Prepared by MERRILL CORPORATION

U.S. Securities and Exchange Commission

Washington, D. C. 20549

FORM 1O-QSB

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2001

o	TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number : 0-26226

MICROFIELD GRAPHICS, INC.

(Exact name of small business issuer as specified in its charter)

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

P. O. Box 23968

Portland, Oregon 97281

(Address of principal executive offices and zip code)

(503) 968-4607

(Issuer's telephone number including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 3 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes ý No o

The number of shares outstanding of the Registrant's Common Stock as of September 29, 2001 was 4,596,066 shares.

Transitional Small Business Disclosure Format (check one): Yes ý No o

MICROFIELD GRAPHICS, INC.

FORM 10-QSB

INDEX

PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated Balance Sheet – September 29, 2001 and December 30, 2000

		Consolidated Statement of Operations – Three and Nine Months Ended September 29, 2001 and September 30, 2000

		Consolidated Statement of Cash Flows – Nine Months Ended September 29, 2001 and September 30, 2000

		Notes to Consolidated Financial Statements

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations


PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings

	Item 6.	Exhibits and Reports on Form 8-K

MICROFIELD GRAPHICS, INC.

CONSOLIDATED BALANCE SHEET

	September 29,			December 30,
	2001			2000
	(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	552,681		$	830,634
Accounts receivable, net	6,291			99,392
Prepaid expenses and other	11,218			48,337
Total current assets	570,190			978,363

Other assets	10,267			10,267
	$	580,457		$	988,630

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	34,896		$	86,917
Accrued payroll and payroll taxes	7,916			8,020
Accrued liabilities	34,728			219,336
Total liabilities	77,540			314,273


Shareholders’ equity:
Common stock, no par value, 25,000,000 shares authorized, 4,596,066 and 4,597,066 shares issued and outstanding, respectively	15,757,643			15,758,279
Accumulated deficit	(15,254,726		)	(15,083,922		)
Total shareholders’ equity	502,917			674,357

	$	580,457		$	988,630

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

MICROFIELD GRAPHICS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

	Three months ended						Nine months ended
	September 29,			September 30,			September 29,			September 30,
	2001			2000			2001			2000
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Sales	$	-		$	-		$	-		$	-
Cost of goods sold	-			-			-			-
Gross profit	-			-			-			-

Operating expenses
Research and development	-			-			-			-
Marketing and sales	-			-			-			-
General and administrative	82,947			54,000			289,487			162,000

Loss from operations	(82,947		)	(54,000		)	(289,487		)	(162,000		)

Other income (expense)
Interest income (expense), net	4,342			(13,674		)	19,449			(30,301		)
Other income, net	-			12,304			77,331			35,274

Loss before provision for income taxes	(78,605		)	(55,370		)	(192,707		)	(157,027		)
Provision for income taxes	-			-			-			-

Loss from continuing operations	$	(78,605	)	$	(55,370	)	$	(192,707	)	$	(157,027	)

Discontinued Operations:
Loss on discontinued SoftBoard operations	-			(117,931		)	-			(507,446		)
Gain on sale of discontinued Softboard operations	21,903			-			21,903			-

Net loss	$	(56,702	)	$	(173,301	)	$	(170,804	)	$	(664,473	)

Basic and Diluted net loss per share from continuing operations	(.02		)	(.01		)	(.04		)	(.03		)

Basic and diluted net loss per share	(.01		)	(.04		)	(.04		)	(.16		)

Shares used in per share calculations
Basic and diluted	4,596,066			4,572,793			4,596,316			4,286,832

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

MICROFIELD GRAPHICS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

	Nine months ended
	September 29,			September 30,
	2001			2000
Cash Flows From Operating Activities:
Net loss	$	(170,804	)	$	(664,473	)
Add (deduct):
Loss from discontinued SoftBoard operations	-			507,446
Gain on sale of discontinued SoftBoard operations	(21,903		)	-
Loss from continuing operations	(192,707		)	(157,027		)


Changes in assets and liabilities:
Accounts receivable	93,101			(137,395		)
Prepaid expenses and other	37,119			8,534
Accounts payable	(52,021		)	131,468
Accrued payroll and payroll taxes	(104		)	(4,213		)
Accrued liabilities	(184,608		)	(10,801		)
Net cash used by operating activities	(299,220		)	(169,434		)

Net cash provided (used) by discontinued operations	21,903			(280,399		)

Net cash used by operating activities	(277,317		)	(449,833		)

Cash flows from investing activities:
Acquisition of property and equipment	-			(3,905		)
Other long-term assets	-			14,473

Net cash provided by investing activities	-			10,568

Cash flows from financing activities:
Payments on equipment line of credit	-			(52,455		)
Proceeds from operating line of credit	-			24,204
Proceeds from long term note	-			400,000
Proceeds from exercise of common stock options and warrants	-			13,000
Payments to repurchase common stock	(636		)	-

Net cash (used) provided by financing activities	(636		)	384,749

Net (decrease) increase in cash and cash equivalents	(277,953		)	(54,516		)

Cash and cash equivalents, beginning of period	830,634			113,041
Cash and cash equivalents, end of period	$	552,681		$	58,525

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

MICROFIELD GRAPHICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Microfield Graphics, Inc. (the “Company”) for the three and nine months ended September 29, 2001 and September 30, 2000 have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. The financial information as of December 30, 2000 is derived from the Company’s Annual Report on Form 10-KSB. The accompanying consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles and should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 30, 2000. In the opinion of Company’s management, the unaudited consolidated financial statements for the interim periods presented include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for such interim periods. Operating results for the three and nine months ended September 29, 2001 are not necessarily indicative of the results that may be expected for the full year or any portion thereof.

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to the last day of December. The Company’s current fiscal year is the 52-week period ending December 29, 2001. The Company’s last fiscal year was the 52-week period ended December 30, 2000. The Company’s third fiscal quarters in fiscal 2001 and 2000 were the 13-week periods ended September 29, 2001 and September 30, 2000, respectively.

2. Discontinued Operations

On September 7, 2000, the Company entered into 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. A contingent earn-out payment in the amount of $21,903 was received during the third quarter of 2001. The Company retained cash, accounts receivable and the majority of the outstanding liabilities. Shareholders approved the agreement and the transaction was finalized on October 24, 2000.

As a result of shareholder approval of the Greensteel agreement, discontinued operations accounting treatment has been applied to the SoftBoard operation. Accordingly, the net loss incurred from the SoftBoard operations is reported in loss 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 used by discontinued operations” whether associated with operating, investing or financing activities.

Revenues from discontinued SoftBoard operations were $ 2,318,449 for the nine months ended September 30, 2000.

3. New Accounting Pronouncements

On July 20, 2001, the Financial Accounting Standards Board (FASB) issues FASB Statement No. 142 (FAS 142), Goodwill and Other Intangible Assets. FAS 142 changes the accounting for goodwill and certain other intangible assets from an amortization method to an impairment-only approach. Upon adoption of FAS 142, goodwill and certain other intangible assets will be tested at the reporting unit annually and whenever events or circumstances occur indicating that goodwill and certain other intangible assets might be impaired. Amortization of goodwill and certain other intangible assets, including goodwill recorded in past business combinations, will cease. The adoption date for the Company will be January 1, 2002. FAS 142 will have no impact on the Company’s results of operations and financial position.

On July 20, 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 establishes new standards for accounting and reporting requirements for business combinations and will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interest method will be prohibited. The Company adopted this statement during the third quarter of fiscal 2001. The adoption of SFAS No. 141 did not have a material impact on the Company’s consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Prior to October 24, 2000 Microfield Graphics, Inc. (the “Company”) developed, manufactured, and marketed computer conferencing and telecommunications products that facilitate group communications. The Company’s product lines consisted of a series of digital whiteboards, interactive rear projection systems, and interactive plasma display systems sold under the brand name SoftBoard, along with a variety of application software packages, supplies and accessories. Information written or drawn on the SoftBoard surface is recorded and displayed on a personal computer simultaneously and in color and utilized proprietary technology that had been owned by the Company.

On October 24, 2000 the assets of the company that were utilized in operating the SoftBoard business were sold to Greensteel, Inc., a wholly-owned subsidiary of PolyVision Corporation. The Company has not been engaged in continuing operations since that date. The Company is exploring entering into new lines of business through specific strategic acquisitions. While the Company has no current agreements with respect to any acquisition, it is actively exploring acquisition transactions.

RESULTS OF OPERATIONS

As of October 24, 2000, the Company sold its SoftBoard operations to Greensteel, Inc. The financial data presented in the Company’s financial statements has been retroactively reclassified to present the SoftBoard operations as discontinued operations for the three and nine month periods ended September 29, 2001, and September 30, 2000. Therefore, no comparative data regarding sales, gross profit, research and development expenses, or marketing and sales expenses have been presented as they are not representative of the Company’s current activities.

Three months and Nine months ended September 29, 2001 Compared with Three months and Nine months ended September 30, 2000

General and Administrative Expenses. General and administrative expenses increased $127,000 (78%) to $289,000 for the nine months ended September 29, 2001 from $162,000 for the nine months ended September 30, 2000. General and administrative expenses for the three and nine months ended September 30, 2000 have been retroactively reclassified to differentiate discontinued operations from continuing operations. General and administrative expenses for the three months and nine months ended September 30, 2000 include only management compensation and benefits for the period. General and administrative expenses for the three months and nine months ended September 29, 2001 include management compensation and benefits as well as the costs associated with continuing operations, consisting primarily of insurance, legal fees, and accounting fees.

Other Income (Expense). Other income (expense) includes interest income, interest expense, and miscellaneous income. Other income (expense) increased $92,000 (1840%) to $97,000 for the nine months ended September 29, 2001 from $5,000 for the nine months ended September 30, 2000. The increase is primarily due to the receipt of consulting fees earned, in the sum of $60,000, as a result of an agreement between the Company and Christenson Electric, Inc., and settlement of disputed vendor invoicing in the amount of $17,000. The Christenson agreement was discontinued effective April 30, 2001.

The Company had no ongoing operations at September 29, 2001.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations and capital expenditures through public and private sales of equity securities, cash from operations, and borrowings under bank lines of credit. At September 29, 2001 the Company had working capital of $492,650 and its principal source of liquidity consisted of $552,681 in cash and cash equivalents. Accounts receivable decreased $93,000 to $6,000 at September 29, 2001 from $99,000 at December 30, 2000. Accounts payable decreased $52,000 to $35,000 at September 29, 2001 compared to $87,000 at December 30, 2000. The Company believes that its cash and cash equivalents are sufficient to sustain its business for the remainder of the year.

The Company has no commitments for capital expenditures in material amounts.

The Company was incorporated in Oregon in 1986. The Company’s executive offices are located at 7324 SW Durham Rd, Portland, OR 97224.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On January 28, 2000, a class action complaint, Adair v. Microfield Graphics, Inc. Et ano., 00 Civ. 0629 (MBM), was filed against the Company in United States District Court Southern District of New York. The complaint alleges that the Company and its Chief Executive Officer issued false and misleading statements concerning the Company’s purchase agreement with 3M. The complaint alleges that, as a result of these allegedly material misstatements and omissions, the Company’s stock price was artificially inflated during the period from July 23, 1998 through April 2, 1999 and requests that damages be determined at trial. The Company denies the allegations and intends to vigorously defend itself.

In April 2000, the Company filed a motion to transfer venue of the action to the District of Oregon. The Company’s motion was granted on November 14, 2000. On July 13, 2001, the United States District Court for the District of Oregon entered a Preliminary Order providing for, among other things, a fairness hearing by the Court, which was held on September 24, 2001, to consider the proposed settlement arrived at by the Company, its Chief Executive Officer, and the lead plaintiffs. The proposed settlement provides that all claims asserted in the action be dismissed and settled, subject to final court approval. Under the proposed settlement, the Company and its Chief Executive Officer deny liability and any and all wrongdoing. The proposed settlement provides for the payment of $455,000 in full, complete, and final settlement of any and all claims. As a result of the September 24, 2001 hearing, a final order has been issued and is pending distribution of the settlement. The Company’s Directors and Officers insurance coverage provides for liability coverage up to $4,000,000 and is expected to cover the full amount of the proposed settlement.

Item 6. Exhibits and Reports on Form 8-K

(a) The exhibits filed as part of this report is listed below:

No exhibits are filed herewith.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended September 29, 2001.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 13, 2001

	MICROFIELD GRAPHICS, INC.

	By:	/s/ JOHN B. CONROY
	John B. Conroy
	Chief Executive Officer
	(Principal Executive and Financial Officer)