form10q.htm

U.S. Securities and Exchange Commission

Washington, D. C. 20549

Form 1O-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2007

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number : 0-26226

MICROFIELD GROUP, INC.

(Name of small business issuer in its charter)

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

111 SW Columbia Ave., Suite 480

Portland, Oregon 97201

(Address of principal executive offices and zip code)

(503) 419-3580

(Issuer’s telephone number)

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

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

Common Stock

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

o Large Accelerated Filer

x Accelerated Filer

o Non-Accelerated Filer

Indicate by check mark whether Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes xNo

The aggregate market value of voting stock held by non-affiliates of the registrant at September 29, 2007 was

$63,798,483 computed by reference to the average bid and asked prices as reported on the Nasdaq Bulletin Board Market.

The number of shares outstanding of the Registrant's Common Stock as of September 29, 2007 was 83,317,416 shares.

MICROFIELD GROUP, INC.

FORM 10-Q

INDEX

PART I FINANCIAL INFORMATION			Page

	Item 1.	Financial Statements (unaudited)

		Condensed Consolidated Balance Sheets – September 29, 2007 and December 30, 2006	3

		Condensed Consolidated Statements of Operations – three and nine months ended September 29, 2007 and September 30, 2006	4

		Condensed Consolidated Statement of Cash Flows – nine months ended September 29, 2007 and September 30, 2006	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

	Item 4.	Controls and Procedures	31



PART II OTHER INFORMATION

	Item 1.	Legal Proceedings	34

	Item 1A.	Risk Factors	34

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

	Item 3.	Defaults Upon Senior Securities	42

	Item 4.	Submission of Matters to a Vote of Security Holders	42

	Item 5.	Other Information	42

	Item 6.	Exhibits	42

Item 1. Financial Statements

MICROFIELD GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
	September 29,			December 30,
	2007			2006
Current assets:
Cash and cash equivalents	$	1,125,900		$	2,193,308
Certificates of deposit		698,899			351,476
Accounts receivable, net of allowances of $214,000 and $195,000		10,520,414			9,105,485
Inventory, net of allowances		617,704			513,127
Costs in excess of billings		2,674,188			2,350,338
Other current assets		334,352			437,103
Total current assets		15,971,457			14,950,837

Property and equipment, net		750,866			659,295
Intangible assets, net (Note 6)		5,069,574			5,466,087
Goodwill		35,977,047			35,977,047
Other assets		94,664			94,081
	$	57,863,608		$	57,147,347

Current liabilities:
Accounts payable	$	5,487,321		$	5,063,271
Accrued payroll taxes and benefits		2,206,063			1,659,193
Bank line of credit (Note 4)		5,109,719			3,830,321
Current portion of notes payable (Note 4)		1,387,192			460,576
Billings in excess of costs		919,142			899,071
Other current liabilities		-			358,051
Total current liabilities		15,109,437			12,270,483

Long-term liabilities:
Long term notes payable (Note 4)		71,430			1,260,859
Total long-term liabilities		71,430			1,260,859

Commitments and contingencies
Shareholders’ equity :
Convertible Series 3 preferred stock, no par value, 10,000,000 shares authorized, 0 and 2,040 shares issued and outstanding at September 29, 2007 and December 30, 2006, respectively (Note 2)		-			856,670
Convertible Series 4 preferred stock, no par value, 10,000,000 shares authorized, 0 and 526 shares issued and outstanding at September 29, 2007 and December 30, 2006, respectively (Note 2)		-			174,423
Common stock, no par value, 225,000,000 shares authorized, 83,317,416 and 79,023,905 shares issued and outstanding at September 29, 2007 and December 30, 2006, respectively (Note 2)		115,347,959			113,067,867
Common stock warrants (Note 3)		36,178,218			36,178,218
Accumulated deficit		(108,843,436	)		(106,661,173	)
Total shareholders’ equity		42,682,741			43,616,005
	$	57,863,608		$	57,147,347

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

MICROFIELD GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

	Three months ended						Nine months ended
	September 29,			September 30,			September 29,			September 30,
	2007			2006			2007			2006

Sales	$	20,207,386		$	20,662,728		$	52,005,473		$	60,794,333
Cost of goods sold		15,057,247			19,451,853			41,020,602			53,970,289
Gross profit		5,150,139			1,210,875			10,984,871			6,824,044

Operating expenses
Sales, general and administrative		4,196,592			3,066,672			12,156,046			9,849,694
Stock-based compensation (Note 3)		184,444			271,736			668,443			1,247,326
Income (loss) from operations		769,103			(2,127,533	)		(1,839,618	)		(4,272,976	)

Other income (expense)
Interest expense, net		(172,369	)		(928,580	)		(500,521	)		(1,773,412	)
Derivative income (expense)		-			9,755,843			-			8,319,107
Other income (expense), net		254,091			(46,386	)		173,535			193,834
Income (loss) before provision for income taxes		850,825			6,653,344			(2,166,604	)		2,466,553

Provision for income taxes		-			-			(15,659	)		-
Income (loss) from continuing operations		850,825			6,653,344			(2,182,2633	)		2,466,553

Discontinued operations:
Gain on sale of discontinued operations		-			-			-			17,068

Net income (loss)	$	850,825		$	6,653,344		$	(2,182,263	)	$	2,483,621

Net income (loss) per share from continuing operations:
Basic	$	0.01		$	0.09		$	(0.03	)	$	0.04
Diluted	$	0.01		$	0.08		$	(0.03	)	$	0.03

Net loss per share from discontinued operations:
Basic	$	-		$	-		$	-		$	-
Diluted	$	-		$	-		$	-		$	-

Net income (loss) per share:
Basic	$	0.01		$	0.09		$	(0.03	)	$	0.04
Diluted	$	0.01		$	0.08		$	(0.03	)	$	0.03

Net income (loss) per share attributable to common shareholders	$	0.01		$	0.09		$	(0.03	)	$	0.04
Basic
Diluted	$	0.01		$	0.08		$	(0.03	)	$	0.03

Shares used in per share calculations:
Basic		83,135,867			74,531,401			82,023,503			65,433,453
Diluted		86,052,443			82,026,176			82,023,503			72,928,227

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

MICROFIELD GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 29, 2007			September 30, 2006
Cash Flows From Operating Activities:
Net loss	$	(2,182,263	)	$	2,483,621
Add (deduct):
Gain on sale of discontinued operations – SoftBoard		-			(17,068	)

Loss from continuing operations		(2,182,263	)		2,466,553
Depreciation of equipment		210,923			176,446
Amortization of intangible assets		396,513			388,762
Option vesting valuation		668,443			1,247,326
Revaluation of warrants		-			(8,319,107	)
Issuance of shares for delayed filing		-			822,126
Gain on disposal of fixed assets		-			5,454

Changes in current assets and liabilities:
Restricted cash		(347,423	)		-
Accounts receivable		(1,414,929	)		(2,909,748	)
Accounts receivable-related party		-			20,904
Inventory		(104,577	)		111,147
Other current assets		102,751			4,978
Costs in excess of billings		(323,850	)		(1,884,114	)
Other assets		(583	)		(66,681	)
Accounts payable		430,613			(386,699	)
Accrued payroll, taxes and benefits		546,870			326,806
Billings in excess of cost		20,071			(291,875	)
Other current liabilities		(358,051	)		(78,878	)

Net cash used by continuing operations		(2,355,492	)		(8,366,600	)

Net cash provided by discontinued operations – SoftBoard		-			17,068

Net cash used by operating activities		(2,355,492	)		(8,349,532	)

Cash flows from investing activities
Purchases of fixed assets		(302,495	)		(397,363	)

Net cash used by investing activities		(302,495	)		(397,363	)

Cash flows from financing activities:
Increase (decrease) in cash overdraft position		-			(942,436	)
Borrowings on line of credit		44,462,692			73,867,430
Repayments on line of credit		(43,183,294	)		(74,347,911	)
Exercise of options and warrants		613,021			5,600
Repayments on notes payable		(361,882	)		(1,034,934	)
Repayments on notes payable – related party		-			(757,653	)
Borrowings on note payable – related party		-			41,966
Borrowings on capital lease, net		99,069			-
Proceeds from private placement, and other		(39,027	)		13,588,492

Net cash provided by financing activities		1,590,579			10,420,554

Net increase (decrease) in cash and cash equivalents		(1,067,408	)		1,673,659

Cash and cash equivalents, beginning of period		2,193,308			729,016
Cash and cash equivalents, end of period	$	1,125,900		$	2,402,675
Supplemental disclosures for cash flow information:
Cash paid during the period for interest	$	556,361		$	1,089,024
Cash paid during the period for income taxes	$	-		$	-

Supplemental schedule of non-cash financing and investing activities:
Adjustments to acquired goodwill	$	-		$	(52,241	)
Conversion of preferred to common	$	1,031,093		$	3,018,110
Conversion of warrant liability to common	$	-		$	13,229,360
Non-cash exercise of warrants	$	-		$	1,640,591
Reduction of debt through issuance of common stock	$	-		$	262,677
Valuation of warrants issued in private placement	$	-		$	14,758,004

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

MICROFIELD GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(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-Q. 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 September 29, 2007, are not necessarily indicative of the results that may be expected for the year ended December 29, 2007. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 30, 2006 financial statements and footnotes thereto included in the Company's SEC Form 10-K.

Business and Basis of Presentation

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

The condensed consolidated financial statements include the accounts of Microfield and its wholly owned subsidiaries, Christenson Electric, Inc. and EnergyConnect, Inc. (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. The Company’s headquarters are located in Portland, Oregon.

Reclassification

Certain reclassifications have been made to prior periods’ data to conform to the current presentation. These reclassifications had no effect on reported net income (loss).

Fiscal Year

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to the last day of December. The Company’s current fiscal year is the 52-week period ending December 29, 2007. The Company’s last fiscal year was the 53-week period ended December 30, 2006. The Company’s third fiscal quarters in fiscal 2007 and 2006 were the 13-week periods ended September 29, 2007 and September 30, 2006, respectively.

New Accounting Pronouncements

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

2. Capital Stock

The Company has authorized 10,000,000 shares of Preferred stock, no par value. As of September 29, 2007 and December 30, 2006, the Company’s Series 2 preferred stock had been completely converted to 4,321,431 common shares. As of September 29, 2007 the Company’s Series 3 preferred stock had been completely converted to 2,039,689 common shares. As of December 30, 2006, the Company had 2,040 shares of Series 3 preferred stock issued and outstanding. As of September 29, 2007 the Company’s Series 4 preferred stock had been completely converted to 526,315 common shares. As of December 30, 2006, the Company had 526 shares of Series 4 preferred stock issued and outstanding. The Company has authorized 225,000,000 shares of Common Stock, no par value. As of September 29, 2007 and December 30, 2006, the Company had 83,317,416 and 79,023,905 shares of common stock issued and outstanding, respectively.

Series 3 Preferred Stock

The terms of the Series 3 preferred stock were 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 our net profits in subsequent quarters before any dividends are paid upon shares of junior stock. No dividends have been declared.

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.

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 September 29, 2007, 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 were 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 our net profits in subsequent quarters before any dividends are paid upon shares of junior stock. No dividends have been declared.

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 September 29, 2007, the beneficial conversion feature associated with the Series 4 preferred stock was fully amortized.

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 month period ended September 29, 2007, the Company issued an aggregate of 1,727,507 shares of common stock in exchange for common stock options exercised. The Company also issued an aggregate of 2,566,004 shares of common stock in exchange for conversion of Series 3 and Series 4 preferred stock.

3. Stock Options and Warrants

Stock Incentive Plan

The Company has a Stock Incentive Plan (the "Plan"). At September 29, 2007 and December 30, 2006, 7,491,750 and 9,057,577 shares of common stock were reserved, respectively, for issuance to employees, officers, directors and outside advisors. Under the Plan, the options may be granted to purchase shares of the Company's common stock at fair market value, as determined by the Company's Board of Directors, at the date of grant. The options are exercisable over a period of up to five years from the date of grant or such shorter term as provided for in the Plan. The options become exercisable over periods from zero to four years.

A total of 373,500 options to purchase shares of the Company’s common stock were granted to employees and directors of the Company during the nine months ended September 29, 2007. Of these, 11,000 were granted in the third quarter of 2007. The 373,500 options granted during the nine months ended September 29, 2007 are forfeited if not exercised within five years. Of this total, 100,000 options were granted to directors. These 100,000 options were fully vested upon grant. The remaining 273,500 options were granted to employees with under one year in service with the Company and do not vest for the first 12 months. Following the first year vesting period the options become 25% vested, and then vest ratably over the following 36 months. The weighted average per share value of the options granted in the nine months ended September 29, 2007 was $0.83. There were 1,727,507 common shares issued during the current year nine-month period at a weighted average of $0.34 per share as a result of option exercises.

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
Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$0.26 - $0.94		7,040,361		3.29	$	0.51		5,469,570	$	0.48
$1.76 - $2.70		451,389		3.86	$	2.14		183,159	$	2.23
		7,491,750		3.47	$	0.61		5,652,729	$	0.54

Transactions involving stock options issued are summarized as follows:

	Number of Shares			Weighted Average Price Per Share
Outstanding at December 31, 2005		7,717,765		$	0.44
Granted at market price		1,385,000			1.13
Granted at other than market price		240,000			0.38
Exercised		(265,188	)		0.38
Cancelled or expired		(20,000	)		1.25
Outstanding at December 30, 2006		9,057,577		$	0.54
Granted		373,500			0.83
Exercised (Note 2)		(1,727,507	)		0.34
Cancelled or expired		(211,820	)		0.41
Outstanding at September 29, 2007		7,491,750		$	0.61

The Company has computed the value of all options granted during fiscal 2007 and 2006 using the Black-Scholes pricing model as prescribed by SFAS No. 123(R).

Stock-based compensation expense recognized under SFAS 123(R) for the three months ended September 29, 2007 and September 30, 2006 was $184,444 and $271,736, respectively, and for the nine months ended September 29, 2007 and September 30, 2006 was $668,443 and $1,247,326, respectively.

Common Stock Warrants

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 was 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 shareholders voted to increase the authorized shares available for issuance or conversion, which cured the situation described above. Accordingly, the fair value of the warrants on September 1, 2004 was determined to be $48,976. The warrant liability was reclassified to shareholders’ equity and the increase from the initial warrant value was recorded in earnings in the fiscal year ended January 1, 2005. As of September 29, 2007, the warrant holders have exercised 101,308 warrants in exchange for 101,308 shares of our common stock and 10,000 warrants remain outstanding.

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 was convertible into shares of common stock. This exercise, when aggregated with all other outstanding equity arrangements, resulted in the total number of common shares that could be required to be delivered to exceed the number of authorized common shares. In accordance with EITF 00-19, the fair value of the warrants issued in the private placement must be recorded as a liability in the financial statements using the Black-Scholes model, and any subsequent changes in the Company’s stock price to be recorded in earnings. Accordingly, the fair value of these warrants at the date of issuance was determined to be $64,902. At 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 shareholders 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. As of September 29, 2007, the warrant holders have exercised 183,333 warrants in exchange for 183,333 shares of our common stock and 150,001 warrants remain outstanding.

In connection with the 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% 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 was 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 shareholders voted to increase the authorized shares available for issuance or conversion, which cured the situation described above. Accordingly, the fair value of the warrants on September 1, 2004 was determined to be $20,776. The warrant liability was reclassified to shareholders’ equity and the increase from the initial warrant value was recorded in earnings in the fiscal year ended January 1, 2005. For the months from August 1, 2004 to July 2, 2005, according to the terms of the warrant provision of the August 24, 2004 debt agreement, the Company was obligated to issue 1,626,042 additional warrants. The 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. As of September 29, 2007, the holders of these warrants exercised 1,309,616 warrants in exchange for 1,170,841 shares of the Company’s common stock, and 316,426 warrants remain outstanding.

On October 13, 2005, the Company issued an aggregate of 19,695,432 warrants in connection with acquisition of acquired EnergyConnect, Inc. The Company valued the warrants using the Black-Scholes option pricing model, applying a useful life of 5 years, a risk-free rate of 4.06%, an expected dividend yield of 0%, a volatility of 129% and a fair value of the common stock of $2.17. Total value of the warrants issued amounted $36,495,391, which was included in the purchase price of ECI. The warrants have a term of five years and an exercise price of $2.58 per share. As of September 29, 2007, the warrant holders have not exercised any of these warrants.

On October 5, 2005, in conjunction with a private placement which resulted in gross proceeds of $3,276,000, the Company sold 5,233,603 shares of common stock at $0.70 per share, and issued warrants to purchase up to 2,944,693 shares of common stock. The warrants have a term of five years and an exercise price of $0.90 per share. As of September 29, 2007, the warrant holders have exercised 54,235 warrants, for 42,274 shares of common stock, and 2,890,458 warrants remain outstanding.

No warrants were exercised or forfeited during the three or nine months ended September 29, 2007.

4. Debt

Operating Line of Credit

As of September 29, 2007, the Company has a $10,000,000 credit facility, which was renewed for a year to March 2008. At December 30, 2006, the Company had two lines of credit with this lender for a total borrowing availability of $9,000,000. The two lines were combined and expanded to $10,000,000 in January 2006. This facility is renewed annually. Borrowings under the line of credit are due on demand, bear interest payable weekly at prime plus 5% 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, and other accommodations, the Company had potential available borrowing capacity at September 29, 2007 of $119,000. As of September 29, 2007 and December 30, 2006, borrowings of $4,991,286 and $3,710,905, respectively, were outstanding under the Company’s facilities with this lender. The Company was in compliance with the terms of the borrowing facility at September 29.2007.

The Company has a second loan facility which is an unsecured $120,000 line of credit at prime plus 3 ¾%, due on demand with interest payable monthly. As of September 29, 2007 and December 30, 2006, there was $118,433 and $119,416, respectively, outstanding under this line. The Company was in compliance with the terms of this line of credit at September 29, 2007.

Long Term Debt

The Company had notes payable outstanding at September 29, 2007 and December 30, 2006. The total amount of these debts and their terms are summarized below.

	September 29,			December 30,
	2007			2006

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 September 30, 2006, and monthly principal payments of $10,000 beginning August 1, 2006 through July 1, 2007. This is a non-interest bearing Note.	$	-		$	70,000

Automotive Rentals, Inc. Motor Vehicle Capital Lease agreement effective March 1, 2007 for five Ford E-350 Electrical Service vans. The Lease term is 60 months and payments are due on the 15^th of each month beginning in April 2007. The monthly payments total $2,560.20 per month for all five vehicles. The interest rate is 6.375% per annum.		77,084			-

Automotive Rentals, Inc. Motor Vehicle Capital Lease agreement effective September 1, 2007 for one Ford E-350 Electrical Service van. The Lease term is 44 months and payments are due on the 15^th of each month beginning in September 2007. The monthly payment totals $580.25 per month for this vehicle. The interest rate is 6.375% per annum.		21,985			-

Automotive Rentals, Inc. 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 rates are 3.625% and 3.875% per annum, respectively.		21,612			43,910

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.		23,355			89,369

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% per annum are due on the first day of each month beginning in August 2005 through July 2008. Principal payments of $22,619 are due on the first day of each month beginning on August 2005 through July 2008. A balloon payment for the remaining amount is then due in August 2008.		1,314,585			1,518,156

Total debt		1,458,621			1,721,435
Less current portion		(1,387,191	)		(460,576	)

Long term debt	$	71,430		$	1,260,859

Aggregate maturities of long-term debt as of September 29, 2007 are as follows:

Fiscal Year	Amount
Twelve months ended September, 2008	$	1,387,191
Twelve months ended September, 2009		36,171
Twelve months ended September, 2010		32,099
Thereafter		3,160
	$	1,458,621

5. Related Party Transactions

The Company has a number of promissory notes and lease obligations owing to related parties. The following table lists the notes and obligations outstanding at September 29, 2007 by related party.

Related Party	Type of Obligation	Maturity Date		Amount of Obligation		Monthly Payment
Christenson Leasing LLC^(a)	T. I. lease	December 2007	$	23,355	$	7,940
Christenson Leasing LLC^(a)	Equipment lease	December 2007		-		^(d)60,000
Rod Boucher	Bond guarantee fees	Open obligation		-		^(b)various
Mark Walter	Bond guarantee fees	Open obligation		-		^(b)various
Destination Microfield, LLC	Vehicle lease	December 2007		-		^(c)46,350
William C. McCormick	Bond guarantee fees	Open obligation		-	$	^(e)2,413
John B. Conroy	Note receivable	September 2005	$	66,250		-

^(a)	Robert J. Jesenik, a significant shareholder of Microfield and a former director owns a significant interest in this entity.

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

^(c)	These payments vary over the term of the loan. This amount represents the monthly payment in effect on September 29, 2007.

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

^(e)	These indemnity fees are payments made on a standby letter of credit which is in place to guarantee payments to vendors on a specific job.

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

Bond Guarantee Fees

Mark Walter/Rod Boucher

A certain number of CEI construction projects require us to maintain a surety bond. The bond surety company requires an additional guarantee for issuance of the bond. We have agreements with Mark Walter, our President and Rod Boucher, our CEO, under which at quarter end pays Walter and Boucher between $1,000 and $4,000 per month for their personal guarantees of this bond liability. The guarantee fee is computed as 10% of the open liability under bonds issued for CEI.

William McCormick

Certain construction projects within CEI required standby letters of credit. Our Chairman of the Board of directors has provided a letter of credit in the amount of $193,000, for which he is paid an indemnity fee. Under the letter of credit agreement, 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.

Tenant improvement lease

On December 30, 2002, Christenson Electric entered into a non-cancelable operating lease agreement with Christenson Leasing, LLC (CLC)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% per annum 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.

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’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 the formerly separate subsidiary, 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 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 Christenson Electric in October 2005.

Master Vehicle Lease Agreements

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. In October 2005, we signed a twelve month extension to this lease at $45,000 per month, with the lease now scheduled to end in December 2007. The lease also contains an interest rate provision with the monthly payment adjusting based on any increases in the prime rate. The monthly payment in effect on

September 29, 2007 is $46,350. This adjustment is made on an annual basis.

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 September 29, 2007, accrued interest receivable under this note totaled $26,519. We have accounted for the $66,250 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.

6. Amortization of Purchased Intangible Assets

The following table presents details of the purchased intangible assets as of September 29, 2007 and December 30, 2006:

	September 29, 2007			December 30, 2006
Intangibles purchased in 2003
Christenson Technology customer lists	$	663,305		$	663,305
Christenson Technology trade name		872,771			872,771

Intangibles purchased in 2005
Christenson Electric customer relationships		1,687,335			1,687,335
Christenson Electric trade name		758,356			758,356
EnergyConnect developed technology		2,390,667			2,390,667


		6,372,434			6,372,434
Less accumulated amortization		(1,302,860	)		(906,347	)

	$	5,069,574		$	5,466,087

The Company’s trade name is considered to have an undeterminable life, and as such will not be amortized. Instead, the trade name will be tested annually for impairment, with any impairment charged against earnings in the Company’s consolidated statements of operations. Customer lists related to the CTS base of customers was determined to have a six-year life. The CEI customer relationship was determined to have a ten-year life, and the developed technology has an estimated useful life of ten years.

Amortization of intangible assets included as a charge to operations was $132,171 and $396,513 for the three and nine months ended September 29, 2007, respectively.

Based on the Company’s current intangible assets, amortization expense for the five succeeding years will be as follows:

	Amortization
Twelve months ending	Expense
September 2008	$	526,101
September 2009		509,138
September 2010		407,800
September 2011		407,800
September 2012 and beyond		1,587,608
Total	$	3,438,447

7. Private Placements

June 30, 2006 private placement

On June 30, 2006, in conjunction with a private placement which resulted in gross proceeds of $15,000,000, the Company sold 7,500,000 shares of common stock at $2.00 per share, and issued warrants to purchase up to 5,625,000 shares of common stock. The warrants have a term of five years and an exercise price of $3.00 per share. Since the warrants are subject to certain registration rights, The Company recorded a warrant liability totaling $14,758,004 in accordance with EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” The warrant liability has been recalculated using the closing price of the Company’s common stock as of June 30, 2006 of $3.07. The registration rights provide for the Company to file a registration statement with the Securities and Exchange Commission (“SEC”) no later that 90 days after the closing of the transaction and have it declared effective by the SEC no later than 120 days after the closing of the transaction. The registration statement was filed with the SEC on July 21, 2006. The Company valued the warrants using the Black-Scholes option pricing model, applying a useful life of 5 years, a risk-free rate of 5.35%, an expected dividend yield of 0%, a volatility of 123% and a deemed fair value of the common stock of $3.07, which was the closing market price on June 30, 2006. At September 30, 2006, the warrant liability was recalculated using the closing price of the Company’s common stock as of September 29, 2006 of $1.73. The registration statement was declared effective by the SEC on September 29, 2006.

October 5, 2005 private placement

On October 5, 2005, in conjunction with a private placement which resulted in gross proceeds of $3,434,000, the Company sold 5,233,603 shares of common stock at $0.70 per share, and issued warrants to purchase up to 2,944,693 shares of common stock. The warrants have a term of five years and an exercise price of $0.90 per share. Since these warrants are subject to certain registration rights, the Company recorded a warrant liability totaling $6,286,919 in accordance with EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” The Company valued the warrants using the Black-Scholes option pricing model, applying a useful life of 5 years, a risk-free rate of 4.06%, an expected dividend yield of 0%, a volatility of 129% and a deemed fair value of the common stock of $2.37, which was the closing market price on October 4, 2005. In accordance with SFAS 133 “Accounting for Derivative Instruments and Hedging Activities,” the Company revalued the warrants as of December 31, 2005, April 1, July 1, and August 9, 2006, the warrant liability was recalculated using the closing price of the Company’s common stock as of those dates. This revaluation from the end of 2005 to April 1, 2006 resulted in an increase of $3,895,829 in the warrant liability and was recorded as a loss on revaluation of warrant liability in the consolidated statement of operations in the three months ended April 1, 2006.

The registration statement was filed with the SEC on February 13, 2006. This filing was declared effective on June 8, 2006. On August 2, 2006, a post-effective amendment was filed which suspended the effectiveness of this registration. That amendment was declared effective on August 9, 2006.

8. Segment Information

The Company is managed by specific lines of business including construction and services, energy related transactional and redistribution services. The Company’s management makes financial decisions and allocates resources based on the information it receives from its internal management system on each of its lines of business. Certain other expenses associated with the public company status of Microfield are reported at the Company’s corporate level, not within the subsidiaries. These expenses are reported separately in this footnote. The Company’s management relies on the internal management system to provide sales, cost and asset information by line of business.

Summarized financial information by line of business for the three and nine months ended September 29, 2007, and September 30, 2006, as taken from the internal management system previously discussed, is listed below.

	Three Months Ended				Nine Months Ended
	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
Revenue
Construction services	$	15,516,840	$	19,719,652	$	41,597,436	$	58,711,566
Energy transactional and redistribution services		4,690,546		943,076		10,408,037		2,082,767

Total revenue	$	20,207,386	$	20,662,728	$	52,005,473	$	60,794,333

	Three Months Ended				Nine Months Ended
	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
Gross Profit (Loss)
Construction services	$	2,703,677	$	1,098,749	$	7,489,413	$	6,807,242
Energy transactional and redistribution services		2,446,462		112,126		3,495,458		16,802

Total gross profit	$	5,150,139	$	1,210,875	$	10,984,871	$	6,824,044

	Three Months Ended						Nine Months Ended
	September 29, 2007			September 30, 2006			September 29, 2007			September 30, 2006
Operating Income (Loss)
Construction services	$	330,780		$	(739,782	)	$	380,848		$	94,230
Energy transactional and redistribution services		1,069,579			(601,659	)		(61,202	)		(2,075,566	)
Corporate		(631,256	)		(786,092	)		(2,159,264	)		(2,291,640	)

Total operating income (loss)	$	769,103		$	(2,127,533	)	$	(1,839,618	)	$	(4,272,976	)

	As of		As of
	September 29, 2007		September 30, 2006
Assets
Construction services	$	23,596,006	$	29,559,916
Energy transactional and redistribution services		33,912,844		31,853,065
Corporate		354,758

Total assets	$	57,863,608	$	61,412,981

	Three Months Ended				Nine Months Ended
	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
Capital Expenditures
Construction services	$	90,560	$	153,111	$	262,113	$	362,590
Energy transactional and redistribution services		14,063		32,454		40,382		34,775
Corporate		-		-		-		-

Total capital expenditures	$	104,623	$	185,565	$	302,495	$	397,365

The net operating income (loss) data listed above includes the effects of selling, general and administrative expense, depreciation, amortization, charges for goodwill impairment and the write-off of intangible assets. The following tables disclose those amounts for each segment.

	Three Months Ended				Nine Months Ended
	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
Operating Expenses
Construction services	$	2,372,897	$	1,838,531	$	7,108,566	$	6,714,447
Energy transactional and redistribution services		1,376,883		713,785		3,556,660		2,090,933
Corporate		631,256		786,092		2,159,263		2,291,640

Total operating expense	$	4,381,036	$	3,338,408	$	12,824,489	$	11,097,020

	Three Months Ended				Nine Months Ended
	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
Depreciation, Amortization and Write-off of Intangibles
Construction services	$	128,248	$	135,925	$	403,633	$	381,570
Energy transactional and redistribution services		69,276		64,356		203,804		183,638
Corporate		-		-		-		-

Total depreciation, amortization, and write off of Intangibles	$	197,524	$	200,281	$	607,437	$	565,208

There were no inter-company sales in the three and nine months ended September 29, 2007 and September 30, 2006. All of the Company’s assets as of September 29, 2007 and December 30, 2006, were attributable to U.S. operations.

9. Business Concentration

Revenue from two (2) major customers, which accounted for greater than 10% of total sales, approximated $4,641,000 and $3,049,000 or 23% and 15% of sales for the three-month period ended September 29, 2007. The larger of these two amounts was from PJM, which runs the largest electric grid in the United States, and is a customer in the ECI subsidiary. This revenue is the result of multiple participating electric consumers who executed energy transactions that were aggregated and billed to PJM. The revenue is dependent on actions taken by these third parties in conjunction with ECI, for which PJM remits payment. Of these participants, there are none whose transactions totaled 10% or more of our revenue in the three months ended September 29, 2007 and September 30, 2006.

Revenue from these same two customers of $10,202,000 and $5,435,000 accounted for 20% and 10% of total sales for the nine-month period ended September 29, 2007. For the nine months ended September 30, 2006, revenue from one customer was $11,444,000 or 19%.

Total accounts receivable of $1,813,000 or 17% of total accounts receivable was due from one customer as of September 29, 2007. At December 30, 2006 $975,000 or 11% was due from one customer.

10. Subsequent Events

On October 1, 2007, the Company received a letter of intent from members of the management of Christenson Electric, Inc. offering to purchase 100% of the stock of Christenson Electric from Microfield, its parent. Microfield’s Board of Directors appointed a special committee of independent directors to evaluate the offer from Christenson’s management. The Board also subsequently began a search for other interested buyers with the help of an investment banking firm, which process the special committee would oversee. The Board agreed to a 35 day time frame in which to accept other outside offers for the purchase of Christenson. The investment banking firm was also enlisted to provide Microfield’s Board of Directors with a fairness opinion to assist them in evaluating the proposed purchase of CEI.

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

The following discussion of the financial condition and results of operations of Microfield Group, Inc. should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.

Forward-Looking Statements

Certain statements contained in this Form 10-Q concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts are "forward-looking statements" within the meaning of the federal securities laws. Although the Company believes that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct. These forward-looking statements involve a number of risks and uncertainties, and actual results may differ materially from the results discussed in the forward-looking statements. Any such forward-looking statements should be considered in light of such important factors and in conjunction with other documents of the Company on file with the SEC.

New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for the Company to predict all of such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligations to update the information contained in such statement to reflect subsequent developments or information.

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, and sustainable transaction-based 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 27,365,305 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 debt in the amount of $8,916,000 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.

We specialize in the installation of electrical, control, and telecommunications products and services, and in transactions involving integration of consumers of electricity into the wholesale electricity markets. The Company expanded through acquisitions in 2005 from an energy and related technologies and services business to a business that also provides energy consumers a new source of energy revenues and savings and the means to achieve such benefits. Included in these acquisitions are the capabilities to service high voltage facilities including wind farms and solar energy collection facilities. Our objective is to leverage our assets and resources and build a viable, profitable wholesale power transaction electrical services, and technology infrastructure business.

We have the ability to deliver the following products and services:

Electrical and systems engineering and design

Controls, lighting, and cabling

Building electric service

Solar, wind, distributed generation, and substations

Information technology networks

Telecommunications, computer telephony, and integrated systems

Life safety and security systems

Redistribution in malls and shopping centers

Construction, maintenance, inspection, and upgrades

Integrated building controls, wiring, and cabling

HVAC

Lighting

Life safety systems

Telecommunications systems integration and infrastructure

Computer telephony integration

Digital Video CCTV systems

Enterprise security systems

Wireless networking solutions

Information technology networks

Voice / data systems

Electrical construction service

Buildings and industrial systems

Substations

Wind farms, solar collectors, and distributed generation

Redistribution in malls and shopping centers

Software development

Commercial building energy data management, data acquisition, and modeling

Regional grid data monitoring, data management, and price forecasting

Electric consumer transactional interface, wholesale products, and transaction management

Settlement systems and related protocols

Electric Power Transactions

Service electric energy, capacity, and reserve needs of regional electric grids

Service wholesale electric markets to improve electric supply and delivery efficiencies

Enable commercial building owners, universities and industrial consumers to contribute to these services

Rapidly expand the awareness and use of these services through partnerships with large energy management firms

CEI has been focused on electrical and technology products and services to customers in the Portland and Eugene, Oregon markets and the southwest Washington State markets. With the acquisitions in 2005 the Company’s footprint for coordinating, managing, directing, and/or supervising services to energy consumers is being expanded to include additional regions in the US. CEI also provides electrical design and construction services to utilities, grid operators and electric power generation companies nationally. ECI enables buildings and industrial electric consumers to contribute to the wholesale electric market, provides the transaction technologies and processes to integrate consumers into the wholesale electric market, and uses these capabilities to service regional electric grid operators with energy, capacity, reserves, and related needs. Integrating CEI and ECI combines the breadth of services needed to deliver full service solutions to our customers.

CEI has continuously provided electrical design, engineering, and construction services for more that 50 years. It now services all of the electrical, control, lighting, safety, security, and related systems needed for economic and secure operations of buildings and industrial sites. A substantial portion of CEI business is repeat business under long-standing relationships with its customers. CEI operates a fleet of service trucks that supply the electric related needs of hundreds of customers.

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

ECI provides wholesale electric market transaction services to regional electric grids. Selected needs of electric grid operators, including energy, capacity, and reserves have been formed into products that can be delivered through ECI systems to the grid. ECI technologies, processes, and services enable buildings and electric consumers to contribute to such wholesale services at levels and with complexities of service never before achieved. It is anticipated ECI transaction services will increase the need for many of the services supplied by CEI.

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 deliver, 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.

The Company’s current acquisition strategy is to actively review target opportunities for value-added potential and pursue targets that bring significant benefits, and are strategic and accretive.

Management’s Focus in Evaluating Financial Condition and OperatingPerformance.

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. Subsidiary revenues are reviewed each day by the Presidents of each subsidiary and the assigned financial officer. Bookings are reviewed weekly by the Chief Executive Officer, the Subsidiary Presidents, the Chief Financial Officer, and the management team. Monthly revenue for the prior month by subsidiary is examined in detail by the executive team. Appropriate actions are taken based on these daily, weekly, and monthly reviews.

Contracts and Bids: Expected revenues and expenses are forecast from evaluation of contracts and bids for future business. Each subsidiary President reviews the progress toward contract execution, and progress toward completion of contracts or progress toward achieving target levels of service within the contract. For large contracts the review and tracking oversight is specific to the project. For smaller contracts, monthly review of relevant statistics for performance and activity level is made by the executive management team.

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 Corporate Controller, 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 monthly to review reports that monitor expenses and cost efficiency, among other factors. Additionally, the executive team of Christenson Electric, comprised of our President, CFO and Controller, meets weekly to review the subsidiaries’ operations. All expenses of EnergyConnect are reviewed and approved by the President of EnergyConnect and the Corporate Controller. Each subsidiary’s financial statements are reviewed monthly with a portion of 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 uses this information in determining cash requirements.

Longer term cash needs are reviewed on a weekly basis by our 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.

Research and Development. Research and Development expense related to development of proprietary tools and software used in the business is budgeted each year in advance. The CEO, EnergyConnect’s President, and the Senior Vice President of System Development review expenses monthly to determine and authorize any deviations from budget.

Customer service. We consider our reputation as one of our most valuable assets. Much of the revenue in our Christenson subsidiary 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 continues to grow.

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 we manage between energy users and regional electric grid operators. Christenson’s 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. EnergyConnect’s revenues from transactions are driven primarily by the acquisition of energy consumers to participate in our programs and support delivery of increasing amounts of service to regional grid operators. Acquisition of such participants is an education intensive process dominated by relationship building. Business comes from direct sales, referrals, partners, and joint service arrangements.

Cash. We generate cash mainly through operations. Cash is borrowed daily from an asset based lender under a revolving credit facility in Christenson Electric. These borrowings are repaid through collections from customers’ accounts. Christenson 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 produces cash from operations but is not cash positive on an annual 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 seasonality in revenue, timing of large wind project awards, tight supply of products used in certain industries affecting our projects, 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, and wholesale power market prices.

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.

We have been investing in building EnergyConnect’s revenue base, which has taken more time and effort than previously anticipated. These efforts within ECI have increased the first three quarters of revenue substantially over prior year quarterly revenues. We anticipate that as more of our efforts are concentrated on educating our participant base within ECI, revenue should continue to build on a year over year basis. Our goal for profitability in Christenson remains a priority. While CEI’s third quarter operating profit has also produced an operating profit for the nine months through September 29, 2007, not having obtained a large wind project yet in 2007 has impacted the profit levels we anticipated to have in CEI at this point in the year. Our goals for net profitability within Christenson for 2007 remain. Achieving this will depend on our ability to secure additional projects and keep our gross margins as high as possible.

Trends.

A large portion of our Christenson 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. With the new customer base obtained from the acquisitions in 2005, we are experiencing more seasonality in our revenue base. A large portion of CEI’s business is impacted by the weather. Wind farms are located in areas of the country where the weather usually becomes severe in the winter, limiting or preventing work on those projects during the severe winter months. Also, the number of wind projects commencing in the U. S. has put pressure on the supply of wind turbines and other related parts.

EnergyConnect’s business can be greatly affected by wholesale electric energy prices that fluctuate with weather, natural gas prices, and electric system conditions. A recent trend in ECI’s industry is the growing awareness of demand response and the competition that awareness has created. While there are several companies in the demand response arena, there are many segments in which companies are generating revenue. EnergyConnect generates the majority of its revenue in the energy market programs which allow companies to enter the wholesale energy markets on an hourly basis each day. The two largest companies in the demand response market generate the majority of their revenue either from hardware sales or from capacity market programs. Capacity market programs involve making a commitment to curtail electricity use when requested by their electric grid. For that commitment, these companies are paid a monthly reservation fee, which is their base of revenue.

EnergyConnect recorded a material amount of revenue from capacity programs in the third quarter of 2007. For the three months ended September 29, 2007, these capacity programs produced $2.5 million, or 54% of EnergyConnect’s third quarter 2007 revenue. This revenue was recorded from a PJM Interconnection capacity program that commenced on June 1, 2007 and runs through May 31, 2008. As a part of this program the Company is required to respond to a request from PJM to curtail energy usage within its participant base. This requirement is for the months of June through September. A response to PJM’s request for the months of October through May is voluntary. In compliance with the revenue recognition guidance of SAB 101 “Revenue Recognition in Financial Statements” as amended by SAB 104 “Revenue Recognition,” the entire twelve months of payments under this capacity program is recorded as revenue in the third quarter of 2007. To the extent that the Company enters into this program in future years, and the rules of the program for voluntary participation past the month of September remain the same as currently stated, the Company will recognize as revenue, most, if not all of the payments from this program in its third quarter each year. This may cause revenue for the company’s EnergyConnect subsidiary to show higher revenue in the third quarter compared to other quarters.

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; and

Warrant liability.

Revenue recognition and allowances

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, 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 also produce revenue through 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 use in their buildings. In conjunction with such arrangements we also contract with the power grid operators to use energy, capacity, and related ancillary services during specified times and under specified conditions. These transactions are summarized at the end of each monthly period and submitted to the power grid for settlement and approval. The transactions are recorded as revenue on the settlement date, which may fall 30-60 days after the transaction date from which the revenue is derived, because management feels that without an established history for this source of revenue, and the potential for disputes, that the settlement date, which is the date on which both parties agree to the amount of revenue to recognize, is the most conservative and appropriate date to use. At the time in which there is adequate transaction and settlement history to be assured that transactions will be accurately settled and collection of the transaction amounts are reasonably assured, the Company will recognize revenue at the date of the energy program transaction.

The Company also records revenue from capacity programs with electric grid operators. EnergyConnect recorded a material amount of revenue from capacity programs in the third quarter of 2007. For the three months ended September 29, 2007, these capacity programs produced $2.5 million, or 54% of EnergyConnect’s third quarter 2007 revenue. This revenue was recorded from a PJM Interconnection capacity program that commenced on June 1, 2007 and runs through May 31, 2008. As a part of this program the Company is required to respond to a request from PJM to curtail energy usage within its participant base. This requirement is for the months of June through September. Under this program, a response to PJM’s request for the months of October through May is voluntary. In compliance with the revenue recognition guidance of SAB 101 “Revenue Recognition in Financial Statements” as amended by SAB 104 “Revenue Recognition,” the entire twelve months of payments under this capacity program is recorded as revenue in the third quarter of 2007. To the extent that the Company enters into this program in future years, and the rules of the program for voluntary participation past the month of September remain the same as currently stated, the Company will recognize as revenue, most, if not all of the payments from this program in its third quarter each year. This may cause revenue for the company’s EnergyConnect subsidiary to show higher revenue in the third quarter compared to other quarters.

Accruals for contingent liabilities

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

Inventories and reserves for shrinkage and obsolescence

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 September 29, 2007, the allowance for inventory obsolescence was $60,000 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.

Bad debt reserves

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 September 29, 2007, the allowance for doubtful accounts was $214,000. This allowance was determined by reviewing customer accounts and considering each customer’s creditworthiness as of September 29, 2007, 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.

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

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

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

Warrant Liability

In connection with the placement of certain debt instruments during the second quarter 2006 and the year ended December 31, 2005, we issued freestanding warrants. Although not all of the warrants provide for net-cash settlement, in certain circumstances, physical or net-share settlement is deemed to not be within our control and, accordingly, we are required to account for these freestanding warrants as a derivative financial instrument liability, rather than as shareholders’ equity.

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

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

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

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

Results of Operations

The financial information presented for the three and nine months ended September 29, 2007 and September 30, 2006, represents activity in Microfield Group, Inc. and its wholly-owned subsidiaries, CEI and ECI.

Sales. Revenue for the three months ended September 29, 2007 was $20,207,000 compared to $20,663,000 for the three months ended September 30, 2006. The composition of revenue between the third quarters of 2007 and 2006, changed from being provided predominantly by CEI in 2007 to a larger contribution to total revenue from ECI in 2007. Revenues within ECI were $4,691,000 for the third quarter of 2007 compared to $943,000 for the third quarter 2006. This five-fold increase in year-over-year quarterly revenue in ECI represents the inception of a capacity based program in PJM under which the Company recorded $2.5 million in revenue during the quarter. In accordance with the guidance of SAB 104 “Revenue Recognition,” this amount, which represents twelve months of capacity program payments, is properly recognized in total in the third quarter of 2007. A portion of the Company’s revenue growth between quarters is also due to growth of the participant base within ECI. Sales within CEI for the third quarter of 2007 totaled $15,517,000 compared to $19,720,000 in the third quarter of 2006. This decrease is primarily the result of the lack of any revenue from a large wind project in the current period, and from lower levels of revenue within the electrical service division of CEI compared to the prior year’s quarter.

Sales to two customers comprised 38% of the Company’s total sales for the three months ended September 29, 2007. There were sales to two customers that comprised 25% of total revenue in the three months ended September 30, 2006.

Revenue for the nine months ended September 29, 2007 was $52,005,000 compared to $60,794,000 for the nine months ended September 30, 2006. Sales within CEI and ECI for the nine month period in 2007 totaled $41,597,000 and $10,408,000, respectively. Revenue for the nine months ended September 30, 2006 for CEI and ECI was $58,711,000 and $2,083,000, respectively. There were sales to two customers that comprised 30% of total revenue in the nine months ended September 29, 2007. There were sales to one customer during the nine months ended September 30, 2006 that comprised 32% of the Company’s total sales for that period.

Cost of Sales. Cost of sales totaled $15,057,000 or 74.5% of sales for the fiscal quarter ended September 29, 2007, compared to $19,452,000 or 94.1% of sales for the same period in the prior year. This decrease in dollar cost of sales is due to significant costs associated with a large wind project in the prior year quarter that did not exist in the current year. Also contributing to the lower percentage of cost of sales is the low cost associated with a capacity program in EnergyConnect, described below. Cost of sales for the nine months ended September 29, 2007 was $41,021,000 compared to $53,970,000 for the nine months ended September 30, 2006. Costs of sales in ECI include payments to participants in the energy and capacity programs. Costs of sales in ECI were $2,244,000 and $6,913,000 for the three and nine months ended September 29, 2007. Costs of sales in CEI include the cost of labor, products, supplies and overhead used in providing electrical and technology services. Costs of sales in CEI were $12,813,000 and $34,108,000 for the three and nine months ended September 29, 2007.

Gross Profit. Gross profit for the three months ended September 29, 2007 was $5,150,000 or 25.5% compared to $1,211,000 or 5.9% for the same period in 2006. This improvement in gross margin is due to a capacity program in PJM under which $2.5 million in net revenue was recognized against costs of approximately $339,000. It is not anticipated that the margins on this PJM program will be this high in the program year starting in 2008. The margin improvement was also due to the return to industry standard profit margins on CEI projects in the third quarter of 2007. In the third quarter of 2006, the Company recorded significant costs associated with a large wind project. The Company also took a $400,000 reserve in 2006 for a dispute on a power transmission project that was in process at the time of the acquisition of CEI. Gross profits for ECI and CEI for the three months ended September 29, 2007 were $2,446,000 or 52.1% of sales, and $2,704,000 or 17.4% of sales, respectively.

Gross profit for the nine months ended September 29, 2007 was $10,985,000 or 21.1% compared to $6,824,000 or 11.2% for the same period in 2006. Gross profits for ECI and CEI for the nine months ended September 29, 2007 were $3,495,000 or 33.6% of sales, and $7,489,000 or 18.0% of sales, respectively.

Future gross profit margins will depend on the volume and mix of sales of products and services to the Company’s customers, as well as the Company’s ability to control costs. It is the Company’s goal to sustain higher levels of gross margins through continuing cost reduction efforts, diligent management oversight of project costs, and through an emphasis on obtaining work projects and new transactional service agreements at higher gross margin levels.

Operating Expenses. Operating expenses were $4,381,000 (21.7% of sales) for the three months ended September 29, 2007, compared to $3,338,000 (16.2% of sales) for the three months ended September 30, 2006. This increase is primarily due to added personnel costs in ECI as we continue to invest in the sales force needed to build ECI’s revenue base. Operating expenses in ECI totaled $1,377,000 for the three months ended September 29, 2007, compared to $714,000 for the same period in 2006. Operating expenses are comprised mainly of payroll costs, including stock-based compensation, facilities and equipment rent, outside services, insurance, utilities and depreciation. Payroll related costs in ECI increased to $923,000 in the three months ended September 29, 2007 from $396,000 in the same period in 2006. Payroll related costs in CEI decreased to $1,392,000 in the three months ended September 29, 2007 from $1,480,000 in the same period in 2006.

Operating expenses were $12,824,000 (24.7% of sales) for the nine months ended September 29, 2007, compared to $11,097,000 (18.3% of sales) for the nine months ended September 30, 2006. The increase is due to higher personnel costs associated with building the sales force in ECI. Operating expenses in ECI increased by $1,466,000 to $3,557,000 in the nine months ended September 29, 2007 from $2,091,000 in the same period in 2006. Operating expenses in CEI increased to $7,109,000 in the nine months ended September 29, 2007 from $6,714,000 in the same period in 2006. This increase was due to the reclassification of $707,000 in lease charges out of cost of sales and into operating expenses in 2007. Operating costs for the consolidated entities were also affected by the charge for stock based compensation, which was $668,000 for the nine months ended September 29, 2007, compared to $1,247,000 in the nine months ended September 30, 2006. This stock-based compensation was lower in the current year due to the expiration of a contract in August of 2006 with an outside service provider under which part of their compensation was paid with stock options.

Interest Expense. Net interest expense was $172,000 for the three months ended September 29, 2007, compared to $929,000 for the three months ended September 30, 2006. The decrease is due primarily to a $669,000 penalty on registration of shares issued in the October 2005 private placement. The Company’s cost of capital was also lower in 2007 compared to 2006. Net interest expense was $501,000 for the nine months ended September 29, 2007 compared to $1,773,000 for the nine months ended September 30, 2006. Total interest expense associated with the registration penalty in the nine months ended September 30, 2006 was $825,000. The average debt levels in 2006 were also significantly higher than the average debt levels in 2007, causing higher interest in 2006 compared to 2007.

Derivative income/expense. The Company had no derivative income or expense in 2007, but recorded derivative income of $8,319,000 in the first nine months of 2006. This was the result of the re-valuation of a warrant obligation initially recorded in the October 2005 private placement. In accordance with SFAS 131, this warrant obligation was required to be marked-to-market at the end of each reporting period, with the resulting increase or decrease in its value being recorded as derivative income or expense in the Company’s consolidated statement of operations for that period. These derivative amounts are recorded based on the fluctuations of the Black Scholes value of the derivative liabilities listed on the consolidated balance sheet. The expense is computed using the fair value of the Company’s common stock, among other factors, and will produce derivative expense or derivative income as the Company’s stock price increases or decreases, respectively.

Gain / Loss From Discontinued Operations

Discontinued operations are comprised of a royalty from the sale of the SoftBoard business. The SoftBoard business was sold in 2000. As part of the sale price, the Company received 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.” The amount of $17,068 received in the first quarter 2006 was the last payment to be received by the Company under the royalty agreement.

Income Taxes. There was a small charge for income taxes for the three and nine months ended September 29, 2007 due to minimum income taxes due to various state tax agencies in those periods. No federal tax benefit from loss carryback was recorded in either year as there was no income tax paid in the open loss carryback periods. The Company has provided a full valuation allowance on its net deferred tax asset.

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, 2007, the Company had positive working capital of approximately $862,000 and its primary source of liquidity consisted of cash and its operating line of credit.

Accounts receivable increased to $10,520,000 at September 29, 2007 from $9,105,000 at December 30, 2006. Company receivables are net of an allowance for doubtful accounts of $214,000 and $195,000 at September 29, 2007 and December 30, 2006, respectively. Included in the receivable balance is approximately $1.8 million due from PJM under a capacity based demand response program the Company entered into in 2007. All of the revenue under that program was recognized in the third quarter and will be received monthly through June of 2008. At September 29, 2007, one customer’s outstanding receivable balance accounted for 17% of total outstanding accounts receivable.

Inventory increased to $618,000 at September 29, 2007 from $513,000 at December 30, 2006 due to normal fluctuations in inventory between the summer and winter period ends. This balance mainly includes inventory used in the electrical services business. The Company maintains a fleet of trucks and vans which each maintain a certain level of inventory needed to provide timely products and services to the Company’s customers. The inventory levels should remain relatively constant, and increase slightly as the Company’s revenue increases.

The Company recorded costs in excess of billings, which reflect those costs incurred on construction and services, which have not yet been billed to customers. This amount increased to $2,674,000 at September 29, 2007 from $2,350,000 at December 30, 2006. This amount should remain relatively constant as a percentage of sales on an ongoing basis.

Property and equipment, net of depreciation increased by $92,000 to $751,000 at September 29, 2007, compared to $659,000 at December 30, 2006. This increase was due primarily to the purchase of a limited number of service vehicles, computer equipment associated with the Company’s increases in headcount, less normal depreciation on fixed assets. The Company does not anticipate spending significant amounts to acquire fixed assets for the foreseeable future.

Accounts payable increased by $424,000 to $5,487,000 at September 29, 2007 from $5,063,000 at December 30, 2006. This increase is due to normal fluctuations in levels of payables associated with activity at the end of the third quarter compared to the activity levels at December 30, 2006. Payables consist primarily of the costs of inventory, materials and supplies used in the electrical construction services and technology infrastructure services provided by the Company.

Accrued payroll, payroll taxes and benefits were $2,206,000 at September 29, 2007. These amounts consist primarily of union and non-union payroll, payroll withholdings, health and welfare benefits owed to the unions representing the Company’s 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 the revenues of the Company reflecting the increased or decreased activity levels, and as such, represents a main cash use of the Company’s funds. These liabilities are primarily short-term in nature with most of them being paid within one to six weeks of the expense being incurred.

The main bank line of credit was approximately $4,991,000 at September 29, 2007 compared to a balance of $3,830,000 at December 30, 2006. This lending facility is a primary source of funds for the Company. Amounts are drawn against it each day based on the amount of eligible revenues that are billed by the Company. As receivables are collected daily, those funds are used to pay down the facility. The facility has a limit of $10,000,000 and borrowings are based on 80% of eligible accounts receivable. Accommodations have occasionally been made to increase the borrowings by including a higher advance rate percentage plus including a portion of work in process in the borrowing base. The Company had borrowing capacity available of approximately $257,000 at September 29, 2007.

The Company had no commitments for capital expenditures in material amounts at September 29, 2007.

Inflation

In the opinion of management, inflation will not have a material impact on the Company’s financial condition and results of its operations.

Off-Balance Sheet Arrangements

The Company does not maintain off-balance sheet arrangements nor does it participate in any non-exchange traded contracts requiring fair value accounting treatment.

Item 3. Quantitative and Qualitative Disclosures About Market Risks.

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

Item 4. Controls and Procedures

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

Evaluation of Disclosure Controls and Procedures

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

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

Management’s Annual Report on Internal Control over Financial Reporting

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

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

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

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

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

Management’s assessment of the effectiveness of our internal control over financial reporting identified the following material weaknesses as of December 30, 2006:

Revenue Recognition - Implementing a consistent application of percent of completion estimation, implementing accurate project costing controls, as well as maintaining adequate records of contracts.

Cash Disbursements and Liability Recognition - Standardizing purchasing policies and procedures, segregating purchasing duties where appropriate and improving the receipt and approval function.

In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Because of the material weaknesses described above, management concluded that, as of December 30, 2006, our internal control over financial reporting was not effective.

Management has corrected many significant weaknesses and made significant progress in correcting these material weaknesses. The Company will continue to dedicate significant personnel and financial resources to the ongoing remediation and control maintenance efforts. Management expects that the remediation efforts it has made will result in the finding that there are no longer material weaknesses in the Company’s controls and procedures.

Changes in Internal Control over Financial Reporting

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

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

Revenue recognition

•

Criteria and procedures established defining approved customer contracts

•

Control function established to review and monitor compliance to new procedures

•

Improved document control and file check out procedures

•

Procedure established defining consistent percentage completion Gross Margin estimation process

Cash disbursements and liability recognition

•

Document control system established and monitored for compliance

•

Cut off procedures formalized and consistently applied

•

Centralized departmental budgets and accountability established

•

Purchasing procedures have been formalized and implementation has been completed

•

Procedures instituted to provide for appropriate separation of duties

Other

•

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

•

Control function added to review reconciliations

•

Control evidence records and procedures for each job function

•

Timely and frequent project reviews

•

Timely closing and review of books and records

•

Deadlines imposed for period end closings

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

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is subject to other 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 should not have a material adverse effect on its financial position, results of operations or liquidity.

Item 1A. Risk Factors

The Company has sought to identify what it believes to be the most significant risks to its business, but cannot predict whether, or to what extent, any of such risks may be realized nor can it guarantee that it has identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to the Company’s Common Stock.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company provides the following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to its business, products and services. These are factors that could cause actual results to differ materially from expected results. Other factors besides those listed here could adversely affect the Company.

We Have a History Of Losses Which May Continue and Which May Negatively ImpactOur Ability to Achieve Our Business Objectives.

We incurred operating losses of $5,631,000 and $75,946,000 for the twelve months ended December 30, 2006 and December 31, 2005, respectively. The losses include expenses of $1,442,000 due to non-cash charges for stock-based compensation in 2006. Of the loss amount in 2005, $77,420,000 was due to a non-cash write-off of impaired goodwill from the ECI transaction, and other intangible asset, non-cash impairment charges. We cannot assure 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 Experience Continuing Losses and Are Unable to Obtain Additional Funding Our Business Operations Will beHarmed and If We Do Obtain Additional Financing Our Then Existing ShareholdersMay Suffer Substantial Dilution.

Additional capital may 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 development operations or continue our business operations.

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

Many Of Our Competitors Are Larger and Have Greater Financial and OtherResources than We Do and Those Advantages Could Make It Difficult For Us toCompete 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, have longer operating histories, have larger customer bases, and have substantially greater financial, development and marketing resources than we do. The energy transaction business has many competitors, some larger than we are and with greater resources. 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 ProductLines 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

hiring, training and management of employees.

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

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

Potential future acquisitions could be difficult to integrate, disrupt ourbusiness, dilute stockholder value and adversely affect our operating results.

Since July 2005, we have acquired two companies and may expand our operations through targeted, strategic acquisitions over time. This may require significant management time and financial resources because we may need to integrate widely dispersed operations with distinct corporate cultures. Our failure to manage future acquisitions successfully could seriously harm our operating results. Also, acquisition costs could cause our quarterly operating results to vary significantly. Furthermore, our stockholders would be diluted if we financed the acquisitions by incurring convertible debt or issuing securities.

Goodwill Recorded On Our Balance Sheet May Become Impaired, Which Could Have AMaterial 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. For the fiscal year 2005, we wrote off, approximately $77 million of goodwill due to impairment testing of this asset. No goodwill or intangible asset value was written off in the fiscal year 2006.

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

Our success is dependent on the growth in energy management and curtailmentprograms, and the continued need for electrical construction and technologyservices, and to the extent that such growth slows and the need for servicescurtails, our business may be harmed.

The construction services industry has experienced uncertainty both in the United States and internationally. That trend is a result of the state of the capital markets, renewed growth in the construction industry, passage of favorable energy tax legislation by Congress and the uncertain housing markets. It is difficult to predict whether these factors will result in economic improvement in the industries which our company serves. If the rate of growth should slow, 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;

Weather abnormalities;

Unexpected price increases;

Changes in the rules by the electric grid operators regarding payments for our transactional energy services;

While opportunities for transactional revenue is higher in cold weather months, 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 indecreased 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 lawsuitsor indemnity claims, which could materially and adversely affect our businessand results of operations.

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

Our failure to comply with, or the imposition of liability under, environmentallaws 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 seasonalvariations, which may cause our operating results to vary significantly fromperiod 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 power lines 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. Additionally, more energy management transactional revenues are produced in peak energy usage months during the winter and summer. Seasonal variations will cause fluctuations in our revenues during the year. 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 ouroperations.

Our electric services business is labor intensive, requiring large numbers of electricians, installers and other personnel. Subject to seasonality, approximately 75-85% 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 AdequatelyProtected Outside the United States, Resulting in Loss of Revenue.

We believe that our trademarks, whether licensed or owned by us, and other proprietary rights are important to our success and our competitive position. In the course of any potential international expansion, we may, however, experience conflict with various third parties who acquire or claim ownership rights in certain trademarks. We cannot assure 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 RemovedFrom the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers toSell Our Securities and the Ability of Stockholders to Sell Their Securities inthe 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 1999 — 2001 (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 theTrading Market in Our Securities is Limited, Which Makes Transactions in OurStock 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.

Potential Fluctuations in Annual Operating Results

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

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

Limitation of Liability and Indemnification of Officers and Directors

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

Continued Influence of Current Officers and Directors

The present officers and directors own approximately 19% of the outstanding shares of Common Stock, and therefore are in a position to elect a significant number of our Directors and otherwise influence the Company, including, without limitation, authorizing the sale of equity or debt securities of Microfield, the appointment of officers, and the determination of officers' salaries. Shareholders have no cumulative voting rights. (See Security Ownership of Certain Beneficial Owners and Management in 2006 Form 10-K.)

Management of Growth

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)

None.

(b)

None.

(c)

There have been no purchases of common stock by the Company or its affiliates during the quarter ended September 29, 2007.

Item 3. Defaults Upon Senior Securities

None.

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

There were no matters submitted to a vote of security holders during the quarter ended September 29, 2007.

Item 5. Other Information

None.

Item 6. Exhibits

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

Exhibit No.

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

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

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

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

99.1 Press release of financial results incorporated by reference to Form 8-K filed November 8, 2007.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 8, 2007

		MICROFIELD GROUP, INC.

		By: /s/ Rodney M. Boucher
		Rodney M. Boucher
		Chief Executive Officer
		(Principal Executive Officer)