited condensed consolidated statement of operations for the nine months ended October 1, 2005 with CEI’s unaudited statement of operations for the seven and a half months ended July 20, 2005, and ECI’s unaudited statement of operations for the nine months ended September 30, 2005, assuming the transactions occurred on January 4, 2004. Operations of CEI from July 21, 2005 through October 1, 2005 are included in Microfield’s statement of operations, as the acquisition of CEI was effected on the previous day, and all future results were thereinafter consolidated with Microfield. The pro forma information does not purport to be indicative of the results, which would have been reported if the purchase had been in effect for the periods presented or which may result in the future.

Transactions between Microfield, CEI and ECI during the periods presented have been eliminated. There are no significant differences between the accounting policies of Microfield, CEI and ECI.

Note 2 – Pro forma purchase price adjustments

Pursuant to the Merger Agreement, the shareholder of CEI, in total received 2,000,000 shares of Microfield common stock. Also, pursuant to the merger agreement between Microfield and ECI the shareholders of ECI, in total received 27,365,305 shares of Microfield common stock, 19,695,432 warrants to purchase Microfield common stock, and 3,260,940 stock options to purchase Microfield common stock. For purposes of the unaudited pro forma condensed combined financial statements, the fair value of the Company’s common stock issued as a part of the acquisitions was determined based on the average price of the Company’s common stock for several days before and after the announcement dates of the acquisitions of CEI and ECI.

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The components of the separate purchase prices were as follows:


	CEI		ECI
Common stock	$	1,280,000	$	64,034,814
Warrants		—		36,119,391
Stock options		—		6,769,711
Direct acquisition costs		250,000		197,000


Total	$	1,530,000		107,120,916

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 fair values of the assets acquired were based on management’s best estimates. The total purchase prices were allocated to the assets and liabilities acquired as follows:


	CEI			ECI
Cash and other current assets	$	3,391,341		$	118,669
Equipment and other assets		372,032			35,426
Goodwill and other intangible assets		6,688,161			108,127,403
Current liabilities		(4,116,502	)		(1,160,582	)
Long term liabilities		(4,805,032	)		—


Total purchase price	$	1,530,000			107,120,916

Goodwill and intangible assets of $6,688,161 in CEI represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Of this amount $872,771 has been allocated to a tradename intangible. This intangible has an indefinite life and as such is not being amortized. The remainder of the amount has been allocated to goodwill. Goodwill of $108,127,403 in ECI represents the excess of the purchase price over the fair value of the net tangible assets acquired. In accordance with SFAS 142, goodwill is not amortized and will be tested for impairment at least annually.

These transactions had no effect on the Company’s earnings at the dates of acquisition as the assets and liabilities were acquired at the same cost bases for which they were listed in the previous CEI and ECI financial statements, which approximated fair value, except for goodwill which was recorded at the excess of the purchase price over the net assets. There were no assets that were required to be written down at the acquisition date and no material amount of assets that required a regular recurring expense to be charged against the company’s earnings.

Note 3 — Eliminations

Microfield’s wholly-owned subsidiary, Christenson Velagio, Inc. (CVI) provides electrical services for Christenson Electric on some of CEI’s high voltage projects. Microfield’s revenue, combined with CE’s revenue for the nine months ended October 1, 2005 included sales between the two companies totaling approximately $765,000. Gross margin on services between the companies averages approximately 15-20%.

F-62

REPORT OF INDEPENDENT ACCOUNTANTS

RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
Certified Public Accountants

REPORT OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM

Board of Directors
Microfield Group, Inc.
Portland, Oregon

We have audited the accompanying balance sheets of Christenson Electric, Inc. (the “Company”) as of October 31, 2004 and 2003 and the related statements of operations, deficiency in shareholders’ equity (deficit), and cash flows for the years then ended. 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 financial statements referred to above present fairly, in all material respects, the financial position of Christenson Electric, Inc. as of October 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in the Note 3 to the accompanying financial statements, the Company has suffered recurring losses and is experiencing difficulty in generating sufficient cash flow to meet it obligations and sustain its operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


		/s/RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
		Russell Bedford Stefanou Mirchandani LLP
		Certified Public Accountants

New York, New York
September 18, 2005

F-63

CHRISTENSON ELECTRIC, INC.

BALANCE SHEETS
AS OF OCTOBER 31, 2004 AND 2003


	October 31, 2004			October 31, 2003
Assets
Current assets:
Cash and cash equivalents	$	85,696		$	746,284
Accounts receivable, net of allowances of $32,541 and $752,543		1,188,147			7,590,499
Accounts receivable – related parties		20,456			56,647
Notes receivable – related party		—			1,400,000
Costs in excess of billings (Note 5)		589,115			1,312,170
Other current assets (Note 6)		360,344			261,513

Total current assets		2,243,758			11,367,113
Property and equipment, net (Note 4)		280,535			399,272
Investment in related party (Note 12)		1,428,246			365,000
Other assets		104,482			126,734

Total Assets	$	4,057,021		$	12,258,119


Liabilities and Shareholders’ Equity (Deficit)
Current liabilities:
Cash disbursed in excess of available funds	$	283,890		$	150,557
Accounts payable		2,507,586			5,017,892
Accounts payable – related parties		126,009			435,401
Bank line of credit (Note 14)		667,053			—
Current portion of notes payable (Note 14)		55,533			—
Billings in excess of costs (Note 6)		45,047			1,725,708
Other current liabilities (Note 9)		765,410			1,697,119

Total current liabilities		4,450,528			9,026,677


Long-term liabilities:
Long term notes payable (Note 14)		228,717			—
Long term notes payable – related parties (Notes 14 & 18)		180,996			211,751

Total long-term liabilities		409,713			211,751


Commitments and contingencies (Note 19)		—			—
Shareholders’ equity(deficit):
Common stock, no par value, 500 shares authorized, 100 shares issued and outstanding,		63			63
Additional paid-in capital		2,781,657			2,781,657
Retained earnings/(accumulated deficit)		(3,584,940	)		237,971

Total shareholders’ equity(deficit)		(803,220	)		3,019,691

Total liabilities and shareholders’ equity (deficit)	$	4,057,021		$	12,258,119

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

F-64

CHRISTENSON ELECTRIC, INC.

STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED OCTOBER 31, 2004 AND 2003


	October 31,			October 31,
	2004			2003
Cash flows from operating activities:
Net loss	$	(3,549,316	)	$	(4,508,872	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization expense		122,086			173,478
Gain on sale of equipment (Note 12)		—			(445,021	)
Gain on sale of intangibles (Note 12)		—			(1,000,000	)
Write-off of intangible asset (Note 7)		340,470			—
Investments in related party (Note 12)		389,521			84,764
Allowance for doubtful accounts		720,002			(543,543	)

Changes in current assets and liabilities

Receivables and retainages		5,463,701			5,662,754
Refundable income taxes		218,650			1,180,350
Other and related-party receivables		(633,652	)		2,300,598
Costs and estimated earnings in excess of billings		723,055			(537,331	)
Inventory (Notes 8 and 12)		—			897,945
Prepaid expenses and deposits		(98,831	)		(164,722	)
Current note receivable – related party		—			(107,018	)
Accounts payable,net		(2,532,437	)		(2,727,268	)
Accrued expenses		(930,056	)		(483,997	)
Billings in excess of costs and estimated earnings		(1,680,661	)		749,139


Net cash used in operating activities		(1,447,468	)		531,255

Cash flows provided by, (used in) investing activities

Proceeds from sale of equipment (Note 12)		—			872,385
Purchase of equipment and leasehold improvements		(3,348	)		318,900
Other		22,250			11,616

Net cash flows provided by, (used in) investing activities		18,902			1,202,904


Cash flows provided by, (used in) financing activities
Bank overdraft		133,333			(192,427	)
Net (payments) advances on line of credit agreements		667,053			—
Proceeds on long-term debt		1,588,711			1,368,014
Principal payments on long-term debt		(1,619,466	)		(2,348,362	)
Principal payments on capital leases		(1,653	)		(66,059	)

Net cash flows provided by, (used in) financing activities		767,978			(1,238,834	)


Net increase (decrease) in cash		(660,588	)		495,323
Cash and cash equivalents, beginning of period		746,284			250,961

Cash and cash equivalents, end of period	$	85,696		$	746,284

Supplemental schedule of non-cash financing and investing activities:
Contribution to capital through conversion of intercompany amounts					2,781,657
Assumption of debt		284,250
Dividend paid to shareholder		273,595

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

F-67

CHRISTENSON ELECTRIC, INC.

NOTES TO FINANCIAL STATEMENTS
FISCAL YEARS ENDED OCTOBER 31, 2004 AND 2003

Description of Business

Christenson Electric, Inc. (“CEI” or the “Company”), does business as Christenson Power Services (CPS), engages in electrical construction, primarily high voltage electrical services and contract construction, predominantly on electrical substations, transmission facilities and wind farm power generation projects, primarily in the western region of the United States. (see Note 4). In June 2003, CEI elected to exit its unprofitable lines of business and sold certain assets to Christenson Technology Services, Inc. (CTS), a related party. On September 16, 2003, CTS’ was sold to Microfield Group, Inc. (Microfield) in exchange for shares of Microfield’s publicly traded common stock. As part of the sale agreement, CEI and CTS entered into service agreements under which certain employees of each company performed services for the other in exchange for negotiated compensation amounts (see Note 12). Subsequent to the period addressed in this audit, effective July 20, 2005, the parent company of CEI, CEAC, Inc. sold all the outstanding shares of CEI to Microfield (see Note 16).

CPS’ customers include electric utilities, industry, and government agencies. CPS provides new facilities design, design modification, installation, wiring and maintenance from transformers and circuit breakers to complex construction of electrical substation switchyards and transmission yards up to 500,000 volts. In addition, CPS has been involved in the construction of greater than 10% of the currently operating wind farm power generation projects developed in the United States over the last six years. CPS also provides docking crews, electricians and other tradesman provided under long-term staffing contracts, to major regional utilities and the Bonneville Power Administration. Individual project contracting is performed under fixed-price, cost-plus-fee, time and material, and unit-price contracts.

The Company’s headquarters are located in Portland, Oregon.

Summary of Significant Accounting Policies

Fiscal Year – The Company’s fiscal year is the twelve months ending on the last day of October. The Company’s current fiscal year is the twelve months ending October 31, 2004. The Company’s last fiscal year was the twelve months ended October 31, 2003.

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 instruments is recorded at the estimated fair value of these instruments.

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.

Receivables – Contract receivables are recorded when invoices are issued and are written off when they are determined to be uncollectible. The allowance for doubtful accounts is estimated based on the Company’s historical losses, review of specific problem accounts, existing economic conditions in the construction industry, and the financial stability of their customers. The allowance for doubtful accounts at October 31, 2004 and 2003 was $32,541 and $752,543, respectively. Generally, the Company considers contract receivables past due after 60 days. The Company follows the practice of filing statutory liens on construction projects where collection problems are anticipated. The liens serve as collateral for contract receivables.

F-68

Concentrations – Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of sales and accounts receivable. The Company’s cash balances are with federally insured banks and periodically exceed the insured limits of $100,000. The Company’s receivables are from customers concentrated in the construction industry and various companies within the western region of the United States. For the twelve months period ending October 31, 2004, three customers accounted for 58% of total sales. For the twelve months period ending October 31, 2003, two customers accounted for 32% of total sales. At October 31, 2004 and 2003, two different sets of customers represented accounts receivable of more than 69% and 50%, respectively, of total outstanding accounts receivable. In addition, two vendors accounted for 34% of the Company’s accounts payable at October 31, 2004 and three vendors accounted for 42% of the Company’s accounts payable at October 31, 2003. 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.

CEI performs limited credit evaluations of its customers, does not require collateral on accounts receivable balances, but does retain lien rights to reduce its risk. CEI has experienced material credit losses for the periods presented. These have been primarily isolated to discontinued operations.

CEI currently relies on various sources for key components used in the installation and sales of its products and services. None of CEI’s products or supplies used in the performance of its services is from a single source. The inability of any limited source suppliers to fulfill supply and production requirements, could materially impact future operating results.

The Company’s business is concentrated in the electrical services industry. Its future success depends on the buying patterns of its customers and continued demand by customers for the Company’s products and services. The Company’s success will depend on its ability to maintain its history of high quality in designing customer solutions and performing its services, enhancing its existing products and services and developing and introducing, on a timely basis, successful new products or services.

Inventory – When held, inventory is stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. CEI no longer maintains inventory, since the sale of CEI inventory to CTS on June 1, 2003 (See Note 8).

Equipment and leasehold improvements – Equipment and leasehold improvements are recorded at cost and include major expenditures, which increase productivity or substantially increase useful lives. Maintenance, repairs, and minor replacements are charged to expense when incurred. When equipment is sold or otherwise disposed of, the asset and related accumulated depreciation are removed from the accounts, and any gain or loss is included in the combined statements of operations.

The cost of equipment is depreciated over the lesser of the term of the related lease or the estimated useful lives of the related assets. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the assets. Depreciation and amortization are computed using the straight-line method for financial reporting purposes over lives ranging from 3 to 7 years.

Impairment of long-lived assets – 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 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.

F-69

The Company measures 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, the Company has 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. To the extent goodwill is determined to be impaired, an impairment charge is recorded in accordance with SFAS 142.

Revenue and cost recognition – Revenues from fixed-price, cost-plus-fee, time and material, and unit-price contracts are recognized using the percentage-of-completion method of accounting, measured by the percentage of contract costs incurred to date to estimated total contract costs. This method is used because management considers total cost to be the best available measure of completion of construction contracts in progress. Provisions for estimated losses on construction contracts in progress are made in their entirety in the period in which such losses are determined without reference to the percentage complete.

Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to revenue and costs, and are recognized in the period in which the revisions are determined. Claims for additional revenue are not recognized until the period in which such claims are allowed.

Direct contract costs include all direct labor, material, estimating costs, and shop and equipment costs. Shop and equipment costs include shop salaries and expenses, facilities rent, small tools, repairs and maintenance, and depreciation not identifiable with or allocated to a specific contract or service activity. General and administrative costs are charged to expense as incurred.

Advertising – Advertising costs are expensed when incurred. Advertising expense was $1,521 and $90,926 for the years ended October 31, 2004 and 2003, respectively.

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 losses, there has been no provision for income taxes in the period presented.

Pension plan contributions – The Company contributes to several Multi-Employer Pension Benefit Plans on behalf of its employees covered by collective bargaining agreements. During the years ended October 31, 2004 and 2003, the Companies contributed $404,236 and $2,059,873, respectively, to these plans, which were expensed as incurred.

CEI’s salaried employees, with at least 1,000 hours of service, who are not covered by collective bargaining agreements, participate in a noncontributory profit sharing plan. Annual contributions are determined at the discretion of CEI’ s Board of Directors. There were no contributions made during the years ended October 31, 2004 and 2003.

Use of estimates – The preparation of the financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures of contingent assets and liabilities at the date of the combined financial statements, and the reported amounts of revenues and expenses during the reporting periods. Accordingly, actual results could differ from these estimates. Estimates are used in accounting for, among other things, the allowance for doubtful accounts, inventory obsolescence, long-term contracts, depreciation, and contingencies.

F-70

Material estimates that are particularly susceptible to significant change in the near-term relate to the valuation of deferred tax assets (see Note 13). Management has estimated the value of goodwill as non-recoverable based on an impairment test effective, October 31, 2004 (see Note 7).

Recent accounting pronouncements

SFAS 151. In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS 151, Inventory Costs— an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “. . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . .” This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe the adoption of this Statement will have any immediate material impact on the Company.

SFAS 152. In December 2004, the FASB issued SFAS No.152, “Accounting for Real Estate Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67” (“SFAS 152) The amendments made by Statement 152 This Statement amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005 with earlier application encouraged. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows.

SFAS 123R. On December 16, 2004, the Financial Accounting Standards Board (“FASB”) published Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock Warrants, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. On April 14, 2005, the SEC amended the effective date of the provisions of this statement. Accordingly, the Company will implement the revised standard in the forth quarter of fiscal year 2006. Currently, the Company accounts for its share-based payment transactions under the provisions of APB 25, which does not necessarily require the recognition of compensation cost in the financial statements. Management is assessing the implications of this revised standard, which may materially impact the Company’s results of operations in the first quarter of fiscal year 2006 and thereafter.

SFAS 152. On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (“ SFAS 153”). This statement amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, if a nonmonetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. SFAS 153 is effective for nonmonetary transactions in fiscal periods that begin after June 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows.

F-71

recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. The Company is required to adopt the provisions of FIN 47 no later than the end of its fiscal 2006. The Company does not expect the adoption of this Interpretation to have a material impact on its financial position, results of operations or cash flows.

SFAS 154. In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The Company does not expect the adoption of this SFAS to have a material impact on its financial position, results of operations or cash flows.

Going Concern

The accompanying combined 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. The Company sustained losses of $3,549,316 and $4,508,872 during the fiscal years ended October 31, 2004 and 2003, respectively. At October 31, 2004, the Company had total liabilities of $4,860,241, $4,450,528 of which is due within twelve months, negative working capital of $2,206,770, and a shareholders’ deficit of $803,220.

The Company’s existence is dependent upon management’s ability to develop profitable operations and resolve its liquidity problems. Management has been focused on cutting certain expenses, both to improve gross margins and to reduce the monthly overhead costs. While the Company anticipates these losses will continue to decline as a result of cost reduction efforts and fundraising events, recurring losses and liquidity issues raise doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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. Investment capital or debt facilities may be difficult to obtain. There can be no assurance that additional capital will be available or, if available, will be at terms acceptable to the Company. The Company is focusing on opportunities to increase revenues and grow margins while continuing to reduce monthly expenses in an attempt to turn cash flow positive and profitable.

4. Property and Equipment

Property and equipment consist of the following:


	October 31,			October 31,
	2004			2003
Furniture and equipment	$	5,127		$	5,127
Leasehold Improvements		718,130			714,781


		723,257			719,908
Less accumulated depreciation and amortization		(442,722	)		(320,636	)


	$	280,535		$	399,272

F-72

Depreciation expense included as a charge to income was $122,086 and $173,478 for the years ended October 31, 2004 and October 31, 2003, respectively.

Construction in Process

Revenues and costs recognized on construction contracts in progress contrast the related billings as follows:


	October 31,			October 31,
	2004			2003
Direct costs to date	$	11,466,430		$	16,397,798
Gross profit to date		1,978,102			2,842,979


Earned contract revenue		13,444,532			19,240,777
Contract billings to date		(12,900,464	)		(19,654,315	)


Net under (over) billings	$	544,068		$	(413,538	)

Included in the accompanying balance sheets under the following captions are:


	October 31,			October 31,
	2004			2003
Costs and estimated earnings in excess of billings	$	589,115		$	1,312,170
Billings in excess of costs and estimated earnings		(45,047	)		(1,725,708	)


Net under (over) billings	$	544,068		$	(413,538	)

The following schedule summarizes the backlog on construction contracts after the year ended October 31, 2004, the construction contracts won from November 1, 2004 to April 30, 2005, and the pipeline of potential construction contracts on which CEI has bid. Backlog represents the amount of revenue CEI expects to realize from work to be performed on uncompleted contracts in progress for the year ended October 31, 2004, and from contractual agreements on which work has not yet begun. Pipeline represents the current potential additional revenue CEI may realize from additional new work in fiscal 2005 and future periods if CEI is selected to work on those contracts.


	Estimated		Estimated		Estimated
	Contract Revenues		Gross Profit		Gross Margin
Contract backlog, balance at October 31, 2004	$	7,595,134	$	1,510,672		19.9	%
New contracts and contract adjustments during fiscal 2005 through April 30, 2005	$	14,932,811	$	1,926,333		12.9	%

Sub-total	$	22,527,944	$	3,437,005
Pipeline at April 30, 2005	$	12,355,000	$	1,679,045		13.6	%

Total backlog and pipeline	$	34,882,944	$	5,116,049		14.7	%

F-73

Other Current Assets

The following table details the breakdown of Company other current assets at October 31, 2004 and 2003.


Description	October 31, 2004		October 31, 2003

Deposits – bid bonds	$	256,977	$	263,311
Deposits – health & welfare		10,000		—
Other deposits		—		(1,798	)
Prepaid expenses		93,367		—

Total other current assets	$	360,344	$	261,513

Goodwill and Intangible Assets

On January 1, 2004, the members of GDC, LLC (GDC) assigned their membership interests to CEI for $10. GDC was founded on or about November 30, 2001, and was primarily engaged as a financing affiliate holding a data center and lighting contracts and dedicated financing for those two assets. As of January 1, 2004, CEI owns 100% of GDC and total assets of $7,746 and liabilities of $348,216 have been incorporated into the Company’s financial statements as of that date. CEI recorded $340,470 in goodwill as part of this acquisition. At October 31, 2004 management determined that the goodwill was fully impaired as a result of the discontinuation and wind down of the GDC business and recorded an impairment charge of $340,470. Now CEI no longer carries goodwill from this acquisition on the books of the Company. The full amortization expense associated with this goodwill was $340,470 for the year ended October 31, 2004. As of October 3, 2004, GDC is no longer in operations, and has no assets and liabilities.

Sales and Acquisitions

Effective June 1, 2003, CEI sold inventory and customer lists with a book value of $500,000 to Christenson Technology Services, Inc. (CTS) in exchange for a $1,500,000 promissory note, with principal and interest due within twelve months, recording a gain on sale of assets of $1,000,000 (see Note 11). The transaction was limited to certain assets related to the electrical services business, and did not include any assets associated with the High Voltage Division of the Company’s business (later known as CPS). As part of the sale agreement, CEI retained some of the contracts under which the Company was providing services at the time of the sale, and the related assets and liabilities, as those operations wound down.

F-74

Other Current Liabilities

The following table details the breakdown of Company other current liabilities at October 31, 2004 and 2003.


Description	October 31, 2004		October 31, 2003

Accrued payroll, bonuses and payroll taxes	$	222,288	$	1,140,810
Accrued interest		11,366		—
Accrued sales tax Washington		263,635		320,303
Current obligations under capital leases		46,906		48,559
Other accrued expenses		221,216		187,448

Total Other Current Liabilities	$	765,411	$	1,697,119

10.

Debt

Effective January 1, 2004, CEI assumed a promissory note between GDC and Umpqua Bank as part of the CEI acquisition of GDC. On October 25, 2004, a forbearance agreement was executed between the parties acknowledging $284,250 in remaining principal due. The forbearance agreement acknowledged the loan is in default and provided a payment plan to retire the note. On or before January 3, 2005, CEI began making monthly principal and interest payments in the amount of $5,553 including interest at 8.25%, calculated on a sixty month amortization, with the remaining balance due on or before December 31, 2005.

Effective August 30, 2004, the Company obtained a $1,000,000 credit facility with CAPCO Financial Company (CAPCO), which expires August 30, 2005. The loan limit was subsequently raised to $2,000,000, and the expiration was extended to January 14, 2006. Borrowings under the line of credit are due on demand, bear interest payable weekly at prime plus 7 1/2% and are collateralized by accounts receivable. The borrowing base is limited by certain factors such as length of collection cycle, subordination of collateral position on bonded work and other credit related factors. Subject to these limitations, the Company had $670,409 available borrowing capacity at October 31, 2004. As of October 31, 2004, borrowings of $667,053 were outstanding under the facility. The Company was in compliance with the terms of the borrowing facility at October 31, 2004.

The total amounts of the individual notes payable outstanding at October 31, 2004 and October 31, 2003, and their terms are summarized below.


	October 31, 2004			October 31, 2003

Umpqua Bank, twelve monthly payments of $5,553.25 in remaining principal due, including interest at 8.25% per annum, beginning on or before January 3, 2005, with the principal balance calculated on a sixty month amortization. The full remaining balance is due on or before December 31, 2005.	$	284,250		$	—

Total long-term debt		284,250			—
Less current maturities of long-term debt		(55,533	)		—


Long-term debt, net of current maturities	$	228,717		$	—

F-75

11.

Shareholders’ Equity

In the year ending October 31, 2004, the Company issued a net dividend of $273,595 to its parent company, CEAC, Inc. (CEAC). This net dividend was composed of two main parts, as described below. First, effective in May 2004, the Company restructured certain accounts payable debt totaling $343,480, which was transferred from the Company to its parent, CEAC, Inc. (CEAC) and which debt was originally with related parties; specifically: $217,306 due to Christenson Leasing, LLC., $117,173 due to JMW Capital Partners, Inc. (now Aequitas Capital Management, Inc.) and $9,000 due to JMW Executive Financial Group, Inc. CEAC in turn transferred the debt to its parent, Chrtistenson Group, LLC. (CG), which converted the debt to membership interests in CG by mutual consent of the parties involved. Second, at October 31, 2004, the Company issued a dividend to CEAC by, in mutual agreement with CEAC, forgiving net receivables due from and payables due to CEAC in the amount of $617,075. The result of the two components was a net reduction of retained earnings of $273,595 from which there was no impact on the number of shares outstanding during the year.

12.

Related Party Transactions

Amount of

Maturity

Obligation at

Related Party

Type of Obligation

Date

October 31, 2004

October 31, 2003

CEAC, Inc. ^(a)

Payable Obligation

Open

—

435,401

Christenson Leasing, LLC (CLC) ^(a)

Equipment Lease

12/31/07

3,149,880

2,738,750

CLC ^(a)

Tenant Improvements Lease

12/31/07

227,902

265,348

Christenson Velagio, Inc. (CVI)

Bond Guarantee Fees

Open

—

Irvine Associates, Inc.

Equipment Lease

5/17/05

11,753

Jesenik Enterprises, Inc. (JEI) ^(a)

Bond Indemnity Fees

Open

126,009

—

JEI ^(a)

Equipment Lease

5/17/05

11,753

JW Assurance and Holding Limited ^(a)

Equipment Lease

5/17/05

16,790

Aequitas Capital
Management ^(a)

Equipment Lease

5/17/05

50,371

^(a) Robert J. Jesenik, a director and significant shareholder of the Company, also owns a significant interest in these entities. Mr. Jesenik is also an executive officer of each of the entities designated by this footnote.

Terms and conditions of each of the notes and agreements are listed below.

Notes Payable

On August 1, 2002, the Company sold its telecommunication division to Christenson Technology Services, Inc. (CTS), a related entity owned by certain stockholders of CEI, in exchange for a note receivable in the amount of $265,189. This note was later converted to equity in a related entity as described below.

On June 1, 2003, CEI sold inventory and customer lists with a book value of $500,000 to Christenson Technology Services, Inc. (CTS) in exchange for a $1,500,000 promissory note, with principal and interest due within twelve months, recording a gain on sale of assets of $1,000,000 (see below). The transaction was limited to certain assets related to the electrical services business, and did not include any assets associated with the High Voltage Division of the Company’s business (later known as CPS). As part of the sale agreement, CEI retained some of the contracts under which the Company was providing services at the time of the sale, and the related assets and liabilities, as those operations wound down.

F-76

On September 15, 2003, CTS, CEI and Microfield Group, Inc. (Microfield) entered into an Agreement to Consolidate, Amend and Satisfy Obligations. Under this agreement CTS acknowledged the separate debts of $1.5 million and $265,000 owed to CEI. The combined debt of $1,765,000, was split into two separate amounts, in which a new Subordinated Amended and Restated Promissory Note for $1,400,000 was issued to CEI. The remaining $365,000 of indebtedness was converted to 869,048 shares of Microfield Series 2 preferred stock in a transaction in which Microfield acquired CTS on September 16, 2003. On November 15, 2003, the remaining interest due of $52,767 was converted to 125.636 shares of Microfield Series 3 preferred stock and the $1,400,000 Promissory Note was converted to 3,333,333 shares of MGI Series 2 preferred stock. Subsequently, on July 20, 2005, supporting the restructuring of the US Bank loans, CEI transferred its interest in all Microfield Preferred Stock shares held by CEI to CEAC (see Notes 8 and 16).

On January 1, 2004, the members of GDC, LLC (GDC) assigned their membership interests to CEI for $10. GDC, LLC was founded on or about November 30, 2001, and was primarily engaged as a financing affiliate holding a data center and lighting contracts and was the dedicated financing vehicle for those two assets. As of January 1, 2004, CEI owns 100% of GDC, LLC. Total assets of $7,746 and liabilities of $348,216 have been incorporated into the Company’s financial statements as of January 1, 2004. The company recorded $340,470 in goodwill as part of this acquisition. At October 31, 2004 management determined that the goodwill was fully impaired as a result of the discontinuation of the GDC business and recorded an impairment charge of $340,470 in the combined statement of operations for the fiscal year ended October 31, 2004.

Accounts Payable

CEI and CEAC, Inc., CEI’s parent company until the July 20, 2005 sale of CEI to Microfield (see Note 16), maintained open accounts payable between themselves from time to time. At October 31, 2004 and October 31, 2003 the balance due CEAC by CEI was $0 and $445,401, respectively.

Lease Agreements

On December 30, 2002, CEI entered into a non-cancelable operating lease agreement with Christenson Leasing, LLC (CLC) covering $300,000 of leasehold improvements in the Company’s facility. The terms of the lease call for monthly payments of $7,500 including interest at 17.3% through December 2007. The total lease obligation outstanding at October 31, 2004 and October 31, 2003 was $227,902 and $265,348, respectively. At October 31, 2004, CEI was in default under the lease terms, which default was cured in March 2005, with the resumption of payments due under the lease under a modified payment plan arrangement (see Note 14).

On December 31, 2002, CEI entered into a sale and leaseback agreement with CLC, under which it sold machinery and tools, automotive equipment, and office furniture and equipment, not subject to prior liens with a book value of $675,693 to CLC for $4,005,738 in total consideration, $872,385 of which was paid in cash directly to CEI from CLC, and $3,133,353 which was paid directly by CLC to third parties on behalf of CEI. The $3,133,353 was distributed by CLC as follows: $2,781,657 to a bank on behalf of CEAC,

F-77

which resulted in a reduction of debt due to CEAC by CEI; $351,696 to parties to which CEI had outstanding payables due. CEI recorded a gain on sale of assets of $548,387.


Gain on Sale of Assets Schedule	October 31, 2004		October 31, 2003

December 21, 2002, Asset Sale/Lease Transaction with CLC (see above)	$	—	$	548,388
June 1, 2003, transaction with CTS (see above and Note 8)		—		1,000,000
Other and misc.		—		(103,366	)

Total Other Current Liabilities	$	—	$	1,445,022

The resulting lease is recorded as an operating lease with payment terms of $97,255 per month, beginning January 2, 2003, through December 31, 2007. On December 31, 2003, the lease payments due to CLC were reduced to $87,255 per month through expiration at December 1, 2005. Simultaneously, on December 31, 2003, in an agreement with Microfield Group, Inc., CTS’ parent, CEI agreed to deliver 309,524 Microfield Group common shares or the equivalent to CLC as consideration for the rent payment reduction. At October 31, 2004, CEI and CLC agreed to restructure the lease payment schedule, allowing for graduated payments over the remaining term of the lease (see Note 14). Subsequent to the period of this audit, effective June 30, 2005, the Company and CLC agreed to amend the lease further, to reduce the total monthly payment due to $60,000, starting October 31, 2005. In consideration of the reduction, the Company executed a promissory note with CLC totaling $500,000, interest accruing at prime plus 10% per annum, monthly payments of $20,833 due starting October 1, 2005 and maturity at September 1, 2007.

Management Services Agreement

On September 11, 2003 CEI entered into a management services agreement with CTS for the extension of certain management consulting services by CEI and their employees to CTS. Under the terms of the agreement, certain employees provided management consulting services to CTS upon reasonable request. The services to be provided by CEI’s employees include financial, legal, industry and labor affairs and management reporting services. The monthly fee for general management, financial and industry and labor affairs were determined to be $14,000 per month, payable in advance. The fees for legal and management reporting system services requested in addition to those provided normally were set at $150 per hour and $65 per hour, respectively. These fees were discontinued in January 2004.

Administrative Services Agreement

On September 15, 2003, CEI entered into an administrative services agreement with CTS for the extension of certain administrative and related services to CTS. Under the terms of the agreement, certain employees of CTS provided administrative and related services to CEI upon reasonable request. The agreement is subject to a 60-day notice period before termination by either party. The monthly payment for these services was determined at the effective date of the agreement to be approximately $35,000, with a provision to be adjusted as needed based on the level of usage of these services by CEI. During the first quarter of 2004, the payment by CEI for these services was renegotiated to $15,000 per month as the cost of services to CEI had been reduced. CTS did not charge CEI for these services from August 2004 to December 2004, but resumed a charge of approximately $12,500 per month in January 2005.

F-78

Bond Guarantee and Indemnity Fees

CEI has an agreement with CVI, the successor of CTS, under which CVI pays CEI a varying amount per month for CEI’s guarantee of certain bond liabilities. The guarantee fee is computed as 15% (annualized) of the open liability under bonds issued for CTS and indemnified by certain former shareholders of CEI. The amount of the monthly payments has fluctuated as it is subject to the open bond liability, which also fluctuates.

On June 5, 2002, three stockholders of CEI entered into an Indemnity Agreement with two insurance companies with respect to surety bond obligations of CEI and Affiliates. CEI will pay fees to the stockholders for personal indemnities at 15% per annum based on the total bonding in place under the bonding facilities. Subsequently, two stockholders sold their interest in CEI, with the Indemnity Agreement continuing with one former stockholder and the indemnity agreement obligation for the other being assumed by the remaining stockholder, Robert Jesenik. Total indemnity fees paid to stockholders and former stockholders were $87,986 and $446,140 for the years ended October 31, 2004 and 2003, respectively. In the event an obligation arises out of the indemnity agreement requiring payment with cash or collateral, the stockholder and former stockholder shall be indemnified by CEI to the full extent of the payment. Total potential obligations, not recorded on the accompanying combined financial statements, from the personal indemnity agreement amounted to $205,000 and $1,791,830 at October 31, 2004 and 2003, respectfully. As of October 31, 2004, there have been no payments made to the stockholders and former stockholders for purposes of claims regarding the indemnification obligations. CEI has an agreement with Robert Jesenik, dba Jesenik Enterprises, Inc. (JEI), under which CEI pays JEI a varying amount per week based on the remaining amount due to Mr. Jesenik outstanding for past fees due under this agreement. The amount remaining due and payable at October 31, 2004 and October 31, 2003 was $126,009 and $0 respectively. Subsequent to the period of this audit, effective July 1, 2005, the Company and Aequitas Capital Management, Inc. (ACM, assignee of the Robert Jesenik payable) agreed to consolidate the remaining $64,413 due into a promissory note between the parties. The Company executed a promissory note with CLC totaling $214,413 (for this and an additional $150,000 due ACM from the Company), without interest accruing, weekly payments of $5,000 due starting July 5, 2005, and additional payments of $50,000 due on July 5, 2005, August 1, 2005, and September 5, 2005 and maturity at September 26, 2005.

Other Transactions

Effective December 31, 2003, CEI sold its interest in Executive King Air, LLC (EKA), a private transportation company and a related party, by transfer of its one-third (1/3) membership interest in EKA back to EKA for the forgiveness of $85,000 in payments due EKA from CEI.

Related Party Cash Transactions by Year

Following is a summary of significant transactions and related account balances related to accounts payable and accounts receivable in the years ending and with the related parties as captioned:


	October 31, 2004			October 31, 2003
CEAC Distribution:
Accounts Receivable:	$	—		$	13,846
Accounts Payable:		131,474			(47,878	)

Christenson Electric Services:
Accounts Receivable:		(63,684	)		1,337,692
Accounts Payable:		—			—

F-79


	October 31, 2004		October 31, 2003
JMW Executive Financial Group, Inc:
Accounts Receivable:		—		—
Accounts Payable:		1,500		3,000

Sandy & Associates:
Accounts Receivable:		—		2,924
Accounts Payable:		—		—

13.

Income Taxes

The Company has combined federal and state operating loss carry forwards which may be offset against future taxable income. 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.

14.

Commitments and Contingencies

Capital lease – On December 30, 2002, CEI entered into a non-cancelable capital lease agreement with CLC covering $300,000 of leasehold improvements in the Company’s facility. The terms of the lease call for monthly payments of $7,500 including interest at 17.3% through December 2007. The total lease obligation outstanding at October 31, 2004 and 2003 was $227,902 and $265,348, respectively. At October 31, 2004, CEI was in default under the lease terms, which default was cured in March 2005, with the resumption of payments due under the lease under a modified payment plan arrangement. At October 31, 2004 and 2003, the lease obligation was split between current and long term as follows:


	October 31, 2004		October 31, 2003

Current portion due	$	46,906		48,559
Long term amount due		180,996		211,751


Total amount due under capital lease	$	227,902		260,310

At October 31, 2004 and 2003, gross assets and accumulated depreciation related to this lease were as follows:


	October 31, 2004			October 31, 2003

Gross Assets	$	723,257		$	719,908
Less Accumulated Depreciation		(442,722	)		(320,636	)


Net book value	$	280,535		$	399,272

Aggregate payments due annually under the revised capital lease for the next five years are as follows.


Years ending October 31,	Capital Leases
2005	$	63,520
2006		95,280
2007		95,280
2008		15,880
2009		—


Total payments due	$	269,960

F-81

Operating leases – The Company is party to various operating leases, the terms of which are described below.

On December 31, 2002, CEI entered into a sale and leaseback agreement with CLC, under which it sold machinery and tools, automotive equipment, and office furniture and equipment, not subject to prior liens, to CLC (See Note 12). The lease is recorded as an operating lease with payment terms of $97,255 per month, beginning January 2, 2003, through December 31, 2007. On December 31, 2003, the lease payments due to CLC were reduced to $87,255 per month through expiration at December 1, 2005. Simultaneously, on December 31, 2003, in an agreement with Microfield Group, CTS’ parent, CEI agreed to deliver 309,524 Microfield Group common shares or the equivalent to CLC as consideration for the rent payment reduction. At October 31, 2004, CEI and CLC agreed to restructure the lease payment schedule as follows.


Payment dates	Payment amount per month

October – November 2004	$	50,000
December 2004		60,000
January – April 2005		65,000
May – November 2005		100,000
December 2005 – November 2006		115,000
December 2006 – December 2007		125,500

This lease agreement contains a purchase option at fair market value at the end of the lease term.

On September 1, 2003 CEI entered into a sublease agreement in the amount of $40,000 per month, under which it subleased a portion of the equipment listed in the lease agreement between CEI and CLC to CTS, a related party. Under the terms of the agreement, CTS makes its payments directly to CLC.

Subsequent to the period of this audit, effective June 30, 2005, the Company and CLC agreed to amend the lease further, to reduce the total monthly payment due to $60,000, starting October 31, 2005. In consideration of the reduction, the Company executed a promissory note with CLC totaling $500,000, interest accruing at prime plus 10% per annum, monthly payments of $20,833 due starting October 1, 2005 and maturity at September 1, 2007.

Real Property Leases – CEI has entered into various real property leases for use of buildings, offices and storage yards to house the operations and property of CEI. CEI currently has operating activities, where long-term real property leases are required, only in Portland, Oregon. At October 31, 2004, CEI had vacated facilities for the Columbia Square Office and the Bothell Washington Facility and CEI was subleasing these spaces in their entirety.

Future minimum lease commitments for the leases described above as of October 31, 2004, are as follows:

F-82


Location	Maturity		2005		2006		2007		2008

Thurman Building		10/31/2008	$	680,009	$	700,167	$	722,085	$	743,894

Columbia Square Office		7/31/2008		377,606		385,984		394,384		301,738

Bothell Washington Facility		3/31/2006		73,378		30,970		—		—

Total			$	1,130,993	$	1,117,121	$	1,116,469	$	1,045,632

Subsequent events relating to the real property leases led to the following summarized changes to the real property leases as follows: The Thurman Building lease was revised prior to the sale of the building to new owners, with the new agreement relating to the portion of the space used by CEI, the 1^st floor café space, $478,409 in unpaid rent was forgiven and an additional $49,655 was considered deferred rent in the new lease agreement. The portion of the space occupied by CVI then became subject to a separate lease agreement between the Landlord and CVI. The Bothell Washington facility lease was terminated due to default, effective April 14, 2005 and the Company and the Landlord settled remaining amounts due for $15,750.

Collective Bargaining Agreements. — All of CEI’s job site employees are covered by collective bargaining agreements. The majority of these agreements will continue for more than one year.

15. Legal Proceedings

In March, 2004, Kurt Underwood (former President/CEO of Microfield Group, Inc.) filed a lawsuit in Multnomah County Circuit Court, Portland, Oregon under case number 0403-02370 against various related parties including Christenson Electric, Inc. On May 27, 2004, the Company and the other defendants listed in Mr. Underwood’s complaint filed two separate answers, affirmative defenses, and counterclaims against Mr. Underwood.

On May 11, 2005 the Company and Mr. Underwood entered into a Settlement Agreement under which both parties agreed to drop their respective lawsuits. The Settlement Agreement provides in part that certain defendants will jointly and severally purchase Microfield Group, Inc. stock held by Mr. Underwood for the aggregate purchase price of $362,500. The purchase price will be allocated as follows: $50,000 to the purchase of Mr. Underwood’s 119,050 Series 2 preferred shares and the balance to the purchase of Mr. Underwood’s 3,404,958 common shares. Microfield assigned its right to purchase Underwood’s shares under the Settlement Agreement to Energy Fund II, LLC, a related party. Payment under the Settlement Agreement occurred as required. The Company was not directly responsible for this obligation, but did incur certain expenses, including legal expenses associated with this litigation, for which the company entered an accrued expense of $85,000 at October 31, 2004.

From time to time, claims are made against the Companies in the ordinary course of our business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting the Companies from selling one or more products or engaging in other activities. The occurrence of an unfavorable outcome in any specific period could have a material adverse affect on the Company’s results of operations for that period or future periods.

F-83

16.

Subsequent Events

Restructuring

CEAC, Inc., CEI’s parent company until the July 20, 2005 sale of CEI to Microfield (see below), entered into a line of credit agreement with U.S. Bank National Association (US Bank) in March 2000. The debt facility was secured by all of the assets of CEAC and CEI, the stock of CEI, and was also guaranteed by CEI. Subsequent to the periods covered by this audit, effective July 1, 2005, the US Bank loan to CEAC, Inc was restructured into a new loan, with a portion being assigned to CEI. The loan to CEI was for $1,900,000 at an interest rate of prime plus 1.5%, matures on July 31, 2008 and requires principal payments of $22,619 per month.

Supporting the restructuring of the US Bank loans, effective May 31, 2005, CEI transferred its interest in a certain certificate of deposit, valued at $260,061, which is held as a portion of the collateral for the CEAC, Inc. loan from US Bank, and all Microfield Preferred Stock shares held by CEI to CEAC, effective July 20, 2005.

Effective June 30, 2005, the Company and Christenson Leasing, LLC (CLC) agreed to amend the a sale and leaseback agreement made previously between the parties (see Note 5), to reduce the total monthly payment due to $60,000, starting October 31, 2005. In consideration of the reduction, the Company executed a promissory note with CLC totaling $500,000, interest accruing at prime plus 10% per annum, monthly payments of $20,833 due starting October 1, 2005 and maturity at September 1, 2007.

Acquisition

On July 20, 2005, CEAC, Inc. sold all the outstanding shares of Christenson Electric, Inc. (CEI) to Microfield Group, Inc. (Microfield) in exchange for 2 million shares of Microfield’s common stock at $.64 per common share, and the assumption of interest-bearing debt within CEI of approximately $4.6 million. Prior to the transaction, debt of $1.9 million owed to US Bank was transferred from CEAC to CEI. Also, common shares of Microfield, previously held by CEI, were transferred to CEAC. The transaction was valued at approximately $5.9 million. As a result of the transaction, CEI is a wholly-owned subsidiary of Microfield.

F-84

Christenson Electric, Inc.
Condensed Balance Sheets
As of April 30, 2005 and October 31, 2004
(Unaudited)


	As of			As of
	April 30,			October 31,
	2005			2004
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	261,798		$	85,696
Accounts receivable		2,039,939			1,188,147
Accounts receivable – related parties		—			20,456
Unbilled revenue		617,857			589,115
Prepaid expenses and other current assets		420,155			360,344

Total current assets		3,339,749			2,243,758


Property, leaseholds and equipment, net		332,758			280,535
Investments		1,428,246			1,428,246
Other assets		97,255			104,482

Total Assets	$	5,198,008		$	4,057,021


Liabilities and Shareholders’ Deficit
Current liabilities:
Cash disbursed in excess of available funds	$	295,127		$	283,890
Accounts payable		3,958,402			2,507,586
Accounts payable – related parties		—			126,009
Accrued payroll and taxes		155,376			—
Line of credit		655,553			667,053
Current portion of notes payable		534,250			55,533
Other current liabilities		491,642			810,457

Total current liabilities		6,090,350			4,450,528


Long term portion of notes payable		—			228,717
Long term portion of capital lease payable – related party		260,773			180,996

Total liabilities		6,351,123			4,860,241


Commitments and contingencies		—			—

Shareholders’ deficit:
Common stock, no par value, 500 shares authorized, 100 shares issued and outstanding at April 30, 2005 and October 31, 2004		63			63
Additional paid-in capital		2,781,657			2,781,657
Accumulated deficit		(3,934,835	)		(3,584,940	)

Total shareholders’ deficit		(1,153,115	)		(803,220	)


Total liabilities and shareholders’ deficit	$	5,198,008		$	4,057,021

The accompanying notes are an integral part of the unaudited condensed financial statements.

F-85

Christenson Electric, Inc.

Notes to Interim Condensed Financial Statements
Six Months Ended April 30, 2005 and 2004
(Unaudited)

Description of Business

Christenson Electric, Inc. (“CEI” or the “Company”), does business as Christenson Power Services (CPS), engages in electrical construction, primarily high voltage electrical services and contract construction, predominantly on electrical substations, transmission facilities and wind farm power generation projects, primarily in the western region of the United States. (see Note 3). In June 2003, CEI elected to exit its unprofitable lines of business and sold certain assets to Christenson Technology Services, Inc. (CTS), a related party. On September 16, 2003, CTS’ was sold to Microfield Group, Inc. (Microfield) in exchange for shares of Microfield’s publicly traded common stock. As part of the sale agreement, CEI and CTS entered into service agreements under which certain employees of each company performed services for the other in exchange for negotiated compensation amounts (see Note 12). Subsequent to this period, effective July 20, 2005, the parent company of CEI, CEAC, Inc. sold all the outstanding shares of CEI to Microfield (see Note 7).

The Company’s headquarters are located in Portland, Oregon.

Summary of Significant Accounting Policies

Fiscal Year – The Company’s fiscal year is the twelve months ending on the last day of October. The Company’s current fiscal year is the twelve months ending October 31, 2005. The Company’s last fiscal year was the twelve months ended October 31, 2004.

Receivables – Contract receivables are recorded when invoices are issued and are written off when they are determined to be uncollectible. The allowance for doubtful accounts is estimated based on the Company’s historical losses, review of specific problem accounts, existing economic conditions in the construction industry, and the financial stability of their customers. The allowance for doubtful accounts at April 30, 2005 and October 31, 2004 was $50 and $32,541, respectively. Generally, the Company considers contract receivables past due after 60 days. The Company follows the practice of filing statutory liens on construction projects where collection problems are anticipated. The liens serve as collateral for contract receivables.

F-88

Concentrations – Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of sales and accounts receivable. The Company’s cash balances are with federally insured banks and periodically exceed the insured limits of $100,000. The Company’s receivables are from customers concentrated in the construction industry and various companies within the western region of the United States. For the six months period ending April 30, 2005, two customers accounted for 58% of total sales. At April 30, 2005, one customer represented accounts receivable of 71% of total outstanding accounts receivable. In addition, two vendors accounted for 30% of the Company’s accounts payable at April 30, 2004. 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.

CEI performs limited credit evaluations of its customers, does not require collateral on accounts receivable balances, but does retain lien rights to reduce its risk.

Impairment of long-lived assets – 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 discounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for 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.

F-89

management considers total cost to be the best available measure of completion of construction contracts in progress. Provisions for estimated losses on construction contracts in progress are made in their entirety in the period in which such losses are determined without reference to the percentage complete.

Advertising – Advertising costs are expensed when incurred. Advertising expense was $0 and $3,370, respectively for the six months ended April 30, 2005 and 2004, respectively.

Pension plan contributions – The Company contributes to several Multi-Employer Pension Benefit Plans on behalf of its employees covered by collective bargaining agreements. During the six months ended April 30, 2005 and 2004, the Companies contributed $185,622 and $150,376, respectively, to these plans, which were expensed as incurred.

Material estimates that are particularly susceptible to significant change in the near-term relate to the valuation of deferred tax assets. Management has estimated the value of goodwill as non-recoverable based on an impairment test effective, October 31, 2004.

New accounting pronouncements

FIN 47. In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143,” which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. The Company is required to adopt the provisions of FIN 47 no later than the first quarter of fiscal 2006. The Company does not expect the adoption of this Interpretation to have a material impact on its financial position, results of operations or cash flows.

F-90

SFAS 154. In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The Company does not expect the adoption of this SFAS to have a material impact on its financial position, results of operations or cash flows.

3. Capital Stock

The Company has authorized 500 shares of Common Stock, no par value. As of April 30, 2005 and October 31, 2004, the Company had 100 shares of common stock issued and outstanding.

4. Debt

Effective August 30, 2004, the Company obtained a $1,000,000 credit facility with CAPCO Financial Company (CAPCO), which expires August 30, 2005. The loan limit was subsequently raised to $2,000,000, and the expiration was extended to January 14, 2006. Borrowings under the line of credit are due on demand, bear interest payable weekly at prime plus 7 1/2% and are collateralized by accounts receivable. The borrowing base is limited by certain factors such as length of collection cycle, subordination of collateral position on bonded work and other credit related factors. Subject to these limitations, as of April 30, 2004, borrowings of $655,553 were outstanding and the Company had no available borrowing capacity. The Company was in compliance with the terms of the borrowing facility at October 31, 2004.

The total amounts of the individual notes payable outstanding at April 30, 2005 and October 31, 2004, and their terms are summarized below.


	April 30, 2005		October 31, 2004
William C. McCormick, an unsecured note, due July 31, 2005, interest payable monthly at 12% per annum.	$	250,000	$	—

Umpqua Bank, twelve monthly payments of $5,553.25 in remaining principal due, including interest at 8.25% per annum, beginning on or before January 3, 2005, with the principal balance calculated on a sixty month amortization. The full remaining balance is due on or before December 31, 2005. The Company has not made its required payments and the loan is currently in default.		284,250		284,250

F-91


	April 30, 2005			October 31, 2004
Total long-term debt		534,250			284,250
Less current maturities of long-term debt		(534,250	)		(55,533	)


Long-term debt, net of current maturities	$	—		$	228,717

5. Related Party Transactions

The Company has a number of promissory notes, accounts receivable, lines of credit and lease obligations owing to and from related parties. The following table lists the notes, accounts and obligations outstanding at April 30, 2005 and October 31, 2004 and by related party.

Amount of

Obligation at

Maturity

Obligation at

October 31,

Related Party

Type of Obligation

Date

April 30, 2005

2004

CEAC, Inc.^(a)

Accounts Receivable

current

418,417

—

CEAC, Inc.^(a)

Accounts Payable

current

54,464

—

Christenson Leasing, LLC (CLC)^(a)

Equipment Lease

2/31/07

2,597,255

3,149,880

CLC^(a)

TI Lease

12/31/07

216,523

227,902

Christenson Velagio, Inc. (CVI)

Bond Guarantee Fees

Open

—

Irvine Associates, Inc.

Equipment Lease

5/17/05

11,753

Jesenik Enterprises, Inc. (JEI)^(a)

Bond Indemnity Fees

Open

126,913

126,009

JEI^(a)

Equipment Lease

5/17/05

11,753

JW Assurance and Holding Limited^(a)

Equipment Lease

5/17/05

16,790

Aequitas Capital Management^(a)

Equipment Lease

5/17/05

50,371


^(a)		Robert J. Jesenik, a director and significant shareholder of the Company, also owns a significant interest in these entities. Mr. Jesenik is also an executive officer of each of the entities designated by this footnote.

Terms and conditions of each of the notes and agreements are listed below.

Notes Payable

On September 15, 2003, CTS, CEI and Microfield Group, Inc. (Microfield) entered into an Agreement to Consolidate, Amend and Satisfy Obligations. Under this agreement CTS acknowledged the separate debts of $1.5 million and $265,000 owed to CEI. The combined debt of $1,765,000, was split into two separate amounts, in which a new Subordinated Amended and Restated Promissory Note for $1,400,000 was issued to CEI. The remaining $365,000 of indebtedness was converted to 869,048 shares of Microfield Series 2 preferred stock in a transaction in which Microfield acquired CTS on September 16, 2003. On November 15, 2003, the remaining interest due of $52,767 was converted to 125.636 shares of Microfield Series 3 preferred stock and the $1,400,000 Promissory Note was converted to 3,333,333 shares of MGI Series 2 preferred stock. On April 2, 2004 Subsequently, on July 20, 2005, supporting the restructuring of the US Bank loans, CEI transferred its interest in all Microfield Preferred Stock shares held by CEI to CEAC (see Note 7).

F-92

company recorded $340,470 in goodwill as part of this acquisition. At October 31, 2004 management determined that the goodwill was fully impaired as a result of the discontinuation of the GDC business and recorded an impairment charge of $340,470 in the combined statement of operations for the fiscal year ended October 31, 2004.

Accounts Receivable

CEI and CEAC, Inc., CEI’s parent company until the July 20, 2005 sale of CEI to Microfield (see Note 7), maintained open accounts payable and receivable between the companies from time to time. At April 30, 2005 and October 31, 2004 the accounts payable due CEAC by CEI was $52,464 and $0, respectively. At April 30, 2005 and October 31, 2004 the accounts receivable due CEI by CEAC was $418,417 and $0, respectively. These amounts due arose from expenses of CEAC paid by CEI.

Lease Agreements

On May 17, 2001, CEI entered into operating lease agreements covering certain equipment and furniture with Jesenik Enterprises, Inc., JW Assurance and Holding Limited, and JMW Capital Partners, Inc., each a related party, and with Seth Buechley and Irvine Associates, Inc. No payments have been made on these lease obligations since September 2002, though the original lease provided for total payments of $4,645 per month through May 2005. At April 30, 2005 and 2004 the lease obligations due and unpaid totaled $143,997 and $88,257, respectively and the total unpaid amount due under the lease through lease maturity was $148,643 at both dates. The unpaid lease payable obligation split between the parties at April 30, 2005 and 2004, respectively as follows: $11,386 and $6,979 to Jesenik Enterprises, Inc.; $16,266 and $9,969 to JW Assurance and Holding Limited; $48,797 and $29,908 to JMW Capital Partners, Inc. (now Aequitas Capital Management, Inc.); $ 56,163 and $34,422 to Seth Buechley; and $11,386 and $6,979 to Irvine Associates, Inc. At April 30, 2005 and 2004 the total lease obligations remaining totaled $148,643, split between the parties as follows: $11,753 to Jesenik Enterprises, Inc.; $16,790 to JW Assurance and Holding Limited; $50,371 to JMW Capital Partners, Inc.; $ 57,874 to Seth Buechley; and $11,753 to Irvine Associates, Inc. At July 1, 2005, the Company consolidated all but the obligation to Seth Buechley into one promissory note with total principal due of $90,847, interest accruing at 7% per annum, maturing at April 1, 2006, and with $5,047 monthly installment payments and, in addition, a lump sum payment of $50,000 due on October 1, 2005. Management is in discussions with Seth Buechley regarding the payment provisions for his portion of this overdue lease obligation debt.

On December 31, 2002, CEI entered into a sale and leaseback agreement with CLC, under which it sold machinery and tools, automotive equipment, and office furniture and equipment, not subject to prior liens, to CLC. The lease is recorded as an operating lease with payment terms of $97,255 per month, beginning January 2, 2003, through December 31, 2007. On September 1, 2003 CEI entered into a sublease agreement in the amount of $40,000 per month, under which it subleased a portion of the equipment listed in the lease agreement between CEI and CLC to CTS, a related party. Under the terms of the agreement, CTS makes its payments directly to CLC. On December 31, 2003, the lease payments due to CLC were reduced to $87,255 per month through expiration at December 1, 2005. Simultaneously, on December 31, 2003, in an agreement with Microfield Group, Inc., CTS’ parent, CEI agreed to deliver 309,524 Microfield Group common shares or the equivalent to CLC as consideration for the rent payment reduction. At October 31, 2004, CEI and CLC agreed to restructure the lease payment schedule, allowing for graduated payments over the remaining term of the lease as follows:


Payment dates	Payment amount per month

October – November 2004	$	50,000
December 2004		60,000
January – April 2005		65,000
May – November 2005		100,000
December 2005 – November 2006		115,000
December 2006 – December 2007		125,500

F-93

Effective June 30, 2005, the Company and CLC agreed to amend the lease further, to reduce the total monthly payment due to $60,000, starting October 31, 2005. In consideration of the reduction, the Company executed a promissory note with CLC totaling $500,000, interest accruing at prime plus 10% per annum, monthly payments of $20,833 due starting October 1, 2005 and maturity at September 1, 2007.

Management Services Agreement

Administrative Services Agreement

Bond Guarantee and Indemnity Fees

On June 5, 2002, three stockholders of CEI entered into an Indemnity Agreement with two insurance companies with respect to surety bond obligations of CEI and Affiliates. CEI will pay fees to the stockholders for personal indemnities at 15% per annum based on the total bonding in place under the bonding facilities. Subsequently, two stockholders sold their interest in CEI, with the Indemnity Agreement continuing with one former stockholder and the indemnity agreement obligation for the other being assumed by the remaining stockholder, Robert Jesenik. Total indemnity fees paid to stockholders and former stockholders were $39,337 for the six months ended April 30, 2005. In the event an obligation arises out of the indemnity agreement requiring payment with cash or collateral, the stockholder and former stockholder shall be indemnified by CEI to the full extent of the payment. Total potential obligations, not recorded on the accompanying combined financial statements, from the personal indemnity agreement amounted to $20,000 at April 30, 2005. As of April 30, 2005, there have been no payments made to the stockholders and former stockholders for purposes of claims regarding the indemnification obligations. CEI has an agreement with Robert Jesenik, dba Jesenik Enterprises, Inc. (JEI), under which CEI pays JEI a varying amount per week based on the remaining amount due to Mr. Jesenik outstanding for past fees due under this agreement. The amount remaining due and payable at April 30, 2005 was $126,913. Effective July 1, 2005, the Company and Aequitas Capital Management, Inc. (ACM, assignee of the Robert Jesenik payable) agreed to consolidate the remaining amount due into a promissory note between the parties.

Other Transactions

F-94

6. Legal Proceedings

Shareholder lawsuit and settlement

In March, 2004, Kurt Underwood (former President/CEO of Microfield Group, Inc.) filed a lawsuit in Multnomah County Circuit Court, Portland, Oregon under case number 0403-02370 against Robert J. Jesenik, Aequitas Capital Management (formerly known as JMW Capital Partners), Destination Capital, LLC, Microfield Group, Inc., Christenson Electric, Inc., Steven M. Wright, Andrew S. Craig, Thomas A. Sidley, R. Patrick Hanlin, Michael Stansell, Brian A. Oliver, Brian N. Christopher, Kevin D. Robertson, Christenson Group, LLC, and Christenson Velagio, Inc. The lawsuit alleged that the Defendants violated Oregon securities law and Oregon common law in connection with the following transactions (which closed simultaneously in September 2003): (1) the merger of CTS Acquisition Co. (a wholly-owned subsidiary of the Company) with and into Christenson Technology Services, Inc.; and (2) the merger of VSI Acquisition Co. (A wholly-owned subsidiary of the Company) with and into Velagio, Inc. In addition, the lawsuit alleged that Mr. Underwood was terminated as an employee entitling him to severance pay. The lawsuit sought damages of approximately $1.4 million.

On May 27, 2004, the Company, certain defendants filed two separate answers, affirmative defenses, and counterclaims against Mr. Underwood in Multnomah County Circuit Court alleging violations of Oregon Securities law and Oregon common law in connection with the above named transactions. In addition, the countersuit alleged that Mr. Underwood was terminated by the Company for good cause. The lawsuit sought damages of not less than $2.5 million and return of the 3.4 million shares of Microfield stock held by Mr. Underwood in exchange for the return of the shares of Velagio stock held by the Microfield.

On May 11, 2005 the defendants and Mr. Underwood entered into a Settlement Agreement under which both parties agreed to drop their respective lawsuits. The Settlement Agreement provides that certain defendants will jointly and severally purchase Mr. Underwood’s Microfield Stock for the aggregate purchase price of $362,500. The purchase price will be allocated as follows: $50,000 to the purchase of Mr. Underwood’s 119,050 Series 2 preferred shares and the balance to the purchase of Mr. Underwood’s 3,404,958 common shares. Additionally, the Settlement Agreement terminates Mr. Underwood’s Microfield Warrant. Microfield assigned its right to purchase Underwood’s shares under the Settlement Agreement to Energy Fund II, LLC, a related party. Payment under the Settlement Agreement occurred as scheduled on August 1, 2005.

7. Subsequent Events

Restructuring

CEAC, Inc., CEI’s parent company until the July 20, 2005 sale of CEI to Microfield (see below), entered into a line of credit agreement with U.S. Bank National Association (US Bank) in March 2000. The debt facility was secured by all of the assets of CEAC and CEI, the stock of CEI, and was also guaranteed by CEI. Effective July 1, 2005, the US Bank loan to CEAC, Inc was restructured into a new loan, with a portion being assigned to CEI. The loan to CEI was for $1,900,000 at an interest rate of prime plus 1.5%, matures on July 31, 2008 and requires principal payments of $22,619 per month.

F-95

RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
Certified Public Accountants

REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

Board of Directors
EnergyConnect, Inc.
San Jose, California

We have audited the accompanying balance sheets of EnergyConnect, Inc. as of December 31, 2004 and 2003 and the related statements of operations, deficiency in stockholders’ equity, and cash flows for the years then ended. 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.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of EnergyConnect, Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in the Note 2 to the accompanying financial statements, the Company has suffered recurring losses and is experiencing difficulty in generating sufficient cash flow to meet it obligations and sustain its operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

McLean, Virginia
September 15, 2005

F-97

ENERGYCONNECT, INC.

BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003


	December 31,			December 31,
	2004			2003
Current assets:
Cash and cash equivalents	$	10,814		$	6,087
Other current assets		14,689			4,466

Total current assets		25,503			10,553

Property and equipment, net of accumulated depreciation of $22,701 and $16,399 at December 31,2004 and 2003 ,respectively (Note 4)		4,185			116
Intangible assets, net of accumulated amortization of $104 and $0 at December 31,2004 and 2003, respectively (Note 5)		3,006			—
Total assets	$	32,694		$	10,669


Current liabilities:
Accounts payable	$	181,378		$	1,625
Accrued payroll and taxes		413,532			280,000
Bank line of credit (Note 6)		100,412			—
Note payable (Note 11)		200,000			—
Other current liabilities-related parties (Note 8)		128,355			118,256
Total current liabilities		1,023,677			399,881


Long-term liabilities:
Loans payable-related parties (Note 8)		280,240			19,000
Total long-term liabilities		280,240			19,000

Commitments and contingencies (Note 12)		—			—

Deficiency in stockholders’ equity:
Common stock, no par value, 2,500 shares authorized, 143 and 141 shares issued and outstanding at December 31, 2004 and 2003, respectively (Note 10)		425,322			350,307
Common stock subscription (Note 10)		(285,015	)		(210,000	)
Accumulated deficit		(1,411,530	)		(548,519	)
Total deficiency in stockholders’ equity		(1,271,223	)		(408,212	)

Total liabilities and deficiency in stockholders’ equity	$	32,694		$	10,669

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

F-98

ENERGYCONNECT, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003


	December 31, 2004			December 31, 2003
Cash flows from operating activities:

Net loss	$	(863,011	)	$	(257,442	)

Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization (Note 4 and 5)		6,406			765

Changes in current assets and liabilities:
Other current assets		(10,223	)		(4,466	)
Accounts payable		313,086			158,293
Other current liabilities		10,298			80,882


Net cash used in operating activities		(543,444	)		(21,968	)


Cash flows from investing activities
Purchase of intangibles (Note 5)		(3,110	)		—
Purchases of property and equipment (Note 4)		(10,371	)		—


Net cash used in investing activities		(13,481	)		—


Cash flows from financing activities:
Proceeds from note payable (Note 11)		200,000			—
Loan from shareholder, net		261,240			19,000
Borrowing on line of credit (Note 6)		100,412			—


Net cash provided by financing activities		561,652			19,000


Net increase (decrease) in cash and cash equivalents		4,727			(2,968	)

Cash and cash equivalents, beginning of year		6,087			9,055

Cash and cash equivalents, end of year	$	10,814		$	6,087


Supplemental Disclosures of Cash Flow Information:
Interest paid in cash	$	—		$	—
Taxes paid in cash	$	—		$	—

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

F-101

ENERGYCONNECT, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2004 AND 2003

1. Description of the Business

EnergyConnect, Inc. (the “Company”) provides technologies and services to enable commercial buildings to participate in new wholesale electric power markets. Building operational flexibility is modeled and controlled to supply needed products and services to the electric grid. EnergyConnect collects payment for these products and services and shares payments with participating buildings.

The Company was incorporated in March 1998 as a Nevada Corporation. The Company’s headquarters are located in San Jose, California.

2. Liquidity Matters

The accompanying 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 financial statements during the years ended December 31, 2004 and 2003, the Company incurred net losses of $863,011 and $257,442, respectively. The Company’s current liabilities exceeded its current assets by $998,174 as of December 31, 2004. 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 revenues and profitable operations. Management has been focused on developing software which when in use will generate a customer base and initial revenues. While the Company anticipates these efforts will result in initial revenues toward the third quarter of 2005, recurring losses and liquidity issues raise doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

By raising funds to sustain the company until revenues are sufficient to support operations, management believes it will have sufficient capital resources to meet projected cash flow deficits. However, if during that period or thereafter, the Company is not successful in generating 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. Investment capital or debt facilities may be difficult to obtain. There can be no assurance that additional capital will be available or, if available, will be at terms acceptable to the Company.

3. Summary of Significant Accounting Policies

Fiscal Year

The Company’s fiscal year is the twelve month period ending on the last day of December. The Company’s current fiscal year is the twelve month period ending December 31, 2004. The Company’s last fiscal year was the twelve month period ended December 31, 2003.

Cash and Cash Equivalents

Fair Value of Financial Instruments

F-102

Advertising Costs

The Company follows the policy of charging the costs of advertising to expenses incurred. The Company incurred no advertising costs in either period.

Property and Equipment

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. At December 31, 2004 and 2003 there was no outstanding trade accounts receivable. The Company performs limited credit evaluations of its customers, does not require collateral on accounts receivable balances. The Company has not experienced material credit losses for the periods presented.

Revenue and Cost Recognition

For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB104”), which superceded Staff Accounting Bulletin No. 101, Revenue Recognition In Financial Statements (“SAB101”).

SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.

SAB 104 incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”), Multiple-Deliverable Revenue Arrangements. EITF 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing EITF 00-21 on the Company’s financial position and results of operations was not significant.

Impairment of Long-lived Assets

The Company has adopted Statement of Financial Accounting Standards No. 144 (SFAS 144). The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should an impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future undiscounted cash flows resulting from the use and ultimate disposition of the asset. SFAS No. 144 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

The Company’s long lived assets consist of a patent. While it has not been issued and amortization has not started, this asset will be 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 long-lived assets that management expects to hold and use is based on the fair value of the asset as estimated using a undiscounted cash flow model.

F-103

Income Taxes

Computation of Net Income (Loss) per Share

Comprehensive Income

Statement of Financial Accounting Standards No. 130 (“SFAS 130”), “Reporting Comprehensive Income,” establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have any items of comprehensive income in any of the periods presented.

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.

Proprietary Software in Development

In accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (“FAS 86”), the Company will capitalize computer software development upon the establishment of technological feasibility. Technological feasibility is considered to have occurred upon completion of a detailed program design which has been confirmed by documenting and tracing the detail program design to product specifications and has been reviewed for high-risk development issues, or to the extent a detailed program design is not pursued, upon completion of a working model that has been confirmed by testing to be consistent with the product design. Amortization will be provided based on the greater of the ratios that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or the straight-line method over the estimated useful life of the product. As of December 31, 2004 and 2003, the Company had not capitalized software development costs.

F-104

Research and Development

The Company accounts for research and development costs in accordance with the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 2 (“SFAS 2”), “Accounting for Research and Development Costs. Under SFAS 2, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company incurred no research and product development costs for the year ended December 31, 2004 and 2003.

Stock Based Compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company’s stock at the date of the grant over the exercise price of the related option. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial reports for the year ended December 31, 2004 and 2003 and will adopt the interim disclosure provisions for its financial reports for the subsequent periods. The Company has no awards of stock-based employee compensation outstanding at December 31, 2004 and 2003.

Reclassification

Certain reclassifications have been made to conform to prior periods’ data to the current presentation. These reclassifications had no effect on reported losses.

Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123R (revised 2004), “Share-Based Payment” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”.Statement 123R supersedes APB opinion No. 25, “Accounting for Stock Issued to Employees”, and amends FASB Statement No. 95, “Statement of Cash Flows”.Generally, the approach in Statement 123R is similar to the approach described in Statement 123. However, Statement 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. On April 14, 2005, the SEC amended the effective date of the provisions of this statement. The effect of this amendment by the SEC is that the Company will have to comply with Statement 123R and use the Fair Value based method of accounting no later than the first quarter of 2006. Management has not determined the impact that this statement will have on Company’s financial statements.

F-105

SFAS 153. On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (“ SFAS 153”). This statement amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, if a nonmonetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. SFAS 153 is effective for non-monetary transactions in fiscal periods that begin after June 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows.

FIN 47. In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143,” which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. The Company is required to adopt the provisions of FIN 47 no later than its last quarter of fiscal 2006. The Company does not expect the adoption of this Interpretation to have a material impact on its financial position, results of operations or cash flows.

SFAS 154. In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The Company does not expect the adoption of this SFAS to have a material impact on its financial position, results of operations or cash flows.

4. Property and Equipment

Property and equipment consist of the following:


	December 31,			December 31,
	2004			2003
Computer hardware and software	$	26,886		$	16,515

Less accumulated depreciation and amortization		(22,701	)		(16,399	)


	$	4,185		$	116

Depreciation expense included as a charge to income was $6,302 and $765 for the years ended December 31, 2004 and 2003, respectively.

F-106

5. Intangible Assets

The costs and accumulated amortization of intangible assets at December 31, 2004 and 2003, are summarized as follows:


	2004			2003
Patent	$	3,110		$	—
Less: accumulated amortization		(104	)		—

Intangible assets, net	$	3,006		$	—

Amortization expense included as a charge to income was $104 and $0 for the years ended December 31, 2004 and 2003, respectively.

6. Operating Line of Credit

During the year ended December 31, 2004, the Company secured a $120,000 credit facility, which expires on March 1, 2006. Borrowings under the line of credit are due on demand, bear interest payable monthly at prime plus 3.75% and are unsecured. The Company had available borrowing capacity at December 31, 2004 of approximately $20,000. As of December 31, 2004, borrowings of $100,412 were outstanding under the facility. The Company was in compliance with the terms of the borrowing facility at December 31, 2004.

7. Income Taxes

The provision for income taxes for the years ended December 31, 2004 and 2003 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 31, 2004 and 2003, the Company 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 EnergyConnect’s pre-tax loss in fiscal years 2004 and 2003 would have been approximately $345,000 and $103,000, respectively. However, because of recognition of a full valuation allowance the effective tax rate for the Company was zero in both 2004 and 2003.

At December 31, 2004, the Company had available net operating loss carryforwards of approximately $1,411,000 for federal income tax purposes. Such carryforwards may be used to reduce taxable income, if any, in future years through their expiration in 2005 to 2024 subject to limitations of Section 382 of the Internal Revenue Code, as amended.

8. Related Party Transactions

The following table lists the amounts due to certain shareholders at December 31, 2004 and 2003. The amounts payable to these shareholders and employees represent costs incurred by the listed persons in the performance of their duties on behalf of the Company. The short-term payables are payable on demand and non-interest bearing. No formal repayment terms and arrangement terms exist. Long-term payables bear interest at 10% per annum and the shareholder agreed not to demand payments from the Company within twelve months from December 31, 2004.


	December 31, 2004		December 31, 2003
Short term payables:
Gene Ameduri	$	30,651	$	15,461
Rodney Boucher		—		39,347
Vincent Cushing		97,704		63,448

Total current payables		128,355		118,256


Long term payables:
Rodney Boucher		280,240		19,000

Total long term payables	$	280,240	$	19,000

F-107

In July 2003, the Company entered into an agreement with Gene Ameduri in which he received 40 shares of the Company’s common stock in exchange for a note receivable in the amount of $200,000. The note accrues interest at 5% per annum and is due to the Company in minimum installments of $5,000, corresponding with each of the Company’s qualifying payroll periods beginning on January 1, 2005 (see Note 10 and 13).

9. Business Concentration

During the year ended December 31, 2004, approximately $69,000, or 91%, of total revenues were derived from one major customer.

10. Capital Stock

The Company is authorized to issue 2,500 shares of common stock. The common stock has no par value. The Company has 143 and 141 shares of common stock issued and outstanding at December 31, 2004 and 2003, respectively.

On July 14, 2003, the Company entered into an agreement with an officer in which he received 40 shares of the Company’s common stock in exchange for a note receivable in the amount of $200,000. The note accrues interest at 5% per annum and is due to the Company in minimum installments of $5,000, corresponding with each of the Company’s qualifying payroll periods beginning on January 1, 2005 (see Note 13). On December 12, 2003, an investor subscribed one share of the Company’s common stock in the amount of $10,000. The Company did not receive the proceeds in payment for that stock purchase until May 2005.

During the year ended December 31, 2004, the Company issued 2 shares of common stock to an investor in exchange for $75,015 of proceeds, net of costs and fees. The Company did not receive the proceeds in payment for that stock purchase until February 2005.

In instances where investors purchase stock, and proceeds are not received by the Company in the reporting period, the Company accounts for the shares subscribed as common stock subscription receivable, and those amounts are offset against equity. At December 31, 2004 and 2003, the company had stock subscriptions receivable of $285,015 and $210,000, respectively.

11. Notes Payable to Microfield

In April 2004, the Company entered into a Letter Agreement under which it received $200,000 from Microfield Group, Inc. (Microfield). The Letter Agreement provides for a subsidiary of Microfield, Christenson Velagio, Inc. (CVI) to provide construction and construction related services to the Company. It also provides for the company to receive up to an additional $400,000, if a certain level of purchase orders is issued by the company to CVI. The Letter Agreement terminated on July 31, 2004. The note was converted to 5 shares of the Company’s common stock in March 2005.

12. Commitments and Contingencies

Consulting Agreement

The Company has various consulting agreements with outside contractors to provide business development and consultation services. The Agreements are generally for a term of 12 months from inception and renewable automatically from year to year unless either the Company or Consultant terminates such agreement by written notice.

Litigation

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on its financial position, results of operations or liquidity.

F-108

EnergyConnect, Inc.
Condensed Balance Sheets
As of September 30, 2005 and December 31, 2004


	As of			As of
	September 30,			December 31,
	2005			2004
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	48,997		$	10,814
Accounts receivable		47,827			—
Other current assets		21,845			14,689

Total current assets		118,669			25,503


Property and equipment, net		1,449			4,185
Other assets		33,977			3,006

Total Assets	$	154,095		$	32,694


Liabilities and Shareholders’ Deficit
Current liabilities:
Accounts payable	$	627,215		$	181,378
Note payable		—			200,000
Line of credit		117,454			100,412
Other current liabilities		189,124			541,887

Total current liabilities		933,793			1,023,677


Long term portion of notes payable		226,789			280,240

Total liabilities		1,160,582			1,303,917


Commitments and contingencies		—			—

Shareholders’ deficit:
Common stock, no par value, 2,500 shares authorized, 143 shares issued and outstanding at September 30, 2005 and December 31, 2004		1,491,968			425,322
Common stock subscription					(285,015	)
Accumulated deficit		(2,498,455	)		(1,411,530	)

Total shareholders’ equity (deficit)		(1,006,487	)		(1,272,223	)


Total liabilities and shareholders’ equity (deficit)	$	154,095		$	32,694

The accompanying notes are an integral part of the unaudited condensed financial statements.

F-110

ENERGYCONNECT, INC.

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

1. Description of the Business

The Company was incorporated in March 1998 as a Nevada Corporation. The Company’s headquarters are located in San Jose, California.

2. Liquidity 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 financial statements during the nine months ended September 30, 2005 and 2004, the Company incurred net losses of $1,500,000 and $664,000, respectively. The Company’s current liabilities exceeded its current assets by $815,000 as of September 30, 2005. 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 revenues and profitable operations. Management has been focused on developing software which when in use will generate a customer base and initial revenues. While the Company recorded initial revenues from the deployment of this software during the third quarter of 2005, recurring losses and liquidity issues raise doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

3. Summary of Significant Accounting Policies

General

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

F-113

periods ended September 30, 2005 and 2004, are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. The unaudited condensed financial statements should be read in conjunction with the December 31, 2004 financial statements and footnotes included herein.

Fiscal Year

The Company’s fiscal year is the twelve month period ending on the last day of December. The Company’s current fiscal year is the twelve month period ending December 31, 2005. The Company’s last fiscal year was the twelve month period ended December 31, 2004. The Company’s third fiscal quarters in fiscal 2005 and 2004 were the three month periods ended September 30, 2005 and 2004, respectively.

Cash and Cash Equivalents

Fair Value of Financial Instruments

Advertising Costs

The Company follows the policy of charging the costs of advertising to expenses incurred. The Company incurred no advertising costs in either period.

Property and Equipment

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. At September 30, 2005 there was one customer that comprised the majority of the outstanding trade receivable balance. At September 30, 2004 there was no outstanding trade accounts receivable. The Company performs limited credit evaluations of its customers, does not require collateral on accounts receivable balances. The Company has not experienced material credit losses for the periods presented.

F-114

Revenue and Cost Recognition

SAB 104 incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”), Multiple-Deliverable Revenue Arrangements. EITF 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing EITF 00-21 on the Company’s consolidated financial position and results of operations was not significant.

Impairment of Long-lived Assets

The Company’s long lived assets consist of a patent. While it has not been issued and amortization has not started, this asset will be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such asset 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 long-lived assets that management expects to hold and use is based on the fair value of the asset as estimated using a undiscounted cash flow model.

Income Taxes

Computation of Net Income (Loss) per Share

F-115

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 nine months ended September 30, 2005 and 2004, 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.

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.

Research and Development

The Company accounts for research and development costs in accordance with the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 2 (“SFAS 2”), “Accounting for Research and Development Costs. Under SFAS 2, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company incurred $1,048,000 of research and product development costs in the nine months ended September 30, 2005 and $359,000 in the nine months ended September 30, 2004.

Stock Based Compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS 123.” This statement amends SFAS No. 123,

F-116

“Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company’s stock at the date of the grant over the exercise price of the related option. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial reports for the year ended December 31, 2004 and 2003 and will adopt the interim disclosure provisions for its financial reports for the subsequent periods. The Company has no awards of stock-based employee compensation outstanding at December 31, 2004 and 2003.

Reclassification

Certain reclassifications have been made to conform to prior periods’ data to the current presentation. These reclassifications had no effect on reported losses.

Recent Accounting Pronouncements

F-117

Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows.

SFAS 153. On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (“ SFAS 153”). This statement amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, if a nonmonetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. SFAS 153 is effective for non-monetary transactions in fiscal periods that begin after June 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows.

SFAS 154. In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The Company does not expect the adoption of this SFAS to have a material impact on its consolidated financial position, results of operations or cash flows.

4. Debt.

As of September 30, 2005, the Company has a $120,000 credit facility, which expires on March 1, 2006. Borrowings under the line of credit are due on demand, bear interest payable monthly at prime plus 3.75% and are unsecured. The Company had $2,546 borrowing capacity at September 30, 2005. As of September 30, 2005, borrowings of $117,454 were outstanding under the facility. The Company was in compliance with the terms of the borrowing facility at September 30, 2005.

5. Related Party Transactions

The following table lists the amounts due to certain shareholders at September 30, 2005 and December 31, 2004. The amounts payable to these shareholders and employees represent costs incurred by the listed persons in the performance of their duties on behalf of the Company.


	September 30, 2005		December 31, 2004
Short term payables:
Gene Ameduri	$	42,000	$	30,651
Rodney Boucher		67,000		—
Vincent Cushing		80,124		97,704

Total current payables		189,124		128,355

Long term payables:
Rodney Boucher		226,789		280,240

	$	226,789	$	280,240

F-118

At December 31, 2004 the Company had a liability of $413,333 on its balance sheet representing deferred compensation owed to Vincent Cushing for the years 2002, 2003 and 2004. Mr. Cushing owns a minority interest in the Company. During the nine months ended September 30, 2005 this liability was settled, with Mr. Cushing forgiving the entire debt. Accordingly, the full $413,333 is classified as income from forgiveness of debt and is listed as other income (expense), net in the condensed statement of operations.

6. Capital Stock

The Company is authorized to issue 2,500 shares of common stock. The common stock has no par value. The Company has 143 shares of common stock issued and outstanding at September 30, 2005 and December 31, 2004.

7. Subsequent Events

On October 13, 2005, the Company’s shareholders entered into an agreement to sell all the outstanding shares of EnergyConnect, Inc. in exchange for 27,365,305 shares of Microfield Group, Inc. common stock at $2.34 per common share, issuance of 19,695,432 warrants to purchase the Company’s common shares at $2.58 per share, and issuance of 3,260,940 options to purchase the company’s common stock at $0.32 per share. The transaction was valued at approximately $107 million. As a result of the transaction, ECI is a wholly-owned subsidiary of Microfield Group, Inc.

F-119

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Our Articles of Incorporation, as amended, provide to the fullest extent permitted by Oregon law, our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director’s or officer’s fiduciary duty. The effect of this provision of our Articles of Incorporation, as amended, is to eliminate our right and our shareholders (through shareholders’ derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in its Articles of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers. In addition, we have entered into indemnification agreements with our officers and directors.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth an itemization of all estimated expenses, all of which we will pay, in connection with the issuance and distribution of the securities being registered:

NATURE OF EXPENSE AMOUNT


SEC Registration fee	$	2,336.00
Accounting fees and expenses		45,000.00	*
Legal fees and expenses		75,000.00	*
Miscellaneous		2,664.00

TOTAL	$	125,000.00

* Estimated.

II-1

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

On July 28, 2004, The Company issued an aggregate of 1,600,000 shares of common stock to a consultant in exchange for $560,000 of services rendered, which approximated the fair value of the shares issued during the period services were completed and rendered. Compensation costs of $560,000 were charged to operations during the year ended January 1, 2005. In October 2004, one of the Series 2 preferred stockholders converted 119,048 shares of Series 2 preferred stock into 119,048 shares of common stock.

On September 16, 2003 the Company acquired Christenson Technology Services, Inc. and Velagio, Inc. in exchange for 8,386,285 shares of the Company’s common stock. The shares of common stock issued in conjunction with the acquisition were not registered under the Securities Act of 1933.

On September 26, 2003, the Company issued 3,607,151 shares of restricted Series 2 preferred stock in conjunction with a private placement at $.42 per share. In total, the Company received net cash proceeds from the private placement of approximately $715,000 and conversion of $765,000 of debt. Issuance costs relative to the private placement were approximately $35,000. These shares of stock are not registered under the Securities Act of 1933 and must be held for the time required by Rule 144 promulgated under the Securities Act.

On April 8, 2004 the Company issued 4605.265 shares of Series 4 preferred stock in conjunction with a private placement at $380 per share. Each of the Series 4 preferred shares are convertible into one thousand shares of the Company’s common stock. In total, the Company received net proceeds from the private placement of approximately $1,724,000. Issuance costs relative to the private placement were approximately $26,000. These shares of stock are not registered under the Securities Act of 1933 and must be held for the time required by Rule 144 promulgated under the Securities Act.

Pursuant to an Agreement and Plan of Merger dated July 20, 2005 by and between the Company, CPS Acquisition Co., Christenson Electric, Inc. and CEAC, Inc., an Oregon corporation and sole shareholder of Christenson Electric, the Company issued 2,000,000 shares of its common stock to CEAC. The shares of common stock issued in conjunction with the acquisition were not registered under the Securities Act of 1933.

On October 5, 2005, the Company closed a private placement of $3,659,520 of its common stock to certain accredited investors. The Company sold 5,227,886 shares of common stock to the investors for $0.70 per share. In

II-2

addition, each investor received a warrant to purchase one share of common stock for every two shares purchased in the private placement. The warrants have a five year term and an exercise price of $0.90 per share.

On October 13, 2005, the Company acquired, via merger, substantially all of the assets of EnergyConnect, Inc., a Nevada corporation. As a result of the merger, the Company issued 27,365,306 shares of its common stock and 19,695,432 common stock purchase warrants exercisable at $2.58 per share to EnergyConnect shareholders in exchange for all the outstanding shares of EnergyConnect. The Company also granted options to purchase shares of our common stock at $0.32 per share to the Energy Connect option holders in connection with the assumption of the EnergyConnect Employee Stock Option Plan.

All of the above offerings and sales were deemed to be exempt under Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of Microfield Group, Inc. or executive officers of Microfield Group, Inc., and transfer was restricted by Microfield Group, Inc. in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings. Except as disclosed above, we have not employed any underwriters in connection with any of the above transactions.

Except as expressly set forth above, the individuals and entities to whom we issued securities as indicated in this section of the registration statement are unaffiliated with us.

II-3

ITEM 27. EXHIBITS.

The following exhibits are included as part of this Form SB-2. References to “the Company” in this Exhibit List mean Microfield Group, Inc., an Oregon corporation.


Exhibit No.		Description

	2.1	Form of Asset Purchase Agreement between Greensteel, Inc., and Microfield Graphics, Inc., dated September 7, 2000 (Incorporated by reference to Annex A to the Registrant’s Proxy Statement filed October 3, 2000).

	2.2	Form of Agreement and Plan of Merger between Microfield Graphics, Inc. and Innovative Safety Technologies, LLC. and Microfield Merger Sub, Inc. dated September 16, 2002 (Incorporated by reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K filed October 3, 2002).

	2.3	Form of Agreement and Plan of Merger by and among Microfield Group, Inc. and CTS Acquisition Co. and Christenson Technology Services, Inc. and Christenson Group, LLC, dated September 15, 2003 (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed October 1, 2003.

	2.4	Form of Agreement and Plan of Merger by and among Microfield Group, Inc. and VSI Acquisition Co. and Velagio, Inc. and Kurt A. Underwood and TSI Telecommunication Services, Inc. dated as of September 15, 2003 (Incorporated by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed October 1, 2003).

	2.5	Form of Agreement and Plan of Merger by and among Microfield Group, Inc. and CPS Acquisition Co. and Christenson Electric, Inc. and CEAC, Inc. dated as of July 20, 2005 (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed July 26, 2005)

	2.6	Agreement and Plan of Merger by and among Microfield Group, Inc. and ECI Acquisition Co. and EnergyConnect, Inc. dated as of October 11, 2005 (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed October 19, 2005)

	3.1	Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to Registrant’s Registration Statement on Form SB-2 (File No. 33-918900).

	3.2	Amended Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed March 21, 2005).

	3.3	Bylaws, as amended (Incorporated by reference to Exhibit 3.2 to Registrant’s Registration Statement on Form SB-2 (File No. 33-918900).

	5.1	Opinion of Dunn Carney Allen Higgins & Tongue LLP.*

	10.1	Restated 1995 Stock Incentive Plan dated May 11, 1998 (Incorporated by reference to Exhibit 10.11 to Registrant’s Quarterly Report on Form 10-QSB for the three month period ending July 3, 1999).

	10.2	Form of $400,000 Subordinated Promissory Note issued to JMW Capital Partners, Inc., dated June 30, 2000 (Incorporated by reference to Exhibit 10.14 to Registrant’s Quarterly Report on Form 10-QSB for the three month ending July 1, 2000).

	10.3	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 (Incorporated by reference to Exhibit 10.15 to Registrant’s Quarterly Report on Form 10-QSB for the three month ending July 1, 2000)

	10.4	Form of Registration Rights Agreement between the Company and JMW Capital Partners, Inc. (now known as Aequitas Capital Management), dated June 30, 2000 (Incorporated by reference to Exhibit 10.16 to Registrant’s Quarterly Report on Form 10-QSB for the three month ending July 1, 2000).

	10.5	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 (Incorporated by reference to Exhibit 10.17 to Registrant’s Quarterly Report on Form 10-QSB for the three month ending July 1, 2000).

	10.10	Form of Loan Agreement and Promissory Note dated August 24, 2004 between Microfield Group, Inc. and Destination Capital, LLC.

	10.22	Microfield Group, Inc. 2004 Stock Incentive Plan (Incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-KSB filed May 20, 2005).

	10.24	Settlement Agreement between the Company, Kurt A. Underwood and various other parties (Incorporated by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-KSB filed May 20, 2005).

	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).

	14	Code of Business Conduct and Ethics*

	21.1	Subsidiaries of the Registrant.

	23.1	Consent of Dunn Carney Allen Higgins & Tongue LLP (included in Exhibit 5.1)*

	23.2	Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm

	23.3	Consent of Russell Bedford Stefanou Mirchandani LLP , Registered Independent Accountants

	24.1	Power of Attorney (included on page II-6)


*		To be filed by amendment.

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Rodney M. Boucher and Randall Reed, and each of them, his true and lawful attorneys in fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement, and any subsequent registration statements pursuant to Rule 462 of the Securities Act of 1933 and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact or his substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated.


SIGNATURE	TITLE	DATE

/s/ RODNEY M. BOUCHER	Chief Executive Officer and Director	February 13, 2006
Rodney M. Boucher

/s/ A. MARK WALTER	President and Director	February 13, 2006
A. Mark Walter

/s/ RANDALL R. REED	Chief Financial Officer	February 13, 2006
Randall R. Reed

/s/ GENE AMEDURI	Director	February 13, 2006
Gene Ameduri

/s/ WILLIAM C. MCCORMICK	Director	February 13, 2006
William C. McCormick

/s/ MICHAEL W. STANSELL	Director	February 13, 2006
Michael W. Stansell

II-6

EXHIBIT INDEX


Exhibit No.		Description

	2.1	Form of Asset Purchase Agreement between Greensteel, Inc., and Microfield Graphics, Inc., dated September 7, 2000 (Incorporated by reference to Annex A to the Registrant’s Proxy Statement filed October 3, 2000).

	2.2	Form of Agreement and Plan of Merger between Microfield Graphics, Inc. and Innovative Safety Technologies, LLC. and Microfield Merger Sub, Inc. dated September 16, 2002 (Incorporated by reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K filed October 3, 2002).

	2.3	Form of Agreement and Plan of Merger by and among Microfield Group, Inc. and CTS Acquisition Co. and Christenson Technology Services, Inc. and Christenson Group, LLC, dated September 15, 2003 (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed October 1, 2003.

	2.4	Form of Agreement and Plan of Merger by and among Microfield Group, Inc. and VSI Acquisition Co. and Velagio, Inc. and Kurt A. Underwood and TSI Telecommunication Services, Inc. dated as of September 15, 2003 (Incorporated by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed October 1, 2003).

	2.5	Form of Agreement and Plan of Merger by and among Microfield Group, Inc. and CPS Acquisition Co. and Christenson Electric, Inc. and CEAC, Inc. dated as of July 20, 2005 (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed July 26, 2005)

	2.6	Agreement and Plan of Merger by and among Microfield Group, Inc. and ECI Acquisition Co. and EnergyConnect, Inc. dated as of October 11, 2005 (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed October 19, 2005)

	3.1	Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to Registrant’s Registration Statement on Form SB-2 (File No. 33-918900).

	3.2	Amended Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed March 21, 2005).

	3.3	Bylaws, as amended (Incorporated by reference to Exhibit 3.2 to Registrant’s Registration Statement on Form SB-2 (File No. 33-918900).

	5.1	Opinion of Dunn Carney Allen Higgins & Tongue LLP.*

	10.1	Restated 1995 Stock Incentive Plan dated May 11, 1998 (Incorporated by reference to Exhibit 10.11 to Registrant’s Quarterly Report on Form 10-QSB for the three month period ending July 3, 1999).

	10.2	Form of $400,000 Subordinated Promissory Note issued to JMW Capital Partners, Inc., dated June 30, 2000 (Incorporated by reference to Exhibit 10.14 to Registrant’s Quarterly Report on Form 10-QSB for the three month ending July 1, 2000).

	10.3	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 (Incorporated by reference to Exhibit 10.15 to Registrant’s Quarterly Report on Form 10-QSB for the three month ending July 1, 2000)

	10.4	Form of Registration Rights Agreement between the Company and JMW Capital Partners, Inc. (now known as Aequitas Capital Management), dated June 30, 2000 (Incorporated by reference to Exhibit 10.16 to Registrant’s Quarterly Report on Form 10-QSB for the three month ending July 1, 2000).

	10.5	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 (Incorporated by reference to Exhibit 10.17 to Registrant’s Quarterly Report on Form 10-QSB for the three month ending July 1, 2000).

II-7


Exhibit No.		Description

	10.10	Form of Loan Agreement and Promissory Note dated August 24, 2004 between Microfield Group, Inc. and Destination Capital, LLC. (Incorporated by reference to Exhibit 10.10 to Registrant’s Current Report on Form 8-K Filed August 30, 2005).

	10.22	Microfield Group, Inc. 2004 Stock Incentive Plan (Incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-KSB filed May 20, 2005).

	10.24	Settlement Agreement between the Company, Kurt A. Underwood and various other parties (Incorporated by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-KSB filed May 20, 2005).

	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).

	14	Code of Business Conduct and Ethics*

	21.1	Subsidiaries of the Registrant.

	23.1	Consent of Dunn Carney Allen Higgins & Tongue LLP (included in Exhibit 5.1)*

	23.2	Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm

	23.3	Consent of Russell Bedford Stefanou Mirchandani LLP , Registered Independent Accountants

	24.1	Power of Attorney (included on page II-6)


*		To be filed by amendment.

II-8


Microfield Group, Inc.
For the Years Ended January 1, 2005 and January 3, 2004

Report of Registered Independent Certified Public Accounting Firm		F-3
Report of Independent Registered Public Accounting Firm		F-4
Consolidated Balance Sheets as of January 1, 2005 and January 3, 2004		F-5
Consolidated Statements of Operations for the years ended January 1, 2005 and January 3, 2004		F-6
Statement of Changes in Shareholders’ Equity (Deficit) for the years ended January 1, 2005 and January 3, 2004		F-7 to F-8
Consolidated Statements of Cash Flows for the years ended January 1, 2005 and January 3, 2004		F-9 to F-10
Notes to Consolidated Financial Statements		F-11 to F-37

For the Nine Months Ended October 1, 2005 and October 2, 2004

Condensed Consolidated Balance Sheets – October 1, 2005 and January 1, 2005		F-38
Condensed Consolidated Statements of Operations – three and nine months ended October 1, 2005 and October 2, 2004		F-39
Condensed Consolidated Statements of Cash Flows – nine months ended October 1, 2005 and October 2, 2004		F-40
Notes to Condensed Consolidated Financial Statements		F-41 to F-57

Pro forma Condensed Combined Statements of Operations for the Years Ended January 1, 2005, October 31, 2004 and December 31, 2004		F-58
Unaudited Pro forma Condensed Combined Statements of Operations for the Nine Months Ended October 1, 2005, September 30, 2005, and the Seven and a Half Months Ended July 30, 2005		F-59
Pro forma Condensed Combined Balance Sheets as of October 1, 2005 and September 30, 2005		F-60
Notes to Unaudited Condensed Combined Financial Statements		F-61


Christenson Electric Inc.
For the Fiscal Years Ended October 31, 2004 and 2003

Report of Registered Independent Certified Public Accounting Firm		F-63
Balance Sheets – October 31, 2004 and 2003		F-64
Statements of Operations for the years ended October 31, 2004 and 2003		F-65
Statement of Changes in Shareholders’ Equity (Deficit) for the years ended October 31, 2004 and 2003		F-66
Statements of Cash Flows for the years ended October 31, 2004 and 2003		F-67
Notes to Financial Statements		F-68 to F-84

For the Six Months Ended April 30, 2005 and 2004

Statements of Operations –six months ended April 30, 2005 and 2004		F-85
Statements of Cash Flows – six months ended April 30, 2005 and 2004		F-86


Notes to Financial Statements		F-87 to F-95

EnergyConnect, Inc.

For the Fiscal Years Ended December 31, 2004 and 2003

Report of Registered Independent Certified Public Accounting Firm		F-96
Balance Sheets – December 31, 2004 and 2003		F-97
Statements of Operations for the years ended December 31, 2004 and 2003		F-98
Statement of Changes in Shareholders’ Equity (Deficit) for the years ended Deceber 31, 2004 and 2003		F-99
Statements of Cash Flows for the years ended December 31, 2004 and 2003		F-100
Notes to Financial Statements		F-101 to F-108

For the Nine Months Ended September 30, 2005 and 2004

Statements of Operations – nine months ended September 30, 2005 and 2004		F-110
Statements of Cash Flows – nine months ended September 30, 2005 and 2004		F-111
Notes to Financial Statements		F-112 to F-118


(1)		Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using the average of the high and low price as reported on the Over-The-Counter Bulletin Board on February 7, 2006, which was $2.67 per share.


	Page
Prospectus Summary		1
Risk Factors		3
Forward Looking Statements		10
Use of Proceeds		10
Market For Common Stock and Related Stockholder Matters		10
Management’s Discussion and Analysis or Plan of Operations		11
Business		31
Description of Property		38
Legal Proceedings		38
Management		39
Executive Compensation		41
Certain Relationships and Related Transactions		44
Security Ownership of Certain Beneficial Owners and Management		49
Description of Securities		51
Indemnification for Securities Act Liabilities		54
Plan of Distribution		55
Selling Stockholders		57
Legal Matters		59
Experts		59
Available Information		59
Index to Financial Statements		F-1
EXHIBIT 21.1
EXHIBIT 23.2
EXHIBIT 23.3


							Retained			Total
							Earnings			Stockholders’
	Common Stock				Additional		(Accumulated			Equity
	Shares		Amount		Paid-in Capital		Deficit)			(Deficit)

Balance, October 31, 2002		100	$	63			$	4,746,843		$	4,746,906

Contribution to Capital						2,781,657					2,781,657

October 31, 2003 Net Loss								(4,508,872	)		(4,508,872	)



Balance, October 31, 2003		100	$	63		2,781,657	$	237,971		$	3,019,691

October 31,2004 Net Loss								(3,549,316	)		(3,549,316	)

Net dividend (Note 11)								(273,595	)		(273,595	)


Balance, October 31, 2004		100	$	63		2,781,657	$	(3,584,940	)	$	(803,220	)


	October 31, 2004		October 31, 2003
Christenson Leasing:
Accounts Receivable:		—		(1,172,385	)
Accounts Payable:		696,179		2,401,485

Christenson Technology Services:
Accounts Receivable:		—		1,858,009
Accounts Payable:		—		—

Christenson Velagio:
Accounts Receivable:		2,460,811		1,185,830
Accounts Payable:		2,869,537		2,844,552

Executive Air Services, Inc.:
Accounts Receivable:		—		7,431
Accounts Payable:		—		1,157

Executive King Air, LLC:
Accounts Receivable:		344		246,826
Accounts Payable:		—		26,551

Filter Technologies, Inc.:
Accounts Receivable:		8,740		141,652
Accounts Payable:		—		2,811

Irvine & Associates:
Accounts Receivable:		—		—
Accounts Payable:		6,109		78,672

Jesenik Enterprises:
Accounts Receivable:		—		—
Accounts Payable:		188,666		160,001

JMW Capital Partners, Inc:
Accounts Receivable:		171,396		149,952
Accounts Payable:		1,549		326,834

JMW Capital Properties, Inc:
Accounts Receivable:		—		(9,430	)
Accounts Payable:		7,162		33,391


	Six Months Ended			Six Months Ended
	April 30, 2005			April 30, 2004
Sales	$	6,952,988		$	7,004,613
Cost of sales		5,984,507			5,669,167


Gross profit		968,481			1,335,446

Operating expenses:
Sales, general and administrative expense		1,252,165			1,869,536


Loss from operations		(283,684	)		(534,090	)

Other income (expense), net		(66,211	)		(165,891	)


Loss from continuing operations	$	(349,895	)	$	(699,981	)


											Total
					Subscription			Accumulated			Shareholders’
	Shares		Amount		Receivable			Deficit			Equity(Deficit)
Balance December 31, 2002		100	$	140,307	$	—		$	(291,077	)	$	(150,770	)

Common stock issued in exchange for note receivable		40		200,000		(200,000	)		—			—

Common stock subscribed		1		10,000		(10,000	)		—			—

Net loss		—		—		—			(257,442	)		(257,442	)


Balance December 31, 2003		141	$	350,307	$	(210,000	)	$	(548,519	)	$	(408,212	)

Common stock subscribed		2		75,015		(75,015	)		—			—

Net loss		—		—		—			(863,011	)		(863,011	)

Balance December 31, 2004		143	$	425,322	$	(285,015	)	$	(1,411,530	)	$	(1,271,223	)


	Nine Months			Nine Months
	Ended			Ended
	September			September 30,
	30, 2005			2004
	(Unaudited)			(Unaudited)
Sales	$	244,825		$	52,314
Cost of sales		153,318			12,750


Gross profit		91,507			39,564

Operating expenses:
Sales, general and administrative expense		1,566,741			696,518


Loss from operations		(1,475,234	)		(656,954	)

Other expense, net		388,309			(6,894	)


Net Loss	$	(1,086,925	)	$	(663,848	)