10-K

U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended January 1, 2011

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number: 000-26226

ENERGYCONNECT GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Oregon	93-0935149
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

901 Campisi Way, Suite 260, Campbell, CA	95008
(Address of Principal Executive Offices)	(Zip Code)

(408) 370-3311

(Registrant’s Telephone Number, Including Area Code)

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-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(b) of the Act.    ¨  Yes    x  No

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

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

¨ Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company

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

The aggregate market value of the voting stock and non-voting common equity held by non-affiliates (based upon the closing sale price of $0.15 per share on the Over the Counter Bulletin Board on July 3, 2010) was $12,937,508.

The number of shares outstanding of the registrant’s Common Stock as of March 29, 2011 was 136,320,765 shares.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant has incorporated by reference portions of its Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this annual report.

ENERGYCONNECT GROUP, INC.

FORM 10-K INDEX

PART I

		Page
Item 1.	Business		1
Item 1A.	Risk Factors		11
Item 1B.	Unresolved Staff Comments		23
Item 2.	Properties		23
Item 3.	Legal Proceedings		23
Item 4.	(Removed and Reserved)		23
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities		24
Item 6.	Selected Financial Data		26
Item 7.	Management’s Discussion and Analysis of Financial Condition And Results of Operations		27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		34
Item 8.	Financial Statements and Supplementary Data		35
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		55
Item 9A(T).	Controls and Procedures		55
Item 9B.	Other Information		56
PART III
Item 10.	Directors, Executive Officers, and Corporate Governance		57
Item 11.	Executive Compensation		57
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		57
Item 13.	Certain Relationships and Related Transactions, and Director Independence		57
Item 14.	Principal Accountant Fees and Services		57
PART IV
Item 15.	Exhibits and Financial Statement Schedules		58
SIGNATURES			60
EXHIBIT INDEX			61

PART I

ITEM 1. BUSINESS

We use the terms “EnergyConnect”, the “Company”, “we”, “us” and “our” in this form 10-K to refer to the business of EnergyConnect Group, Inc. and its subsidiary.

Business Summary

EnergyConnect Group, Inc. is a leading provider of demand response services to the electricity grid. Demand response programs provide grid operators with additional electricity generation capacity by encouraging consumers to curtail their electricity usage. Historically, to provide a reliable supply of electricity and to avoid service disruption, electric utilities have increased power generation by building additional power plants and transmission infrastructure. However, an alternative approach to increasing the supply side of electricity is to use demand response programs to reduce overall peak demand or shift load from peak to off-peak times, thereby optimizing the balance of demand and supply and reducing the need for additional power generation capacity. Demand response programs fall into two main groups, programs made for customers to stand by and respond to a grid event initiated by the grid operator and programs that rely on customers curtailing their use of electricity based upon price signals.

Through our proprietary software as a service (SaaS) platform, we allow commercial and industrial consumers of electricity to access demand response programs that are offered by grid operators and get paid by agreeing to stand by and curtail based upon a grid event or responding to a price signal. Our participants are commercial and industrial consumers of electricity. We contract with them to identify, develop and, if necessary, implement curtailment strategies. We enroll our participants in demand response programs operated by grid operators, who pay us for standing by or by reducing load by responding to a price signal. We in turn pass on a portion of these payments to our participants in accordance with their contract with us.

Description of Market

In a wholesale electricity market, such as the energy market operated by the Pennsylvania, New Jersey, Maryland Interconnection, LLC (PJM), the market operator is responsible for buying, selling and delivering wholesale electricity, thereby balancing the needs of suppliers, wholesale customers and other market participants. These markets operate like a stock exchange, with the price of electricity resulting from matching supply, for example power supplied by the generators, with demand, consisting of the retail, industrial and commercial consumers of electricity. The PJM market uses locational marginal pricing (LMP) that reflects the value of electricity at a specific time and location. If the lowest-priced electricity can reach all locations, prices are the same across the entire grid. If there is congestion and energy cannot flow to all locations more-expensive electricity is ordered to meet that demand. As a result, the LMP is higher in those locations of constraint. Wholesale electricity prices fluctuate across the grid based on five-minute intervals; however most consumers of electricity pay rates that are based on an average price of electricity that includes a hedge premium. This means that most consumers do not see wholesale prices and have no way of reacting to them. We have developed and deployed a software solution that allows our customers to see estimates of these prices and transact in the wholesale market.

The energy market consists of Day-Ahead and Real-Time, or Day-Of, markets. The Day-Ahead market is a forward market in which hourly LMPs are calculated for the next operating day based on generation offers, demand bids and scheduled bilateral transactions. The Real-Time market is a spot market in which LMPs are calculated at five-minute intervals based on actual grid operating conditions.

Real-Time Response

Our participants reduce their usage of electricity based on a pre-determined curtailment strategy they have developed and estimated wholesale electricity prices that we provide. EnergyConnect is paid for the actual

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measured reduction in electricity usage, expressed either in kilowatts per hour (KWh) or megawatts per hour (MWh) at the actual LMP less the participant’s retail rate. We in turn pay our participants a percentage of the payment we receive, in each case based upon the contract with our customer.

Real-Time Dispatch

Our participants reduce their usage of electricity in response to requests by the grid operator. The grid operator notifies us of an emergency event, we in turn notify our participants of their need to reduce demand. EnergyConnect is paid for our participants standing by to respond to the grid operator’s request to curtail. We in turn pay our participants a percentage of the payment we receive based in each case upon our individual contract with them.

Day-Ahead

Some grid operators establish Day-Ahead economic markets with forward hourly electricity prices. The price certainty of the Day-Ahead market provides a known return for a specific curtailment strategy. For example, pre-cooling buildings in early morning hours facilitates subsequent reductions of energy use in the peak afternoon hours. We provide our participants with the information and support required to participate in the Day-Ahead electrical energy market. EnergyConnect is paid for the reduction in usage. Reductions in excess of the amount committed to the Day-Ahead market are generally paid at the prevailing real-time rate. We in turn pay our customers based upon our contracts with them. Any under-delivery results in penalties from the grid operator and generally must be made up by our participants buying energy at the real-time rate.

Corporate Background

The Company was incorporated in August 1986 as an Oregon Corporation, succeeding operations that began in October 1984. In 2009 we moved our corporate headquarters from Lake Oswego, Oregon, to Campbell, California.

In 2003 we acquired a part of Christenson Electric, Inc. (“CEI”), and in 2005, we acquired the remainder of CEI and the stock of EnergyConnect, Inc. (“ECI”). This combined a 60-year old electrical contracting and technology business with a high-growth demand response business. In November 2007 we agreed to sell the stock of CEI. The sale was completed on April 24, 2008. All significant inter-company accounts and transactions have been eliminated in consolidation.

Subsequent Events

On March 2, 2011, we entered into an Agreement and Plan of Merger with Johnson Controls Holding Company, Inc., a Delaware corporation, (“JCI”), and Eureka, Inc., an Oregon corporation and wholly owned subsidiary of JCI (“Merger Sub”), pursuant to which Merger Sub will merge with and into us, with us being the surviving corporation and a wholly owned subsidiary of JCI (the “Merger”). We currently anticipate the Merger to close some time during the third quarter of 2011.

Corporate Strategy

Our objective is to leverage our unique and proprietary software technology and business processes to provide demand response solutions that service wholesale electricity markets. We offer a complete range of demand response services to commercial and industrial consumers of electricity. We utilize a direct sales organization to identify and enter into contracts with commercial and industrial participants. We intend to increase the number of customers and participants by configuring our software to work in more energy markets within North America and by adding additional distribution channels for our proprietary software technology.

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New Sales Channels

Historically, we have relied on a direct sales organization supplemented by sales agents to identify and sign up commercial and industrial participants. Looking ahead, we intend to use indirect channels in addition to the direct sales organization and develop partnerships with, for example, utilities, technology providers, demand response aggregators and large national companies. As these organizations already have relationships with commercial and industrial consumers, the cost of acquiring new participants will be significantly lower if we can develop these channels and partnerships.

Technology Licenses

Under our current business model, we are paid by grid operators for the reduction of demand during peak hours, and we share a portion of this revenue with commercial and industrial consumers who are under contract with us. We offer a software-based solution to these participants that, in addition to providing them with the ability to transact in the wholesale electricity markets, provides a range of electricity information services. For example, we show current electricity loads for our customers, forecast prices and provide current tariff structures and other information of interest to our customers.

We believe that our participants and channel partners may be willing to pay a monthly subscription fee for the use of the software rather than a percentage share of the revenues generated from using the software. If we are successful in moving to this model, this will give us a more predictable revenue streams. It will also allow our software to be deployed into markets that do not rely on a wholesale electricity market, to help customers understand electricity prices and usage.

Our technology solution is designed for price-based demand response activities that encourage consumers to change their behaviors and electricity consumption patterns based on peak demand and the wholesale price of electricity. We believe that the market for price-based demand response will increase over the next few years, either through the opening and development of wholesale electricity markets and/or the adoption of more granular tariff structures such as critical peak pricing or real-time pricing. By using more granularity in a tariff, consumers will pay variable prices for electricity based on the time of use which in turn is based on the overall load on the grid.

Products and Services

We provide grid operators with products similar to those the grid operator purchases from electric power generators. EnergyConnect helps grid operators and utilities manage peak demand while empowering energy users to respond to market price signals with real-time energy information and access to a full range of demand response opportunities in the price-responsive, ancillary services and capacity markets. Our customers are mid- to large-sized consumers of electricity in commercial, institutional and industrial organizations. Using our GridConnect™ integrated demand response technology platform (released in July 2010), we help our customers control their energy expenditure and increase demand response earnings while enhancing grid reliability.

Our flagship web-based products on the GridConnect™ platform are:

• EventConnect™, which allows customers to manage and optimize participation in capacity programs;

• FlexConnect™, which delivers actionable intelligence that enables organizations to voluntarily engage and maximize price-based demand response earnings opportunities in wholesale electricity markets; and

• ReadyConnect™, which makes it easy for customers to engage in PJM’s synchronous reserve (SR) program and receive payments for short-duration curtailment at short notice

More than being just a demand response “aggregator,” EnergyConnect provides web-based tools to connect energy users directly into wholesale electricity markets. Our engineers have developed the GridConnect™

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technology platform, which is different from competing products in that it translates multiple streams of energy information, weather trends, price signals, etc. into actionable knowledge that makes sense from a customer’s perspective and drives changes in energy use behavior.

Traditional demand response programs offered to commercial and industrial companies have gravitated toward “standby” or capacity-type programs. In these programs, customers are paid to be on standby for most of the year, and the program is only activated when there is a potential grid emergency or if supply is constrained for a utility. For many programs this may only happen one or two times per year. While these resources have a significant value to the grid, they can provide much more value by being available for short term grid imbalances or times when supply costs are rising. These markets have typically been more challenging for customers to participate in and more difficult for third parties to manage. EnergyConnect makes it easy for customers to participate in all markets and connects them with opportunities to earn money by helping the grid year round.

Experience shows that simple price signals are not enough to motivate customers into actions that change energy use behavior. By connecting our user base with greater visibility and access to energy information and markets, EnergyConnect’s products and services take the complexity out of demand response by effectively answering critical questions from the customers’ context and operational constraints. Moreover, progressive cumulative intelligence allows users to track, among others, their energy savings, demand response earnings and historical participation.

Our program encourages active demand response participation that:

• Decreases the need for new power generation;

• Reduces our overall carbon footprint;

• Prevents rolling blackouts and brownouts;

• Improves the reliability and efficiency of the electrical grid;

• Provides funding to reinvest earnings for a virtuous cycle of energy efficiency improvements; and

• Makes environmental stewardship profitable

Customers using our proven GridConnect™ product represent a diverse range of vertical markets, such as state and municipal governments, higher education, heavy industry, agriculture, water and sewage treatment, commercial office buildings, cold storage, sports arenas, high tech office campuses, hospitals, shopping centers and retailers, to name a few. The breadth and scope of EnergyConnect’s customer base demonstrates the ability to adapt demand response solutions to a variety of unique markets, applications, and operations.

Capacity Programs – EventConnect™

The capacity solution is the traditional demand response capability that has been in use for over 40 years. Capacity programs are designed to address the few times a year when an emergency event occurs where an electrical grid may approach the capacity limits of electrical generation in the region during the period just before a blackout or brownout. Participants in the capacity program are generally paid a fee to be on standby to respond on several hours’ notice to a request from the grid to reduce electrical usage for a specified period. Each grid operator and/or utility may have unique requirements for notification time, response duration, and performance penalties. Notification by the grid is typically by phone or email.

EventConnect™ is our software solution to assist our participants in managing their capacity programs. We are paid by the grid for having our participants with standby capability reduce usage when called, with specific timing requirements for response and duration. Under the PJM program, the annual commitment and registration is undertaken in the spring for the ensuing 12 months starting in June of each year and including a testing period from June to September. Payments are made to us from PJM weekly over the twelve-month period. We

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recognize the revenues from these programs over the four month performance period from June to September. We, in turn, pay our participants a portion of such payments, based on their contracts. Obligations to curtail usage within PJM are for 6 hour durations, a maximum of 10 times per year, with between 2 and 24 hours advance notice. Several such events were called under the PJM capacity program during the period June to September 2010 and we successfully responded on each occasion. In the previous three years, when no events were called during the performance period, we tested our participants’ ability to respond, and they performed over 100% in aggregate.

Payments under the PJM capacity program are set three years in advance. Capacity prices in 2009 were approximately $50,000 per MW per year, increased to approximately $63,000 per MW in 2010, and will fall to $40,000 per MW in 2011. In 2012, prices for PJM will be split by region, and based on the auction held in May 2009, will fall to approximately $6,000 per MW per year in the Western Region of PJM and will increase to approximately $60,000 per MW per year in the Eastern Region of PJM. In 2013, prices for PJM will again be split by region, and based on the auction held in May 2010, will increase to approximately $10,000 per MW per year in the Western Region of PJM and approximately $85,000 per MW per year in the Eastern Region of PJM.

Economic or Price-Based Demand Response – FlexConnect™

The economic program differs from the capacity program as it allows commercial and industrial consumers of electricity to curtail usage at their discretion based on price signals from the grid. Participants in such programs are paid for their discretionary performance rather than being paid to standby and curtail based on a demand from the grid.

We have developed a proprietary software solution, FlexConnect™, designed specifically to allow our participants to engage in wholesale electricity markets. FlexConnect™ is a hosted SaaS solution with an easy-to-use interface that allows our participants to make curtailment decisions and understand the opportunity in revenue and cost savings that result from executing the curtailment strategy. Through FlexConnect™, we provide grid operators with a reduction in electricity demand at any time when wholesale prices for electricity on the grid are above the consumer retail price. Grid operators pay us the difference between the wholesale price and the retail cost of electricity, at one-hour increments, for verified reductions by our participants from a calculated baseline of usage. In turn, we share a portion of these payments with participants, based on their contracts.

We work with our commercial and industrial consumers to understand their curtailment capability. This includes an analysis of the assets available for curtailment at the facility along with an estimated reduction in consumption of electricity that will result from shutting down the particular assets. This may be achieved by shutting off lighting in unoccupied areas of a building or cycling air conditioning units. For our industrial participants, this may be achieved by delaying firing a furnace in a steel mill, or shutting down the water pumps in a quarry at a cement plant. Our participants may create any number of different curtailment strategies that reflect their specific business processes. These various curtailment strategies are stored in the FlexConnect™ software.

To implement the curtailment strategy, we first either install telemetry or gain access to the facilities’ metering data so we can accurately measure the change in consumption that results from executing a specific curtailment activity. We then work with our participants to understand the criteria they wish to use for triggering a notification for curtailment, based on the business processes in place at their facilities at various times of the day and the magnitude of revenue opportunity at which our participants would like us to notify them of an opportunity to curtail. We then establish the baseline of electricity usage at our participant’s facilities. This involves complex calculations that are performed by our proprietary software based on rules that have been set by the grid operator. The calculations include an estimate of usage based on the previous four days with the most similar situations and adjustments based on weather conditions. The baseline sets the bar against which the curtailment strategy is measured. Finally, we test our participant to ensure that, based on the specific curtailment plans they have entered into FlexConnect™, they can deliver the reduction in usage that they estimate. With this final step, our participants are ready to transact with the wholesale electricity market.

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FlexConnect™ continually monitors the market for price signals and provides our participants with estimates of the next days’ hourly price of electricity based on data contained in the day-ahead market. Participants are notified electronically, based upon their pre-determined notification criteria, when there is an opportunity for them to participate in the market. The participant’s facility manager is then required to decide whether to participate or not. If they elect to participate, they select the curtailment strategy and the specific hours they will run the strategy by checking boxes in the FlexConnect™ user interface. FlexConnect™ then calculates, based on the participation hours and curtailment strategy, what revenue opportunity exists for the participant as a result of taking the curtailment actions. If the participant wishes to execute the curtailment strategy, they submit the schedule that we in turn pass on to the grid operator through our software interface. The participant physically executes the strategy by shutting down plant or changing the parameters on its equipment (for example, the temperature on air conditioning) and is required to confirm in FlexConnect™ that the curtailment strategy or a modified version of the strategy has been executed. In a few instances, the notification to run a specific strategy is sent from FlexConnect™ directly to a building system that executes the strategy. FlexConnect™ then measures the actual drop in consumption from the calculated baseline and automatically prepares the documentation that is sent to the grid operator for settlement.

As it can take up to 60 days for the settlement process with the grid operator to be completed, FlexConnect™ includes a shadow settlement process. The forecast wholesale price is replaced with the actual price, which is set one hour after the time of usage. When the settlement process has been completed and we are paid by the grid operator for the curtailment, we pay our participants based on the terms of our contracts with them.

Grid operators provide a real-time and a Day-Ahead market for electrical energy in which we participate. Unlike capacity programs, this is a payment for service solution and there are generally no penalties or charges for not participating.

Synchronous Reserves, Ancillary Services and Others – ReadyConnect™

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

Some grids limit the participation of demand response at this time. In the PJM grid, demand response may provide 25% of the synchronous reserve needs in each area of the region. Synchronous reserve requires 10-minute response time with a 30-minute maximum duration. Generally, only our most sophisticated participants are active in this market.

Electric Power Industry

While demand for electricity in North America has contracted lately, mainly due to reduced loads as a result of the economic recession, constraints on new generating or transmission infrastructure may move the regional electric grids closer to capacity limitations. Regardless of whether the constraints on new construction come from “not in my back yard” concerns, environmentalists worried about climate change or the space limitations of large urban cities, the result is delays in planned electrical generation, transmission, and distribution capacity. In this environment, demand response can provide the added buffer to keep grids functioning reliably and to delay or even negate the need to build new infrastructure.

The electric power industry is in a state of change. Worldwide fluctuations in supplies of key materials and fuels, environmental footprint limits, and public perception are driving change. Expectations and pressures on the industry to improve efficient use of fuels and materials, to improve reliability, and to reduce system losses have increased steadily during that last two decades. We are also seeing the increasing reliance on renewable energy

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sources such as solar and wind, which tend to be more uncertain than other forms of power. All of these pressures and changes support the advancement and development of more and better demand response. EnergyConnect is aligned with the changing industry and helps support the needed changes while concurrently reducing electricity costs.

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

Wholesale Power Markets are regulated by the Federal Energy Regulatory Commission (“FERC”). FERC issued a National Action Plan on Demand Response in June 2010. This report helps to define a clearer vision of how demand response will develop in the future.

Anatomy and Challenges of Demand Response

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

Despite its potential, the growth of demand response has been limited by technology and regulation. Prior to the development of transparent wholesale electric markets, the Internet, and electronic building energy control systems with Internet access, the number of people required to implement effective demand response was prohibitive. Today, by using automated technology to link wholesale market prices and grid conditions with the status, flexibilities, and capabilities of buildings and industrial sites, increased participation is possible.

Regulatory Impacts

The enactment of the New Direction for Energy Independence, National Security and Consumer Protection Act in December, 2007, (the “Energy Act of 2007”) presents remarkable opportunities for demand response providers to emerge as active wholesale market resources that are the “green” equivalent of traditional generation and transmission providers. Demand response is codified in the Energy Act of 2007 as a necessary and proven resource that will promote energy conservation, cost savings and energy efficiencies for the emerging “smart grid” by engaging participants with the intelligence required to actively manage consumption during peak demand and high prices. The Energy Act of 2007’s emphasis on smart grid modernization technologies also presents significant opportunities for our core competencies. Our ability to provide scalable automation of demand response transactions will increase the price elasticity and lower the overall regional market price of electricity and improve the efficiency of electricity grids. In addition to beneficial impacts on regional energy markets, our participants benefit by maximizing income potential and reducing energy costs.

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Customers

Our principal customers are power grid operators, who are primarily a conduit through which electrical curtailment transactions with our participants are processed. The vast majority of our revenues each year are processed through PJM, which serves as the market for electrical transactions in a specific region in the United States.

PJM

PJM is the most mature wholesale electricity market in the United States. During the fourth quarter of 2008, wholesale prices fell dramatically due a reduction in load resulting from the economic slowdown. This severely reduced the number of opportunities for our participants to participate in the wholesale market as prices were at or below their retail electricity price. This in turn affected our revenue opportunities. During 2009, wholesale electricity prices have remained at these low levels. For 2010, energy prices improved over 2009 but, like the overall economy, was short of 2007 levels.

The PJM Interconnection Capacity program establishes a three-year laddered pricing structure for demand response participants that are not subject to market fluctuations. Each year has a fixed price that is set three years in advance. Capacity prices in 2009 were approximately $50,000 per MW per year, increased to approximately $63,000 per MW in 2010 and will fall to $40,000 per MW in 2011. In 2012, prices for PJM split by region, and based on the auction held in May 2009, will fall to approximately $6,000 per MW in the Western Region of PJM and will increase to approximately $60,000 in the Eastern Region of PJM. In 2013 prices for PJM again split by region, and based on the auction held in May 2010, will increase to approximately $10,000 per MW per year in the Western Region of PJM and will increase to approximately $85,000 per MW per year in the Eastern Region of PJM.

Participants

Our participants are commercial and industrial organizations with whom we enter into contracts to standby or curtail electricity usage based on demand from grid operators or in reaction to a price signal. We aggregate the amount of standbys and curtailments and sell this capacity to grid operators. Most of our sales effort and most of our sales force are focused on bringing electricity consumers into our service offerings. Each participant we bring into the portfolio adds to our capability to serve the needs of the wholesale electricity market.

Sales Revenue

Most of our sales are to large regional electric grid operators that serve wholesale power markets for electricity. Membership in these regional grids and participation in the committee decision structures of these organizations provide the access and advocacy channels we need to implement, execute, and advance our sales. In addition, some of our sales are generated directly from electric utilities that sponsor demand response programs.

Competition

Our competition includes public and private companies that cater to various segments of demand response products and services. We are a full-service provider of demand response products that incorporate our proprietary technologies to leverage our participants’ flexibilities and make it easier to meet the needs of a broad range of needs of grid operators.

Our competitors are utilities and third-party curtailment service providers that contract with utilities that outsource these programs. They make up the largest part of the demand response market today and reflect the bulk of demand response activities over the past 40 years. These programs are not particularly well received by consumers and tend to be ineffective in achieving significant amounts of demand response or significant benefits

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to the electric system. More intense concentration on these programs by well financed public utilities and third-party providers has improved performance.

In addition, there are two well financed corporations that offer demand response solutions similar to ours. However, they have not created an integrated software platform for their participants. We have a technological advantage over these competitors at this time because of our use of software. We expect our competitors to attempt to duplicate our business model.

With so few suppliers pursuing a large potential market, we find our market overlapping our competitors’ only with a small percentage of energy consumers.

Intellectual Property

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

We protect our intellectual property rights through a combination of patent, trademark, trade secret and other intellectual property law, nondisclosure agreements and other measures. We own a patent application which covers aspects of enterprise energy automation. The lifetime of a utility patent typically extends for 20 years from the date of filing with the relevant government authority. We hold 1 trademark and have 4 trademark applications pending in the United States. We require our business partners to enter into confidentiality and nondisclosure agreements before we disclose any sensitive aspects of technology and business plans.

We typically enter into proprietary information agreements with employees, consultants, vendors, customers and business partners.

We believe, however, that our financial performance will depend more upon our service, technical knowledge and innovative design abilities than upon such protection. Notwithstanding the foregoing, we will strongly defend all intellectual property rights from infringement.

For more information about risks related to our intellectual property, please see “Item 1A: Risk Factors” including “Our intellectual property rights may not be adequately protected outside the United States, resulting in loss of revenue” and “Intellectual property litigation could harm our business.”

Government Approval or Regulations

We are subject to and comply with federal regulations pertaining to health and safety, employment, privacy, and related regulations pertinent to all public businesses. FERC must approve all wholesale products purchased by regional grids, and state commissions may be involved in approval of transactions with electric utilities. On January 26, 2010, we announced we had been granted Market Based Rate Authorization (MBRA) by FERC effective August 17, 2009. MBRA allows EnergyConnect to engage in a variety of wholesale electricity market transactions that complement our demand response solutions and expands the range of services we can provide to grid operators, utilities and commercial, industrial and institutional power consumers. As a result of this decision EnergyConnect is now a public utility as defined by Section 201 (e) of the Federal Power Act. We are also subject to certain local government regulations. Any failure by us to comply with foreign, federal, state or local agency regulations could subject us to substantial financial liabilities, operational interruptions and adverse publicity, any of which could materially and adversely affect our business, results of operations and financial condition. We are not aware of any pending or threatened investigation, proceeding or action by foreign, federal, state or local agencies, or third parties involving our current business or facilities.

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Research and Development

Research and development costs are charged to operations as incurred. The Company incurred approximately $1.0 million and $0.8 million of expenditures on research and development for the years ended January 1, 2011, and January 2, 2010, respectively.

Employees

As of January 1, 2011, we directly employed 43 full time employees, two part time employees, four full time contractors and one part time contractor. None of our employees are covered by collective bargaining agreements.

Principal Offices

Our principal corporate office is located at 901 Campisi Way, Suite 260, Campbell, CA 95008, and our telephone number is (408) 370-3311. We are an Oregon corporation. We maintain a website at www.energyconnectinc.com. The information contained on this website is not deemed to be a part of this annual report.

Our Sales and Support principal operating office is in Conshohocken, Pennsylvania, and our main development office is based in Portland, Oregon.

Debt Facility

On November 5, 2010, the Company and EnergyConnect, Inc. (collectively with the Company, the “Borrowers”) entered into a $4,000,000 revolving loan credit facility (the “Credit Facility”) with Silicon Valley Bank and Partners For Growth III, L.P. (collectively, the “Lenders”), which matures on September 30, 2011. Advances under the Credit Facility are to be made by the Lenders to the Borrowers on a formulaic basis based on 100% of the Company’s accounts receivable owed by Pennsylvania New Jersey Maryland Interconnection LLC and its successors and assigns (“PJM”) which arise in the ordinary course of the Company’s business. Advances made by the Lenders to the Borrowers under the Credit Facility accrue interest at a rate of 12.5% per annum. The obligations of the Borrowers under the Credit Facility are secured by a first priority security interest in all of the Borrowers’ assets, including intellectual property. The Credit Facility contains various representations and warranties, covenants (including, but not limited to, limitations on dispositions of assets, changes in business, management, ownership or business locations, mergers or acquisitions, indebtedness, encumbrances, dividends and investments,) and events of default typical for a transaction of this type. In addition, the Borrowers are required to (i) perform to at least 85% of PJM’s requirements for “Load Management Event Compliance” for the period from June 1st through September 30th, (ii) maintain a minimum unrestricted cash balance at Silicon Valley Bank of at least $1,000,000 at all times, and (iii) achieve confirmed registrations for the 2011 PJM “Capacity Program” of at least $20,000,000 by March 31, 2011. A violation of one or more of these covenants or the occurrence of certain other events could result in a default permitting the termination of the Lenders’ commitments under the Credit Facility and/or the acceleration of any loan amounts then outstanding. The Borrowers must use the proceeds advanced under the Credit Facility solely as working capital and to fund their general business requirements. As partial consideration for providing the Borrowers with the Credit Facility, the Company granted to the Lenders a 7-year warrant to purchase 3,750,000 shares of the Company’s common stock at a price per share of $0.15. A copy of this agreement is attached hereto as Exhibit 4.2 and the foregoing summary is qualified in its entirety by the terms of the agreement, which are incorporated herein by this reference.

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ITEM 1A. RISK FACTORS

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

Some of the information included herein contains forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on the beliefs of, estimates made by and information currently available to our management and are subject to certain risks, uncertainties and assumptions. Any statements contained herein (including, without limitation, statements to the effect that the Company, we, or management “may,” “will,” “expects,” “anticipates,” “estimates,” “predicts,” “continues,” “plans,” “believes,” or “projects,” “should,” “could,” “would,” “intends” or statements concerning “potential” or “opportunity,” and any variations thereof, comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements. Our actual results may vary materially from those expected in these forward-looking statements. Our business, prospects, financial condition and operating results could be materially and adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in the report, including our consolidated financial statements and the related notes.

The closing of the Merger is subject to certain conditions.

On March 2, 2011, the closing price of our stock was $0.129 per share. On March 3, 2011, we announced the signing of the Merger Agreement. Following the announcement, our stock has been trading at prices in excess of $0.20 per share. The obligations of JCI, Merger Sub and us to complete the Merger are subject to the satisfaction (or waiver) of the following conditions, among others:

• approval of the merger by a majority of our common shareholders entitled to vote on the Merger;

• absence of any law, injunction, judgment or ruling prohibiting the Merger;

• the accuracy of the representations and warranties of each party; and

• performance, in all material respects, of all obligations and compliance with, in all material respects, agreements and covenants to be performed or complied with by each party.

In addition, JCI’s and Merger Sub’s obligation to effect the Merger is subject to the satisfaction or waiver of the following conditions:

• there has not been, and no event or circumstances shall have occurred that would reasonably be expect to result in, a material adverse effect on us;

• we having obtained cancellation acknowledgments from holders of certain warrants or such warrants having expired; and

• consents having been obtained from our lender, any utility, independent system operator or market regulator whose approval is required by contract or applicable law, and the U.S. Federal Energy Regulatory Commission.

We cannot give any assurance that all of the conditions to the Merger will either be satisfied or waived or that the Merger will occur.

If we fail to comply with covenants related to our loan agreements, we may be required to repay our indebtedness thereunder, which may have an adverse effect on our liquidity.

Although we were in compliance with all covenants under the revolving line of credit (“credit line”) as of January 1, 2011, it is possible that we may not be in compliance or fail to comply with certain covenants or other

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agreements in the future. Some of the covenants are subjective in nature that gives our lender the opportunity to call an event of default based upon their good faith opinion. If we are unable to meet the financial or other covenants, including the subjective covenants, under the credit line or negotiate future waivers or amendments of such covenants, an event of default could occur. Upon the occurrence and during the continuance of an event of default under the revolving line of credit, Silicon Valley Bank and Partners for Growth (collectively, “SVB”) has available a range of remedies customary in these circumstances, including without limitation declaring all outstanding debt, together with accrued and unpaid interest thereon, to be immediately due and payable, foreclosing on the assets securing the obligations arising under the credit line and/or ceasing to provide additional revolving loans, which could have a material adverse effect on us.

Even if we are in compliance with all the covenants and other terms of our credit line, there can be no assurance that SVB will continue to provide funds based upon our requests.

Our independent auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.

In their report dated April 1, 2011, our independent auditors stated that our financial statements for the year ended January 1, 2011 were prepared assuming that we would continue as a going concern, and that they have substantial doubt about our ability to continue as a going concern. Our auditors’ doubts are based on our incurring net losses and deficits in cash flows from continuing operations. We continue to experience net losses. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including by the sale of our securities, or obtaining loans from financial institutions, where possible. Our continued net losses increase the difficulty of our meeting such goals and our efforts to continue as a going concern may not prove successful.

We have incurred net losses since our inception, and we may continue to incur net losses in the future and may never reach profitability.

We were incorporated in the State of Oregon in 1986, and began commercial sales of our demand response products in 2005. We have yet to demonstrate that we can generate sufficient sales of our products to become profitable. The extent of our future operating losses and the timing of profitability are uncertain, and we may never achieve profitability. We have incurred significant net losses since our inception, including losses of approximately $0.3 million and $3.2 million for the fiscal years ended January 1, 2011, and January 2, 2010, respectively. At January 1, 2011, we had an accumulated deficit of $158 million. It is possible that we will never generate sufficient revenues from product sales to achieve profitability. Even if we do achieve significant revenues from our product sales, we expect our operating expenses to increase as we, among other things:

• grow our internal and third-party sales and marketing forces to expand the sales of our products;

• increase our research and development efforts to improve upon our existing products and develop new products; and

• acquire and/or license new technologies.

As a result of these activities, we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.

If we experience continuing losses and are unable to obtain additional funding, our business operations will be harmed, and if we do obtain additional financing, our shareholders may suffer significant dilution.

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

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

A substantial majority of our revenues are and have been generated from contracts with, and open market sales to, a small number of grid operators and utilities, and the modification or termination of these contracts or sales relationships could materially adversely affect our business.

We are reliant upon both grid operators such as PJM and utilities for our revenues. Changes to market rules or sales relationships with these entities could have a material adverse impact on our business. We have experienced significant changes of the rules by PJM. In 2007, PJM initiated an economic incentive that encourages a significant activity level within the economic program. When the incentive expired in late 2007, the number of customers participating in the economic program declined significantly. On March 15, 2011, the FERC issued Order 745 regarding compensation of demand response in organized markets. The new rule directs that Independent System Operators (“ISOs”) and Regional Transmission Operators (“RTOs”) such as PJM implement changes to economic compensation such that compensation at full LMP is required when there is a net benefit to doing so. The RTOs are directed to specify an LMP price threshold above which economic demand response would be paid full LMP. The threshold levels remain to be identified by the RTOs. The ruling is expected to allow participation by some entities currently excluded and to remove barriers to entry for customers served by public power utilities. These changes should encourage more demand response activity. However, because many of the details of implementation remain uncertain, there can be no assurance as to the timing and participation levels in the economic programs within PJM and the other RTOs.

We face pricing pressure relating to electric capacity made available to grid operators and utilities and in the percentage or fixed amount paid to commercial, institutional and industrial customers for making capacity available, which could adversely affect our results of operations and financial position and delay or prevent our future profitability.

We are experiencing increased competition in capacity programs. As there are limited barriers to entry, we have seen a number of small companies enter into capacity programs. This in turn has led to an increase in the share of our revenues that we share with our customers in order to remain competitive in capacity programs, resulting in increased pressure on our gross margins.

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

Demand response is heavily regulated by FERC and state public utility commissions. Recently, regulators at federal and state levels have been supportive of facilitating the demand response business as an effective way to improve reliability and reduce costs on electrical grids. There have been a number of reports prepared by FERC that support and encourage price responsive demand response programs. However a change in FERC commissioners or federal and state attitudes toward demand response could have a material adverse effect on our business. The failure of FERC to rule in favor of such programs could have a material adverse effect on our ability to grow revenues or add more customers. If FERC were to rule against PJM, this may discourage other markets to develop price response programs, thus limiting our ability to sell our solutions into new emerging markets.

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Regional grids establish local operating rules for demand response offerings, which limit the revenue opportunity for demand response offerings.

Regional grids establish local operating rules that restrict and limit demand response offerings. Grid operating rules are established through committee processes and may be subject to FERC approval. Though demand response providers are members of regional grids and participate on these committees, other members such as electrical generators and utilities are much larger and may use their influence to set rules that limit demand response.

All regional grids have rules that guide demand response revenue opportunities. In 2008, PJM Interconnection introduced new rules that changed the revenue opportunities for demand response offerings, and instituted a screening process that may limit some customers’ desire or ability to enter markets served by PJM. Additional rules may be established to restrict or outright eliminate current demand response offerings and revenue opportunities.

Our ability to provide security deposits or letters of credit is limited and could negatively affect our ability to bid on or enter into significant long-term agreements or arrangements with utilities or grid operators.

Recent regulatory developments may require us to post letters of credit or security deposits in order to participate in key demand response programs. Given our limited access to capital, we may not have sufficient funds to meet these credit requirements that may in turn preclude us from participating in these markets, adversely affecting our ability to create shareholder value as a standalone company.

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

Some of our competitors are larger and may have the financial resources to develop automated systems and business processes that would allow them to compete effectively with our price-based products and strategies. Our competitors may also develop the ability to deliver in volume the same set of products that we currently provide. Finally our competitors may choose to provide similar products at lower costs. The occurrence of any of the foregoing could negatively impact our results, and our share price could suffer as a consequence.

Our loan agreements contain financial and operating restrictions that may limit our access to credit.

Under our current credit line our lender, Silicon Valley Bank, has a perfected first position security interest in our assets. This, along with other restrictions in the credit line, significantly limits our ability to obtain additional credit while this line is in place.

We have a history of losses which may continue and which may negatively impact our ability to achieve our business objectives.

We have incurred operating losses for three of the last four years, and net losses for each of the last four

years. We cannot be certain that we can achieve or sustain profitability on a quarterly or annual basis in the future. Our operations are subject to the risks and competition inherent in the establishment of a business enterprise. Revenues and profits, if any, will depend upon numerous factors, including without limitation:

• our ability to retain our current customers and participants;

• our ability to sign new customers and participants;

• the wholesale price of electricity in economic markets; and

• the ability to configure our software for other markets

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If we continue to incur losses, our accumulated deficit will continue to increase, which may make it harder for us to obtain financing and achieve our business objectives. Failure to achieve such goals would have an adverse impact which could result in reducing or limiting our operations.

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

Our annual and quarterly operating results have fluctuated in the past and will likely fluctuate in the future. We believe that period to period comparisons of our results of operations are not a good indication of our future performance. 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 without limitation:

• fluctuations in demand for our services;

• length of sales cycles;

• weather abnormalities;

• unexpected price changes;

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

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

• reductions in the margins of products and services offered by our competitors;

• costs of integrating technologies or businesses that we add; and

• delays in payment resulting from administrative delays from utilities in processing settlements.

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 the price for 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.

If the software we use in providing our demand response and energy management solutions produces inaccurate information or is incompatible with the systems used by our customers, we could be unable to provide our solutions, which could lead to a loss of revenues and trigger penalty payments.

We provide our customers with estimates of bill savings and revenues resulting from executing a specific curtailment strategy. These estimates are in turn based on a number of factors such as customer tariff structures, estimated wholesale electricity prices and estimates of the reduction in electricity usage as a result of a curtailment activity. If the estimates we provide prove to be significantly different from actual payments or savings, our customers’ use of the software could reduce. They may be subject to certain penalties if our estimates are inaccurate in Day-Ahead markets.

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

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

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

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

Increased infrastructure investment and or lower fuel prices could reduce the cost of electricity, which would negatively impact demand response revenues.

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

We have a limited operating history in an emerging market, which may make it difficult to evaluate our business and prospects, and may expose us to increased risks and uncertainties.

The markets in which we operate are still developing. Although PJM, which is our primary market, is the most developed wholesale electricity market within North America and other regions are looking to adopt similar market models, there can be no assurance that wholesale electricity markets will develop beyond PJM. To the extent that wholesale electricity markets do not develop, our revenue growth may be adversely affected, and the price of our stock may suffer as a consequence.

If we fail to successfully educate existing and potential grid operators and utility customers regarding the benefits of our demand response and energy management solutions or a market otherwise fails to develop for those solutions, our ability to sell our solutions and grow our business could be limited.

We depend upon the acceptance of our technology platform by customers, grid operators and utilities, as a major driver of revenues. For example, we are currently in discussions with a number of utilities to adopt our technology and price-based demand response products as a solution to new state regulations that are coming into effect. There can be no assurance that the utilities will adopt price-based demand response programs or even if they do so, that they will use our proprietary solution.

The failure to renew or sign new contracts with commercial and industrial consumers, would negatively impact our business by reducing our revenues, delaying or preventing our profitability and requiring us to spend more money to maintain and grow our commercial, institutional and industrial participant base.

The majority of our participants are under annual contracts, which means we have to re-sign them each year for the capacity and economic programs. Although we have moved towards longer term contracts, there can be no assurance that we will be successful in signing more participants to longer term contracts, or in re-signing existing participants annually. The failure to retain participants could have a significant impact on our revenues.

We may incur significant penalties and fines if found to be in non-compliance with any applicable State or Federal regulation, despite our best efforts at compliance and adherence.

Although we have been in compliance with State and Federal regulations and have not incurred significant fines our business could suffer a material adverse impact if we were found to be in non-compliance with regulations. Furthermore, in addition to the risk of significant penalties, our ability to retain our existing participants or sign new participants could be materially adversely affected if we were found to be in non-compliance with regulations.

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The success of our businesses depends in part on our ability to develop and increase the functionality of our GridConnect™ software solutions.

We estimate that we have invested over 100,000 man hours into developing our GridConnect™ solution, which affords access to our EventConnect™, FlexConnect™ and ReadyConnect™ software. Not only do we have to ensure that our software continues to offer our participants up-to-date functionalities to transact in the electricity markets, we also need to continue to innovate and improve our solutions so our software remains easy to use yet critical to our customers’ energy strategies.

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

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

Some of our competitors are larger and have greater financial and other resources than we do and those advantages could make it difficult for us to compete.

In the demand response industry, several companies 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, which may give them a competitive advantage over us. Our competitors who succeed may enjoy increased revenues and profits from an increase in market share, and our results and share price could suffer as a consequence.

The failure to manage our growth in operations and acquisitions of new product lines and new businesses could have a material adverse effect on us.

Any growth of our operations could place a significant strain on our current management resources. To manage growth, we will need to continue to improve our operational 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 to our net income by an acquisition.

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 shareholders’ interests would be diluted if we financed the acquisitions by incurring convertible debt or issuing securities.

Although we currently only have operations within the United States, if we were to acquire an international operation, we would face additional risks, including without limitation:

• difficulties in staffing, managing and integrating international operations due to language, cultural or other differences;

• different or conflicting regulatory or legal requirements;

• foreign currency fluctuations; and

• diversion of significant time and attention of our management.

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Our success largely depends on our ability to hire, retain, integrate and motivate sufficient numbers of qualified personnel, including senior management. The management of our business is dependent on key personnel that may be difficult to replace.

Our success depends on our ability to attract and retain highly skilled personnel, including senior management and international personnel. Our chief executive officer, Kevin Evans, is particularly important to our ability to succeed. From time to time we experience turnover in some of our senior management positions. We compensate our employees through a combination of salary, benefits and equity compensation. Recruiting and retaining skilled personnel is highly competitive, particularly in the San Francisco Bay Area where we are headquartered. If we fail to provide competitive compensation to our employees, it will be difficult to retain, hire and integrate qualified employees and contractors, and we may not be able to maintain and expand our business. If we do not retain our senior managers or other key employees for any reason, we risk losing institutional knowledge and experience, expertise and other benefits of continuity and the ability to attract and retain other key employees. In addition, we must carefully balance the growth of our employee base with our current infrastructure, management resources and anticipated operating cash flows. If our revenue growth or employee levels vary significantly, our operating cash flows and financial condition could be adversely affected. Volatility or lack of positive performance in our stock price may also affect our ability to retain key employees, many of whom have been granted stock options, other equity incentives or both. Our practice has been to provide equity incentives to our employees through the use of stock options and other equity vehicles, but the number of shares available for new options and other forms of securities grants is limited. We may find it difficult to provide competitive stock option grants or other equity incentives, and our ability to hire, retain and motivate key personnel may suffer.

Recently and in past years, we have initiated reductions in our workforce of both employees and contractors to align our employee base with our anticipated revenue base or with our areas of focus, and we have experienced turnover in our workforce. These reductions have resulted in reallocations of duties, which could result in employee and contractor anxiety. Reductions in our workforce could make it difficult to attract, motivate and retain employees and contractors, which could affect our ability to deliver our products in a timely fashion and adversely affect our business.

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

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

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

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

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

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

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

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

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

We have in the past been, and may in the future be, named as a defendant in lawsuits, claims and other legal proceedings during the ordinary course of our business. In addition, pursuant to our service arrangements, we generally indemnify our customers for claims related to the services we provide there under. Furthermore, our electrical, technology, and transactional services are integral to the operation and performance of the electricity 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 intellectual property rights may not be adequately protected outside the United States, resulting in loss of revenue.

We believe that our software and other intellectual property and proprietary rights, whether licensed or owned by us, 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 intellectual property. We cannot assure you that the actions we have taken to establish and protect our intellectual property 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 proprietary rights of others. Also, we cannot assure you that others will not assert rights in, or ownership of, our proprietary rights 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.

We may become involved in various legal proceedings which arise in the ordinary course of business with possibly adverse results, and are currently named as defendants in a putative class action lawsuit.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

At present, EnergyConnect, its board of directors, JCI Holding and Eureka, Inc., a wholly owned subsidiary of JCI Holding, are named as defendants in three putative class action lawsuits brought by alleged shareholders challenging EnergyConnect’s proposed merger with JCI Holding. The shareholder actions generally allege, among other things, that each member of the EnergyConnect board of directors breached their fiduciary duties to EnergyConnect shareholders by authorizing the sale of EnergyConnect to JCI Holding for consideration that does not maximize value to EnergyConnect shareholders. The complaints also allege that EnergyConnect, JCI Holding

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and Eureka, Inc. aided and abetted the breaches of fiduciary duty allegedly committed by the members of the EnergyConnect board of directors. The shareholder actions seek equitable relief, including enjoining the defendants from consummating the merger on the agreed-upon terms. On March 28, 2011, the court entered an order consolidating the three cases into one matter.

See also Item 3. Legal Proceedings.

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. Such 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 may be forced 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 the intellectual property in dispute, we may not be able to do so on favorable terms, or at all.

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.

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.

We depend on the electric power industry for revenues and, as a result, our operating results have experienced, and may continue to experience, significant variability due to volatility in electricity prices, seasonality of peak demand and overall demand for electricity. An oversupply of electric generation capacity and varying regulatory structures, program rules and program designs in certain regional power markets could negatively affect our business and results of operations.

We saw a significant shift in the profile of our revenues from fiscal 2008 to fiscal 2009. As electricity prices have been near all-time lows due to low fuel prices and the impact of the economic recession, the ability for our customers to transact in the economic programs was significantly reduced in 2009 and 2010. We have therefore relied upon the capacity markets to make up nearly all of our revenues over the last two years. In contrast, in 2008 we saw strong electricity prices and very active economic programs that accounted for a majority of our revenues.

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Global economic and credit market conditions, and any associated impact on spending by utilities or grid operators or on the continued operations of our commercial, institutional and industrial customers, could have a material adverse effect on our business, operating results, and financial condition.

General worldwide economic conditions have experienced a downturn due to the effects of the subprime lending crisis, general credit market crisis, collateral effects on the finance and banking industries, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. This can not only manifest itself into low fuel prices and lower level of demand for electricity that result in wholesale electricity prices being below the retail rates for our participants, thereby limiting participation in the economic programs, but can also result in longer sales cycles to sign new participants to our contracts.

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

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

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

Technological advances could increase electrical generating capacity, reduce transmission losses and thereby reduce the price of electricity. In addition, advances in electricity storage capabilities could come to market that would allow grid operators an alternative solution to help balance the load on the grid. Development of either technology could reduce revenue opportunities for our demand response products.

Failure of other providers of demand response products to provide value to the electricity grids may limit the entire demand response market through unfavorable regulation and/or operating rules on particular grids.

Our growth in the demand response area is dependent in part on other electricity grids developing wholesale markets for electricity. Other grid operators are likely to look to PJM programs and monitor the success of these programs before deciding to introduce similar programs in their area. One of the elements of this decision making may be how curtailment service providers within PJM managed the demand response activities. If other providers see areas of the PJM program that have not worked effectively they could create potentially unfavorable regulations or operating rules within their grids that could limit opportunities for us to expand.

Our ability to use our net operating loss carryforwards may be subject to limitation which could result in increased future tax liability for us.

Generally, a change of more than 50% in the ownership of a company’s stock, by value, over a three-year period constitutes an ownership change for U.S. federal and state income tax purposes. An ownership change may limit a company’s ability to use its net operating loss carryforwards attributable to the period prior to such change. The number of shares of our common stock that we issued as a result of our private placement in 2008, combined with debt conversion in 2010, may be sufficient, taking into account prior or future shifts in our ownership over a three-year period, to cause us to undergo an ownership change. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal and state taxable income may become subject to limitations, which could result in an increased future tax liability for us. In addition, we will not be able to utilize any operating loss carryovers in California due to the California Budget Act of 2010, S870, enacted on October 8, 2010, which suspended the utilization of net operating loss carryovers for purposes of California state tax.

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Our directors and management will exercise significant control over our company, which will limit your ability to influence corporate matters.

Our directors and management, acting together, could have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:

• delaying, deferring or preventing a change in corporate control;

• impeding a merger, consolidation, takeover or other business combination involving us; and

• discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

Natural disasters and events beyond our control can affect our operations and ability to collect revenues.

Our operations and revenues can be subject to natural disasters and other events beyond our control, such as earthquakes, fires, tsunami, extreme wind conditions, power failures, telecommunication loss, terrorist attacks and acts of war. Our corporate headquarters and a portion of our critical business offices are located in California near major earthquake faults. Such events of disaster, whether natural or manmade, could cause severe destruction or interruption to our operations and as a result, our business could suffer serious harm.

If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board, which would limit the ability of broker-dealers to sell our securities and the ability of shareholders to sell their securities in the secondary market.

Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13 in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board, and 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 shareholders to sell their securities in the secondary market. There can be no assurance that in the future we will always be current in our reporting requirements.

Our common stock is subject to the “penny stock” rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.

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

• that a broker or dealer approve a person’s account for transactions in penny stocks; and

• that 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.

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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

• states 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.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We do not own any real property. Our leased facilities as of January 1, 2011 are as follows:

Location	Square Feet	Primary Use	Lease Terms
Campbell, CA	5,218 sq ft	Office space (headquarters)	Lease expires August 31, 2012
Lake Oswego, OR	9,693 sq ft	Office space	Lease expires July 31, 2011
Conshohocken, PA	2,562 sq ft	Office space	Lease expires September 30, 2012

We believe that our current facilities are suitable and adequate to meet our anticipated needs for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

Litigation (see also Subsequent Events in Note 15 to the Consolidated Financial Statements in Part II, Item 8):

EnergyConnect, its board of directors, JCI Holding and Eureka, Inc., a wholly owned subsidiary of JCI Holding, are named as defendants in three putative class action lawsuits brought by alleged shareholders challenging EnergyConnect’s proposed merger with JCI Holding. The shareholder actions generally allege, among other things, that each member of the EnergyConnect board of directors breached their fiduciary duties to EnergyConnect shareholders by authorizing the sale of EnergyConnect to JCI Holding for consideration that does not maximize value to EnergyConnect shareholders. The complaints also allege that EnergyConnect, JCI Holding and Eureka, Inc. aided and abetted the breaches of fiduciary duty allegedly committed by the members of the EnergyConnect board of directors. The shareholder actions seek equitable relief, including enjoining the defendants from consummating the merger on the agreed-upon terms. On March 28, 2011, the court entered an order consolidating the three cases into one matter.

ITEM 4. (Removed and Reserved)

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PART II

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

Our common stock is quoted on the Over the Counter Bulletin Board under the symbol “ECNG.OB.” The transfer agent for our common stock is Mellon at 17 Battery Place, New York, NY 10004.

The following table sets forth the high and low intra-day bid information for our Common Stock for the fiscal quarters indicated as reported on the OTC Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

Fiscal 2009	High		Low
First Quarter	$	0.21	$	0.05
Second Quarter		0.14		0.08
Third Quarter		0.09		0.05
Fourth Quarter		0.14		0.04
Fiscal 2010	High		Low
First Quarter	$	0.20	$	0.07
Second Quarter		0.19		0.12
Third Quarter		0.26		0.14
Fourth Quarter		0.18		0.09

Our common stock is thinly traded and any reported sale prices may not be a true market-based valuation of our common stock. On January 1, 2011, the closing bid price of our common stock, as reported on the OTC Bulletin Board, was $0.11.

As of March 29, 2011, there were approximately 171 holders of record of our common stock.

Trades in our common stock may be subject to Rule 15g-9 under the Exchange Act, which imposes requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, broker/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser’s written agreement to the transaction before the sale.

The SEC also has rules that regulate broker/dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities listed on some national exchanges, provided that the current price and volume information with respect to transactions in that security is provided by the applicable exchange or system). The penny stock rules require a broker/dealer, before effecting a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing before effecting the transaction, and must be given to the customer in writing before or with the customer’s confirmation. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for shares of common stock.

No purchases of the Company’s equity securities were made by or on behalf of the company or any Company affiliated purchaser within the meaning of Section 240.10b-18(a)(3) during the fourth quarter of 2010.

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Dividend Policy

We have never declared or paid dividends on shares of our common stock. We intend to retain future earnings, if any, to support the development of our business and therefore do not anticipate paying cash dividends for the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.

Securities Authorized for Issuance Under Equity Compensation Plans

The following equity compensation information, as of January 1, 2011, is presented in compliance with SEC regulation S-K Item 201(d).

	Number of Securities to be issued upon exercise of outstanding options and warrants		Weighted average exercise price of outstanding options and warrants		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Plan category	(a)		(b)		(c)
Equity compensation plans approved by security holders		12,770,251	$	0.20		2,163,985
Equity compensation plans not approved by security holders		14,040,874	$	1.44		N/A
Total		26,811,125	$	0.85		N/A

Unregistered Securities Sold in 2010

On September 8, 2010, following notice that the Company intended to repay the balance of the convertible loan facility, Aequitas Commercial Finance, LLC (“Aequitas”) opted to convert, pursuant to the loan agreement as amended between the Company and Aequitas, all but $1 of the remaining principal plus accrued interest, totaling $3,307,280, into 36,504,180 shares of common stock.

On November 10, 2010, the Company issued 2,500,000 units of restricted stock to various officers of the Company. Twenty five percent of the restricted stock units vest six months after the date of grant and twelve and one half percent of the restricted stock units vest every three months thereafter, such that 100% of the restricted stock units shall be fully vested on the two year anniversary of the date of grant.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report. The statements of operations data for the twelve months ended January 1, 2011, and January 2, 2010 and the balance sheet data at January 1, 2011, and January 2, 2010 are derived from our audited financial statements which are included elsewhere in this annual report. The statement of operations data for the years ended January 3, 2009, December 29, 2007, and December 30, 2006, and the balance sheet data at January 3, 2009, December 29, 2007, and December 30, 2006, are derived from our audited financial statements which are not included in this annual report. The historical results are not necessarily indicative of results to be expected for future periods. The following information is presented in thousands, except per share data.

	January 1, 2011			January 2, 2010			January 3, 2009			December 29, 2007			December 30, 2006
Statements of Operations:
Revenue	$	31,644		$	19,921		$	25,859		$	12,626		$	3,202	(1)
Cost of revenue		19,475			12,883			18,420			8,789			3,032	(1)
Gross profit		12,169			7,038			7,439			3,837			170	(1)
Operating expense		10,849			9,317			41,486	(3)		8,180			6,076	(1)
Income (loss) from continuing operations		1,320			(2,279	)		(34,066	)		(4,341	)		1,561	(1)
Net income (loss)		(308	)		(3,222	)		(34,077	)		(14,036	)		833	(1)
Net income (loss) per share	$	—		$	(0.03	)	$	(0.37	)	$	(0.17	)	$	0.01	(1)
Weighted average shares		107,833			95,481			91,245			82,536			71,374
Balance Sheet Data:
Cash and cash equivalents	$	1,136		$	1,062		$	410		$	758	(2)	$	2,193	(2)
Total assets		15,920			9,775			7,357			48,086	(2)		57,147	(2)
Long-term liabilities		25			1,913			—			61	(2)		1,261	(2)
Total liabilities		11,312			9,746			5,361			16,828	(2)		13,531	(2)
Shareholders’ equity	$	4,608		$	29		$	1,996		$	31,258	(2)	$	43,616	(2)

1 Excludes operations that were discontinued in the year ended December 29, 2007.

2 Includes assets and liabilities related to operations that were discontinued in the year ended December 29, 2007.

3 Includes write-off in 2008 of impaired goodwill of $29.4 million resulting from the testing of the carrying value of goodwill purchased in the acquisition of ECI in October 2005.

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

Some of the information in this annual report contains forward-looking statements. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve substantial risks and uncertainties. One can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. One should read statements that contain these words carefully because they:

• discuss future expectations;

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

• state other “forward-looking” information.

We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors,” “Business” and elsewhere in this Form 10-K. See “Risk Factors beginning on page 11.”

Overview

EnergyConnect Group, Inc. is a leading provider of demand response services to the electricity grid. Demand response programs provide grid operators with additional electricity generation capacity by encouraging consumers to curtail their electricity usage. Historically, to provide a reliable supply of electricity and to avoid service disruption, grid operators have increased power generation by building additional power plants and transmission infrastructure. However, an alternative approach to increasing the supply side of electricity is to use demand response programs to reduce overall peak demand or shift load from peak to off-peak times, thereby optimizing the balance of demand and supply and reducing the need for additional power generation capacity. Demand response programs fall into two main groups: programs made for participants to stand by and respond to a grid event initiated by the grid operator, and programs that rely on participants curtailing their use of electricity based upon price signals.

Through our proprietary software as a service (SaaS) platform, we allow commercial and industrial consumers of electricity to access demand response programs that are offered by the grid and get paid by agreeing to stand by and curtail based upon a grid event or responding to a price signal. Our participants are commercial and industrial consumers of electricity with whom we contract to identify, develop and if necessary implement curtailment strategies. We enroll our participants in demand response programs operated by grid operators, who pay us for standing by or by reducing load by responding to a price signal. We make payments to our participants based on the terms and conditions of their contract with us.

The Company was incorporated in August 1986 as an Oregon Corporation, succeeding operations that began in October 1984. The Company’s headquarters are located in Campbell, California.

Description of Market

In a wholesale electricity market, such as the energy market operated by Pennsylvania, New Jersey, Maryland Interconnection, LLC (“PJM”), the market operator is responsible for buying, selling and delivering wholesale electricity thereby balancing the needs of suppliers, wholesale customers and other market participants. These markets operate like a stock exchange, with the price of electricity resulting from matching supply, for example power supplied by the generators, with demand, consisting of the retail, industrial and commercial consumers of electricity. The PJM market uses locational marginal pricing (“LMP”) that reflects the value of electricity at a specific time and location. If the lowest-priced electricity can reach all locations, prices are the same across the

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entire grid. If there is congestion and energy cannot flow to all locations, more expensive electricity is ordered to meet that demand. As a result, the LMP is higher in those locations of constraint. Wholesale electricity prices fluctuate based on five-minute intervals across the grid, however most consumers of electricity pay rates that are based on an average price of electricity that includes a hedge premium. This means that most consumers do not see wholesale prices and have no way of reacting to them. We have developed and deployed a software solution that allows our participants to transact in the wholesale market.

The energy market consists of Day-Ahead and Real-Time, or Day-Of, markets. The Day-Ahead market is a forward market in which hourly LMPs are calculated for the next operating day based on generation offers, demand bids and scheduled bilateral transactions. The Real-Time market is a spot market in which LMPs are calculated at five-minute intervals based on actual grid operating conditions.

Real-Time Response

Our participants reduce their usage of electricity based on a pre-determined curtailment strategy they have developed and estimated prices for wholesale electricity that we provide. EnergyConnect is paid for the actual measured reduction in electricity usage expressed either in kilowatts per hour (KWh) or megawatts per hour (MWh) at the actual LMP less the participant’s retail rate. We in turn pay our participants a percentage of the payment we receive based upon our individual contracts with them.

Real-Time Dispatch

Our participants reduce their usage of electricity in response to requests by the grid operator. The grid operator notifies us of an emergency event, we in turn notify our participants of their need to reduce demand. EnergyConnect is paid for our participants standing by to respond to the grid operator’s request to curtail. We in turn pay our participants a percentage of the payment we receive based upon our individual contracts with them.

Day-Ahead

Some grid operators establish Day-Ahead economic markets with forward hourly electricity prices. The price certainty of the Day-Ahead market provides a known return for a specific curtailment strategy, for example, by pre-cooling buildings in early morning hours to create subsequent reductions of energy use in the peak afternoon hours. We provide our participants with all the information and support required to participate in the Day-Ahead electrical energy market. EnergyConnect is paid for the reduction in usage. Reductions in excess of the amount committed to the Day-Ahead market are generally paid at the prevailing Real-Time rate. Under-delivery generally must be made up by our participants buying energy at the Real-Time rate.

Critical Accounting Policies

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

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

Revenue Recognition

We provide grid operators with products similar to those the grid operator purchases from electric power generators. Our products can be grouped into two main categories: “Capacity” and “Economic”.

The Capacity programs are designed to curtail usage during times when an electrical grid approaches its capacity limits of electrical generation just before a blackout or brownout. Participants in the capacity program are generally paid a fee to be on standby to respond on several hours’ notice to a request from the grid to reduce electrical usage for a specified period.

The Economic programs differ from the capacity programs as they allow commercial and industrial consumers of electricity to curtail usage at their discretion based on price signals from the grid. Participants in such programs are paid for their discretionary performance rather than being paid to standby and curtail based on a request from the grid.

Under the Capacity programs grid operators pay us an annual fee in weekly installments to stand by and provide demand response resources to the grid when the grid calls an event. We record these payments as revenue over the time when we are required to perform under these capacity programs. For some programs our obligation to perform does not match the period over which we are paid by the grid, in which case we recognize revenues over the mandatory performance period.

Under the Economic programs we are paid by the grid for our commercial and industrial participants’ ability to reduce electricity usage in response to a price signal from the grid. Through our software we summarize price responsive activity and submit to the grid for payment. At the end of each monthly period the power grid approves the payments and we, in turn, recognize revenue based upon the grid approval.

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

Some of our contracts with our participants are multi-year contracts for their participation in capacity markets where both the pricing and the participant’s commitment are known. Contracts signed for delivery in future years form the basis of our backlog. As of January 1, 2011, we had approximately 196 MW of capacity backlog with our participants, compared to no backlog at January 2, 2010.

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.

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Impairment of Intangible and Long-Lived Assets

In accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets, we assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use and eventual disposition. Our long-lived assets subject to this evaluation include property and equipment and amortizable intangible assets. If our estimate of future undiscounted net cash flows is insufficient to recover the carrying value of the assets, we will record an impairment loss in the amount by which the carrying value of the assets exceeds the fair value. If assets are determined to be recoverable but the useful lives are shorter than originally estimated, we depreciate or amortize the net book value of the asset over the newly determined remaining useful lives.

Stock-Based Compensation

We account for stock-based compensation under the provisions of ASC 718-10 and ASC 505-50, “Stock Compensation and Equity Based Payments to Non-Employees”. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statement of Operations.

The weighted average grant date fair value of all options granted in the years ended January 1, 2011 and January 2, 2010 was $0.10 and $0.08, respectively. These fair values were computed using the Black-Scholes pricing model and the following assumptions:

	2010	2009
Risk-free interest rate	1.15 – 2.60%	1.80 – 2.75%
Expected dividend yield	0%	0%
Expected term	5 years	5 years
Expected volatility	82%	118%

The amounts expensed for stock-based compensation related to options totaled $448,907 and $742,225 for the years ended January 1, 2011 and January 2, 2010, respectively.

Results of Operations

The financial information presented for the years ended January 1, 2011 and January 2, 2010 represents activity in EnergyConnect Group, Inc. and its wholly-owned operating subsidiary, EnergyConnect, Inc (ECI).

Revenue. The Company generates revenue mainly from demand response transactions regulated by a Federal Energy Regulatory Commission (FERC) tariff. These transactions include economic or price-based programs and capacity programs. Economic or price-based programs entail voluntary, daily opportunities to enter into transactions in the energy markets based on our participants’ responses to fluctuations in hourly energy prices.

Capacity programs allow for payments to partners such as ECI based on energy availability and curtailment when required by an electric grid to stabilize the supply and demand of electricity on the grid. Also included in the FERC tariff are rules under which we recognize revenue in capacity-based energy programs.

The FERC tariff also allows for other revenue opportunities in helping to meet various needs of electric grids. We recognize revenue from these programs ratably over the months during which our response is required.

Revenue for the year ended January 1, 2011 was $31,644,000 compared to $19,921,000 for the year ended January 2, 2010, an increase of 58.8%. This increase in year-over-year revenue in ECI is due primarily to an

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increase in PJM capacity revenues from the annual program from $12,274,000 to $21,101,000, or 71.9%. We also recognized revenue of $6,578,000 from a capacity transaction in the first quarter of 2010, compared to $4,084,000 from similar capacity transactions in the first six months of 2009, an increase of 61.1%.

Gross Profit. Gross profit for the year ended January 1, 2011 was $12,169,000 (or 38.5% of revenue) compared to $7,038,000 (or 35.3% of revenue) for the year ended January 2, 2010, an increase of 72.9%. This increase is attributable to the $4,691,000 gross profit generated by the high margin capacity transaction completed in the first quarter of 2010 compared to the $3,023,000 generated by capacity transactions in the first six months of 2009, and also an increase in the profitability of the annual program from $3,675,000 to $7,091,000, the increase being primarily attributable to the $8,827,000 increase in revenue from this program.

Gross profit comprises revenue, less the related amounts due to our participants for capacity commitments made by them, and for transactions initiated by them, and various costs required to do business in the grids in which we operate. Future gross profit margins will depend on the Company’s ability to sign contracts with participants for appropriate percentages for the duration of the contract term.

Operating Expenses. Operating expenses were $10,849,000 (34.3% of revenue) for the year ended January 1, 2011, compared to $9,317,000 (46.8% of revenue) for the year ended January 2, 2010, an increase of 16.4%. The increase in expenses is primarily due to increases of $582,000 in legal and professional fees, $903,000 in personnel costs, including salaries, and $140,000 in occupancy costs, offset by a decrease in non-cash stock-based compensation of $207,000.

Interest expense, net and other. Net interest expense was $1,580,000 for the year ended January 1, 2011, compared to $943,000 for the year ended January 2, 2010. Net interest expense in both 2010 and 2009 comprised mainly interest expense incurred under the Company’s debt facility and amortization of debt discount associated with the beneficial conversion feature of the debt facility. Net interest expense increased in 2010 due to an acceleration of the charge against debt discount and the $150,000 in minimum interest charges incurred when the loan was repaid, and due to higher average aggregate borrowings, offset by a reduction in interest rates. Following conversion of the principal balance of the Aequitas loan into common stock in September 2010, interest expenses are expected to be significantly lower in the future, although there will be interest payable at 12.5% on borrowings against the Company’s line of credit, and there is also a non-cash charge of approximately $34,000 per month relating to amortization of the expense attributed to warrants issued to obtain this line through September 30, 2011.

Taxation. Income tax expense was $48,000 in the year ended January 1, 2011, all relating to state tax charges for which insufficient net operating losses were available to offset the current year’s taxable income, partly due to California’s suspension of utilization of NOL carryovers. We have provided a full valuation allowance on our net deferred tax asset.

Liquidity and Capital Resources

Since inception, we have financed our operations and capital expenditures through public and private sales of equity securities, cash from operations, and borrowings under operating and revolving lines of credit.

At January 1, 2011, the Company had positive working capital of approximately $3,207,000, compared to approximately $278,000 at January 2, 2010. The increase is primarily due to the increase in receivables resulting from increased revenue from the PJM capacity program, partially offset by a corresponding increase in payables to participants. The Company derived significant liquidity in the year ended January 1, 2011, as the balance on its convertible note was repaid in common stock. Further, the Company has obtained a $4,000,000 revolving line of credit which matures on September 30, 2011.

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Accounts receivable increased to $12,613,000 at January 1, 2011 from $6,811,000 at January 2, 2010. The increase was primarily due to the increase in revenue from the annual PJM capacity program. We receive funds from this capacity transaction over the PJM program year on a weekly basis starting each June. Our remaining receivables will increase and decrease in accordance with the revenue recognized in each quarter. The large majority of our revenue, and therefore cash and receivables, is generated through PJM, which serves as the market for electrical transactions in a specific region in the United States. We are members of PJM, and our relationship with this power grid is perpetual. We do have a concentration of receivables from PJM, however, we do not believe there is a significant risk arising from this concentration.

Property and equipment, net of depreciation increased to $189,000 at January 1, 2011, compared to $187,000 at January 2, 2010. This increase was due to approximately $139,000 in additions to fixed assets offset by normal depreciation charges of $137,000 during the year. After acquiring computer equipment for approximately $150,000 in the first quarter of 2011, we do not anticipate spending significant amounts to acquire other fixed assets for the foreseeable future.

Accounts payable and related accruals increased to $10,796,000 at January 1, 2011 from $7,509,000 at January 2, 2010. The increase was primarily due to increase in cost of revenue from the annual PJM capacity program, commensurate with the increase in revenue. At January 1, 2011, other than normal obligations to vendors, payables consist primarily of payment obligations to participants in our capacity programs, not currently due, and to normal monthly obligations in our economic programs.

As a result of our history of losses and our experiencing difficulty in generating sufficient cash flow to meet our obligations and sustain our operations, our independent registered public accounting firm in their report dated April 1, 2011, included in our January 1, 2011 Form 10-K, expressed substantial doubt about our ability to continue as going concern.

We believe that revenues generated by operations, combined with our $4 million line of credit, will be adequate to fund our operations until September 2011. Thereafter, we may need to renew the credit facility or obtain alternative financing in order to attain cash flow break even from operations. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock, the downturn in the U.S. stock and debt markets and the first priority lien on all of our assets granted to our secured lender could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we may have to curtail our operations.

By adjusting the Company’s operations and development to the level of capitalization, management believes it has sufficient capital resources to meet projected cash flow deficits. However, if the Company is not successful in generating sufficient liquidity from operations or in raising sufficient capital resources on acceptable terms, or is no longer in compliance with the terms of its debt facility, this could have a material adverse effect on the Company’s business, results of operations, liquidity and financial condition. If operations and cash flows continue to improve through these efforts, management believes that the Company can continue to operate. However, no assurance can be given that management’s actions will result in profitable operations or the resolution of its liquidity problems.

Recent regulatory developments may require us to post letters of credit or security deposits in order to participate in key demand response programs. Given our limited access to capital, we may not have sufficient funds to meet these credit requirements that may in turn preclude us from participating in these markets, adversely affecting our ability to create shareholder value as a standalone company.

32

Concentrations

We record revenue and therefore accounts receivable through agreements with both building owners and the power grid operators. Under our agreements with facilities owners, we use electrical and energy related products that help energy consumers control energy use in their buildings. In conjunction with this agreement we are members of the power grid operators and have agreed to provide the grids with 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 grids for settlement and approval. While the power grids are our customers, they are primarily a conduit through which these electrical curtailment transactions are processed. The vast majority of our revenues each year are processed through PJM, which serves as the market for electrical transactions in a specific region in the United States. Transactions are initiated by building owners, who are our participants. These transactions form the basis for our revenue.

Financial transactions and instruments that potentially subject us to concentrations of credit risk consist primarily of revenue generating transactions and the resultant accounts receivable. We record no allowance for doubtful accounts, and the Company has never recorded a bad debt expense with respect to its present activities.

During the years ended January 1, 2011, and January 2, 2010, sales to one customer, PJM, accounted for $29,121,000, or 92.0% of revenue, and $17,552,000, or 88.1% of revenue, respectively. Our sales to PJM are made up of a number of transactions with participants. No single participant accounted for 10% or more of our revenue in either period. PJM accounted for 98.0% of accounts receivable at both January 1, 2011, and January 2, 2010.

While the Company has been able to manage its working capital needs with the current credit facilities, additional financing is likely required in order to meet its current and projected cash flow requirements from operations. We may need additional investments in order to continue operations to cash flow break even. We cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and the downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock.

At January 1, 2011, we had commitments for capital expenditures totaling approximately $150,000, all for computer equipment.

Inflation

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

Off-Balance Sheet Arrangements

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

Related Party Transactions

See Notes 5 and 8 to the Consolidated Financial Statements for a full description of convertible debt transactions with a related party in the years ended January 1, 2011 and January 2, 2010. The balance outstanding on this debt

33

was fully converted into shares of common stock in September 2010. As of January 1, 2011, there are no amounts owed to related parties other than nominal amounts incurred in the normal course of business.

Contractual Obligations and Commitments

The following is a summary of our significant contractual cash obligations for the periods indicated that existed as of January 1, 2011, and is based on information appearing in the notes to consolidated financial statements included elsewhere in this filing.

	Total		Less than 1 Year		1-2 Years		3-5 Years		More than 5 Years
Operating Leases	$	436,342	$	312,834	$	123,508	$	—	$	—
Capital Expenditure		150,000		150,000		—		—		—
Total obligations	$	586,342	$	462,834	$	123,508	$	—	$	—

Recent Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements in Part II, Item 8 for a full description of new accounting pronouncements, including the respective expected dates of adoption, none of which have had, or are expected to have, a material impact on our results of operations or financial condition.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

EnergyConnect Group, Inc.

Campbell, California

We have audited the accompanying consolidated balance sheet of EnergyConnect Group, Inc. and subsidiary (collectively, the “Company”) as of January 1, 2011, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based upon our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EnergyConnect Group, Inc. and subsidiary as of January 1, 2011, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 for the year ended January 1, 2011, the Company has suffered recurring losses from operations and is experiencing difficulty in generating sufficient cash flow to meet its obligations and sustain its operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 14 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ SingerLewak LLP

San Jose, CA,

April 1, 2011

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

EnergyConnect Group, Inc.

Campbell, California

We have audited the accompanying consolidated balance sheets of EnergyConnect Group, Inc. and its wholly-owned subsidiary (the “Company”) as of January 2, 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended January 2, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based upon our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EnergyConnect Group, Inc. and its wholly-owned subsidiary as of January 2, 2010, and the consolidated results of its operations and its cash flows for the year ended January 2, 2010, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14, the Company is experiencing difficulty in generating sufficient cash flow to meet its obligations and sustain its operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 14. The accompanying statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ RBSM LLP

New York, New York,

March 18, 2010

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ENERGYCONNECT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

AS OF JANUARY 1, 2011 AND JANUARY 2, 2010

	January 1, 2011			January 2, 2010
Assets
Current assets:
Cash and cash equivalents	$	1,136,074		$	1,062,306
Accounts receivable, net of zero allowance		12,612,560			6,811,495
Other current assets		745,383			237,242
Total current assets		14,494,017			8,111,043
Property and equipment, net		188,696			187,085
Intangible assets, net		1,159,695			1,398,761
Other assets		77,508			78,035
Total assets	$	15,919,916		$	9,774,924
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	10,796,332		$	7,508,561
Other current liabilities		490,653			324,886
Total current liabilities		11,286,985			7,833,447
Long term liabilities:
Note payable, net of debt discount		—			1,912,937
Other liabilities		24,804			—
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred Stock, no par value, 10,000,000 shares authorized, none outstanding at January 1, 2011 or January 2, 2010		—			—
Common Stock, no par value, 225,000,000 shares authorized, 135,735,879 and 95,629,961 shares issued and outstanding at January 1, 2011 and January 2, 2010, respectively		162,911,984			158,024,289
Accumulated deficit		(158,303,857	)		(157,995,749	)
Total stockholders’ equity		4,608,127			28,540
Total liabilities and stockholders’ equity	$	15,919,916		$	9,774,924

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

37

ENERGYCONNECT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JANUARY 1, 2011 AND JANUARY 2, 2010

	January 1, 2011			January 2, 2010
Revenue	$	31,644,355		$	19,920,525
Cost of revenue		19,475,581			12,882,257
Gross profit		12,168,774			7,038,268
Operating expenses		10,849,034			9,317,077
Operating income (loss)		1,319,740			(2,278,809	)
Interest expense, net and other		(1,579,711	)		(943,212	)
Loss before provision for income taxes		(259,971	)		(3,222,021	)
Provision for income taxes		48,137			—
Net loss	$	(308,108	)	$	(3,222,021	)
Net loss per share – basic and diluted	$	—		$	(0.03	)
Shares used to compute net loss per share – basic and diluted		107,832,925			95,480,783

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

38

ENERGYCONNECT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED JANUARY 1, 2011 AND JANUARY 2, 2010

	Common Stock						Accumulated Deficit			Total
	Shares			Amount
Balances as of January 3, 2009		95,179,961		$	156,769,983		$	(154,773,728	)	$	1,996,255
Restricted shares issued to directors		450,000			54,000			—			54,000
Stock-based compensation related to options		—			742,225			—			742,225
Collection of notes receivable for exercise of stock options		—			5,700			—			5,700
Beneficial conversion feature related to convertible debt		—			452,381			—			452,381
Net loss		—			—			(3,222,021	)		(3,222,021	)
Balances as of January 2, 2010		95,629,961		$	158,024,289		$	(157,995,749	)	$	28,540
Restricted shares issued to directors		650,000			112,000			—			112,000
Stock-based compensation related to options		—			448,907			—			448,907
Collection of notes receivable for exercise of stock options		—			13,786			—			13,786
Repayment of note receivable via surrender of stock		(100,000	)		(13,500	)		—			(13,500	)
Common shares issued upon exercise of options		551,738			39,579			—			39,579
Restricted stock issued to officers		2,500,000			28,261			—			28,261
Beneficial conversion feature related to convertible debt		—			585,758			—			585,758
Common stock issued on conversion of debt		36,504,180			3,307,279			—			3,307,279
Fair value of warrants issued					365,625			—			365,625
Net loss		—			—			(308,108	)		(308,108	)
Balances as of January 1, 2011		135,735,879		$	162,911,984		$	(158,303,857	)	$	4,608,127

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

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ENERGYCONNECT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JANUARY 1, 2011 AND JANUARY 2, 2010

	January 1, 2011			January 2, 2010
Cash flows from operating activities:
Net loss	$	(308,108	)	$	(3,222,021	)
Reconciling adjustments
Depreciation of equipment		136,797			140,447
Amortization of intangible assets		239,066			239,067
Stock-based compensation related to options		448,907			742,225
Stock-based compensation related to restricted stock		140,261			54,000
Amortization of debt discount including beneficial conversion feature		722,821			315,318
Change in operating assets and liabilities:
Accounts receivable		(5,801,065	)		(2,437,677	)
Other current assets		(156,016	)		331,902
Other assets		527			(7,159	)
Accounts payable		3,287,771			2,392,265
Other liabilities		190,571			197,871
Net cash used in operating activities		(1,098,468	)		(1,253,762	)
Cash flows from investing activities:
Purchase of property and equipment		(138,408	)		(28,270	)
Increase in intangible assets		—			(4,206	)
Net cash used in investing activities		(138,408	)		(32,476	)
Cash flows from financing activities:
Repayments on line of credit		—			(117,257	)
Proceeds from debt financing, net of repayments		1,257,279			2,050,000
Proceeds from exercise of stock options		39,579			—
Collection of notes receivable for exercise of stock options		13,786			5,700
Net cash provided by financing activities		1,310,644			1,938,443
Net increase in cash and cash equivalents		73,768			652,205
Cash and cash equivalents at beginning of the period		1,062,306			410,101
Cash and cash equivalents at end of the period	$	1,136,074		$	1,062,306
Supplemental disclosures of cash flow information:
Interest paid (includes $257,280 paid in conversion shares in the year ended January 1, 2011)	$	949,593		$	427,919
Income taxes paid	$	—		$	—
Supplemental schedule of non-cash investing and financing activities:
Beneficial conversion feature related to convertible debt	$	585,758		$	452,381
Common stock issued on conversion of debt	$	3,307,279		$	—
Issuance of warrants to obtain line of credit	$	365,625		$	—
Repayment of note receivable via surrender of stock	$	13,500		$	—

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

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ENERGYCONNECT GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Description of the Business

EnergyConnect Group, Inc. is a leading provider of demand response services to the electricity grid. Demand response programs provide grid operators with additional electricity generation capacity by encouraging consumers to curtail their electricity usage. Historically, to provide a reliable supply of electricity and to avoid service disruption, grid operators have increased power generation by building additional power plants and transmission infrastructure. However, an alternative approach to increasing the supply side of electricity is to use demand response programs to reduce overall peak demand or shift load from peak to off-peak times, thereby optimizing the balance of demand and supply and reducing the need for additional power generation capacity. Demand response programs fall into two main groups, programs made for participants to stand by and respond to a grid event initiated by the grid operator and programs that rely on participants curtailing their use of electricity based upon price signals.

Through our proprietary software as a service (SaaS) platform, we allow commercial and industrial consumers of electricity to access demand response programs that are offered by the grid and get paid by agreeing to stand by and curtail based upon a grid event or responding to a price signal. Our participants are commercial and industrial consumers of electricity with whom we contract to identify, develop and if necessary implement curtailment strategies. We enroll our participants in demand response programs operated by grid operators, who pay us for standing by or for reducing load by responding to a price signal. We in turn pass on a portion of these payments to our participants in accordance with their contract with us.

The consolidated financial statements include the accounts of EnergyConnect Group, Inc. and its wholly owned operating subsidiary, EnergyConnect, Inc. (collectively the “Company”).

The Company was incorporated in August 1986 as an Oregon corporation, succeeding operations that began in October 1984. In 2009 we moved our corporate headquarters from Lake Oswego, Oregon to Campbell, California.

2.    Summary of Significant Accounting Policies

Fiscal Year

The Company’s fiscal year is the 52 or 53 week period ending on the Saturday closest to the last day of December. The Company’s current fiscal year is the 52 week period ended January 1, 2011. The Company’s last fiscal year was the 52 week period ended January 2, 2010.

Principles of Consolidation

The Consolidated Statements of Operations, presented above, contain revenue and expense data of EnergyConnect Group, Inc. for the years ended January 1, 2011, and January 2, 2010. On October 13, 2005, EnergyConnect Group, Inc. acquired its wholly-owned subsidiary, EnergyConnect, Inc (“ECI”). The revenue and expense data of ECI is included in the Consolidated Statements of Operations. All significant inter-company accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

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

41

Advertising Costs

Advertising and marketing costs of $0.03 million and $0.01 million were expensed as incurred in the years ended January 1, 2011, and January 2, 2010, respectively.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is charged using the straight-line method over the estimated useful lives of the assets as follows:

Computers and software	3 years
Leasehold improvements	3 to 5 years, or remaining lease term if shorter
Furniture and fixtures	5 years

Revenue Recognition

We provide grid operators with products similar to those the grid operator purchases from electric power generators. Our products can be grouped into two main categories: “Capacity” and “Economic”.

The Capacity programs are designed to curtail usage during times when an electrical grid approaches its capacity limits of electrical generation just before a blackout or brownout. Participants in the capacity program are generally paid a fee to be on standby to respond on several hours’ notice to a request from the grid to reduce electrical usage for a specified period.

The Economic programs differ from the capacity programs as they allow commercial and industrial consumers of electricity to curtail usage at their discretion based on price signals from the grid. Participants in such programs are paid for their discretionary performance rather than being paid to standby and curtail based on a request from the grid.

Under the Capacity programs grid operators pay us an annual fee in weekly installments to stand by and provide demand response resources to the grid when the grid calls an event. We record these payments as revenue over the time when we are required to perform under these capacity programs. For some programs our obligation to perform does not match the period over which we are paid by the grid in which case we recognize revenues over the mandatory performance period.

Under the Economic programs we are paid by the grid for our commercial and industrial participants’ ability to reduce electricity usage in response to a price signal from the grid. Through our software we summarize price responsive activity and submit to the grid for payment. At the end of each monthly period the power grid approves the payments, and we in turn recognize revenue based upon the grid approval.

An additional source of our revenue is derived from agreements with the power grid operators whereby a monthly reserve fee is paid for our agreement to be available to provide relief in the form of curtailment of energy usage in times of high energy demand. We record these payments as revenue over the period during which we are required to perform under these programs. Under certain programs, our obligation to perform may not coincide with the period over which we receive payments under that program. In these cases we record revenue over the mandatory performance obligation period and record a receivable for the amount of payments that will be received after that period has been completed. An allowance for doubtful accounts is assessed based on a combination of historical experience, aging analysis and information on specific accounts.

The vast majority of our revenue in 2009 and 2010 was processed through the Pennsylvania, New Jersey, Maryland Interconnection, LLC (“PJM”). PJM serves as the market for electrical transactions in a specific region in the United States. Our agreement with PJM is an ongoing one as we are members of PJM. These transactions are initiated by building owners, who are our participants. The transactions form the basis for our revenue.

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Impairment of Intangible and Long-Lived Assets

We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use and eventual disposition. Our long-lived assets subject to this evaluation include property and equipment and amortizable intangible assets. If our estimate of future undiscounted net cash flows is insufficient to recover the carrying value of the assets, we will record an impairment loss in the amount by which the carrying value of the assets exceeds the fair value. If assets are determined to be recoverable but the useful lives are shorter than originally estimated, we depreciate or amortize the net book value of the asset over the newly determined remaining useful lives.

Income Taxes

The Company accounts for income taxes using the asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in operations in the period that includes the enactment date. In addition, we have adopted the provisions of FASB guidance on accounting for uncertainty in income taxes which provides a financial statement recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Under this guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

Computation of Net Income (Loss) per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding plus common share equivalents from conversion of dilutive stock options, warrants, and restricted stock using the treasury method, and convertible securities using the as-converted method, except when antidilutive. In the event of a net loss, the effects of all potentially dilutive shares are excluded from the diluted net loss per share calculation as their inclusion would be antidilutive.

Stock Based Compensation

The Company measures the fair value of all stock-based awards to employees, including stock options, on the grant date and records the fair value of these awards, net of estimated forfeitures, to compensation expense over the service period. The fair value of awards to consultants is measured on the dates on which performance of services is completed, with interim valuations recorded at balance sheet dates while performance is in progress. The fair value of options is estimated using the Black-Scholes valuation model, and of restricted stock is based on the Company’s closing share price on the measurement date. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Operations.

Comprehensive Income

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

Use of Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the

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

Research and Development

Research and development costs are charged to operations as incurred. The Company incurred approximately $1.0 million and $0.8 million of expenditures on research and development for the years ended January 1, 2011, and January 2, 2010, respectively.

Segment Information

Segments are defined as components of the Company’s business for which separate financial information is available that is evaluated by the Company’s chief operating decision maker (its CEO) in deciding how to allocate resources and assess performance. The Company presently has only one operating segment, comprising domestic operations only.

Reclassification

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

Fair Value Measurement

Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).

Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, we primarily use prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). We also consider the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.

The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The three hierarchy levels are defined as follows:

Level 1 inputs are observable inputs and use quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date and are deemed to be most reliable measure of fair value.

Level 2 inputs are observable inputs and reflect assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity.

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Level 2 inputs include 1) quoted prices for similar assets or liabilities in active markets, 2) quoted prices for identical or similar assets or liabilities in markets that are not active, 3) observable inputs such as interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, credit risks, default rates, and 4) market-corroborated inputs.

Level 3 inputs are unobservable inputs and reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.

The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable and other current assets and liabilities approximate fair value because of their short-term maturity. The Company has not elected the fair value option with respect to any of its assets or liabilities.

Recent Accounting Pronouncements

In April 2010, the FASB issued ASC Update No. 2010-17, Milestone Method of Revenue Recognition (ASU 2010-17). ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. ASU 2010-17 is effective for interim and annual reporting periods beginning after June 15, 2010, with early adoption permitted. We adopted this standard effective July 4, 2010, and its adoption did not have a material impact on our consolidated financial position or results of operations.

In January 2010, the FASB issued ASC Update No. 2010-06, Improving Disclosure about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires additional disclosures regarding fair value measurements, amends disclosures about post-retirement benefit plan assets and provides clarification regarding the level of disaggregation of fair value disclosures by investment class. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for certain Level 3 activity disclosure requirements that will be effective for reporting periods beginning after December 15, 2010. The adoption of this standard did not and will not have a material impact on our consolidated financial position or results of operations.

In September 2009, the FASB ratified ASC Update No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB ASC Subtopic 605-25. This consensus provides for two significant changes to the existing multiple element revenue recognition guidance. First, this guidance deletes the requirement to have objective and reliable evidence of fair value for undelivered elements in an arrangement and will result in more deliverables being treated as separate units of accounting. The second change modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. These changes may result in entities recognizing more revenue up-front, and entities will no longer be able to apply the residual method and defer the fair value of undelivered elements. Upon adoption of these new rules, each separate unit of accounting must have a selling price, which can be based on management’s estimate when there is no other means to determine the fair value of that undelivered item, and the arrangement consideration is allocated based on the relative selling price. This accounting guidance is effective no later than fiscal years beginning on or after June 15, 2010 but may be adopted early as of the first quarter of an entity’s fiscal year. Entities may elect to adopt this accounting guidance either through prospective application to all revenue arrangements entered into or materially modified after the date of adoption or through a retrospective application to all revenue arrangements for all periods presented in the financial statements. We adopted this standard effective April 4, 2010, and its adoption did not have a material impact on our consolidated financial position or results of operations.

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

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3.    Property and Equipment

Property and equipment consist of the following:

	January 1, 2011			January 2, 2010
Furniture and fixtures	$	88,190		$	79,688
Leasehold improvements		47,867			48,173
Software and computer equipment		497,734			374,683
		633,791			502,544
Less accumulated depreciation		(445,095	)		(315,459	)
	$	188,696		$	187,085

Depreciation expense (which includes amortization of leasehold improvements) included in operating expenses was $136,797 and $140,447 for the years ended January 1, 2011 and January 2, 2010, respectively.

4.    Intangible Assets

Intangible assets currently consist of the following:

	January 1, 2011			January 2, 2010
Developed technology	$	2,394,873		$	2,394,873
Less accumulated amortization		(1,235,178	)		(996,112	)
	$	1,159,695		$	1,398,761

Amortization of intangible assets included as a charge to income was $239,066 and $239,067 for the years ended January 1, 2011, and January 2, 2010, respectively. Based on the Company’s current intangible assets, amortization expense for the next five years will be as follows:

Year	Amortization Expense
2011	$	239,067
2012		239,067
2013		239,067
2014		239,067
Thereafter		203,427
Total	$	1,159,695

5.    Debt

Bank Line of Credit

On November 5, 2010, we entered into a $4,000,000 revolving line of credit with Silicon Valley Bank and Partners For Growth III, L.P. (collectively “SVB”). Borrowings under the agreement are at an interest rate of 12.5%. The facility matures on September 30, 2011. We granted the lender a first priority security interest in all of our assets. We issued a total of 3.75 million warrants to SVB in connection with the agreement. These warrants have a term of seven years, and an exercise price of $0.15. Utilizing the Black-Scholes valuation model and assumptions of the fair value of common stock of $0.15, an expected term of five years, estimated volatility of 81.88%, a zero dividend rate and a risk free interest rate of 1.10%, the Company determined the total allocated fair value of the warrants to be $365,625. This sum was recorded within current assets, and is being amortized as interest expense on a straight line basis over the term of the credit line.

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As at January 1, 2011, the Company had not yet borrowed against the line. The Company is in compliance with all covenants under this facility.

Debt Facility

On February 26, 2009, the Company entered into a $5 million loan agreement with Aequitas Commercial Finance, LLC (“Aequitas”, see also Note 8). On December 23, 2009, the Company entered into an amendment of the convertible debt agreement. This loan agreement, as amended, provided us with a debt facility that enabled us to borrow money in a maximum principal amount not to exceed $5 million. The interest rate for funds borrowed by us in the first 12 month term was 23% payable monthly in arrears, with an additional 7% deferred interest per annum. For the balance of the term, and for all amounts borrowed under the amendment, the interest rate was 22% payable monthly in arrears, with an additional 3% deferred interest per annum. The accrued deferred interest at 7% was added to the current principal balance of the loan at the end of the first twelve-month term. The accrued deferred interest at 3% was added to the current principal balance of the loan prior to conversion. The lender was granted a first priority security interest in all of our assets, and had the right to convert up to 100% of unpaid principal and interest into shares of our common stock at an exercise price of $0.0906 per share, either on the planned maturity date of February 24, 2012, or to the extent the Company gave notice of its intent to pay down the principal balance outstanding.

On September 8, 2010, following notice that the Company intended to repay the balance of the facility, the lender opted to convert all but $1 of the remaining principal plus accrued interest, totaling $3,307,280, into 36,504,180 shares of common stock. The Company repaid the remaining $1 on September 24, 2010.

The balance of this debt facility comprises the following at January 1, 2011 and January 2, 2010:

	January 1, 2011			January 2, 2010
Convertible note payable:
Draw-down of principal, net	$	3,049,999		$	2,050,000
Deferred interest added to principal		257,280			—
Conversion to common stock		(3,307,279	)		—
Net principal balance		—			2,050,000
Debt discount – beneficial conversion feature, net of accumulated amortization of $1,038,139 and $315,318 at January 1, 2011, and January 2, 2010, respectively.		—			(137,063	)
Note payable, net of debt discount	$	—		$	1,912,937

In 2009, the Company recognized an imbedded conversion feature present in the convertible note (which equaled the intrinsic value of the conversion option on each date funds were drawn down from the facility) as additional paid-in capital and as a discount against the convertible note. The intrinsic value recognized was $452,381 in the year ended January 2, 2010, which was recorded as both additional paid-in capital and as a discount against the convertible note. In the year ended January 1, 2011, the Company recognized a further $585,758 as additional paid-in capital and as a discount against the convertible note, which arose both when funds were drawn down, and when deferred and accrued interest was added to principal prior to conversion.

This debt discount attributed to the beneficial conversion feature was amortized over the convertible note’s maturity period as interest expense. In addition, an accelerated charge of the unamortized expense, based on the proportion of debt repaid to debt outstanding prior to repayment, was recorded whenever principal was either paid down or converted to common stock. We amortized the convertible note debt discount attributed to the beneficial conversion feature and recorded non-cash interest expense in the amount of $722,821 and $315,318 for the years ended January 1, 2011 and January 2, 2010, respectively. The balance of unamortized debt discount that was expensed on conversion to common stock on September 8, 2010, including the debt discount that arose when accrued interest was transferred to principal immediately prior to conversion, amounted to $516,845.

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Interest paid to Aequitas totaled $941,840 and $452,816 for the years ended January 1, 2011 and January 2, 2010, respectively. Interest payments in the year ended January 1, 2011, include $150,000 in minimum interest charges of $50,000 per month for the remaining contract term of ninety days after the balance of principal was repaid, and $257,280 in deferred and accrued interest charges paid in common stock, following conversion on September 8, 2010. In addition, the Company paid Aequitas fees of $3,000 per month from March 2009 until August 2010. Aequitas agreed to release its liens on the Company’s assets and waive all covenants and loan fees during the termination period following receipt of the $150,000 minimum interest charges, which the Company paid on October 1, 2010.

The balance owed on the debt facility (including deferred interest) was recorded as long-term debt. We remained current with our obligations under this agreement, and were in compliance with all covenants, up to the date of conversion.

6.    Capital

Common Stock

We are authorized to issue up to 225,000,000 shares of common stock, no par value. As of January 1, 2011, and January 2, 2010, there were 135,735,879 and 95,629,961 shares, of common stock outstanding, respectively. Holders of the common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefore. Upon the liquidation, dissolution, or winding up of our company, the holders of common stock are entitled to share ratably in all of our assets which are legally available for distribution after payment of all debts and other liabilities and liquidation preference of any outstanding common stock. The outstanding shares of common stock are validly issued, fully paid and non-assessable.

During the year ended January 1, 2011, the Company issued 36,504,180 shares due to the conversion of debt of $3,307,279 at $0.0906 per share (see Note 5). In addition, the Company issued an aggregate of 650,000 and 450,000 shares of common stock during the years ended January 1, 2011, and January 2, 2010, respectively, all of which were issued to directors for their services on the Company’s board (see Note 7). Further, in the year ended January 1, 2011, the Company issued 2,500,000 shares of restricted stock to five of the Company’s officers, issued 551,738 shares of common stock due to the exercise of options (see Note 7), and retired 100,000 shares as partial repayment of a note receivable from an employee. There were no shares of restricted stock issued to officers, options exercised or shares retired in the year ended January 2, 2010.

Preferred Stock

We are authorized to issue up to 10,000,000 shares of preferred stock, no par value. The 10,000,000 shares of preferred stock authorized are undesignated as to preferences, privileges and restrictions. As the shares are issued, the Board of Directors must establish a “series” of the shares to be issued and designate the preferences, privileges and restrictions applicable to that series. As of January 1, 2011, and January 2, 2010, there were no remaining shares of any series of preferred stock outstanding.

7.    Stock Options and Warrants

Stock Incentive Plan

The Company presently grants awards under the 2004 Stock Incentive Plan, as amended (the “Plan”). The purpose of the Plan is to enable the Company to attract and retain the services of (1) selected employees, officers and directors of the Company or of any subsidiary of the Company and (2) selected nonemployee agents, consultants, advisors, persons involved in the sale or distribution of the Company’s products and independent contractors of the Company or any subsidiary. The Plan is administered by the Compensation Committee of the

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Board of Directors, who may grant various awards, including Incentive Stock Options (“ISOs”), Non-Statutory Stock Options (“NSOs”), Stock Appreciation Rights and Restricted Shares.

A summary of stock option and restricted stock transactions in the two years ended January 1, 2011 is as follows:

	Shares Available for Grant			Stock Options					Restricted Stock
				Number of Options Outstanding			Weighted Average Exercise Price		Number of Shares Outstanding			Weighted Average Grant-Date Fair Value
Balance at January 4, 2009		10,507,104			6,078,870		$	0.81		—		$	—
Granted		(11,363,249	)		11,363,249		$	0.08		—		$	—
Granted – restricted stock		(450,000	)		—		$	—		450,000		$	0.12
Vested – restricted stock		—			—		$	—		(450,000	)	$	0.12
Cancelled or expired		2,932,589			(2,932,589	)	$	0.41		—		$	—
Balance at January 2, 2010		1,626,444			14,509,530		$	0.29		—		$	—
Granted		(2,860,000	)		2,860,000		$	0.15		—		$	—
Granted – restricted stock		(650,000	)		—		$	—		650,000		$	0.17
Exercised		—			(551,738	)	$	0.07		—		$	—
Vested – restricted stock		—			—		$	—		(650,000	)	$	0.17
Cancelled or expired		4,047,541			(4,047,541	)	$	0.52		—		$	—
Balance at January 1, 2011		2,163,985			12,770,251		$	0.20		—		$	—

The Company has issued both options and restricted stock under the Plan. Restricted stock grants afford the recipient the opportunity to receive shares of common stock, subject to certain terms, whereas options give them the right to purchase common stock at a set price. The Company’s options generally have vesting restrictions that are eliminated over a four-year period, although vesting may be over a shorter period, or may occur on the grant date, depending on the terms of each individual award.

The Company received $39,579 for the 551,738 options exercised during the year ended January 1, 2011, which had an intrinsic value of $35,349. There were no options exercised during the year ended January 2, 2010.

The following table summarizes information concerning options outstanding and exercisable as of January 1, 2011, with the first line showing options that were in-the-money:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding as of January 1, 2011		Weighted Average Remaining Contractual Life (in Years)		Weighted Average Exercise Price		Number Exercisable as of January 1, 2011		Weighted Average Remaining Contractual Life (in Years)		Weighted Average Exercise Price
$0.050 - $0.109		4,398,896		7.65	$	0.06		2,500,457		7.24	$	0.06
$0.110 - $2.702		8,371,355		4.86	$	0.28		3,479,789		2.57	$	0.43
		12,770,251		5.82	$	0.20		5,980,246		4.52	$	0.27

The aggregate intrinsic value of options outstanding and exercisable at January 1, 2011 was $225,864 and $131,589, respectively. Aggregate intrinsic value is the total pretax amount (i.e., the difference between the Company’s stock price and the exercise price) that would have been received by the option holders had all their in-the-money options been exercised.

The fair value of stock options vested in the years ended January 1, 2011 and January 2, 2010 was $574,990 and $540,533, respectively. The weighted average grant date fair value of all options granted in the years ended

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January 1, 2011 and January 2, 2010 was $0.10 and $0.08, respectively, computed using the Black-Scholes pricing model and the following assumptions:

	2010	2009
Risk-free interest rate	1.15 – 2.60%	1.80 – 2.75%
Expected dividend yield	0%	0%
Expected term	5 years	5 years
Expected volatility	82%	118%

The amounts expensed for stock-based compensation related to options totaled $448,907 and $742,225 for the years ended January 1, 2011, and January 2, 2010, respectively. The amounts expensed for stock-based compensation related to restricted stock awards totaled $140,261 and $54,000 for the years ended January 1, 2011, and January 2, 2010, respectively. Of these, expenses of $112,000 and $54,000 for the years ended January 1, 2011, and January 2, 2010, respectively, relate to awards to independent directors of the Company (including two who were elected in the year ended January 1, 2011) in connection with their services as directors. These awards granted the directors a total of 650,000 and 450,000 shares of the Company’s common stock in 2010 and 2009, respectively (see Note 6). These shares are fully vested on the award date, but are restricted from transfer, except as permitted for estate planning purposes, until January 15 of the year following the award. The remaining expense of $28,261 in the year ended January 1, 2011 relates to awards totaling 2,500,000 unregistered shares to five officers of the Company on November 10, 2010, which will vest 25% after six months, then 12.5% at the end of each three month period, assuming continuous employment, so these shares will be fully vested after two years.

At January 1, 2011, the total stock-based compensation cost not yet recognized was $1,082,182. This cost is expected to be recognized over an estimated weighted average amortization period of 2.19 years. No amounts related to stock-based compensation costs have been capitalized. The tax benefit and the resulting effect on cash flows from operating and financing activities related to stock-based compensation costs were not recognized as the Company currently provides a full valuation allowance for all of its deferred taxes.

Common Stock Warrants

The Company has various warrants to purchase shares of its common stock outstanding, which were issued in conjunction with private placements, acquisitions and debt issuance, or in exchange for services received. All warrants contain standard anti-dilution clauses in the event of recapitalization, stock splits or combinations, merger or reorganization, dividends or distributions and similar equity adjustments, but none of the warrants presently outstanding contain anti-dilution provisions that would prevent them from being considered indexed to the Company’s own stock, so they are all accounted for within Stockholders’ Equity.

A summary of changes in the number of outstanding common stock warrants in the year ended January 1, 2011 is as follows:

Balance on January 2, 2010		During the Year Ended January 1, 2011							Balance on January 1, 2011		Exercise Price		Expiration Date
		Granted		Exercised		Forfeited
	—		3,750,000		—		—			3,750,000	$	0.15	November 2017
	316,425		—		—		(316,425	)		—	$	0.38	March to July 2010
	100,000		—		—		—			100,000	$	0.40	May 2013
	4,565,874		—		—		—			4,565,874	$	0.60	May 2013
	2,752,323		—		—		(2,752,323	)		—	$	0.90	September to October 2010
	19,695,433		—		—		(19,695,433	)		—	$	2.58	October 2010
	5,625,000		—		—		—			5,625,000	$	3.00	June 2011
	33,055,055		3,750,000		—		(22,764,181	)		14,040,874

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The 3,750,000 warrants with an exercise price of $0.15, expiring in November 2017, were issued in conjunction with obtaining a line of credit in 2010 (see Note 5).

8.    Related party and related party transactions

The Company had a convertible debt facility with Aequitas Commercial Finance LLC, an affiliate of Aequitas Management LLC which, with its associates, had beneficial ownership of more than 10% of the Company at January 1, 2011, following conversion of principal outstanding on the debt facility into 36,504,180 shares of our common stock. Aequitas has disclosed in its most recent 13D filing with the SEC that it has approximately a 30% ownership position. One of the Company’s directors (until his resignation, effective September 17, 2010), William McCormick, is also an advisor of Aequitas Management LLC. Interest paid to Aequitas totaled $941,840 and $452,816 for the years ended January 1, 2011 and January 2, 2010, respectively. Interest payments in the year ended January 1, 2011, include $150,000 in minimum interest charges of $50,000 per month for the remaining contract term of ninety days after the balance of principal was repaid, and $257,280 in accrued interest charges that were added to the principal balance of the note, and thus paid in common stock as part of the conversion on September 8, 2010. In addition, the Company paid Aequitas fees of $3,000 per month from March 2009 until August 2010. See also Notes 5 and 6 above.

9.    Business Concentrations

We record revenue and therefore accounts receivable through agreements with both building owners and the power grid operators. Under our agreements with facilities owners, we use electrical and energy related products that help energy consumers control energy use in their buildings. In conjunction with this agreement we are members of the power grid operators and have agreed to provide the grids with 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 grids for settlement and approval. While the power grids are our customers, they are primarily a conduit through which these electrical curtailment transactions are processed. The vast majority of our revenues each year are processed through PJM, which serves as the market for electrical transactions in a specific region in the United States. Transactions are initiated by building owners, who are our participants. These transactions form the basis for our revenue.

Financial transactions and instruments that potentially subject us to concentrations of credit risk consist primarily of revenue generating transactions and the resultant accounts receivable. We record no allowance for doubtful accounts, and the Company has never recorded a bad debt expense with respect to its present activities.

During the years ended January 1, 2011, and January 2, 2010, sales to one customer, PJM, accounted for $29,121,000, or 92.0% of revenue, and $17,552,000, or 88.1% of revenue, respectively. Our sales to PJM are made up of a number of transactions with participants. No single participant accounted for 10% or more of our revenue in either period. PJM accounted for 98.0% of accounts receivable at both January 1, 2011, and January 2, 2010.

10.    Income Taxes

Income tax expense consisted of $48,137 and $2,680 provision for various states for the years ended January 1, 2011, and January 2, 2010, respectively. We made no provision for federal income taxes due to our federal net operating loss carryforwards to offset both regular taxable income and alternative minimum taxable income and our utilization of deferred state tax benefits

The provision for income taxes for the years ended January 1, 2011, and January 2, 2010, differs from the amount which would be expected as a result of applying the statutory tax rates to the losses before income taxes due primarily to changes in the valuation allowance to fully reserve net deferred tax assets.

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As of January 1, 2011, and January 2, 2010, EnergyConnect had deferred tax assets primarily consisting of its net operating loss carryforwards. However, because of cumulative losses in several consecutive years, the Company has recorded a full valuation allowance such that its net deferred tax asset is zero.

Deferred tax assets are comprised of the following components:

	January 1, 2011			January 2, 2010
State Taxes	$	10,882		$	891
Accruals and Reserves		33,401			—
Stock-based Compensation		97,960			—
Net Operating Loss Carryforwards		9,315,383			11,393,048
Research and Development Credits		46,510			73,431
Total Deferred Tax Assets		9,504,136			11,467,370
Valuation Allowance		(9,032,291	)		(11,261,191	)
Total Deferred Tax Assets after Valuation Allowance		471,845			206,179
Fixed Assets and Intangibles		(471,845	)		(206,179	)
Total Deferred Tax Liabilities		(471,845	)		(206,179	)
Net Deferred Tax Asset	$	—		$	—

We must also make judgments whether the deferred tax assets will be recovered from future taxable income. To the extent that we believe that recovery is not likely, we must establish a valuation allowance. A valuation allowance has been established for deferred tax assets which we do not believe meet the “more likely than not” criteria. Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If our assumptions and consequently our estimates change in the future, the valuation allowances we have established may be increased or decreased, resulting in a respective increase or decrease in income tax expense.

In July 2006, the FASB issued authoritative guidance on accounting for uncertainty in income taxes, which requires that realization of an uncertain income tax position must be more likely than not (i.e. greater than 50% likelihood of receiving a benefit) before it can be recognized in the consolidated financial statements. The guidance further provides the benefit to be realized assuming a review by tax authorities having all relevant information and applying current conventions. The interpretation also clarifies the consolidated financial statements classification of tax related penalties and interest and set forth new disclosures regarding unrecognized tax benefits. The adoption of ASC 740-10 did not have a material impact on our financial position or results of operations. The Company has not provided any reserve as of January 1, 2011.

At January 1, 2011, the Company had available net operating loss carryforwards of approximately $25.4 million for federal income tax and $20.1 million for state (including $2.5 million for California, where the use of carryforwards has been suspended) purposes. Such carryforwards may be used to reduce consolidated taxable income, if any, in future years through their expiration in 2011 to 2029 subject to limitations of Section 382 of the Internal Revenue Code, as amended. Utilization of net operating loss carryforwards may be limited due to the ownership changes resulting from the Company’s initial public offering in 1995 and the Company’s acquisitions, stock issuances and debt conversion since then. In addition, the Company has research and development credits aggregating approximately $47,000 for income tax purposes at January 1, 2011. Such credits may be used to reduce taxes payable, if any, in future years through their expiration in 2011 and 2012.

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11.    Net Income (Loss) per Share

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

	Year ended January 1, 2011			Year ended January 2, 2010
Net loss	$	(308,108	)	$	(3,222,021	)
Basic and diluted loss per share	$	—		$	(0.03	)
Basic and diluted weighted average common shares outstanding		107,832,925			95,480,783

The following potential common shares arising from stock options, restricted stock, warrants and convertible debt were excluded from the computation of diluted net loss per share attributable to holders of common stock as they had anti-dilutive effects for the periods indicated:

	Year Ended
	January 1, 2011		January 2, 2010
Outstanding options		13,527,096		14,280,927
Unvested restricted stock		357,143		—
Outstanding warrants		28,351,363		33,055,055
Shares issuable upon conversion of convertible note		27,642,357		23,034,774
Total potential common shares excluded from denominator for diluted EPS computation		69,877,959		70,370,756

12.    Commitments and Contingencies

Operating lease commitments

We have three facility lease agreements. Aggregate future minimum obligations for leases in effect as of January 1, 2011, are as follows:

Year	Amount
2011	$	312,834
2012		123,508
2013 and beyond		—
Total	$	436,342

Rent expense charged to operations for the years ended January 1, 2011, and January 2, 2010, was approximately $471,000 and 365,000, respectively.

Employment Agreements

The Company appointed Kevin R. Evans President and Chief Executive effective January 5, 2009. Pursuant to the employment agreement, the Company agreed to pay Mr. Evans an annual base salary of $300,000. In February, 2009, Mr. Evans signed an amendment to his employment agreement lowering his salary to $225,000. In addition, and pursuant to a change of control agreement, the Company has agreed to pay Mr. Evans twelve months of severance pay upon a change of control of the Company or upon Mr. Evans termination without cause or his resignation for good reason – based on his original salary of $300,000. Following the announcement of the planned merger (see Note 15), Mr. Evans’ salary has reverted to the original annual base of $300,000.

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Legal Proceedings

From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. There were no ongoing legal proceedings during the year ended January 1, 2011. See Note 15 for legal proceedings that have subsequently arisen.

13.    Benefit Plan

The Company has a 401(k) plan (the “Plan”) that allows eligible employees to contribute part of their annual compensation to the Plan, subject to certain limitations. Each employee directs the investment of their contributions across a series of mutual funds, and their contributions vest immediately. The Company does not make any matching contributions, and the costs of administering the Plan are not material.

14.    Going Concern Matters

The accompanying audited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements during the years ended January 1, 2011 and January 2, 2010, the Company incurred net losses of $0.3 million and $3.2 million, respectively and generated negative cash flow from operations in the amount of $1.1 million and $1.3 million, respectively. These factors among others indicate that the Company may be unable to continue as a going concern for a reasonable period of time. While we believe the revolving line of credit with SVB (see Note 5), along with cash generated by operations, will be adequate for our working capital needs until at least September 30, 2011, we may need to renew the line of credit or obtain additional capital in order to sustain and expand operations thereafter.

15.    Subsequent Events

On March 2, 2011, we entered into an Agreement and Plan of Merger with Johnson Controls Holding Company, Inc., a Delaware corporation, (“JCI”), and Eureka, Inc., an Oregon corporation and wholly owned subsidiary of JCI (“Merger Sub”), pursuant to which Merger Sub will merge with and into us, with us being the surviving corporation and a wholly owned subsidiary of JCI (the “Merger”). We currently anticipate the Merger to close some time during the third quarter of 2011.

EnergyConnect, its board of directors, JCI Holding and Eureka, Inc., a wholly owned subsidiary of JCI Holding, are named as defendants in three putative class action lawsuits brought by alleged shareholders challenging EnergyConnect’s proposed merger with JCI Holding. The shareholder actions generally allege, among other things, that each member of the EnergyConnect board of directors breached their fiduciary duties to EnergyConnect shareholders by authorizing the sale of EnergyConnect to JCI Holding for consideration that does not maximize value to EnergyConnect shareholders. The complaints also allege that EnergyConnect, JCI Holding and Eureka, Inc. aided and abetted the breaches of fiduciary duty allegedly committed by the members of the EnergyConnect board of directors. The shareholder actions seek equitable relief, including enjoining the defendants from consummating the merger on the agreed-upon terms. On March 28, 2011, the court entered an order consolidating the three cases into one matter.

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16.    Selected Quarterly Data (UNAUDITED)

The following table sets forth selected unaudited quarterly information for the Company’s years ended January 1, 2011, and January 2, 2010:

	Year ended January 1, 2011
	First			Second			Third		Fourth
Revenue	$	7,023,833		$	6,442,099		$	17,408,942	$	769,481
Gross profit	$	4,569,242		$	1,744,249		$	5,308,161	$	547,122
Net income (loss)	$	2,081,826		$	(1,089,596	)	$	1,451,505	$	(2,751,843	)
Net income (loss) per share – basic and diluted	$	0.02		$	(0.01	)	$	0.01	$	(0.02	)
	Year ended January 2, 2010
	First			Second			Third		Fourth
Revenue	$	1,210,211		$	7,521,756		$	10,337,922	$	850,636
Gross profit	$	568,223		$	3,223,973		$	3,116,750	$	129,322
Net income (loss)	$	(2,081,574	)	$	601,050		$	528,411	$	(2,269,908	)
Net income (loss) per share – basic and diluted	$	(0.02	)	$	0.01		$	0.01	$	(0.02	)

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

None.

ITEM 9A(T). CONTROLS AND PROCEDURES

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

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation 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 a testing process with respect to our disclosure controls and procedures which includes the establishment of internal policies related to financial reporting.

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

55

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, 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 has not identified any material weaknesses as of January 1, 2011. In making this assessment, management used the criteria set forth in “Internal Control over Financial Reporting – Guidance for Smaller Public Companies” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Attestation Report of Registered Public Accounting Firm

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

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.

ITEM 9B. OTHER INFORMATION

None

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Information required by this item is incorporated by reference to the EnergyConnect Proxy Statement for the 2011 Annual Meeting of Shareholders.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference to the EnergyConnect Proxy Statement for the 2011 Annual Meeting of Shareholders.

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

Information required by this item is incorporated by reference to the EnergyConnect Proxy Statement for the 2011 Annual Meeting of Shareholders.

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

Information required by this item is incorporated by reference to the EnergyConnect Proxy Statement for the 2011 Annual Meeting of Shareholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this item is incorporated by reference to the EnergyConnect Proxy Statement for the 2011 Annual Meeting of Shareholders.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) We have filed the following documents as part of this Annual Report on Form 10-K:

1. Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firms	35
Financial Statements:
Consolidated Balance Sheets	37
Consolidated Statements of Operations	38
Consolidated Statements of Stockholders’ Equity	39
Consolidated Statements of Cash Flows	40
Notes to Consolidated Financial Statements	41

2. Exhibits

EXHIBIT INDEX

Exhibit No.	Description
2.1	Acquisition Agreement by and between Registrant and CEI Acquisition, LLC dated as of November 27, 2007 (Incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed December 3, 2007).
2.2	First Amendment to Acquisition Agreement by and between CEI Acquisition, LLC and Registrant dated January 30, 2008 (Incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed February 5, 2008).
2.3	Agreement and Plan of Merger, dated as of March 2, 2011, by and among EnergyConnect Group, Inc., Johnson Controls Holding Company, Inc., and Eureka, Inc. (Incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed March 7, 2011).
3.1	Fourth Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed December 23, 2010).
3.2	Eighth Restated Articles of Incorporation (Incorporated by reference to Exhibit 3(i) to Registrant’s Current Report on Form 8-K filed March 21, 2005).
4.1	Form of Warrant to purchase shares of common stock (Incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed May 13, 2008).
4.2	Form of Warrant to purchase shares of common stock dated as of November 5, 2010.
10.1†	Microfield Group, Inc. 2004 Stock Incentive Plan (Incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-KSB filed May 20, 2005).
10.2	Form of Securities Purchase Agreement dated May 7, 2008 by and among Microfield Group, Inc. and the purchasers set forth on the signature page thereto (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed May 13, 2008).
10.3	Form of Registration Rights Agreement dated May 7, 2008 by and among Microfield Group, Inc. and the purchasers signatory thereto (Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed May 13, 2008).

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Exhibit No.	Description
10.4	First Amendment dated December 23, 2009 to Loan Agreement dated February 26, 2009 by and among EnergyConnect Group, Inc. and Aequitas Commercial Finance, LLC, as amended December 23, 2009 (Incorporated by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K filed March 18, 2010).
10.5†	Employment Offer Letter to John Stremel (Chief Technology Officer), dated as of August 5, 2005 (Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K filed March 18, 2010).
10.6†	Employment Offer Letter to William Munger (VP of Human Resources and Chief of Staff), dated as of August 2, 2006 (Incorporated by reference to Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K filed March 18, 2010).
10.7†	Employment Offer Letter to Andrew Warner (formerly Chief Financial Officer), dated as of July 21, 2009 (Incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K filed March 18, 2010).
10.8†	Employment Agreement with Kevin Evans (Chief Executive Officer) dated as of January 5, 2009 (Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K filed March 18, 2010).
10.9†	Change of Control Agreement with Kevin Evans (Chief Executive Officer) dated as of January 5, 2009 (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K filed March 18, 2010).
10.10	Loan and Security Agreement dated as of November 5, 2010 (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed November 10, 2010).
10.11†	Incentive Plan effective as of January 20, 2011 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 27, 2011).
10.12	Consulting Agreement with Tatum dated December 2, 2010.
14	Code of Business Conduct and Ethics (Incorporated by reference to Exhibit 14 to the Registrant’s Amendment No. 1 to Form S-1 filed on May 2, 2006).
21.1	Subsidiaries of the Registrant.
23.1	Consent of SingerLewak LLP, Registered Independent Accountants.
23.2	Consent of RBSM LLP, Registered Independent Accountants.
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.

† Indicates a management contract or compensatory plan or arrangement.

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SIGNATURES

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

Dated: April 1, 2011

ENERGYCONNECT GROUP, INC.
By:	/s/ Kevin R. Evans
	Kevin R. Evans Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kevin R. Evans and Amir Ameri, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes may do or cause to be done by virtue hereof.

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

Signature	Title
/s/Kevin R. Evans	Chief Executive Officer and Director
Kevin R. Evans	Date: April 1, 2011
/s/Amir Ameri	Chief Financial Officer
Amir Ameri	Date: April 1, 2011
/s/ Gary D. Conley	Chairman of the Board and Director
Gary D. Conley	Date: April 1, 2011
/s/Rodney M. Boucher	Director
Rodney M. Boucher	Date: April 1, 2011
/s/ N. Beth Emery	Director
N. Beth Emery	Date: April 1, 2011
/s/ Andrew N. MacRitchie	Director
Andrew N. MacRitchie	Date: April 1, 2011
/s/ John P. Metcalf	Director
John P. Metcalf	Date: April 1, 2011
/s/ Thomas P. Reiter	Director
Thomas P. Reiter	Date: April 1, 2011
/s/ Kurt E. Yeager	Director
Kurt E. Yeager	Date: April 1, 2011

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EXHIBIT INDEX

Exhibit No.	Description
4.2	Form of Warrant to purchase shares of common stock dated as of November 5, 2010.
10.12	Consulting Agreement with Tatum dated December 2, 2010.
21.1	Subsidiaries of the Registrant.
23.1	Consent of SingerLewak LLP, Registered Independent Accountants.
23.2	Consent of RBSM LLP, Registered Independent Accountants.
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.

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EX-4.2

Exhibit 4.2

WARRANT

THIS WARRANT (“WARRANT”) WAS SOLD IN A PRIVATE TRANSACTION, WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR THE SECURITIES LAWS OF ANY STATE, AND MAY BE OFFERED OR SOLD ONLY IF REGISTERED UNDER THE SECURITIES ACT AND SUCH LAWS OR IF AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND SUCH LAWS IS AVAILABLE.

Company:	EnergyConnect Group, Inc. an Oregon corporation
Number of Shares:	[—], subject to adjustment
Class of Shares:	Common Stock, no par value per share (OTCBB: ECNG)
Exchange Price:	$0.15 per share, subject to adjustment
Issue Date:	November 5, 2010
Expiration Date:	November 5, 2017

The term “Holder” shall initially refer to [—], which is the initial holder of this Warrant and shall further refer to any subsequent permitted holder of this Warrant from time to time.

The Company does hereby certify and agree that, for the sum of $[—] paid to Holder on the date hereof, which the parties agree is fair consideration for this Warrant, Holder, or its permitted successors and assigns, hereby is entitled to exchange this Warrant in EnergyConnect Group, Inc. an Oregon corporation (the “Company”) for [—] ([—]) shares of Common Stock (as defined below), all upon the terms and subject to the provisions of this Warrant. The shares of Common Stock issuable upon exchange of this Warrant are referred to herein as the “Warrant Stock,” and the Warrant and the Warrant Stock is sometimes together referred to as the “Securities.”

Section 1 Term, Price and Exchange of Warrant.

1.1 Term of Warrant. This Warrant shall be exchangeable for a period of seven (7) years from the Issue Date (hereinafter referred to as the “Expiration Date”).

1.2 Exchange Price. The price per share at which the Warrant Stock is issuable upon exchange of this Warrant shall be Fifteen Cents ($0.15), subject to Section 1.3 (a) hereof and subject to adjustment from time to time as set forth herein (the “Exchange Price”).

1.3 Exercise of Warrant; Exchange of Warrant.

(a) This Warrant may be exercised, in whole or in part, upon surrender to the Company at its then principal offices in the United States of this Warrant to be exchanged, together with the form of election to exchange or exercise attached hereto as

Exhibit A duly completed and executed, and upon payment to the Company of the Exercise Price for the number of shares of Warrant Stock in respect of which this Warrant is then being exercised (an “Exercise”). In whole or in part in lieu of an Exercise, Holder may exchange this Warrant as set forth in the remainder of this Section 1.3 (an “Exchange”). Except in connection with an Acquisition (as set forth in Section 1.6), this Warrant may not be exchanged or exercised until the earlier of the date on which the Company’s audited financial statements have been released by the Company’s auditors or May 1, 2013.

(b) Upon an Exchange, the Holder shall receive Warrant Stock such that, without the payment of any funds, the Holder shall surrender this Warrant in exchange for the number of shares of Warrant Stock equal to “X” (as defined below), computed using the following formula:

X	=	Y * (A-B)
		A

Where

X	=	the number of shares of Warrant Stock to be issued to Holder
Y	=	the number of shares of Warrant Stock to be exchanged under this Warrant
A	=	the Fair Market Value of one share of Warrant Stock
B	=	the Exchange Price (as adjusted to the date of such calculations)
*	=	multiplied by

(c) For purposes of this Warrant, the “Fair Market Value” of one share of Warrant Stock shall be (i) if the Company’s common stock (the “Common Stock”) is or become listed on a national stock exchange or is quoted on the Nasdaq Global Select Market or Nasdaq Global Market, the highest closing sale price reported on such exchange or market during the trading day on which Holder delivers its Election of Exchange to the Company, or (ii) if the Common Stock is traded over-the-counter, the highest closing bid price reported for the Common Stock during the trading day on which Holder delivers its Election of Exchange to the Company. If the Common Stock is not traded as contemplated in clauses (i) or (ii), above, the Fair Market Value of a share of the Company’s Warrant Stock shall be the price per share which the Company could obtain from a willing buyer for Common Stock sold by the Company from its authorized but unissued shares, as the Board of Directors of the Company (“Board”) shall determine in its reasonable good faith judgment, but in no event less than the price at which qualified employee stock options issued at such time are exercisable. In the event that Holder elects to convert the Warrant Stock through Exchange in connection with a transaction in which the Warrant Stock is converted into or exchanged for another security, Holder may effect a Exchange directly into such other security.

2

(d) Upon surrender of this Warrant, and the duly completed and executed form of election to exchange or exercise, and payment of the Exchange Price or conversion of this Warrant through Exchange, the Company shall issue and deliver within 3 business days to the Holder or such other person as the Holder may designate in writing a certificate or certificates for the number of shares of Warrant Stock so purchased upon the Exchange or exercise of this Warrant. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such Warrant Stock as of the date of the surrender of this Warrant, and the duly completed and executed form of election to exchange or exercise, and payment of the Exchange Price or conversion of this Warrant through Exchange; provided, that if the date of surrender of this Warrant and payment of the Exchange Price is not a business day, the certificates for the Warrant Stock shall be deemed to have been issued as of the next business day (whether before or after the Expiration Date). If this Warrant is exchanged or exercised in part, a new warrant of the same tenor and for the number of shares of Warrant Stock not exchanged or exercised shall be executed by the Company.

1.4 Fractional Interests. The Company shall not be required to issue fractions of shares of Warrant Stock upon the exchange of this Warrant. If any fraction of a share of Common Stock would be issuable upon the exchange of this Warrant (or any portion thereof), the Company shall purchase such fraction for an amount in cash equal to the same fraction of the last reported sale price of the Common Stock on the NASDAQ Global Select Market or Nasdaq Global Market or any other national securities exchange or market on which the Common Stock is then listed or traded.

1.5 Automatic Conversion upon Expiration. In the event that, upon the Expiration Date, the Fair Market Value of one share of Common Stock (or other security issuable upon the exchange hereof) as determined in accordance with Section 1.3(c) is greater than the Exchange Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be converted pursuant to Section 1.3 as to all Warrant Stock (or such other securities) for which it shall not previously have been exchanged or converted, and the Company shall promptly deliver a certificate representing the Warrant Stock (or such other securities) issued upon such conversion to the Holder.

1.6 Treatment of Warrant Upon Acquisition of Company.

(a) “Acquisition”. For the purpose of this Warrant, “Acquisition” means any sale or other disposition of all or substantially all of the assets of the Company in whatever form, or any reorganization, consolidation, or merger of the Company (whether in a single transaction or multiple related transactions) where the holders of the Company’s voting securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction(s).

(b) Treatment of Warrant at Acquisition. Upon the closing of any Acquisition, the successor entity (if applicable in such Acquisition) shall, as condition to such Acquisition, either: (i) assume the obligations of this Warrant, and this Warrant shall

3

be exercisable for the same securities as would be payable for the Warrant Stock issuable upon exchange of the unexchanged portion of this Warrant as if such Warrant Stock were outstanding on the record date for the Acquisition (and the Warrant Price and/or number of shares of Warrant Stock shall be adjusted accordingly) or (ii) purchase this Warrant at its “Fair Value” (as such term is defined herein).

(c) Purchase at Fair Value.

For purposes of this Warrant, “Fair Value” shall mean that value determined by the parties using a Black-Scholes Option-Pricing Model (the “Black-Scholes Calculation”) with the following assumptions: (A) a risk-free interest rate equal to the risk-free interest rate at the time of the closing of the Acquisition (or as close thereto as practicable), (B) a contractual life of the Warrant equal to the remaining term of this Warrant as of the date of the Acquisition, (C) an annual dividend yield equal to dividends declared on the underlying Common Stock during the term of this Warrant (calculated on an annual basis), and (D) a volatility factor of the expected market price of the Company’s Warrant Stock comprised of: (1) if the Company is publicly traded on a national securities exchange or is quoted on the Nasdaq Global Select Market or Nasdaq Global Market, its volatility over the one year period prior to the Acquisition, (2) if the Company is a non-public company, the volatility, over the one year period prior to the Acquisition, of an average of publicly-traded companies in the same or similar industry to the Company with such companies having similar revenues. The purchase price determined in accordance with the above shall be paid upon the initial closing of the Acquisition and shall not be subject to any post-Acquisition closing contingencies or adjustments; provided, however, the parties may take such post-Acquisition closing contingencies or adjustments into account in determining the purchase price, and if the parties take any post-Acquisition closing contingencies or adjustments into account, then upon the partial or complete removal of those post-Acquisition closing contingencies or adjustments, a new Black-Scholes Calculation would be made using all of the same inputs except for the value of the Company’s Common Stock (as determined under subclause (D)), and the increased value of such shares of Common Stock (including, but not limited to any earn-out or escrowed consideration) would be paid in full to Holder immediately after those post-Acquisition closing contingencies or adjustments can be determined or achieved.

Section 2. Exchange and Transfer of Warrant.

(a) This Warrant may be transferred, in whole or in part, without restriction, subject to (i) Holder’s compliance with applicable securities laws, and (ii) the transferee holder of the new Warrant assuming in writing the obligations of the Holder set forth in this Warrant. A transfer may be registered with the Company by submission to it of this Warrant, together with the annexed Assignment Form attached hereto as Exhibit B duly completed and executed. After the Company’s receipt of this Warrant and the Assignment Form so completed and executed, the Company will issue and deliver to the transferee a new warrant (representing the portion of this Warrant so transferred) at the same Exchange Price per share and otherwise having the same terms and provisions as this Warrant, which the Company will register in the new holder’s name. In the event

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of a partial transfer of this Warrant, the Company shall concurrently issue and deliver to the transferring holder a new warrant that entitles the transferring holder to purchase the balance of this Warrant not so transferred and that otherwise is upon the same terms and conditions as this Warrant. Upon the due delivery of this Warrant for transfer, the transferee holder shall be deemed for all purposes to have become the holder of the new warrant issued for the portion of this Warrant so transferred, effective immediately prior to the close of business on the date of such delivery, irrespective of the date of actual delivery of the new warrant representing the portion of this Warrant so transferred.

(b) In the event of the loss, theft or destruction of this Warrant, the Company shall execute and deliver an identical new warrant to the Holder in substitution therefor upon the Company’s receipt of (i) evidence reasonably satisfactory to the Company of such event and (ii) if requested by the Company, an indemnity agreement reasonably satisfactory in form and substance to the Company. In the event of the mutilation of or other damage to the Warrant, the Company shall execute and deliver an identical new warrant to the Holder in substitution therefor upon the Company’s receipt of the mutilated or damaged warrant.

(c) The Company shall pay all reasonable costs and expenses incurred by Holder and any subsequent holder in connection with the exchange, exercise, transfer or replacement of this Warrant, including, without limitation, the costs of preparation, execution and delivery of a new warrant and of share certificates representing all Warrant Stock.

Section 3. Certain Covenants.

(a) The Company shall at all times reserve for issuance and keep available out of its authorized and unissued Common Stock, solely for the purpose of providing for the exchange of this Warrant, such number of shares of Warrant Stock as shall from time to time be sufficient therefor.

(b) The Company will not, by amendment or restatement of its Certificate of Incorporation or Bylaws or through reorganization, consolidation, merger, amalgamation, sale of assets or otherwise, avoid or seek to avoid the observance or performance of any of the terms of this Warrant. Without limiting the foregoing, the Company (i) will not increase the par value of any Warrant Stock receivable upon the exchange of this Warrant above the amount payable therefor upon such exchange and (ii) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares upon the exchange or exercise of this Warrant.

(c) So long as Holder holds this Warrant, the Company shall deliver to Holder such reports as it provides to its stockholders generally, as and when delivered to such stockholders. The parties shall not treat the Warrant or the Warrant Stock as being granted or issued as property transferred in connection with the performance of services or otherwise as compensation for services rendered.

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Section 4. Adjustments to Exchange Price and Number of shares of Warrant Stock.

4.1 Adjustments. The Exchange Price shall be subject to adjustment from time to time in accordance with this Section 4. Upon each adjustment of the Exchange Price pursuant to this Section 4, the Holder shall thereafter be entitled to acquire upon exchange, at the Exchange Price resulting from such adjustment, the number of shares of Warrant Stock of the Company obtainable by multiplying the Exchange Price in effect immediately prior to such adjustment by the number of shares of Common Stock acquirable immediately prior to such adjustment and dividing the product thereof by the new Exchange Price resulting from such adjustment.

4.2 Subdivisions, Combinations and Stock Dividends. If the Company shall at any time subdivide by split-up or otherwise, its outstanding Common Stock into a greater number of shares, or issue additional Common Stock as a dividend, bonus issue or otherwise with respect to any Common Stock, the Exchange Price in effect immediately prior to such subdivision or share dividend or bonus issue shall be proportionately reduced and the number of shares acquirable upon exchange hereunder shall be proportionately increased. Conversely, in case the outstanding Common Stock of the Company shall be combined into a smaller number of shares, the Exchange Price in effect immediately prior to such combination shall be proportionately increased.

4.3 Reclassification, Exchange, Substitutions, Etc. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exchange or exercise of this Warrant, Holder shall be entitled to receive an amended warrant for the number and kind of securities and property that Holder would have received for the Warrant Stock if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. The Company or its successor shall promptly issue to Holder an amendment to this Warrant setting forth the number and kind of such new securities or other property issuable upon exchange or exercise of this Warrant as a result of such reclassification, exchange, substitution or other event that results in a change of the number and/or class of securities issuable upon exchange or exercise of this Warrant. The amendment to this Warrant shall provide for adjustments (as determined in good faith by the Company’s Board of Directors) which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 4 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exchange of the new Warrant. The provisions of this Section 4.3 shall similarly apply to successive reclassifications, exchanges, substitutions, or other similar events.

4.4. Notices of Record Date, Etc. In the event that the Company shall:

(1) declare or propose to declare any dividend upon its Common Stock, whether payable in cash, property, stock or other securities and whether or not a regular cash dividend, or

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(2) offer for sale any additional shares of any class or series of the Company’s stock or securities exchangeable for or convertible into such stock in any transaction that would give rise (regardless of waivers thereof) to pre-emptive rights of any class or series of stockholders, or

(3) effect or approve any reclassification, exchange, substitution or recapitalization of the capital stock of the Company, including any subdivision or combination of its outstanding capital stock, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation, or to liquidate, dissolve or wind up (including an assignment for the benefit of creditors), or

(4) offer holders of registration rights the opportunity to participate in any public offering of the Company’s securities,

then, in connection with such event, the Company shall give to Holder:

(i) at least ten (10) days prior written notice of the date on which the books of the Company shall close or a record shall be taken for such a dividend or offer in respect of the matters referred to in (1) or (2) above, or for determining rights to vote in respect of the matters referred to in (3) above; and

(ii) in the case of the matters referred to in (3) above, at least ten (10) days prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (1) shall also specify, in the case of any such dividend, the date on which the holders of capital stock shall be entitled thereto and the terms of such dividend, and such notice in accordance with clause (2) shall also specify the date on which the holders of capital stock shall be entitled to exchange their capital stock for securities or other property deliverable upon such reorganization, reclassification, exchange, substitution, consolidation, merger or sale, as the case may be, and the terms of such exchange. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holder of this Warrant at the address of Holder; and

(iii) in the case of the matter referred to in (4) above, the same notice as is given or required to be given to the holders of such registration rights.

4.5 Adjustment by Board of Directors. If any event occurs as to which, in the opinion of the Board of Directors of the Company, the provisions of this Section 4 are not strictly applicable or if strictly applicable would not fairly protect the rights of the Holder in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights, but in no event shall any adjustment have the effect of increasing the Exchange Price as otherwise determined pursuant to any of the provisions of this Section 4, except in the case of a combination of shares of a type contemplated in Section 4.2 and then in no event to an amount larger than the Exchange Price as adjusted pursuant to Section 4.2.

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4.6 Officers’ Statement as to Adjustments. Whenever the Exchange Price and/or number of shares of Warrant Stock subject to the Warrant is required to be adjusted as provided in Section 4, the Company shall forthwith file at its principal office with a copy to the Holder notice parties set forth in Section 7 hereof a statement, signed by the Chief Executive Officer or Chief Financial Officer of the Company, showing in reasonable detail the facts requiring such adjustment, the Exchange Price and number of issuable shares that will be effective after such adjustment; provided, however, such statement shall not be required to the extent the information requested in this Section 4.6 is available through the Company’s current reports filed with the Securities and Exchange Commission. If at any time the information described in this Section 4.6 is readily available through the Company’s reports filed with the Securities and Exchange Commission, the Company shall not be required to provide a separate notice of adjustment to the Holder; provided, however, if such information is not readily available through the Company’s current reports filed with the Securities Exchange Commission and made public, the Company shall cause a notice setting forth any such adjustments to be sent by mail, first class, postage prepaid, to the record Holder of this Warrant at its notice address(es) appearing in Section 7.

4.7 Issue of Securities other than Common Stock. In the event that at any time, as a result of any adjustment made pursuant to Section 4, the Holder thereafter shall become entitled to receive any securities of the Company, other than Common Stock, thereafter the number of such other shares so receivable upon exchange of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Section 4.

Section 5. Rights and Obligations of the Warrant Holder.

Except as otherwise specified in this Warrant, this Warrant shall not entitle the Holder to any rights of a holder of Warrant Stock in the Company until such time as this Warrant is exchanged or exercised. The Company hereby grants the following registration rights to Holder. If during the term of this Warrant the Company proposes to file a registration statement under the Securities Act with respect to an offering for its own account of any class of its equity securities (other than a registration statement on Form S-8 (or any successor form) or any other registration statement relating solely to employee benefit plans or filed in connection with an exchange offer, a transaction to which Rule 145 (or any successor provision) under the Securities Act applies or an offering of securities solely to the Company’s existing shareholders), then the Company shall in each case give written notice of such proposed filing to Holder as soon as practicable (but no later than 20 business days) before the anticipated filing date, and such notice shall offer Holder the opportunity to register such number of shares of Warrant Stock as Holder may request. Holder shall advise the Company in writing within 10 business days after the date on which the Company’s notice is so given, setting forth the number of shares of Warrant Stock for which registration is requested. If the Company’s offering is to be an underwritten offering, the Company shall, subject to the further provisions of this Warrant, use its reasonable best efforts to cause the managing

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underwriter or underwriters to permit the Holders of the Warrant Stock requested to be included in the registration for such offering to include such Warrant Stock in such offering on the same terms and conditions as any similar securities of the Company included therein, subject to Holder’s execution of an underwriting agreement with the managing underwriter or underwriters selected by the Company in the same manner as other holders participating in the registration. In connection with any such offering, the Company will (i) include only such information relating to the Holder and the sale of Holder’s securities as Holder shall specifically permit and (ii) indemnify the Holder against liabilities, losses and damages that Holder may incur in connection with the offering, including those relating to the applicable securities laws, and any breach by the Company of this Warrant.

Section 6. Representations, Warranties and Covenants of the Company. The Company represents and warrants to, and covenants with, Holder that:

6.1 Corporate Power; Authorization. The Company has all requisite corporate power and has taken all requisite corporate action to execute and deliver this Warrant, to sell and issue the Warrant and Warrant Stock and to carry out and perform all of its obligations hereunder. This Warrant has been duly authorized, executed and delivered on behalf of the Company and constitutes the valid and binding agreement of the Company, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors’ rights generally and (ii) as limited by equitable principles generally. The person executing this Warrant is a duly authorized officer of the Company with all necessary legal authority to bind the Company generally and with the specific legal authority to cause the Company to execute and deliver this Warrant.

6.2 Validity of Securities. This Warrant, when sold against the consideration therefor as provided therein, will be validly authorized, issued and fully paid. The issuance and delivery of the Warrant is not subject to consent, approval, preemptive or any similar rights of the stockholders of the Company (which have not been duly waived) or any liens or encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws; and when the Warrant Stock is issued upon exercise and in accordance with the terms hereof, and this Warrant is converted into Warrant Stock, such securities will be, at each such issuance, validly issued and outstanding, fully paid and nonassessable, in compliance with all applicable securities laws and free of any liens or encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws.

6.3 Capitalization. The authorized capital of the Company consists of 225,000,000 shares of Common Stock, of which 133,102,130 were issued and outstanding on November 5, 2010, 10,000,000 Preferred Shares, no par value per share, of which 0 are issued and outstanding. As of the date hereof, the Company has reserved a total of 20,000,000 shares of its Common Stock for issuance under its 2004 Stock Option Plan, of which 2,649,978 shares are available for issuance upon exercise of outstanding options. A true, correct and current copy of the Company’s Articles of Incorporation as amended to date is appended as Exhibit C hereto. Except as specified in this Warrant,

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there are no other options, warrants, conversion privileges or other contractual rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company’s capital stock or other securities.

6.4 No Conflict. The execution and delivery of this Warrant do not, and the consummation of the transactions contemplated hereby and thereby will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit, under, any provision of the Articles of Incorporation of the Company, as amended, or any mortgage, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, the effect of which would have a material adverse effect on the Company or materially impair or restrict its power to perform its obligations as contemplated hereby.

6.5 Governmental and other Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental authority or other person or entity is required on the part of the Company in connection with the issuance, sale and delivery of the Warrant and the Warrant Stock, except such filings as shall have been made prior to and shall be effective on and as of the date hereof. All shareholder consents required in connection with issuance of the Warrant and Warrant Stock have either been obtained by Borrower or no such consents are required.

6.6 Authorized and Unissued Warrant Stock. During the period within which this Warrant may be exercised, the Company will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of this Warrant, a sufficient number of authorized but unissued Warrant Stock when and as required to provide for the exercise of the rights represented hereby.

6.7 Exempt from Registration. Assuming the accuracy of the representations and warranties of Holder in Section 7 hereof, the offer, sale and issuance of the Warrant and the Warrant Stock will be exempt from any registration requirements of the Securities Act pursuant to 506 of Regulation D under the Securities Act, the registration and qualification requirements of applicable state securities laws and any registration or similar requirements of the laws of the State of Oregon. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of Securities to any person or persons so as to bring the sale of such Shares by the Company within the registration provisions of the Securities Act.

6.8 Delivery of Information; Accuracy. The Company acknowledges its delivery of certain Representations and Warranties dated September 22, 2010 (the “Representation Letter”), to Silicon Valley Bank, which Representations and Warranties form the basis for Holder purchasing this Warrant. The information contained in Part B of the Representation Letter and all documents, instruments and other information

10

delivered to Holder in connection therewith are true, correct, accurate and complete in all material respects.

6.9 Legends. The Company shall remove any restrictive securities legends on Warrant Stock resulting from exchange of the Warrant six (6) months following the issuance of the Warrant.

Section 7. Representations and Warranties of Holder. Holder hereby represents and warrants to the Company as of the Closing Date as follows:

7.1 Investment Experience. Holder is an “accredited investor” within the meaning of Rule 501 under the Securities Act, and was not organized for the specific purpose of acquiring the Securities. Holder is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Holder has such business and financial experience as is required to give it the capacity to protect its own interests in connection with the purchase of the Securities.

7.2 Investment Intent. Holder is purchasing the Warrant for investment for its own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act. Holder understands that the Warrant has not been registered under the Securities Act or registered or qualified under any state securities law in reliance on specific exemptions therefrom, which exemptions may depend upon, among other things, the bona fide nature of Holder’s investment intent as expressed herein.

7.3 Authorization. Holder has all requisite power and has taken all requisite action required of it to carry out and perform all of its obligations hereunder. The execution and delivery of this Warrant has been duly authorized, executed and delivered on behalf of Holder and constitutes the valid and binding agreement of Holder, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors’ rights generally and (ii) as limited by equitable principles generally. The consummation of the transactions contemplated herein and the fulfillment of the terms herein will not result in a breach of any of the terms or provisions of Holder’s constitutional documents or instruments.

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Section 8. Restrictive Stock Legend.

This Warrant and the Warrant Stock have not been registered under any securities laws. Accordingly, any share certificates issued pursuant to the exchange of this Warrant shall (until receipt of an opinion of counsel in customary form that such legend is no longer necessary) bear the following legend:

THIS WARRANT AND THE WARRANT STOCK ISSUABLE UPON EXCHANGE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”), AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OF DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN CUSTOMARY FORM THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT.

Section 9. Notices.

Any notice or other communication required or permitted to be given here shall be in writing and shall be effective (a) upon hand delivery or delivery by e-mail or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received) or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received), or (b) on the third business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communication shall be:

if to Holder, at

[—]

with a copy (not constituting notice) to

[—]

or

if to the Company, at

Andrew Warner, CFO

EnergyConnect

901 Campisi Way, Suite 260

Campbell, CA 95008

Andrew Warner, CFO

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Fax: (866) 858-0478

Email: awarner@energyconnectinc.com

with a copy (not constituting notice) to:

Orrick, Herrington & Sutcliffe, LLP

1000 Marsh Road

Menlo Park, California 94025

Attn: Peter Cohn, Esq.

Fax: (650) 614-7401

Email: pcohn@orrick.com

Each party hereto may from time to time change its address for notices under this Section 7 by giving at least 10 calendar days’ notice of such changes address to the other party hereto.

Section 10. Amendments and Waivers.

This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant may only be amended by an instrument in writing signed by both parties.

Section 11. Applicable Law; Severability.

This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of Oregon. If any one or more of the provisions contained in this Warrant, or any application of any provision thereof, shall be invalid, illegal, or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and all other applications of any provision thereof shall not in any way be affected or impaired thereby.

Section 12. Construction; Certain Definitions

Any rule of construction to the effect that an agreement is to be construed against the party initially drafting such agreement is expressly waived and disclaimed by the parties hereto. The term “Affiliate” means, with respect to any Person, any Person that controls, is controlled by or is under common control with such Person. A Person shall be presumed to have control when it possesses the power, directly or indirectly, to direct, or cause the direction of, the management or policies of another Person, whether through ownership of voting securities, by contract, or otherwise. The term “Person” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity of any kind. “$” means United States dollars.

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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed on the day and year first above written.

COMPANY:	ACKNOWLEDGED AND AGREED:
ENERGYCONNECT GROUP, INC.	HOLDER:
By:	By:
Name:	Name:
Title:	Title:

Warrant Signature Page

Exhibit A

To:

ELECTION TO EXCHANGE OR EXERCISE

1. The undersigned hereby exercises its right to exchange its Warrant for                      fully paid, validly issued and nonassessable shares covered by the attached Warrant in accordance with the terms thereof.

1. The undersigned hereby elects to exercise the attached Warrant for fully paid, validly issued and nonassessable Shares by payment of $         as specified in the attached Warrant. This right is exercised with respect to          of shares.

[Strike the paragraph above that does not apply.]

The undersigned requests that certificates for such shares be issued in the name of, and delivered to:

2. By its execution below and for the benefit of the Company, the undersigned hereby restates each of the representations and warranties in Section 7 of the Warrant as of the date hereof.

Date:	[Holder]
	By
		Name:
		Title:

Exhibit B

ASSIGNMENT FORM

To:

The undersigned hereby assigns and transfers this Warrant to

(Insert assignee’s social security or tax identification number)

(Print or type assignee’s name, address and postal code)

and irrevocably appoints                                                                                        to transfer this Warrant on the books of the Company.

Date:	[—]
	By
	Name:

Exhibit C

Articles of Incorporation

EX-10.12

Exhibit 10.12

Schedule to Interim Services Agreement

This Schedule is entered into in connection with that certain Interim Services Agreement, dated December 2, 2010 (the “Agreement”), by and between Tatum, a division of SFN Professional Services LLC (“Tatum,” “we,” “us” or “our”) and EnergyConnect, Inc. (“Company,” “you” or “your”) and will be governed by the terms and conditions of the Agreement.

Tatum Resource Name: Amir Ameri

Position: Interim CFO

Company Supervisor: CEO

Start Date: December 3, 2010

Replacement: If you are dissatisfied with the Services provided by the Tatum Resource, we will immediately remove the Tatum Resource and endeavor to furnish a replacement as soon as reasonably practical. We do not guarantee that we will be able to find a suitable replacement. If you notify us of your dissatisfaction with the Services provided by the Tatum Resource prior to the conclusion of the Tatum Resource’s third day of work, we will not charge you for the first 16 hours worked by the Tatum Resource.

Minimum Term: Inapplicable

Termination: Either party may terminate this Schedule at any time for any reason upon notice to the other party; provided, however, the parties will endeavor to provide as much notice as possible prior to termination (preferably two business weeks).

Fees: You will pay to Tatum a fee of $2060 a day for the Tatum Resource.

Billings: Tatum will bill for Services weekly in arrears.

In the event of a conflict between the terms and conditions of this Schedule and the Agreement, the terms and conditions of the Agreement will control.

Tatum, a division of SFN Professional Services LLC		EnergyConnect, Inc.
By:	/s/ Reed Kingston	By:	/s/ Kevin R. Evans
Name:	Reed Kingston	Name:	Kevin R. Evans
Title:	Managing Partner	Title:	CEO
Date:	12/2/10	Date:	12/3/10

Interim Services Agreement

December 2, 2010

Mr. Kevin Evans

Chief Executive Officer

EnergyConnect, Inc.

901 Campisi Way, Suite 260

Campbell, CA 95008

Dear Kevin:

Tatum, a division of SFN Professional Services LLC (“Tatum,” “we,” “us” or “our”) is pleased that EnergyConnect, Inc. (“Company,” “you” or “your”) has selected us to provide you with outsourced interim services. The services (the “Services”) and fees will be more particularly described on the Schedule attached hereto and will be provided by the individual resource (the ‘Tatum Resource”) identified on such Schedule. Schedules for additional Tatum Resources may be added from time to time upon the mutual written agreement of the parties. In addition, upon the request of the Company and the execution of an additional Schedule to this agreement, Tatum will provide search Services to the Company, all as more particularly described on such Schedule.

Engagement. The Tatum Resource will be one of Tatum’s professionals, and we will be solely responsible for determining the conditions, terms and payment of compensation and benefits for the Tatum Resource. You will be solely responsible for providing the Tatum Resource day-to-day guidance, supervision, direction, assistance and other information necessary for the successful and timely completion of the Services. Tatum will have no oversight, control, or authority over the Tatum Resource with respect to the Services. The Company acknowledges that it is solely responsible for the sufficiency of the Services for its purposes. The Company will designate a management-level individual to be responsible for overseeing the Services, and the Tatum Resource will report directly to such individual with respect to the provision of the Services. Unless the Tatum Resource is acting as an executive officer of the Company and is authorized by the Company to make such decision, the Company will not permit or require the Tatum Resource to be the ultimate decision making authority for any material decision relating to your business, including, without limitation, any proposed merger, acquisition, recapitalization, financial strategy or restructuring.

Fees and Expenses. You will pay us the fees set forth on the applicable Schedule. In addition, you will reimburse Tatum directly for all travel and out-of-pocket expenses incurred in connection with this agreement (including any Schedules).

Payment Terms. Payments to Tatum should be made within 10 days of receipt of invoice by electronic transfer in accordance with the instructions set forth below or such alternative instructions as provided by us from time to time. Any amounts not paid when due may be subject to a periodic service charge equal to the lesser of 1.5% per month and the maximum amount allowed under applicable law, until such amounts are paid in full, including assessed service charges. In lieu of terminating this agreement, we may suspend the provision of any Services if amounts owed are not paid in accordance with the terms of this agreement.

Bank Name and Address: Bank of America, 1950 N Stemmons Freeway, Suite 5010, Dallas, TX 75207

Beneficiary: Tatum

Beneficiary Account Number: 3751 80 4507

ABA Transit/Routing Number: 111000012

Please reference Company name in the body of the payment.

Effective Date and Termination. This agreement will be effective as of the earlier of (i) the date Tatum begins providing Services to the Company, and (ii) the date of the last signature to this agreement as indicated on the signature page. In the event that a party commits a breach of this agreement (including any Schedule) and fails to cure the same within 10 days following delivery by the non-breaching party of written notice specifying the nature of the breach, the non-breaching party may terminate this agreement or the applicable Schedule effective upon written notice of such termination. The termination rights set forth in this Section are in addition to and not in lieu of the termination rights set forth in each of the Schedules.

Hiring the Tatum Resource Outside of a Tatum Agreement. If, at any time during the time frame in which a Tatum Resource is providing Services to the Company and for a period of 12-months thereafter, other than in connection with this agreement or another Tatum agreement, the Company or any of its subsidiaries or affiliates employs such Tatum Resource, or engages such Tatum Resource as an independent contractor, the Company will pay Tatum a placement fee in an amount equal to 35% of the Annualized Compensation (as defined below). “Annualized Compensation” is defined as salary that may be earned by the Tatum Resource during the first 12 months of service with the Company (or its subsidiary or affiliate) regardless of when or if such compensation is actually paid. The placement fee shall be due upon the commencement of the Tatum Resource’s employment or engagement with the Company (or its subsidiary or affiliate).

Warranties and Disclaimers. We disclaim all representations and warranties, whether express, implied or statutory, including, but not limited to any warranties of quality, performance, merchantability, or fitness of use or purpose. Without limiting the foregoing, we make no representation or warranty with respect to the Tatum Resource or the Services provided hereunder, and we will not be responsible for any action taken by you in following or declining to follow any of the Tatum Resource’s advice or recommendations. The Services provided by Tatum and the Tatum Resource hereunder are for the sole benefit of the Company and not any unnamed third parties. The Services will not constitute an audit, review, opinion, or compilation, or any other type of financial statement reporting or attestation engagement that is subject to the rules of the AICPA or other similar state or national professional bodies or laws and will not result in an opinion or any form of assurance on internal controls.

Limitation of Liability; Indemnity.

(a) Tatum’s liability in any and all categories and for any and all causes arising under this agreement, whether based in contract, tort, negligence, strict liability or otherwise, will, in the aggregate, not exceed the actual fees paid by you to us over the previous two months’ of the agreement with respect to the Tatum Resource from whom the liability arises. In no event will we be liable for incidental, consequential, punitive, indirect or special damages, including, without limitation, interruption or loss of business, profit or goodwill. As a condition for recovery of any liability, you must assert any claim against us within three months after discovery or 60 days after the termination or expiration of the applicable Schedule under which the liability arises, whichever is earlier.

(b) You agree to indemnify us and the Tatum Resource to the full extent permitted by law for any losses, costs, damages, and expenses (including reasonable attorneys’ fees), as they are incurred, in connection with any cause of action, suit, or other proceeding arising in connection with the Tatum Resource’s services to you.

Insurance. If the Tatum Resource is serving as an officer or executive of the Company, the Company will maintain directors and officers insurance covering the Tatum Resource in an amount reasonably acceptable to the Tatum at no additional cost to Tatum or the Tatum Resource, and the Company will

maintain such insurance at all times while this agreement remains in effect. The Company’s directors and officers insurance must be primary and non-contributory. Upon the execution of this agreement and at any other time requested by Tatum, the Company will provide Tatum a certificate of insurance evidencing that the Company is in compliance with the requirements of this Section with a note in the Description of Operations section of the certificate indicating that the coverage is extended to the Tatum Resource.

Governing Law, Arbitration and Witness Fees.

(a) This agreement will be governed by and construed in accordance with the laws of the State of California, without regard to conflicts of laws provisions.

(b) If the parties are unable to resolve any dispute arising out of or in connection with this agreement, the parties agree and stipulate that any such disputes will be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (“AAA”). The arbitration will be conducted in an office of the AAA by a single arbitrator selected by the parties according to the rules of the AAA, and the decision of the arbitrator will be final and binding on both parties. In the event that the parties fail to agree on the selection of the arbitrator within 30 days after either party’s request for arbitration under this Section, the arbitrator will be chosen by the AAA. The arbitrator may in his or her discretion order documentary discovery but will not allow depositions without a showing of compelling need. The arbitrator will render his or her decision within 90 days after the call for arbitration. Judgment on the award of the arbitrator may be entered in and enforced by any court of competent jurisdiction. The arbitrator will have no authority to award damages in excess or in contravention of this agreement and may not amend or disregard any provision of this agreement, including this section. Notwithstanding the foregoing, either party may seek appropriate injunctive relief from any court of competent jurisdiction, and Tatum may pursue payment of any unpaid amounts due under this agreement through any court of competent jurisdiction.

(c) In the event any professional of Tatum (including, without limitation, any Tatum Resource) is requested or authorized by you or is required by government regulation, subpoena, or other legal process to produce documents or appear as witnesses in connection with any action, suit or other proceeding initiated by a third party against you or by you against a third party, you will, so long as Tatum is not a party to the proceeding in which the information is sought, reimburse Tatum for its professional’s time (based on customary rates) and expenses, as well as the fees and expenses of its counsel, incurred in responding to such requests. This provision is in addition to and not in lieu of any indemnification obligations the Company may have under this agreement.

Miscellaneous.

(a) This agreement together with all Schedules constitutes the entire agreement between the parties with regard to the subject matter hereof and supersedes any and all agreements, whether oral or written, between the parties with respect to its subject matter. No amendment or modification to this agreement will be valid unless in writing and signed by both parties.

(b) If any portion of this agreement is found to be invalid or unenforceable, such provision will be deemed severable from the remainder of this agreement and will not cause the invalidity or unenforceability of the remainder of this agreement, except to the extent that the severed provision deprives either party of a substantial portion of its bargain.

(c) Neither party will be deemed to have waived any rights or remedies accruing under this agreement unless such waiver is in writing and signed by the party electing to waive the right or remedy. The waiver by any party of a breach or violation of any provision of this agreement will not operate or be construed as a waiver of any subsequent breach of such provision or any other provision of this agreement.

(d) Neither party will be liable for any delay or failure to perform under this agreement (other than with respect to payment obligations) to the extent such delay or failure is a result of an act of God, war, earthquake, civil disobedience, court order, labor dispute, or other cause beyond such party’s reasonable control.

(e) You may not assign your rights or obligations under this agreement without the express written consent of Tatum. Nothing in this agreement will confer any rights upon any person or entity other than the parties hereto and their respective successors and permitted assigns and the Tatum Resources.

(f) The expiration or termination of this agreement or any Schedule will not destroy or diminish the binding force and effect of any of the provisions of this agreement or any Schedule that expressly, or by reasonable implication, come into or continue in effect on or after such expiration or termination, including, without limitation, provisions relating to payment of fees and expenses (including witness fees and expenses and liquidated damage fees), governing law, arbitration, limitation of liability and indemnity.

(g) You agree to reimburse Tatum for all costs and expenses (including, without limitation, reasonable attorneys’ fees, court costs and arbitration fees) incurred by Tatum in enforcing collection of any monies due under this agreement.

(h) You agree to allow us to use the Company’s logo and name on Tatum’s website and other marketing materials for the sole purpose of identifying the Company as a client of Tatum. Tatum will not use the Company’s logo or name in any press release or general circulation advertisement without the Company’s prior written consent.

(i) The parties acknowledge and agree that this agreement does not pertain to any other divisions, affiliates, and/or subsidiaries of SFN Group, Inc. unless otherwise specified herein.

We appreciate the opportunity to serve you and believe this agreement accurately reflects our mutual understanding of the terms upon which the Services will be provided. We would be pleased to discuss this agreement with you at your convenience. If the foregoing is in accordance with your understanding, please sign a copy of this agreement and return it to my attention.

Sincerely,

Tatum, a division of SFN Professional Services LLC

/s/ Reed Kingston

Reed Kingston

Managing Partner – Northern California

Accepted and agreed:
EnergyConnect, Inc.
By:	/s/ Kevin R. Evans
Name:	Kevin R. Evans
Title:	CEO
Date:	12/3/10

EX-21.1

Exhibit 21.1

Subsidiaries of the Registrant

EnergyConnect, Inc.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement (Nos. 333-139671 and 333-165475) on Form S-8 of EnergyConnect Group, Inc. and subsidiary (collectively, the “Company”) of our report dated April 1, 2011, relating to our audit of the consolidated financial statements, which includes an emphasis paragraph relating to an uncertainty as to the Company’s ability to continue as a going concern, which appears in this Annual Report on Form 10-K of the Company for the year ended January 1, 2011.

/s/ SingerLewak LLP

San Jose, CA

April 1, 2011

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-139671 and 333-165475 on Form S-8 of our report dated March 18, 2010, relating to the financial statements and financial statements schedules of EnergyConnect Group, Inc., which include an explanatory paragraph relating to substantial doubt about the Company’s ability to continue as a going concern, appearing in this Annual Report on Form 10-K of EnergyConnect Group, Inc. for the year ended January 1, 2011.

/s/ RBSM LLP

New York, New York

April 1, 2011

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Kevin Evans, certify that:

1. I have reviewed this annual report on Form 10-K of EnergyConnect Group, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 1, 2011

/s/ Kevin R. Evans

Kevin R. Evans

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Amir Ameri, certify that:

1. I have reviewed this annual report on Form 10-K of EnergyConnect Group, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 1, 2011

/s/ Amir Ameri

Amir Ameri

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906

OF

THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report on Form 10-K of EnergyConnect Group, Inc. (the “Company”) for the twelve months ended January 1, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Covered Report”), I, the principal executive officer of the Company, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:

The Covered Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

The information contained in the Covered Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

IN WITNESS WHEREOF, I have executed this certificate as of this 1st day of April 2011.

/s/ Kevin R. Evans

Kevin R. Evans

Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO SECTION 906

OF

THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report on Form 10-K of EnergyConnect Group, Inc. (the “Company”) for the twelve months ended January 1, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Covered Report”), I, the principal financial officer of the Company, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:

The Covered Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

The information contained in the Covered Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

IN WITNESS WHEREOF, I have executed this certificate as of this 1st day of April 2011.

/s/ Amir Ameri

Amir Ameri

Chief Financial Officer