**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**









**FORM 10-K/A**




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




**For
      the Fiscal Year ended December** **31,
      2006**




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




**For
      the Transition Period from
                    
to**




**Commission
      File Number 001-15831**




**MCF
      CORPORATION**


(Exact
      Name of Registrant as Specified in its Charter)




**Delaware**
              (State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            
            **11-2936371**
              (I.R.S.
                Employer
              Identification
                No.)**600
                California Street, 9****th****Floor**
              **San
                Francisco, CA**
              (Address
                of Principal Executive Offices)
            
            **94108**
              (Zip
                Code)







**(415)
      248-5600**


(Registrant’s
      Telephone Number, Including Area Code)




Securities
      Registered Pursuant to Section 12(b) of the Act:




**Common
      Stock, $0.0001 per share**




Securities
      Registered Pursuant to Section 12(g) of the Act:




**None**




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o No x




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




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.
      Yes x No o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not 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. o




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




Large
                accelerated filero
            
            Accelerated
                filerx
            
            Non-accelerated
                filero







Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Act). Yes o No x




The
      aggregate market value of the 9,694,647 shares of common stock of the Registrant
      issued and outstanding as of June 30, 2006, the last business day of the
      registrant’s most recently completed second fiscal quarter, excluding 841,827
      shares of common stock held by affiliates of the Registrant was $69,898,405.
      This amount is based on the closing price of the common stock on the American
      Stock Exchange of $7.21 per share on June 30, 2006.




The
      number of shares of Registrant’s common stock outstanding as of
      February 13, 2007 was 10,591,309.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




Part III
      of this Form 10-K incorporates by reference certain portions of the
      Registrant’s proxy statement for its 2007 annual meeting of stockholders to be
      filed with the Commission not later than 120 days after the end of the fiscal
      year covered by this report.










**TABLE
      OF CONTENTS**




**PART I**Item 1.
            
            Business
            
            1Item 1A.
            
            Risk
                Factors
            
            10Item 1B.
            
            Unresolved
                Staff Comments
            
            16Item 2.
            
            Properties
            
            17Item 3.
            
            Legal
                Proceedings
            
            17Item 4.
            
            Submission
                of Matters to a Vote of Stockholders
            
            17**PART II**Item 5.
            
            Market
                for Registrant’s Common Stock and Related Stockholder
                Matters
            
            18Item 6.
            
            Selected
                Financial Data
            
            19Item 7.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            20Item 7A.
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            32Item 8.
            
            Financial
                Statements and Supplementary Data
            
            34Item 9.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            63Item 9A.
            
            Controls
                and Procedures
            
            63Item 9B.
            
            Other
                Information
            
            63**PART III**Item
                10.
            
            Directors
                and Executive Officers of the Registrant
            
            65Item 11.
            
            Executive Compensation
            
            69Item 12.
            
            Security Ownership
                of Certain Beneficial Owners and Management
            
            69Item 13.
            
            Certain
                Relationships and Related Transactions
            
            69Item 14.
            
            Principal Accounting Fees And Services
            
            69**PART IV**Item 15.
            
            Exhibits
                and Financial Statement Schedules
            
            70







**Explanatory
          Note**
  This
          Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K of
          MCF Corporation for the fiscal year ended December 31, 2006 is being filed
          for the purpose of adding certain
          exhibits incorporated by reference in Part IV which were omitted from the Annual
          Report on Form 10-K of MCF Corporation filed on February 15, 2007 (the
“ Original
          Filing”). In addition, a s
          required by Rule 12b-15 promulgated under the Securities and Exchange Act
          of 1934, our Chief Executive Officer and Chief Financial Officer are providing
          currently dated Rule 13a-14(a) certifications in connection with this
          Form 10-K/A and currently dated written statements pursuant to
          Section 906 of the Sarbanes-Oxley Act of 2002.
  Except
          as
          described above, no other changes have been made to the Original Filing. For
          the
          convenience of the reader, this Form 10-K/A sets forth the original
          Form 10-K in its entirety. This
          Amendment continues to speak as of the date of the Original Filing, and
          the
          registrant has not updated the disclosures contained therein to reflect
          any
          events which occurred at a date subsequent to the filing of the Original
          Filing.
          The filing of this Form 10-K/A is not a representation that any statements
          contained in items of Form 10-K other than the additional exhibits in Part
          IV
          are true or complete as of any date subsequent to the date of the Original
          Filing.


*This
      Form 10-K and the information incorporated by reference in this
      Form 10-K include forward-looking statements within the meaning of
      Section 27A of the Securities Act of 1933, as amended, and Section 21E
      of the Securities Exchange Act of 1934, as amended. Some of the forward-looking
      statements can be identified by the use of forward-looking words such as
“believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,”
“intends,” “plans,” “estimates” or “anticipates” or the negative of those words
      or other comparable terminology. Forward-looking statements involve risks and
      uncertainties. You should be aware that a number of important factors could
      cause our actual results to differ materially from those in the
      forward* *-looking
      statements. We will not necessarily update the information presented or
      incorporated by reference in this Form 10-K if any of these forward-looking
      statements turn out to be inaccurate. Risks affecting our business are described
      throughout this Form 10-K and especially in the section “Risk Factors.”
This entire Form 10-K, including the consolidated financial statements and
      the notes and any other documents incorporated by reference into this
      Form 10-K should be read for a complete understanding of our business and
      the risks associated with that business.*




**PART I**




**ITEM
      1.****BUSINESS**




**Overview**




We
      are a
      financial services holding company that provides investment banking, equity
      research, institutional brokerage and asset management through our operating
      subsidiaries, Merriman Curhan Ford & Co. and MCF Asset Management,
      LLC. We focus
      on providing a full range of specialized and integrated services to
      institutional investors and corporate clients.




Merriman
      Curhan Ford & Co. is an investment bank and securities broker-dealer
      focused on fast growing companies and institutional investors. Our mission
      is to
      become a leader in the researching, advising, financing and trading of fast
      growing companies under $2 billion in market capitalization. We provide equity
      research, brokerage and trading services primarily to institutions, as well
      as
      investment banking and advisory services to corporate clients. We are gaining
      market share by originating differentiated research for our institutional
      investor clients and providing specialized and integrated services for our
      fast
      growing corporate clients.




MCF
      Asset
      Management, LLC manages absolute return investment products for institutional
      and high-net worth clients. During 2006, we introduced the MCF Navigator fund
      and MCF Voyager fund. Additionally, we are the sub-advisor for the MCF Focus
      fund. As of December 31, 2006, assets under management across our three fund
      products were nearly $30 million.




We
      acquired Catalyst Financial Planning & Investment Management, Inc.
      in February 2005. Catalyst, a Registered Investment Advisor, provides investment
      advice to clients that have invested approximately $130 million of assets.
      In
      January 2007, we sold Catalyst in order to focus on
      other recurring-revenue businesses, such as primary research and asset
      management, which we believe are faster growing and more profitable
      opportunities.




In
      November 2006, we signed a definitive agreement to acquire MedPanel, Inc.,
      a
      privately-held company based in Cambridge, Massachusetts. Upon the closing
      of
      this acquisition, we will begin offering
      primary research services to top biotechnology, pharmaceutical, medical device,
      and financial services companies. Clients will pay subscription fees directly
      to
      MedPanel for access to its online research platform, providing clients with
      greater strategic direction for investment decisions, product development,
      and
      marketing.




We
      are
      headquartered in San Francisco, with additional offices in New York City,
      Newport Beach and Portland, Oregon. As of December 31, 2006, we had 166
      employees. Merriman Curhan Ford & Co. is registered with the Securities
      and Exchange Commission as a broker-dealer and is a member of the National
      Association of Securities Dealers, Inc. and the Securities Investors
      Protection Corporation. MCF Asset Management, LLC is registered with the
      Securities and Exchange Commission.




1




**Principal
      Services**




We
      have
      three business segments: the investment bank and securities broker-dealer,
      asset
      management and wealth management. Our investment bank and broker-dealer provides
      three service offerings: investment banking, brokerage and equity research.
      Our
      asset management segment manages investment products for investors. We sold
      our
      wealth management subsidiary, Catalyst Financial Planning & Investment
      Management Corporation, or Catalyst, in January 2007. The results from this
      segment have been treated as discontinued operations. We will add
      primary research as an additional business segment upon the closing of the
      MedPanel, Inc. acquisition.




***Investment
      Banking***




Our
      investment bankers provide a full range of corporate finance and strategic
      advisory services. Our corporate finance practice is comprised of industry
      coverage investment bankers that are focused on raising capital for fast growing
      companies in selected industry sectors. Our strategic advisory practice tailors
      solutions to meet the specific needs of our clients at various points in their
      growth cycle. Over the last three years, we have focused on growing our
      investment banking business through the hiring of increasingly senior investment
      bankers and support professionals. As of December 31, 2006, we had 29
      professionals in our investment banking group.






*Corporate
      Finance.* Our
      corporate finance practice advises on and structures capital raising solutions
      for our corporate clients through public and private offerings of primarily
      equity and convertible debt securities. Our focus is to provide fast growing
      companies with the capital necessary to drive them to the next level of growth.
      We offer a wide range of financial services designed to meet the needs of fast
      growing companies, including initial public offerings, secondary offerings,
      private investments in public equity, or PIPEs, and private placements. Our
      equity capital markets team executes underwritten securities offerings, assists
      clients with investor relations advice and introduces companies seeking to
      raise
      capital to investors that we believe will be supportive, long-term investors.
      Additionally, we draw upon our contacts throughout the financial and corporate
      world, expanding the options available for our corporate clients.






*Strategic
      Advisory.* Our
      strategic advisory services include transaction specific advice regarding
      mergers and acquisitions, divestitures, spin-offs and privatizations, as well
      as
      general strategic advice. Our commitment to long-term relationships and our
      ability to meet the needs of a diverse range of clients has made us a reliable
      source of advisory services for fast growing public and private companies.
      Our
      strategic advisory services are also supported by our capital markets
      professionals, who provide assistance in acquisition financing in connection
      with mergers and acquisitions transactions.




***Institutional
      Brokerage Services***




We
      provide institutional sales, sales trading and trading services to more than
      550
      institutional accounts in the United States. We execute securities transactions
      for money managers, mutual funds, hedge funds, insurance companies, pension
      and
      profit-sharing plans. Institutional investors normally purchase and sell
      securities in large quantities, which require the distribution and trading
      expertise that we provide.




We
      provide integrated research and trading solutions centered on helping our
      institutional clients to invest profitably, to grow their portfolios and
      ultimately their businesses. We understand the importance of building long-term
      relationships with our clients who we believe look to us for the professional
      resources and relevant expertise to provide answers for their specific
      situations. We believe it is important for us to be involved with public
      companies early in their corporate life cycles. We strive to provide unique
      investment opportunities in fast growing, relatively undiscovered companies
      and
      to help our clients execute trades rapidly, efficiently and
      accurately.




2




*Institutional
      Sales.* Our
      sales professionals focus on communicating investment ideas to our clients
      and
      executing trades in securities of companies in our target growth sectors. By
      actively trading in these securities, we endeavor to couple the capital market
      information flow with the fundamental information flow provided by our analysts.
      We believe that this combined information flow is the underpinning of getting
      our clients favorable execution of investment strategies. Sales professionals
      work closely with our research analysts to provide up-to-date information to
      our
      institutional clients. We interface actively with our clients and plan to be
      involved with our clients over the long term.




*Sales
      Trading* .
      Our
      sales traders are experienced in the industry and possess in-depth knowledge
      of
      both the markets for fast growing company securities and the institutional
      traders who buy and sell them.




*Trading* .
      Our
      trading professionals facilitate liquidity discovery in equity securities.
      We
      make markets in NASDAQ and other securities, trade listed securities and service
      the trading desks of institutions in the United States. Our trading
      professionals have direct access to the major stock exchanges, including the
      New
      York Stock Exchange and the American Stock Exchange. As of December 31, 2006,
      we
      were a market maker in approximately 970 securities.




The
      customer base of our brokerage business is primarily institutional, including
      mutual funds and hedge funds, as well as smaller, private investment firms
      and
      certain high net worth individuals. We believe this group of clients and
      potential clients to number over 4,000. We grew our business during 2006 by
      adding new customers, and increasing the penetration of existing institutional
      customers that use our equity research and trading services in their investment
      process.




*Corporate
      and Venture Services* .
      We
      offer brokerage services to corporations including corporate cash management
      and
      stock repurchase programs through our Corporate and Venture Services group.
      We
      also serve the needs of venture capital investors and company executives with
      restricted stock transactions, cashless exercise of options, hedging and
      diversification strategies, and liquidity strategies. Additionally, the Venture
      Services team provides sales distribution for capital raises for private
      companies via the introduction to venture capital and private equity
      investors.




*Institutional
      Cash Distributors.* ICD is a
      broker of money market funds serving the short-term investing needs of corporate
      finance departments at companies throughout the United States and Europe.
      Companies using ICD’s services receive access to over 40 fund families through
      ICD’s one-stop process that includes one application, one wire and one statement
      that consolidates reporting regardless of the number of funds utilized. As
      of
      December 31, 2006, ICD clients have invested over $12 billion in money
      market funds from which ICD earns brokerage fees. ICD is a
      division of Merriman Curhan Ford & Co.




*Capital
      Access Group* .
      During
      2006, we began raising capital for institutional hedge funds, venture capital
      and private equity clients for a fee through our Capital Access Group. We
      believe fee-based capital raising is an underserved area of the institutional
      brokerage industry.




***Equity
      Research***




A
      key
      part of our strategy is to originate specialized and in-depth research. Our
      analysts cover a universe of approximately 200 companies in our focus industry
      sectors. We leverage the ideas generated by our research teams, using them
      to
      attract and retain institutional brokerage clients.




Supported
      by the firm’s institutional sales and trading capabilities, our analysts deliver
      timely recommendations to clients on innovative investment opportunities. In
      an
      effort to make money for our investor clients, our analysts are driven to find
      undiscovered opportunities in fast growing companies that are not widely held
      and that we believe are undervalued. Given the contrarian and undiscovered
      nature of many of our research ideas, we, as a firm, specialize in serving
      sophisticated, aggressive institutional investors. As of December 31, 2006,
      approximately 75% of the companies covered by our research professionals had
      market capitalizations of $1 billion or less.




3









Our
      research focuses on bottom-up, fundamental analysis of fast growing companies
      in
      selected growth sectors. Our analysts’ expertise in these categories of
      companies, along with their intensive industry knowledge and contacts, provides
      us with the ability to deliver timely, accurate, and value-added information
      to
      our clients.




In
      December 2006, Merriman Curhan Ford & Co. was ranked by *The
      Motley Fool’s* new
      research performance database, CAPS, which tracks the outperform and
      underperform stock ratings from professional and individual investors. Among
      professional analysts, Merriman Curhan Ford & Co. ranked fourth out of 116
      firms tracked, with 72 percent stock picking accuracy.




Our
      objective is to build long lasting relationships with our clients by providing
      investment recommendations that directly equate to enhanced performance of
      their
      portfolios. Further, given our approach and focus on quality service, we believe
      our research analysts are in a unique position to maintain close, ongoing
      communication with our institutional clients.




The
      industry sectors covered by our research analysts include:




**Telecommunications**
            
            **Next-Generation
                Energy**
            
            **Health
                Care**• Communications
                Technology
              • Communications
                Services
              • Wireless
                Technology
            
            • Next-Generation
                Energy
              • Industry
                Technology
            
            • Aging
                and Aesthetics
              • Infectious
                Disease and Oncology
              • Pain,
                Lifestyle and Stress**Technology**
            
            
            
            **Consumer**• Internet
                Applications and Services
              • Digital
                Consumer Semiconductors
              • Semiconductor
                Capital Equipment
              • Semiconductor
                Assembly andTest
                Outsourcing
              • Computer
                Hardware and Networking
            
            
            
            • Gaming
              • Media
                and Entertainment
              • Restaurants
              • Retail
                and Apparel
              • Branded
                Consumer
              • Retail:
                Specialty






4







After
      initiating coverage on a company, our analysts seek to effectively communicate
      new developments to our institutional sales and trading professionals as well
      as
      our institutional investors. We produce full-length research reports, notes
      and
      earnings estimates on the companies we cover. We also produce comprehensive
      industry sector reports. In addition, our analysts distribute written updates
      on
      these issuers both internally and to our clients through the use of daily
      morning meeting notes, real-time electronic mail and other forms of immediate
      communication. Our clients can also receive analyst comments through electronic
      media, and our sales force receives intra-day updates at meetings and through
      regular announcements of developments. All of the above is also available
      through a password protected searchable database of our daily and historical
      research archives, found on our Website at www.merrimanco.com/research .






Our
      equity research group annually hosts several conferences targeting fast growing
      companies and investors, including our Investor Summit, Next-Generation Energy
      Conference and IP Video Conference. We use these events to showcase innovative
      and fast growing companies to institutional investors focused on investing
      in
      these growth sectors.




***Asset
      Management***




MCF
      Asset
      Management, LLC creates investment products for both institutional and high-net
      worth clients. Through the corporate and professional resources of MCF
      Corporation, we have developed an institutional-standard investment management
      platform.




The
      1990's were a decade of broad stock market appreciation.  Investors were
      handsomely rewarded for buying exposure to the stock market by investing in
      long
      only mutual funds, market indices or individual stocks.  So far this
      decade, equity returns have not been as strong or as consistent as throughout
      the 1990's.  As a result, interest in alternative investment strategies,
      such as long/short equity, market neutral, convertible arbitrage, currency
      arbitrage and real estate, have grown in popularity. Investing in
      alternative investment strategies will ideally produce absolute returns that
      are
      not correlated with broad stock market indices and represent a diversification
      of risk for investors.




More
      importantly, we believe both institutions and wealthy individuals have reached
      that same conclusion and will continue to shift more of their investment dollars
      into alternative asset class strategies. It is our intent to help our clients
      in
      their investment process by offering access to alternative investment
      strategies, as well as certain niche based long-only strategies. We have
      established our own alternative investment products and evaluate opportunities
      to acquire and partner with managers of alternative asset investments. We
      currently have three active funds in the market place and we plan to launch
      additional products in 2007.




5




***Primary
      Research***




In
      November 2006, we signed a definitive agreement to acquire MedPanel, Inc. Upon
      the closing of this acquisition, we will begin offering
      primary research services. MedPanel offers customized qualitative, quantitative
      and syndicated health care and medical research, and is best known for its
      in-depth, customized online focus groups. MedPanel, Inc. offers an online
      research platform providing clients across the globe greater strategic direction
      for investment decisions, product development, and marketing. By leveraging
      its
      proprietary methodology and vast network of medical experts, we believe we
      can
      quickly provide independent market data and information to clients in the
      biotechnology, pharmaceutical, medical device, and financial
      industries.




MedPanel’s
      product and service offerings arise from the intelligent application of its
      core
      technology and research platform. MedPanel’s staff guides clients in the
      development of highly targeted customized quantitative and/or qualitative
      research instruments designed to address business issues important to the
      client. In addition, MedPanel has developed proprietary research products which
      it markets to multiple clients. These reports provide timely, consistent and
      cross-comparable data on a regular basis to subscribing clients.




MedPanel
      has experienced five consecutive years of revenue growth, recognizing
      approximately $5 million in revenue during 2006. We believe that once our firms
      have combined, MedPanel’s revenue growth from financial services clients, such
      as mutual fund managers and hedge fund mangers, will accelerate due to the
      ability of the combined company to market MedPanel research through our existing
      institutional sales force. MedPanel has recently expanded their target market
      from biotechnology and pharmaceutical companies to investment managers and
      had
      not expended significant resources in that area. Part of MedPanel’s rationale
      for seeking a merger partner was to expand its financial services customer
      base
      through an established sales force as well as take advantage of the future
      growth potential of a larger, publicly-held company with a greater depth of
      technologies, marketing opportunities and financial and operating
      resources.




***Wealth*** ***Management
      (Discontinued)***




In
      February 2005, we acquired Catalyst Financial Planning &
Investment Management, Inc. Catalyst is a Registered Investment Advisor
      registered with the SEC. Catalyst provides investment advice to clients that
      have invested approximately $130 million of assets. In January 2007, we sold
      Catalyst in order to focus on
      other recurring-revenue businesses, such as primary research and asset
      management, which we believe are faster growing and more profitable
      opportunities. While we currently do not have any specific plans, we do intend
      to pursue a wealth management strategy at some future date.




**Competition**




We
      are
      engaged in the highly competitive financial services and investment industries.
      We compete with Wall Street securities firms - from large U.S.-based firms,
      securities subsidiaries of major commercial bank holding companies and U.S.
      subsidiaries of large foreign institutions, to major regional firms, smaller
      niche players, and those offering competitive services via the Internet. Recent
      developments in the brokerage industry, including decimalization and the growth
      of electronic communications networks, or ECNs, have reduced commission rates
      and profitability in the brokerage industry. Many large investment banks have
      responded to lower margins within their equity brokerage divisions by reducing
      research coverage, particularly for smaller companies, consolidating sales
      and
      trading services, and reducing headcount of more experienced sales and trading
      professionals.




In
      addition to competing for customers and investments, we compete with other
      companies in the financial services and investment industries to attract and
      retain experienced and productive investment professionals. See “Item 1A. Risk
      Factors—Our business is dependent on the services of skilled professionals...”
and—“Our business may suffer if we lose the services...”




6




Many
      competitors have greater personnel and financial resources than we do. Larger
      competitors are able to advertise their products and services on a national
      or
      regional basis and may have a greater number and variety of distribution outlets
      for their products, including retail distribution. Discount and Internet
      brokerage firms market their services through aggressive pricing and promotional
      efforts. In addition, some competitors have much more extensive investment
      banking activities than we do and therefore, may possess a relative advantage
      with regard to access to deal flow and capital.




Recent
      rapid advancements in computing and communications technology, particularly
      the
      Internet, are substantially changing the means by which financial services
      and
      information are delivered. These changes are providing consumers with more
      direct access to a wide variety of financial and investment services, including
      market information and on-line trading and account information. Advances in
      technology also create demand for more sophisticated levels of client services.
      We are committed to using technological advancements to provide a high level
      of
      client service to our target markets. Provision of these services may entail
      considerable cost without an offsetting source of revenue.




For
      a
      further discussion of the competitive factors affecting our business, see “Item
      1A. Risk Factors—The markets for securities brokerage and investment banking
      services are highly competitive.”




**Corporate
      Support**




**Accounting,
      Administration and Operations**




Our
      accounting, administration and operations personnel are responsible for
      financial controls, internal and external financial reporting, human resources
      and personnel services, office operations, information technology and
      telecommunications systems, the processing of securities transactions, and
      corporate communications. With the exception of payroll processing, which is
      performed by an outside service bureau, and customer account processing, which
      is performed by our clearing broker, most data processing functions are
      performed internally. We believe that future growth will require implementation
      of new and enhanced communications and information systems and training of
      our
      personnel to operate such systems.




**Compliance,
      Legal, Risk Management and Internal Audit**




Our
      compliance, legal and risk management personnel (together with other appropriate
      personnel) are responsible for our compliance with the legal and regulatory
      requirements of our investment banking and asset management businesses and
      our
      exposure to market, credit, operations, liquidity, compliance, legal and
      reputation risk. In addition, our compliance personnel test and audit for
      compliance with our internal policies and procedures. Our general counsel also
      provides legal service throughout our company, including advice on managing
      legal risk. The supervisory personnel in these areas have direct access to
      senior management and to the Audit Committee of our Board of Directors to ensure
      their independence in performing these functions. In addition to our internal
      compliance, legal, and risk management personnel, we retain outside consultants
      and attorneys for their particular functional expertise.




**Risk
      Management**




In
      conducting our business, we are exposed to a range of risks
      including:




*Market
      risk* is the
      risk to our earnings or capital resulting from adverse changes in the values
      of
      assets resulting from movement in equity prices or market interest
      rates.




*Credit
      risk* is the
      risk of loss due to an individual customer’s or institutional counterparty’s
      unwillingness or inability to fulfill its obligations.




*Operations
      risk* is the
      risk of loss resulting from systems failure, inadequate controls, human error,
      fraud or unforeseen catastrophes.




7




*Liquidity
      risk* is the
      potential that we would be unable to meet our obligations as they come due
      because of an inability to liquidate assets or obtain funding. Liquidity risk
      also includes the risk of having to sell assets at a loss to generate liquid
      funds, which is a function of the relative liquidity (market depth) of the
      asset(s) and general market conditions.




*Compliance
      risk* is the
      risk of loss, including fines, penalties and suspension or revocation of
      licenses by self-regulatory organizations, or from failing to comply with
      federal, state or local laws pertaining to financial services
      activities.




*Legal
      risk* is the
      risk that arises from potential contract disputes, lawsuits, adverse judgments,
      or adverse governmental or regulatory proceedings that can disrupt or otherwise
      negatively affect our operations or condition.




*Reputation
      risk* is the
      potential that negative publicity regarding our practices, whether factually
      correct or not, will cause a decline in our customer base, costly litigation,
      or
      revenue reductions.




We
      have a
      risk management program that sets forth various risk management policies,
      provides for a risk management committee and assigns risk management
      responsibilities. The program is designed to focus on the
      following:




·
            Identifying,
                assessing and reporting on corporate risk exposures and
                trends;




·
            Establishing
                and revising as necessary policies, procedures and risk
                limits;




·
            Monitoring
                and reporting on adherence with risk policies and
                limits;




·
            Developing
                and applying new measurement methods to the risk process as appropriate;
                and




·
            Approving
                new product developments or business
                initiatives.




We
      cannot
      provide assurance that our risk management program or our internal controls
      will
      prevent or mitigate losses attributable to the risks to which we are
      exposed.




For
      a
      further discussion of the risks affecting our business, see “Item 1A —Risk
      Factors.”




**Regulation**




As
      a
      result of federal and state registration and self-regulatory organization,
      or
      SRO, memberships, we are subject to overlapping layers of regulation that cover
      all aspects of our securities business. Such regulations cover matters including
      capital requirements, uses and safe-keeping of clients’ funds, conduct of
      directors, officers and employees, record-keeping and reporting requirements,
      supervisory and organizational procedures intended to assure compliance with
      securities laws and to prevent improper trading on material nonpublic
      information, employee-related matters, including qualification and licensing
      of
      supervisory and sales personnel, limitations on extensions of credit in
      securities transactions, requirements for the registration, underwriting, sale
      and distribution of securities, and rules of the SROs designed to promote
      high standards of commercial honor and just and equitable principles of trade.
      A
      particular focus of the applicable regulations concerns the relationship between
      broker-dealers and their customers. As a result, many aspects of the
      broker-dealer customer relationship are subject to regulation including, in
      some
      instances, “suitability” determinations as to certain customer transactions,
      limitations on the amounts that may be charged to customers, timing of
      proprietary trading in relation to customers’ trades and disclosures to
      customers.




8




As
      a
      broker-dealer registered with the Securities and Exchange Commission, or SEC,
      and as a member firm of the National Association of Securities
      Dealers, Inc., or NASD, we are subject to the net capital requirements of
      the SEC and the NASD. These capital requirements specify minimum levels of
      capital, computed in accordance with regulatory requirements that each firm
      is
      required to maintain and also limit the amount of leverage that each firm is
      able to obtain in its respective business.




“Net
      capital” is essentially defined as net worth (assets minus liabilities, as
      determined under accounting principles generally accepted in the United States),
      plus qualifying subordinated borrowings, less the value of all of a
      broker-dealer’s assets that are not readily convertible into cash (such as
      furniture, prepaid expenses and unsecured receivables), and further reduced
      by
      certain percentages (commonly called “haircuts”) of the market value of a
      broker-dealer’s positions in securities and other financial instruments. The
      amount of net capital in excess of the regulatory minimum is referred to as
      “excess net capital.”




The
      SEC’s
      capital rules also (i) require that broker-dealers notify it, in
      writing, two business days prior to making withdrawals or other distributions
      of
      equity capital or lending money to certain related persons if those withdrawals
      would exceed, in any 30-day period, 30% of the broker-dealer’s excess net
      capital, and that they provide such notice within two business days after any
      such withdrawal or loan that would exceed, in any 30-day period, 20% of the
      broker-dealer’s excess net capital, (ii) prohibit a broker-dealer from
      withdrawing or otherwise distributing equity capital or making related party
      loans if, after such distribution or loan, the broker-dealer would have net
      capital of less than $300,000 or if the aggregate indebtedness of the
      broker-dealer’s consolidated entities would exceed 1,000% of the broker-dealer’s
      net capital in certain other circumstances, and (iii) provide that the SEC
      may, by order, prohibit withdrawals of capital from a broker-dealer for a period
      of up to 20 business days, if the withdrawals would exceed, in any 30-day
      period, 30% of the broker-dealer’s excess net capital and if the SEC believes
      such withdrawals would be detrimental to the financial integrity of the firm
      or
      would unduly jeopardize the broker-dealer’s ability to pay its customer claims
      or other liabilities.




Compliance
      with regulatory net capital requirements could limit those operations that
      require the intensive use of capital, such as underwriting and trading
      activities, and also could restrict our ability to withdraw capital from our
      broker-dealer, which in turn could limit our ability to pay interest, repay
      debt
      and redeem or repurchase shares of our outstanding capital stock.




We
      believe that at all times we have been in compliance with the applicable minimum
      net capital rules of the SEC and the NASD.




The
      failure of a U.S. broker-dealer to maintain its minimum required net capital
      would require it to cease executing customer transactions until it came back
      into compliance, and could cause it to lose its NASD membership, its
      registration with the SEC or require its liquidation. Further, the decline
      in a
      broker-dealer’s net capital below certain “early warning levels,” even though
      above minimum net capital requirements, could cause material adverse
      consequences to the broker-dealer.




We
      are
      also subject to “Risk Assessment Rules” imposed by the SEC which require, among
      other things, that certain broker-dealers maintain and preserve certain
      information, describe risk management policies and procedures and report on
      the
      financial condition of certain affiliates whose financial and securities
      activities are reasonably likely to have a material impact on the financial
      and
      operational condition of the broker-dealers. Certain “Material Associated
      Persons” (as defined in the Risk Assessment Rules) of the broker-dealers and the
      activities conducted by such Material Associated Persons may also be subject
      to
      regulation by the SEC. In addition, the possibility exists that, on the basis
      of
      the information it obtains under the Risk Assessment Rules, the SEC could seek
      authority over our unregulated subsidiary either directly or through its
      existing authority over our regulated subsidiary.




In
      the
      event of non-compliance by us or one of our subsidiaries with an applicable
      regulation, governmental regulators and one or more of the SROs may institute
      administrative or judicial proceedings that may result in censure, fine, civil
      penalties (including treble damages in the case of insider trading violations),
      the issuance of cease-and-desist orders, the deregistration or suspension of
      the
      non-compliant broker-dealer, the suspension or disqualification of officers
      or
      employees or other adverse consequences. The imposition of any such penalties
      or
      orders on us or our personnel could have a material adverse effect on our
      operating results and financial condition.




9




Additional
      legislation and regulations, including those relating to the activities of
      our
      broker-dealer, changes in rules promulgated by the SEC, NASD or other
      United States, state or foreign governmental regulatory authorities and SROs
      or
      changes in the interpretation or enforcement of existing laws and rules may
      adversely affect our manner of operation and our profitability. Our businesses
      may be materially affected not only by regulations applicable to us as a
      financial market intermediary, but also by regulations of general
      application.




**Geographic
      Area**




MCF
      Corporation is domiciled in the United States and all of our revenue is
      attributed to United States and Canadian customers. All of our long-lived assets
      are located in the United States.




**Available
      Information**




Our
      website address is www.merrimanco.com. You may obtain free electronic copies
      of
      our annual reports on Form 10-K, quarterly reports on Form 10-Q,
      current reports on Form 8-K, and all amendments to those reports on the
“Investor Relations” portion of our website, under the heading “SEC Filings.”
These reports are available on our website as soon as reasonably practicable
      after we electronically file them with the Securities and Exchange Commission.
      We are providing the address to our Internet site solely for the information
      of
      investors. We do not intend the address to be an active link or to otherwise
      incorporate the contents of the website into this report.






**ITEM 1A.**  **RISK
      FACTORS**




Investing
      in our securities involves a high degree of risk. In addition to the other
      information contained in this annual report, including reports we incorporate
      by
      reference, you should consider the following factors before investing in our
      securities.




***We
      may not be able to maintain a positive cash flow and
      profitability.***




Our
      ability to maintain a positive cash flow and profitability depends on our
      ability to generate and maintain greater revenue while incurring reasonable
      expenses. This, in turn, depends, among other things, on the development of
      our
      securities brokerage and investment banking business, and we may be unable
      to
      maintain profitability if we fail to do any of the following:




·
            establish,
                maintain and increase our client
                base;




·
            manage
                the quality of our services;




·
            compete
                effectively with existing and potential
                competitors;




·
            further
                develop our business activities;




·
            manage
                expanding operations; and




·
            attract
                and retain qualified personnel.




We
      cannot
      be certain that we will be able to sustain or increase a positive cash flow
      and
      profitability on a quarterly or annual basis in the future. Our inability to
      maintain profitability or positive cash flow could result in disappointing
      financial results, impede implementation of our growth strategy or cause the
      market price of our common stock to decrease. Accordingly, we cannot assure
      you
      that we will be able to generate the cash flow and profits necessary to sustain
      our business expectations, which makes our ability to successfully implement
      our
      business plan uncertain.




10




Because
      we are a developing company, the factors upon which we are able to base our
      estimates as to the gross revenue and the number of participating clients that
      will be required for us to maintain a positive cash flow and any additional
      financing that may be needed for this purpose are unpredictable. For these
      and
      other reasons, we cannot assure you that we will not require higher gross
      revenue, and an increased number of clients, securities brokerage and investment
      banking transactions, and/or more time in order for us to complete the
      development of our business that we believe we need to be able to cover our
      operating expenses, or obtain the funds necessary to finance this development.
      It is more likely than not that our estimates will prove to be inaccurate
      because actual events more often than not differ from anticipated events.
      Furthermore, in the event that financing is needed in addition to the amount
      that is required for this development, we cannot assure you that such financing
      will be available on acceptable terms, if at all.




***The
      markets for securities brokerage and investment banking services are highly
      competitive. If we are not able to compete successfully against current and
      future competitors, our business and results of operations will be adversely
      affected.***




We
      are
      engaged in the highly competitive financial services and investment industries.
      We compete with large Wall Street securities firms, securities subsidiaries
      of
      major commercial bank holding companies, U.S. subsidiaries of large foreign
      institutions, major regional firms, smaller niche players, and those offering
      competitive services via the Internet. Many competitors have greater personnel
      and financial resources than we do. Larger competitors are able to advertise
      their products and services on a national or regional basis and may have a
      greater number and variety of distribution outlets for their products, including
      retail distribution. Discount and Internet brokerage firms market their services
      through aggressive pricing and promotional efforts. In addition, some
      competitors have much more extensive investment banking activities than we
      do
      and therefore, may possess a relative advantage with regard to access to deal
      flow and capital.




Increased
      pressure created by any current or future competitors, or by our competitors
      collectively, could materially and adversely affect our business and results
      of
      operations. Increased competition may result in reduced revenue and loss of
      market share. Further, as a strategic response to changes in the competitive
      environment, we may from time to time make certain pricing, service or marketing
      decisions or acquisitions that also could materially and adversely affect our
      business and results of operations. We cannot assure you that we will be able
      to
      compete successfully against current and future competitors. In addition, new
      technologies and the expansion of existing technologies may increase the
      competitive pressures on us.




***We
      may experience reduced revenue due to declining market volume, securities prices
      and liquidity, which can also cause counterparties to fail to
      perform.***




Our
      revenue may decrease in the event of a decline in the market volume of
      securities transactions, prices or liquidity. Declines in the volume of
      securities transactions and in market liquidity generally result in lower
      revenue from trading activities and commissions. Lower price levels of
      securities may also result in a reduction in our revenue from corporate finance
      fees, as well as losses from declines in the market value of securities held
      by
      us in trading. Sudden sharp declines in market values of securities can result
      in illiquid markets and the failure of counterparties to perform their
      obligations, as well as increases in claims and litigation, including
      arbitration claims from customers. In such markets, we may incur reduced revenue
      or losses in our principal trading, market-making, investment banking, and
      advisory services activities.




***We
      may experience significant losses if the value of our marketable security
      positions deteriorates.***




We
      conduct securities trading, market-making and investment activities for our
      own
      account, which subjects our capital to significant risks. These risks include
      market, credit, counterparty and liquidity risks, which could result in losses
      for us. These activities often involve the purchase, sale or short sale of
      securities as principal in markets that may be characterized as relatively
      illiquid or that may be particularly susceptible to rapid fluctuations in
      liquidity and price. Trading losses resulting from such trading could have
      a
      material adverse effect on our business and results of operations.




11




***We
      may experience significant fluctuations in our quarterly operating results
      due
      to the nature of our business and therefore may fail to meet profitability
      expectations.***




Our
      revenue and operating results may fluctuate from quarter to quarter and from
      year to year due to a combination of factors, including:




·
            the
                level of institutional brokerage transactions and the level of commissions
                we receive from those transactions;




·
            the
                valuations of our principal
                investments;




·
            the
                number of capital markets transactions completed by our clients,
                and the
                level of fees we receive from those transactions;
                and




·
            variations
                in expenditures for personnel, consulting and legal expenses, and
                expenses
                of establishing new business units, including marketing and technology
                expenses.




We
      record
      revenue from a capital markets advisory transaction only when we have rendered
      the services, the client is contractually obligated to pay and collection is
      probable; generally, most of the fee is earned only upon the closing of a
      transaction. Accordingly, the timing of our recognition of revenue from a
      significant transaction can materially affect our quarterly operating
      results.




***We
      have registered one of our subsidiaries as a securities broker-dealer and,
      as
      such, are subject to substantial regulations. If we fail to comply with these
      regulations, our business will be adversely affected.***




Because
      we have registered Merriman Curhan Ford & Co. with the Securities and
      Exchange Commission, or SEC, and the National Association of Securities
      Dealers, Inc., or NASD, as a securities broker-dealer, we are subject to
      extensive regulation under federal and state laws, as well as self-regulatory
      organizations. The principal purpose of regulation and discipline of
      broker-dealers is the protection of customers and the securities markets rather
      than protection of creditors and stockholders of broker-dealers. The Securities
      and Exchange Commission is the federal agency charged with administration of
      the
      federal securities laws. Much of the regulation of broker-dealers, however,
      has
      been delegated to self-regulatory organizations, such as the NASD and national
      securities exchanges. The NASD is our primary self-regulatory organization.
      These self-regulatory organizations adopt rules, which are subject to SEC
      approval, that govern the industry and conduct periodic examinations of member
      broker-dealers. Broker-dealers are also subject to regulation by state
      securities commissions in the states in which they are registered. The
      regulations to which broker-dealers are subject cover all aspects of the
      securities business, including net capital requirements, sales methods, trading
      practices among broker-dealers, capital structure of securities firms, record
      keeping and the conduct of directors, officers and employees. The SEC and the
      self-regulatory bodies may conduct administrative proceedings, which can result
      in censure, fine, suspension or expulsion of a broker-dealer, its officers
      or
      employees. If we fail to comply with these rules and regulations, our
      business may be materially and adversely affected.




The
      regulatory environment in which we operate is also subject to change. Our
      business may be adversely affected as a result of new or revised legislation
      or
      regulations imposed by the SEC, other United States or foreign governmental
      regulatory authorities or the NASD. We also may be adversely affected by changes
      in the interpretation or enforcement of existing laws and rules by these
      governmental authorities and the NASD.




***Our
      business may suffer if we lose the services of our executive officers or
      operating personnel.***




We
      depend
      on the continued services and performance of D. Jonathan Merriman, our Chairman
      and Chief Executive Officer, for our future success. In addition to
      Mr. Merriman, we are currently managed by a small number of key management
      and operating personnel. Our future success depends, in part, on the continued
      service of our key executive, management and technical personnel, and our
      ability to attract highly skilled employees. Our business could be harmed if
      any
      key officer or employee were unable or unwilling to continue in his or her
      current position. From time to time we have experienced, and we expect to
      continue to experience, difficulty in hiring and retaining highly skilled
      employees. Competition for employees in our industry is significant. If we
      are
      unable to retain our key employees or attract, integrate or retain other highly
      qualified employees in the future, such failure may have a material adverse
      effect on our business and results of operations.




12




***Our
      business is dependent on the services of skilled professionals, and may suffer
      if we can not recruit or retain such skilled
      professionals.***




During
      2006, no sales professional accounted for more than 10% of our revenue. We
      have
      a number of revenue producers employed by our securities brokerage and
      investment banking subsidiary. We do not have employment contracts with these
      employees. The loss of one or more of these employees could adversely affect
      our
      business and results of operations.




***Our
      compensation structure may negatively impact our financial condition if we
      are
      not able to effectively manage our expenses and cash
      flows.***




We
      are
      able to recruit and retain investment banking, research and sales and trading
      professionals, in part because our business model provides that we pay our
      revenue producing employees a percentage of their earned revenue. Compensation
      and benefits is our largest expenditure and this variable compensation component
      represents a significant proportion of this expense. Compensation for our
      employees is derived as a percentage of our revenue regardless of our
      profitability. Therefore, we may continue to pay individual revenue producers
      a
      significant amount of cash compensation as the overall business experiences
      negative cash flows and/or net losses. We may not be able to recruit or retain
      revenue producing employees if we modify or eliminate the variable compensation
      component from our business model.




***We
      may be dependent on a limited number of customers for a significant portion
      of
      our revenue.***




During
      2006, no single customer accounted for more than 10% of our revenue. However,
      we
      have been dependent on one customer or on a small number of customers, for
      a
      large percentage of our revenue at some times in the past and we cannot assure
      you that we will not become so dependent again in the future. If we do become
      dependent on a single customer or small group of customers, the loss of one
      or
      more large customers could materially adversely affect our business and results
      of operations.




***We
      may suffer losses through our investments in securities purchased in secondary
      market transactions or private placements.***




Occasionally,
      our company, its officers and/or employees may make principal investments in
      securities through secondary market transactions or through direct investment
      in
      companies through private placements. In many cases, employees and officers
      with
      investment discretion on behalf of our company decide whether to invest in
      our
      company’s account or their personal account. It is possible that gains from
      investing will accrue to these individuals because investments were made in
      their personal accounts, and our company will not realize gains because it
      did
      not make an investment. Conversely, it is possible that losses from investing
      will accrue to our company, while these individuals do not experience losses
      in
      their personal accounts because the individuals did not make investments in
      their personal accounts.




***We
      may be unable to effectively manage rapid growth that we may experience, which
      could place a continuous strain on our resources and, accordingly, adversely
      affect our business.***




We
      plan
      to expand our operations. Our growth, if it occurs, will impose significant
      demands on our management, financial, technical and other resources. We must
      adapt to changing business conditions and improve existing systems or implement
      new systems for our financial and management controls, reporting systems and
      procedures and expand, train and manage a growing employee base in order to
      manage our future growth. We may not be able to implement improvements to our
      internal reporting systems in an efficient and timely manner and may discover
      deficiencies in existing systems and controls. We believe that future growth
      will require implementation of new and enhanced communications and information
      systems and training of our personnel to operate such systems. Furthermore,
      we
      may acquire existing companies or enter into strategic alliances with third
      parties, in order to achieve rapid growth. For us to succeed, we must make
      our
      existing business and systems work effectively with those of any strategic
      partners without undue expense, management distraction or other disruptions
      to
      our business. We may be unable to implement our business plan if we fail to
      manage any of the above growth challenges successfully. Our financial results
      may suffer and we could be materially and adversely affected if that
      occurs.




13




***Our
      business and operations would suffer in the event of system
      failures.***




Our
      success, in particular our ability to successfully facilitate securities
      brokerage transactions and provide high-quality customer service, largely
      depends on the efficient and uninterrupted operation of our computer and
      communications systems. Our systems and operations are vulnerable to damage
      or
      interruption from fire, flood, power loss, telecommunication failures,
      break-ins, earthquake and similar events. Despite the implementation of network
      security measures, redundant network systems and a disaster recovery plan,
      our
      servers are vulnerable to computer viruses, physical or electronic break-ins
      and
      similar disruptions, which could lead to interruptions, delays, loss of data
      or
      the inability to accept and fulfill customer orders. Additionally, computer
      viruses may cause our systems to incur delays or other service interruptions,
      which may cause us to incur additional operating expenses to correct problems
      we
      may experience. Any of the foregoing problems could materially adversely affect
      our business or future results of operations.




***We
      are highly dependent on proprietary and third-party systems; therefore, system
      failures could significantly disrupt our business.***




Our
      business is highly dependent on communications and information systems,
      including systems provided by our clearing brokers. Any failure or interruption
      of our systems, the systems of our clearing broker or third party trading
      systems could cause delays or other problems in our securities trading
      activities, which could have a material adverse effect on our operating
      results.




In
      addition, our clearing brokers provide our principal disaster recovery system.
      We cannot assure you that we or our clearing brokers will not suffer any systems
      failure or interruption, including one caused by an earthquake, fire, other
      natural disaster, power or telecommunications failure, act of God, act of war
      or
      otherwise, or that our or our clearing brokers’ back-up procedures and
      capabilities in the event of any such failure or interruption will be
      adequate.




***Our
      common stock price may be volatile, which could adversely affect the value
      of
      your shares.***




The
      market price of our common stock has in the past been, and may in the future
      continue to be, volatile. A variety of events may cause the market price of
      our
      common stock to fluctuate significantly, including:




·
            variations
                in quarterly operating results;




·
            our
                announcements of significant contracts, milestones,
                acquisitions;




·
            our
                relationships with other companies;




·
            our
                ability to obtain needed capital
                commitments;




·
            additions
                or departures of key personnel;




·
            sales
                of common stock, conversion of securities convertible into common
                stock,
                exercise of options and warrants to purchase common stock or termination
                of stock transfer restrictions;




·
            general
                economic conditions, including conditions in the securities brokerage
                and
                investment banking markets;




·
            changes
                in financial estimates by securities analysts;
                and




·
            fluctuation
                in stock market price and volume.




14




Many
      of
      these factors are beyond our control. Any one of the factors noted herein could
      have an adverse effect on the value of our common stock.




In
      addition, the stock market in recent years has experienced significant price
      and
      volume fluctuations that have particularly affected the market prices of equity
      securities of many companies and that often have been unrelated to the operating
      performance of such companies. These market fluctuations have adversely impacted
      the price of our common stock in the past and may do so in the
      future.




***Our
      risk management policies and procedures may leave us exposed to unidentified
      or
      unanticipated risk.***




Our
      risk
      management strategies and techniques may not be fully effective in mitigating
      our risk exposure in all market environments or against all types of
      risk.




We
      are
      exposed to the risk that third parties that owe us money, securities or other
      assets will not perform their obligations. These parties may default on their
      obligations to us due to bankruptcy, lack of liquidity, operational failure,
      and
      breach of contract or other reasons. We are also subject to the risk that our
      rights against third parties may not be enforceable in all circumstances. As
      a
      clearing member firm, we finance our customer positions and could be held
      responsible for the defaults or misconduct of our customers. Although we
      regularly review credit exposures to specific clients and counterparties and
      to
      specific industries and regions that we believe may present credit concerns,
      default risk may arise from events or circumstances that are difficult to detect
      or foresee. In addition, concerns about, or a default by, one institution could
      lead to significant liquidity problems, losses or defaults by other
      institutions, which in turn could adversely affect us. If any of the variety
      of
      instruments, processes and strategies we utilize to manage our exposure to
      various types of risk are not effective, we may incur losses.




***We
      could be sued in a securities class action lawsuit.***




In
      the
      past, following periods of volatility in the market price of a company’s
      securities, securities class action litigation often has been instituted against
      that company. Such litigation is expensive and diverts management’s attention
      and resources. We can not assure you that we will not be subject to such
      litigation. If we are subject to such litigation, even if we ultimately prevail,
      our business and financial condition may be adversely affected.




***Your
      ability to sell your shares may be restricted because there is a limited trading
      market for our common stock.***




Although
      our common stock is currently traded on the American Stock Exchange, an active
      trading market in our stock has been limited. Accordingly, you may not be able
      to sell your shares when you want or at the price you want.




***Anti-takeover
      provisions of the Delaware General Corporation Law could discourage a merger
      or
      other type of corporate reorganization or a change in control even if it
      could be favorable to the interests of
      our stockholders.***




The
      Delaware General Corporation Law contains provisions that may enable our
      management to retain control and resist our takeover. These provisions generally
      prevent us from engaging in a broad range of business combinations with an
      owner
      of 15% or more of our outstanding voting stock for a period of three years
      from
      the date that such person acquires his or her stock. Accordingly, these
      provisions could discourage or make more difficult a change in control or a
      merger or other type of corporate reorganization even if it could be favorable
      to the interests of our stockholders.




15




***Because
      our Board of Directors can issue common stock without stockholder approval,
      you
      could experience substantial dilution.***




Our
      Board
      of Directors has the authority to issue up to 300,000,000 shares of common
      stock
      and to issue options and warrants to purchase shares of our common stock without
      stockholder approval in certain circumstances. Future issuance of additional
      shares of our common stock could be at values substantially below the price
      at
      which you may purchase our stock and, therefore, could represent substantial
      dilution. In addition, our Board of Directors could issue large blocks of our
      common stock to fend off unwanted tender offers or hostile takeovers without
      further stockholder approval.




***Our
      ability to issue additional preferred stock may adversely affect your rights
      as
      a common stockholder and could be used as an anti take-over
      device.***




Our
      Articles of Incorporation authorize our Board of Directors to issue up to an
      additional 27,450,000 shares of preferred stock, without approval from our
      stockholders. If you hold our common stock, this means that our Board of
      Directors has the right, without your approval as a common stockholder, to
      fix
      the relative rights and preferences of the preferred stock. This would affect
      your rights as a common stockholder regarding, among other things, dividends
      and
      liquidation. We could also use the preferred stock to deter or delay a change
      in
      control of our company that may be opposed by our management even if the
      transaction might be favorable to you as a common stockholder.




***Our
      officers and directors exercise significant control over our affairs, which
      could result in their taking actions of which other stockholders do not
      approve.***




Our
      executive officers and directors, and entities affiliated with them, currently
      control approximately 26% of our outstanding common stock including exercise
      of
      their options and warrants. These stockholders, if they act together, will
      be
      able to exercise substantial influence over all matters requiring approval
      by
      our stockholders, including the election of directors and approval of
      significant corporate transactions. This concentration of ownership may also
      have the effect of delaying or preventing a change in control of us and might
      affect the market price of our common stock.




***Any
      exercise of outstanding stock options and warrants will dilute then-existing
      stockholders’ percentage of ownership of our common
      stock.***




We
      have a
      significant number of outstanding stock options and warrants. During 2006,
      shares issuable upon the exercise of these options and warrants, at prices
      ranging currently from approximately $0.35 to $49.00 per share, represent
      approximately 11% **** of
      our
      total outstanding stock on a fully diluted basis using the treasury stock
      method.




The
      exercise of the outstanding options and warrants would dilute the then-existing
      stockholders’ percentage ownership of our common stock. Any sales resulting from
      the exercise of options and warrants in the public market could adversely affect
      prevailing market prices for our common stock. Moreover, our ability to obtain
      additional equity capital could be adversely affected since the holders of
      outstanding options and warrants may exercise them at a time when we would
      also
      wish to enter the market to obtain capital on terms more favorable than those
      provided by such options and warrants. We lack control over the timing of any
      exercise or the number of shares issued or sold if exercises occur.




**ITEM 1B.****UNRESOLVED
      STAFF COMMENTS**




We
      have
      filed Amendment No. 2 to our Registration Statement on Form S-4 with the
      Securities and Exchange Commissions on January 18, 2007 in connection with
      our
      acquisition of MedPanel, Inc. There are currently eight unresolved comments
      from
      the SEC, seven of which pertain to specific disclosures in the registration
      statement document and one comment regarding MedPanel’s accounting policy for
      revenue recognition. There are no unresolved comments from the SEC related
      to
      our accounting or periodic disclosures.




16




**ITEM 2.****PROPERTIES**




As
      of
      December 31, 2006, all of our properties are leased. Our principal
      executive offices are located in San Francisco, California. We lease five
      additional offices to support our various investment banking and broker-dealer
      related activities. These offices are located in New York, NY, Cambridge, MA,
      Los Angeles, CA, Newport Beach, CA and Portland, OR. We believe the facilities
      we are now using are adequate and suitable for business
      requirements.




**ITEM 3.****LEGAL
      PROCEEDINGS**




**Thomas
      O’Shea v. Merriman Curhan Ford & Co.**




In
      June
      2006, our broker-dealer subsidiary Merriman Curhan Ford & Co. was served
      with a claim in NASD Arbitration by Mr. O’Shea. Mr. O’Shea is a former at-will
      employee of Merriman Curhan Ford & Co. and worked in the investment banking
      department. Mr. O’Shea resigned from Merriman Curhan Ford & Co. in July
      2005. Mr. O’Shea alleges breach of an implied employment contract, quantum
      meruits, and unjust enrichment based on his allegations that he was to be paid
      more for his work. The matter is in the discovery stage and an arbitration
      hearing is scheduled for June 2007. We believe that we have meritorious defenses
      and intend to contest these claims vigorously. However, in the event that we
      did
      not prevail, based upon the facts as we know them to date, we do not believe
      that the outcome will have a material effect on our financial position,
      financial results or cash flows.




**Westerman
      v. Western Capital Financial Group — NASD Arbitration**




In
      May
      2005, our broker-dealer subsidiary Merriman Curhan Ford & Co. was served
      with a claim in NASD Arbitration by Ms. Westerman. The claim names Western
      Capital Financial Group as one of several defendants. Western Capital Financial
      Group is the predecessor name of Merriman Curhan Ford & Co., the California
      corporation. The Western Capital Financial Group name was effective from
      September June 26, 1986 to July 14, 1998.




This
      claim arises from Ms. Westerman’s purchase of a variable annuity product in
      January 1990 from a predecessor of our broker-dealer subsidiary. MCF Corporation
      acquired Merriman Curhan Ford & Co. in December 2001. The Claimant alleges
      that a registered representative improperly recommended that she move her
      investment to different products on two occasions.




Claimant
      alleges a theory of predecessor liability against Merriman Curhan Ford & Co.
      Claimant prays for monetary damages in excess of $300,000 against the eleven
      named respondents. On May 1, 2006, we reached settlement with Claimant who
      accepted $8,500 to resolve the dispute. Merriman Curhan Ford & Co. has been
      dismissed from the arbitration and the matter is resolved.




**In
      re Odimo Incorporated Securities Litigation**




Merriman
      Curhan Ford & Co. was a defendant in a purported class action suit brought
      in connection with a registered offering involving Odimo Incorporated in which
      we served as co-manager for the company. The complaint, filed in the 17th
      Judicial Circuit Court for Broward County in Florida on September 30, 2005,
      alleged violations of federal securities laws against Odimo and certain of
      its
      officers as well as the company’s underwriters, including us, based on alleged
      misstatements and omissions in the registration statement. Recently, similar
      cases were consolidated and lead plaintiff’s counsel was assigned. Thereafter,
      an amended complaint was filed and the underwriters, including Merriman Curhan
      Ford & Co., were not named as defendants. This matter is now
      resolved.





**Other
      Matters**




Additionally,
      from time to time, we are involved in ordinary routine litigation incidental
      to
      our business.




**ITEM 4.****SUBMISSION
      OF MATTERS TO A VOTE OF STOCKHOLDERS**




No
      matters were submitted to a vote of stockholders during the fourth quarter
      of
      2006.




17




**PART II**




**ITEM 5.****MARKET
      FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER
      MATTERS**




Our
      common stock trades on the American Stock Exchange under the symbol “MEM.” The
      following table sets forth the range of the high and low sales prices per share
      of our common stock for the fiscal quarters indicated. The
      sales
      prices below have been adjusted retroactively to reflect the one-for-seven
      reverse stock split of our authorized and outstanding common stock affected
      on
      November 16, 2006.




**High**
            
            **Low****2006**Fourth
                Quarter
            
            $
            4.97
            
            $
            3.64Third
                Quarter
            
            
            7.35
            
            
            4.06Second
                Quarter
            
            
            10.29
            
            
            7.00First
                Quarter
            
            
            10.36
            
            
            6.72**2005**Fourth
                Quarter
            
            $
            8.33
            
            $
            7.07Third
                Quarter
            
            
            8.82
            
            
            6.65Second
                Quarter
            
            
            10.71
            
            
            7.98First
                Quarter
            
            
            13.93
            
            
            9.31




The
      closing sale price for our common stock on February 13, 2007 was $5.27. The
      market price of our common stock has fluctuated significantly and may be subject
      to significant fluctuations in the future. See Item 7. “Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.”




According
      to the records of our transfer agent, we had approximately 276 stockholders
      of
      record as of February 13, 2007. Because many shares are held by brokers and
      other institutions on behalf of stockholders, we are unable to estimate the
      total number of beneficial stockholders represented by these record
      holders.




Our
      policy is to reinvest earnings in order to fund future growth. Therefore, we
      have not paid and currently do not plan to declare dividends on our common
      stock.




**Securities
      Authorized for Issuance Under Equity Compensation
      Plans**




Information
      relating to compensation plans under which our equity securities are authorized
      for issuance is set forth in Note 9 of the Notes to our Consolidated Financial
      Statements in Part II, Item 8 of the Annual Report on Form 10-K.




**Recent
      Sale of Unregistered Securities**




None.




18




**ITEM 6.**  **SELECTED
      CONSOLIDATED FINANCIAL DATA**




The
      following selected consolidated financial data should be read in conjunction
      with Item 7. “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” and the consolidated financial statements and the notes
      thereto included in Item 8. “Financial Statements and Supplementary
      Data.”




**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Statement
                of operations data:**Revenue
            
            $
            51,818,638
            
            $
            43,184,315
            
            $
            38,368,310
            
            $
            18,306,011
            
            $
            6,469,494Operating
                expenses
            
            
            58,315,930
            
            
            44,912,772
            
            
            36,194,924
            
            
            16,832,676
            
            
            8,291,735Operating
                income (loss)
            
            
            (6,497,292
            )
            
            (1,728,457
            )
            
            2,173,386
            
            
            1,473,335
            
            
            (1,822,241
            )Gain
                (loss) on retirement of convertible notes payable(1)
            
            
            (1,348,805
            )
            
            —
            
            
            —
            
            
            3,088,230
            
            
            —Interest
                income
            
            
            484,909
            
            
            446,273
            
            
            120,431
            
            
            39,483
            
            
            45,345Interest
                expense(2)
            
            
            (535,014
            )
            
            (76,103
            )
            
            (169,787
            )
            
            (1,554,901
            )
            
            (1,364,903
            )Income
                tax expense
            
            
            —
            
            
            (142,425
            )
            
            (249,744
            )
            
            (74,884
            )
            
            —Income
                (loss) from continuing operations
            
            
            (7,896,202
            )
            
            (1,500,712
            )
            
            1,874,286
            
            
            2,971,263
            
            
            (3,141,799
            )Loss
                from discontinued operations
            
            
            (324,213
            )
            
            (13,731
            )
            
            —
            
            
            —
            
            
            (262,843
            )Net
                income (loss)
            
            $
            (8,220,415
            )
            $
            (1,514,443
            )
            $
            1,874,286
            
            $
            2,971,263
            
            $
            (3,404,642
            )Diluted
                income (loss) from continuing operations
            
            $
            (0.79
            )
            $
            (0.16
            )
            $
            0.16
            
            $
            0.39
            
            $
            (1.24
            )**Financial
                condition data:**Cash
                and cash equivalents
            
            $
            13,746,590
            
            $
            11,138,923
            
            $
            17,459,113
            
            $
            6,142,958
            
            $
            1,402,627Marketable
                securities owned
            
            
            7,492,914
            
            
            8,627,543
            
            
            2,342,225
            
            
            608,665
            
            
            764,421Total
                assets
            
            
            30,498,213
            
            
            27,694,413
            
            
            25,007,824
            
            
            9,703,946
            
            
            3,769,127Capital
                lease obligations
            
            
            1,292,378
            
            
            883,993
            
            
            452,993
            
            
            24,401
            
            
            —Notes
                payable, net
            
            
            325,650
            
            
            408,513
            
            
            1,487,728
            
            
            1,927,982
            
            
            8,455,085Stockholders’
                equity (deficit)
            
            $
            16,215,020
            
            $
            18,403,001
            
            $
            16,733,850
            
            $
            5,261,210
            
            $
            (5,529,354
            )







(1)
            In
                April 2003, we exercised our right to cancel the convertible
                promissory note held by Forsythe McArthur & Associates with the
                principal sum of $5,949,042. The fair value of the consideration
                provided
                to Forsythe was less than the carrying amount of the convertible
                note
                payable. The difference between the fair value of the consideration
                provided to Forsythe and the carrying amount of the note payable,
                or
                $3,088,230, was recorded as a gain.  In
              December 2006, MCF Corporation repaid the $7.5 million variable rate
              secured convertible note, issued to Midsummer Investment, Ltd, or
              Midsummer, in March 2006. Midsummer retained the stock warrant to
              purchase 267,857 shares of our common stock. The loss on repayment
              of the
              convertible note consists of the write-off of the unamortized discount
              related to the stock warrant as well as the write-off the unamortized
              debt
              issuance costs.  (2)
            Interest
              expense for 2003 included $1,291,000 in amortization of discounts and
              debt
              issuance costs, while the 2004 amount included $119,000 for amortization
              of discounts and debt issuance costs. The higher amortization expense
              in
              2003 was due to the accelerated amortization that occurred as the notes
              payable were retired or converted to equity instruments during 2003.
              The
              total amount of discounts that will be amortized in future periods
              was
              $13,000 as of December 31,
              2006.




19




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




The
      following discussion and analysis should be read in conjunction with “Selected
      Consolidated Financial Data” and our consolidated financial statements and notes
      thereto included elsewhere in the Annual Report on Form 10-K.




**Overview**




We
      are a
      financial services holding company that provides investment banking, equity
      research, institutional brokerage and asset management through our operating
      subsidiaries, Merriman Curhan Ford & Co. and MCF Asset Management, LLC.
      We focus on providing a full range of specialized and integrated services to
      institutional investors and corporate clients.




Merriman
      Curhan Ford & Co. is an investment bank and securities broker-dealer
      focused on fast growing companies and institutional investors. Our mission
      is to
      become a leader in the researching, advising, financing and trading of fast
      growing companies under $2 billion in market capitalization. We provide equity
      research, brokerage and trading services primarily to institutions, as well
      as
      investment banking and advisory services to corporate clients. We are gaining
      market share by originating differentiated research for our institutional
      investor clients and providing specialized and integrated services for our
      fast-growing corporate clients.




MCF
      Asset
      Management, LLC manages absolute return investment products for institutional
      and high-net worth clients. During 2006, we introduced the MCF Navigator fund
      and MCF Voyager fund. Additionally, we are the sub-advisor for the MCF Focus
      fund. As of December 31, 2006, assets under management across our three fund
      products were nearly $30 million.




In
      February 2005, we acquired Catalyst Financial Planning &
Investment Management, Inc. Catalyst, a Registered Investment Advisor,
      provides investment advice to clients that have invested approximately $130
      million of assets. In January 2007, we sold Catalyst in order to focus on
      other recurring-revenue businesses, such as primary research and asset
      management, which we believe are faster growing and more profitable
      opportunities. While we currently do not have any specific plans, we do intend
      to pursue a wealth management strategy at some future date. The results from
      this segment have been treated as discontinued operations in the consolidated
      financial statements.




**Executive
      Summary**




Our
      revenue grew 20% during 2006 to $51,819,000, a record high, with healthy
      expansion across each of our business lines. We also experienced our largest
      net
      loss during the current fiscal year. There were, however, several non-cash
      items
      included in the net loss, including the expensing of a stock warrant issued
      in
      connection with a financing transaction, stock-based compensation and the
      decline in value of some security positions held in our trading account. Cash
      and cash equivalents increased by $2,608,000 during 2006. Our company has
      consistently grown since we launched Merriman Curhan Ford & Co. at the
      beginning of 2002. Our focus during 2006 was to expand our revenue and build
      a
      stronger franchise through attracting and hiring experienced senior
      professionals. Our focus during 2007 will be to grow our revenue per employee,
      generate meaningful operating cash flows, introduce primary research as a new
      service offering and closely manage our non-compensation related expenses.
      We
      believe that compensation and benefits expense as a percentage of revenue will
      decline as our annual revenue exceeds $100 million.




The
      investment banking team led our overall growth in 2006, with a 43% boost in
      revenue over 2005. We closed more than 30 corporate financing and strategic
      advisory transactions during the year. Our success in expanding our investment
      banking practice in 2006 can be attributed to the investment we have made over
      the last three years in hiring senior investment bankers and support
      professionals, our focus on fast growing companies in our target sectors such
      as
      next-generation energy, and a favorable business environment primarily during
      the first and fourth quarters.




20




Our
      institutional brokerage revenue continued to grow for the fourth consecutive
      year despite the increasing challenges facing this business. Recent developments
      in the brokerage industry, including decimalization and the growth of electronic
      communications networks, or ECNs, have reduced commission rates and
      profitability in the brokerage industry. Many large investment banks have
      responded to lower margins within their equity brokerage divisions by reducing
      research coverage, particularly for smaller companies, consolidating
      sales and
      trading services, and reducing headcount of more experienced sales and trading
      professionals. We believe that we can continue to grow our institutional
      brokerage revenue by producing differentiated equity research on relatively
      undiscovered, fast growing companies within our selected growth sectors and
      providing this research to small and mid-sized traditional and alternative
      investment managers for whom these companies comprise an important part of
      their
      investment portfolios.




During
      2006, our asset management group introduced its first absolute return investment
      products for institutional and high-net worth clients. The MCF Navigator fund
      and MCF Voyager fund began raising capital during 2006. Additionally, we were
      engaged as the sub-advisor for the MCF Focus fund. As of December 31, 2006,
      assets under management across our three fund products were nearly $30 million.
      We don’t expect revenue from managing our investment products to be significant
      until we can accumulate more than $100 million in assets under management.




We
      began
      raising capital for institutional hedge funds, venture capital and private
      equity clients for a fee through our newly formed Capital Access Group during
      2006. We believe fee-based capital raising is an underserved area of the
      institutional brokerage industry. As of December 31, 2006, we had two
      professionals dedicated full-time to this effort. The revenue from Capital
      Access Group was not significant to our overall revenue during 2006, though
      we
      believe that this service offering is complimentary to our institutional
      brokerage business and has the potential for significant future
      growth.




Our
      overall headcount increased by 7% to 166 during 2006, which was significantly
      lower than our 2005 headcount growth rate of 34%. During 2006, we emphasized
      finding the most qualified employee for each position so that we can increase
      revenue per employee in future periods. We expect that, outside of the employees
      that we will assume from our acquisition of MedPanel, we will continue to
      increase our revenue producing employees at approximately the same rate as
      2006
      while maintaining our corporate support headcount unchanged.




We
      continued to invest in areas of our business that we believe will increase
      the
      awareness of our franchise and contribute to future revenue opportunities such
      as hosting investor conferences, introducing management teams of fast growing
      companies to institutional investors, marketing, travel and entertainment,
      and
      other business development activities. These activities resulted in higher
      operating expenses in 2006.




During
      2006, we began recording the expense associated with our stock options in
      accordance with SFAS 123(R). The adoption of this accounting pronouncement
      resulted in approximately $1.9 million in additional non-cash stock-based
      compensation during 2006 as compared to 2005. Our total non-cash stock-based
      compensation expense for 2006 was over $3.8 million. Management excludes
      non-cash stock-based compensation expense from net income (loss) for operational
      and financial decision making purposes because this expense may not be
      indicative of our core business operating results.




During
      2006, we incurred approximately $2.2 million in losses resulting primarily
      from
      a decline in the mark-to-fair market value of positions in our proprietary
      trading account. Much of these losses were unrealized as of December 31,
      2006.




In
      March
      2006, we raised $7.5 million in a private placement of a five year convertible
      debenture with a detachable stock warrant. We raised the capital so that we
      could invest the proceeds as general partner in the MCF Navigator fund. In
      December 2006, we repaid the $7.5 million secured convertible note. The proceeds
      to repay the $7.5 million convertible note were provided by redemption from
      the
      MCF Navigator fund. The investor, Midsummer Investment, Ltd., retained the
      stock
      warrant to purchase 267,858 shares of common stock. The Company recorded a
      primarily non-cash loss on the repayment of the convertible note in the amount
      of $1,349,000 which consisted of $1,154,000 for the write-off of the unamortized
      discount related to the stock warrant and $195,000 for the write-off the
      unamortized debt issuance costs. Midsummer reinvested the $7.5 million directly
      into the MCF Voyager fund and MCF Navigator fund as limited
      partner.




21




**Business
      Environment**




The
      equity and commodity markets were highly volatile during 2006. The first quarter
      started the year with a broad based U.S. and foreign equity market rally that
      resulted in many
      major U.S. indices reaching double digit returns, only to reverse in the second
      quarter and bring most indices to zero or negative year-to-date returns by
      June
      30. During this period, several commodities reached new highs, including crude
      oil ($73/barrel), gold ($732/oz), silver ($14.7/oz), and unleaded gas above
      $3/gallon; all contributing to drive U.S. stock prices and investor confidence
      to year lows. By the beginning of the third quarter, many commodity markets
      reversed with crude oil dropping more than $20/barrel and gold spot prices
      dropping over $166/oz from highs reached only a few months earlier. In July,
      the
      Federal Reserve Board stopped raising the Federal Funds Discount rate and left
      it unchanged for the remainder of the year. In August, the U.S. stock market
      re-started a broad based rally that lasted to the end of the year. NASDAQ
      recovered from negative returns to end with a positive 9.5% and the Russell
      2000
      Growth Index was up over 13% in 2006.




Our
      securities broker-dealer and investment banking activities are linked to the
      capital markets. In addition, our business activities are focused in the
      technology, telecommunications, next-generation energy, health care and consumer
      sectors. By their nature, our business activities are highly competitive and
      are
      not only subject to general market conditions, volatile trading markets and
      fluctuations in the volume of market activity, but also to the conditions
      affecting the companies and markets in our areas of focus.




Fluctuations
      in revenue also occur due to the overall level of market activity, which, among
      other things, affects the flow of investment dollars and the size, number and
      timing of investment banking transactions. In addition, a downturn in the level
      of market activity can lead to a decrease in brokerage commissions. Therefore,
      revenue in any particular period may vary significantly from year to
      year.




The
      financial services industry continues to be affected by an intensifying
      competitive environment. There has been an increase in the number and size
      of
      companies competing for a similar customer base; some of such competitors have
      greater capital resources and additional associated services with which to
      pursue these activities.




22




**Results
      of Operations**




The
      following table sets forth a summary of financial highlights for the three
      years
      ended December 31, 2006:




**200****6**
            
            **2005**
            
            **2004**Revenue:Commissions
            
            $
            30,105,085
            
            $
            26,992,427
            
            $
            21,826,628Principal
                transactions
            
            
            (171,055
            )
            
            1,366,938
            
            
            2,788,120Investment
                banking
            
            
            21,190,786
            
            
            14,816,814
            
            
            13,728,556Other
            
            
            693,822
            
            
            8,136
            
            
            25,006Total
                revenue
            
            
            51,818,638
            
            
            43,184,315
            
            
            38,368,310Operating
                expenses:Compensation
                and benefits
            
            
            42,840,431
            
            
            31,659,488
            
            
            26,765,265Brokerage
                and clearing fees
            
            
            2,614,513
            
            
            2,312,616
            
            
            2,383,831Professional
                services
            
            
            2,441,417
            
            
            1,987,317
            
            
            1,299,540Occupancy
                and equipment
            
            
            1,665,410
            
            
            1,522,351
            
            
            960,849Communications
                and technology
            
            
            2,969,872
            
            
            1,918,693
            
            
            1,404,702Depreciation
                and amortization
            
            
            645,129
            
            
            490,165
            
            
            162,318Travel
                and entertainment
            
            
            2,738,393
            
            
            1,723,290
            
            
            1,448,283Other
            
            
            2,400,765
            
            
            3,298,852
            
            
            1,770,136Total
                operating expenses
            
            
            58,315,930
            
            
            44,912,772
            
            
            36,194,924Operating
                income (loss)
            
            
            (6,497,292
            )
            
            (1,728,457
            )
            
            2,173,386Loss
                on retirement of convertible note payable
            
            
            (1,348,805
            )
            
            —
            
            
            —Interest
                income
            
            
            484,909
            
            
            446,273
            
            
            120,431Interest
                expense
            
            
            (535,014
            )
            
            (76,103
            )
            
            (169,787
            )Income
                (loss) from continuing operations before income taxes
            
            
            (7,896,202
            )
            
            (1,358,287
            )
            
            2,124,030Income
                tax expense
            
            
            —
            
            
            (142,425
            )
            
            (249,744
            )Income
                (loss) from continuing operations
            
            
            (7,896,202
            )
            
            (1,500,712
            )
            
            1,874,286Loss
                on discontinued operations
            
            
            (324,213
            )
            
            (13,731
            )
            
            —Net
                income (loss)
            
            $
            (8,220,415
            )
            $
            (1,514,443
            )
            $
            1,874,286







Our
      revenue during 2006 increased by $8,634,000 or 20%, from 2005 reflecting strong
      growth in investment banking transactions and continued growth of our brokerage
      sales and trading activities. We incurred a net loss of $8,220,000 during 2006
      as compared to net loss of $1,514,000 during 2005.




Our
      net
      loss during 2006 included the following non-cash items:




Stock-based
                compensation expense
            
            $
            3,836,781Loss
                on retirement of convertible note payable
            
            
            1,348,805Depreciation
                and amortization
            
            
            655,334Write-off
                of uncollectible accounts receivable
            
            
            383,565Amortization
                of discounts on debt
            
            
            146,776Amortization
                of intangible assets
            
            
            138,051Total
            
            $
            6,509,312




23




***Investment
      Banking Revenue***




Our
      investment banking activity includes the following:




·
            Capital
                Raising—Capital raising includes private placements of equity and debt
                instruments and underwritten public
                offerings.




·
            Financial
                Advisory—Financial advisory includes advisory assignments with respect to
                mergers and acquisitions, divestures, restructurings and
                spin-offs.




The
      following table sets forth our revenue and transaction volumes from our
      investment banking activities during the three years ended December 31,
      2006:




**200****6**
            
            **2005**
            
            **2004****Revenue:**Capital
                raising
            
            $
            15,939,480
            
            $
            13,396,781
            
            $
            11,845,148Financial
                advisory
            
            
            5,251,306
            
            
            1,420,033
            
            
            1,883,408Total
                investment banking revenue
            
            $
            21,190,786
            
            $
            14,816,814
            
            $
            13,728,556**Transaction
                Volumes:**Public
                offerings:Capital
                underwritten participations
            
            $
            156,500,000
            
            $
            71,238,000
            
            $
            55,637,000Number
                of transactions
            
            
            15
            
            
            8
            
            
            10Private
                placements:Capital
                raised
            
            $
            173,101,000
            
            $
            253,939,000
            
            $
            176,822,000Number
                of transactions
            
            
            15
            
            
            14
            
            
            13Financial
                advisory:Transaction
                amounts
            
            $
            169,423,000
            
            $
            21,321,000
            
            $
            32,800,000Number
                of transactions
            
            
            1
            
            
            1
            
            
            2







Our
      investment banking revenue amounted to $21,191,000, or 41% of our revenue during
      2006, representing a 43% increase compared to $14,817,000 recognized in 2005.
      We
      expanded our public underwriting and financial advisory transactions during
      2006
      which we believe is more valuable to us building our long-term franchise over
      private placements. We participated in 15 equity underwriting transactions
      and
      lead our first initial public offering during 2006.




Our
      investment banking revenue amounted to $14,817,000, or 34% of our revenue during
      2005, representing a 8% increase compared to $13,729,000 recognized in 2004.
      The
      increase in our investment banking revenue during 2005 can be primarily
      attributed to the increased awareness of our brand in the market place and
      a
      favorable business environment during 2005. We believe that the increase in
      revenue was partially offset by a senior management transition in the investment
      banking department. This transition was completed at the beginning of the third
      quarter 2005 with the hiring of a new head of investment banking.




During
      each of the three years ended December 31, 2006, no single investment
      banking customer accounted for more than 10% of our revenue.




24




***Commissions
      and Principal Transactions Revenue***




Our
      broker-dealer activity includes the following:




·
            Commissions—Commissions
                include revenue resulting from executing stock trades for exchange-listed
                securities, over-the-counter securities and other transactions as
                agent.




·
            Principal
                Transactions—Principal transactions consist of a portion of dealer spreads
                attributed to our securities trading activities as principal in
                NASDAQ-listed and other securities, and include transactions derived
                from
                our activities as a market-maker. Additionally, principal transactions
                include gains and losses resulting from market price fluctuations
                that
                occur while holding positions in our trading security
                inventory.




The
      following table sets forth our revenue and several operating metrics which
      we
      utilize in measuring and evaluating performance and the results of our trading
      activity operations:




**200****6**
            
            **2005**
            
            **2004****Revenue:**Commissions
            
            $
            30,105,085
            
            $
            26,992,427
            
            $
            21,826,628Principal
                transactions:Customer
                principal transactions, proprietary trading and market
                making
            
            $
            (207,779
            )
            $
            308,764
            
            $
            1,758,119Investment
                portfolio
            
            
            36,724
            
            
            1,058,174
            
            
            1,030,001Total
                principal transactions revenue
            
            $
            (171,055
            )
            $
            1,366,938
            
            $
            2,788,120**Transaction
                Volumes:**Number
                of shares traded
            
            
            937,005,000
            
            
            983,755,000
            
            
            919,112,000Number
                of active clients
            
            
            564
            
            
            614
            
            
            599







Commissions
      amounted to $30,105,000, or 58%, of our revenue during 2006, representing an
      11%
      increase over $26,992,000 recognized during 2005. The higher commissions can
      be
      attributed to the increase in the number of companies in our selected growth
      sectors that are covered by our research analysts from 136 at December 31,
      2005
      to 194 at December 31, 2006. The
      increase in revenue during 2006 was also due to an increase in average
      commissions per share, partially offset by a slight decrease in our average
      daily trading volume in equity securities. Finally, assets brokered by our
      Institutional Cash Distributors group have more than doubled during 2006.




Commissions
      amounted to $26,992,000, or 62%, of our revenue during 2005, representing a
      24%
      increase over $21,827,000 recognized during 2004. The higher commissions were
      primarily attributed to the hiring of additional sales and research
      professionals and an increase in the penetration of active client accounts
      during 2005 as compared to 2004.




Principal
      transaction revenue consists of four different activities - customer principal
      trades, market making, trading for our proprietary account, and realized and
      unrealized gains and losses in our investment portfolio. As a broker-dealer,
      we
      account for all of our marketable security positions on a trading basis and
      as a
      result, all security positions are marked to fair market value each
      day. Returns
      from market making and proprietary trading activities tend to be more volatile
      than acting as agent or principal for customers.




Principal
      transactions reduced revenue by $171,000 during 2006 and increased revenue
      by
      $1,367,000 during 2005. During 2006, we incurred $2,255,000 in losses resulting
      from a decline in the mark-to-fair market value of positions in our proprietary
      trading account. These losses were partially offset by revenue from principal
      trades for customers. During 2005, we recognized a $109,000 gain in our
      proprietary trading account. The
      $1,058,000 increase in the fair market value of our investment portfolio, which
      primarily consists of stock warrants and restricted common stock issued by
      our
      small and mid-cap clients, during 2005 resulted from gains in our stock warrant
      portfolio. The value of this portfolio has increased in each of the three years
      ended December 31, 2006.




25




During
      2006 and 2005, no single brokerage customer accounted for more than 10% of
      our
      revenue, while one brokerage customer accounted for 10% of our revenue
      during 2004.




***Compensation
      and Benefits Expenses***




Compensation
      and benefits expense represents the majority of our operating expenses and
      includes incentive compensation paid to sales, trading, research and investment
      banking professionals, as well as discretionary bonuses, salaries and wages,
      and
      stock-based compensation. Incentive compensation varies primarily based on
      revenue production. Discretionary bonuses paid to research analysts also vary
      with commissions revenue production but includes other qualitative factors
      as
      well. Salaries, payroll taxes and employee benefits tend to vary based on
      overall headcount.




The
      following table sets forth the major components of our compensation and benefits
      for the three years ended December 31, 2006:




**2006**
            
            **2005**
            
            **2004**Incentive
                compensation and discretionary bonuses
            
            $
            26,563,425
            
            $
            17,990,288
            
            $
            17,694,420Salaries
                and wages
            
            
            9,076,815
            
            
            8,995,642
            
            
            5,801,390Stock-based
                compensation
            
            
            3,836,781
            
            
            1,959,329
            
            
            1,115,909Payroll
                taxes, benefits and other
            
            
            3,363,410
            
            
            2,714,229
            
            
            2,153,546Total
                compensation and benefits
            
            $
            42,840,431
            
            $
            31,659,488
            
            $
            26,765,265Total
                compensation and benefits as a percentage of revenue
            
            
            83
            %
            
            73
            %
            
            70
            %Cash
                compensation and benefits as a percentage of revenue
            
            
            75
            %
            
            69
            %
            
            67
            %







The
      increase in compensation and benefits expense of $11,181,000 or 35%, from 2005
      to 2006 and $4,894,000, or 18%, from 2004 to 2005 were due primarily to higher
      incentive compensation which is directly correlated to revenue production.
      Additionally, our stock-based compensation expenses increased by $1,877,000
      during 2006 as a result of adopting SFAS No. 123(R).




Cash
      compensation is equal to total compensation and benefits expense excluding
      stock-based compensation. Cash
      compensation and benefits expense as a percentage of revenue increased to 75%
      during 2006 as compared to 69% in 2005. The proprietary trading losses of
      $2,255,000 during 2006 added 3% to c ash
      compensation as a percentage of revenue as the losses reduced revenue but did
      not impact compensation expense. The balance of this variance was caused by
      our
      increasing certain incentive payouts during the current year. Cash
      compensation and benefits expense as a percentage of revenue increased to 69%
      during 2005 as compared to 67% in 2004. This increase is due in part to higher
      salaries and wages resulting from increased headcount in anticipation of our
      revenue growth.




Our
      headcount has increased from 116 at December 31, 2004 to 155 at
      December 31, 2005 to 166 as of December 31, 2006.  No
      single
      sales professional accounted for more than 10% of our revenue in 2006. One
      sales
      professional accounted for 12% of our revenue during 2005 and one sales
      professional accounted for 15% of our revenue during 2004.




Stock-based
      compensation increased by $1,877,000 in 2006 as compared to 2005. We adopted
      SFAS 123(R), “Share-Based Payment,” on January 1, 2006 which requires that
      we recognize compensation expense for all share-based awards made to employees
      and directors based on estimated fair values. We used the modified prospective
      application transition method and, accordingly, have not restated financial
      statements for prior periods to include the impact of SFAS 123(R). To determine
      the valuation of share-based awards under SFAS 123(R), we continue to use the
      Black-Scholes option pricing model that we utilized to determine our pro forma
      share-based compensation in prior periods. Additional information regarding
      our
      adoption of SFAS 123(R) during 2006 is set forth in the notes to the
      consolidated financial statements and in “Critical Accounting Policies and
      Estimates”. The
      increase in stock-based compensation during 2005 reflects our decision to grant
      restricted stock to new and existing employees beginning in the second half
      of
      2003. Prior to 2003, we only granted stock options to employees which are
      accounted for under the intrinsic value method, in accordance with APB
      No. 25.




26




***Other
      Operating Expenses***




Brokerage
      and clearing fees include trade processing expenses that we pay to our clearing
      broker and execution fees that we pay to floor brokers and electronic
      communication networks. Merriman Curhan Ford & Co. is a fully-disclosed
      broker-dealer, which has engaged a third party clearing broker to perform all
      of
      the clearance functions. The clearing broker-dealer processes and settles the
      customer transactions for Merriman Curhan Ford & Co. and maintains the
      detailed customer records. Security trades are executed by third-party
      broker-dealers and electronic trading systems. These expenses are almost
      entirely variable with commissions revenue and the volume of brokerage
      transactions. The increase in brokerage and clearing fees of $302,000, or 13%
      from 2005 to 2006 was inline with our growth in the brokerage commission
      activities. The decrease in brokerage and clearing fees of $71,000, or 3% from
      2004 to 2005 while increasing commissions revenue during the same period
      reflects the cost savings that we achieved by negotiating lower fees with our
      clearing broker during the fourth quarter 2004. We anticipate brokerage and
      clearing fees for 2007 will increase sequentially over 2006 as we are
      forecasting a higher level of commissions revenue for 2007.




Professional
      services expense includes legal fees, accounting fees, expenses related to
      investment banking transactions and various consulting fees. Many of these
      expenses, such as legal and accounting fees, are to a large extent fixed in
      nature. The increase of $454,000 or 23%, from 2005 to 2006 included higher
      legal
      fees in connection with investment banking transactions, costs involved with
      introducing our new investment products and litigation costs. The increase
      of
      $688,000 or 53%, from 2004 to 2005 primarily reflected higher legal costs
      related to various corporate and investment banking activities. We anticipate
      professional services expense for 2007 will increase slightly as compared to
      2006.




Occupancy
      and equipment expense includes office leases, equipment rental, equipment and
      leasehold maintenance costs. These expenses are largely fixed in nature and
      tend
      to increase as we hire additional employees. The increase of $143,000, or 9%,
      from 2005 to 2006 and $562,000, or 58%, from 2004 to 2005 resulted mostly from
      expansion of our offices and computer equipment purchases resulting from the
      hiring of additional investment banking, research, sales and trading
      professionals. During 2004, we moved into larger office spaces in San Francisco,
      New York, Boston, Los Angeles and Portland. During 2006, we leased additional
      space in San Francisco. We anticipate occupancy and equipment expense for 2007
      will increase sequentially over 2006.




Communications
      and technology expense includes market data and quote services, voice, data
      and
      Internet service fees, and data processing costs. Historically, these costs
      have
      increased as we hire additional employees. The increase of $1,051,000, or 55%,
      from 2005 to 2006 was primarily due to
      upgrading our trading order management system, as well as the increase in market
      data and quote services as we continue to expand our market maker activities.
      The increase of $514,000 or 37%, from 2004 to 2005 was due to higher telephone
      and data service fees incurred in our sales and trading operations. The higher
      telephone and data service charges are the result of increased headcount and
      the
      expansion of our offices, as well as higher costs to upgrade our information
      technology infrastructure. We anticipate communications and technology expense
      for 2007 will increase sequentially over 2006.




Depreciation
      and amortization expense primarily relate to the depreciation of our computer
      equipment and leasehold improvements. Depreciation and amortization is mostly
      fixed in nature. The increase of $155,000, or 32%, from 2005 to 2006 and
      $328,000, or 202%, from 2004 to 2005 were due to increased capital expenditures,
      including leasehold improvements to our San Francisco and New York offices
      during 2004, to facilitate our growth and expansion. We incurred additional
      leasehold improvements to our San Francisco offices during 2006. We anticipate
      depreciation and amortization expense for 2007 will increase sequentially over
      2006.




27




Travel
      and entertainment expense primarily consists of business development costs
      for
      our investment banking business, travel expenses for client non-deal road shows
      and costs for our research analysts to visit the companies that they cover.
      Non-deal road shows represent meetings in which management teams of our
      corporate clients present directly to our institutional investors. The increase
      of $1,015,000, or 59%, from 2005 to 2006, and $275,000, or 19% from 2004 to
      2005, were due to our continued effort to extend our penetration with our active
      clients, as well as seeking new business opportunities with potential clients.
      We anticipate travel and entertainment expense for 2007 will not increase or
      decrease significantly from 2006.




Other
      operating expense includes professional liability and property insurance,
      recruiting, investor conferences, printing, business licenses and taxes, office
      supplies and other miscellaneous office expenses. The decrease of $898,000
      or
      27%, from 2005 to 2006 was primarily due to the reversal of $500,000 bad debt
      write-off from 2005 related to the note receivable from Ascend Services Ltd.
      We
      collected the full balance of the Ascend note receivable in 2006. The decrease
      in 2006 also reflects the receipt of a favorable legal judgment to the firm
      related to a brokerage activity claim, as well as decrease in recruiting
      expense. The increase of $1,529,000, or 86%, from 2004 to 2005 was attributed
      to
      higher costs associated with our annual investor conference, recruiting costs,
      and various business taxes. The 2005 expense also includes the write-off of
      the
      $500,000 note receivable from Ascend. We anticipate other operating expense
      for
      2007 will increase sequentially over 2006.




***Loss
      on Retirement of Convertible Note Payable***




In
      March
      2006, we raised $7.5 million in a private placement of a five year convertible
      debenture with a detachable stock warrant. We raised the capital so that we
      could invest the proceeds as general partner in the MCF Navigator fund. In
      December 2006, we repaid the $7.5 million secured convertible note. The proceeds
      to repay the $7.5 million convertible note were provided by redemption from
      the
      MCF Navigator fund. The investor, Midsummer Investment, Ltd., retained the
      stock
      warrant to purchase 267,858 shares of common stock. The Company recorded a
      loss
      on the repayment of the convertible note in the amount of $1,349,000, which
      consisted of $1,154,000 for the write-off of the unamortized discount related
      to
      the stock warrant and $195,000 for the write-off the unamortized debt issuance
      costs. Midsummer reinvested the $7.5 million directly into the MCF Voyager
      fund
      and MCF Navigator fund as limited partner.




***Interest
      Income***




Interest
      income represents interest earned on our cash balances maintained at financial
      institutions. The increase of approximately $39,000, or 9%, from 2005 to 2006
      and $326,000, or 271% from 2004 to 2005 were due to increases in average
      interest earning assets and average interest rates during these
      periods.




***Interest
      Expense***




Interest
      expense for 2006 included $352,000 for interest expense and $183,000 for
      amortization of discounts and debt issuance costs, while the 2005 amount
      included $66,000 for interest expense and $10,000 for amortization of discounts
      and debt issuance costs. The increase in 2006 resulted from interest incurred
      for the Midsummer debt from March through December of 2006. The higher
      amortization of discounts and debt issuance costs in 2006 was due to the
      issuance of notes payable to Midsummer
      Investment, Ltd .




***Income
      Tax Expense***




Income
      tax expense reflected taxes calculated for federal and state tax purposes.
      Realization of our deferred tax assets depends upon us generating sufficient
      taxable income in future years from the reversal of temporary differences and
      from net operating loss carryforwards. Due to the uncertainty of the timing
      and
      amount of such realization, we concluded that a full valuation allowance was
      required as of December 31, 2006 and 2005.




28




**Critical
      Accounting Policies and Estimates**




The
      consolidated financial statements are prepared in accordance with accounting
      principles generally accepted in the United States, which require 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. On an on-going basis, we evaluate our estimates, including those
      related to the valuation of securities owned and deferred tax assets. We base
      our estimates on historical experience and on various other assumptions that
      are
      believed 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 could differ
      from those estimates. We believe the following critical accounting policies
      affect our more significant judgments and estimates used in the preparation
      of
      our consolidated financial statements.




***Valuation
      of Securities Owned***




“Securities
      owned” and “Securities sold, but not yet purchased” in our consolidated
      statements of financial condition consist of financial instruments carried
      at
      fair value or amounts that approximate fair value, with related unrealized
      gains
      or losses recognized in our results of operations. The use of fair value to
      measure these financial instruments, with related unrealized gains and losses
      recognized immediately in our results of operations, is fundamental to our
      financial statements and is one of our most critical accounting policies. The
      fair value of a financial instrument is the amount at which the instrument
      could
      be exchanged in a current transaction between willing parties, other than in
      a
      forced or liquidation sale.




Fair
      values of our financial instruments are generally obtained from quoted market
      prices in active markets, broker or dealer price quotations, or alternative
      pricing sources with reasonable levels of price transparency. To the extent
      certain financial instruments trade infrequently or are non-marketable
      securities and, therefore, have little or no price transparency, we value these
      instruments based on management's estimates. The fair value of these securities
      is subject to a high degree of volatility and may be susceptible to significant
      fluctuation in the near term. Securities that contain restrictions are stated
      at
      a discount to the value of readily marketable securities. Stock warrants are
      carried at a discount to fair value as determined by using the Black-Scholes
      Option Pricing model.




***Revenue
      Recognition***




Commissions
      revenue and related clearing expenses are recorded on a trade-date basis as
      security transactions occur. Principal transactions in regular-way trades are
      recorded on the trade date, as if they had settled. Profit and loss arising
      from
      all securities and commodities transactions entered into for the account and
      risk of our company are recorded on a trade-date basis.




Investment
      banking revenue includes underwriting and private placement agency fees earned
      through our participation in public offerings and private placements of equity
      and convertible debt securities and fees earned as financial advisor in mergers
      and acquisitions and similar transactions. Underwriting revenue is earned in
      securities offerings in which we act as an underwriter and includes management
      fees, selling concessions and underwriting fees. Management fees are recorded
      on
      the offering date, selling concessions on settlement date, and underwriting
      fees
      at the time the underwriting is completed and the related income is reasonably
      determinable. Syndicate expenses related to securities offerings in which we
      act
      as underwriter or agent are deferred until the related revenue is recognized
      or
      we determine that it is more likely than not that the securities offerings
      will
      not ultimately be completed. Merger and acquisition fees and other advisory
      service revenue are generally earned and recognized only upon successful
      completion of the engagement. Underwriting revenue is presented net of related
      expenses. Unreimbursed expenses associated with private placement and advisory
      transactions are recorded as expenses as incurred.




As
      co-manager for registered equity underwriting transactions, management must
      estimate our share of transaction related expenses incurred by the lead manager
      in order to recognize revenue. Transaction related expenses are deducted from
      the underwriting fee and therefore reduces the revenue that is recognized as
      co-manager. Such amounts are adjusted to reflect actual expenses in the period
      in which we receive the final settlement, typically 90 days following the
      closing of the transaction.




29




***Stock-Based
      Compensation***




On
      January 1, 2006, we adopted SFAS 123(R), “Shared-Based Payment,” which
      requires the measurement and recognition of compensation expense, based on
      estimated fair values, for all share-based awards, made to employees and
      directors, including stock options, non-vested stock, and participation in
      our
      employee stock purchase plan. Share-based compensation expense recognized in
      our
      consolidated statement of operations for the twelve months ended December 31,
      2006 includes compensation expense for share-based awards granted (i) prior
      to, but not yet vested as of December 31, 2005, based on the grant date
      fair value estimated in accordance with the provisions of SFAS 123, and
      (ii) subsequent to December 31, 2005, based on the grant date fair
      value estimated in accordance with the provisions of SFAS 123(R).




We
      estimate the fair value of stock options granted using the Black-Scholes option
      pricing method. This option pricing model requires the input of highly
      subjective assumptions, including the option's expected life and the price
      volatility of the underlying stock. The expected life of employee stock options
      represents the weighted-average period the stock options are expected to remain
      outstanding. The Company calculated the expected term using the lattice model
      with specific assumptions about the suboptimal exercise behavior, post-vesting
      termination rates and other relevant factors. The expected stock price
      volatility was determined using the historical volatility of our common stock.
      The fair value is then amortized on a straight-line basis over the requisite
      service periods of the awards, which is generally the vesting
      period.




Because
      share-based compensation expense is based on awards that are ultimately expected
      to vest, it has been reduced to account for estimated forfeitures. SFAS 123(R)
      requires forfeitures to be estimated at the time of grant and revised, if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates. In our pro forma information required under SFAS 123 for the periods
      prior to fiscal 2006, we accounted for forfeitures as they occurred. Changes
      in
      these inputs and assumptions can materially affect the measure of estimated
      fair
      value of our share-based compensation.




***Deferred
      Tax Valuation Allowance***




We
      account for income taxes in accordance with the provision of SFAS No.
      109,*Accounting for Income Taxes*,
      which
      requires the recognition of deferred tax assets and liabilities at tax rates
      expected to be in effect when these balances reverse. Future tax benefits
      attributable to temporary differences are recognized to the extent that the
      realization of such benefits is more likely than not. We have concluded that
      it
      is more likely than not that our deferred tax assets as of December 31, 2006
      and
      2005 will not be realized based on the scheduling of deferred tax liabilities
      and projected taxable income. The amount of the deferred tax assets actually
      realized, however, could vary if there are differences in the timing or amount
      of future reversals of existing deferred tax liabilities or changes in the
      actual amounts of future taxable income. Should we determine that we will be
      able to realize all or part of the deferred tax asset in the future, an
      adjustment to the deferred tax asset will be recorded in the period such
      determination is made.




**Liquidity
      and Capital Resources**




Historically,
      we have satisfied our liquidity and regulatory capital needs through the
      issuance of equity and debt securities. As of December 31, 2006, liquid
      assets consisted primarily of cash and cash equivalents of $13,747,000 and
      marketable securities of $7,493,000, for a total of $21,240,000, which is
      $1,473,000 higher than $19,767,000 in liquid assets as of December 31, 2005.




Cash
      and
      cash equivalents increased by $2,608,000 during 2006. Cash provided by our
      operating activities for 2006 was $2,324,000 which consists of our net loss
      of
      $8,220,000 adjusted for non-cash expenses including stock-based compensation
      of
      $3,837,000, net unrealized loss on securities owned of $2,172,000, loss on
      retirement of convertible note payable of $1,349,000, depreciation and
      amortization of $655,000, provision for doubtful accounts of $384,000,
      amortization of discounts on debt of $147,000 and amortization of intangible
      assets of $138,000, partially offset by the increase in commissions and bonus
      payable of $2,976,000. Cash used in investing activities amounted to $137,000
      during 2006 which included (i) an earn out payment in connection with our
      acquisition of Catalyst and (ii) our purchase of equipment and fixtures. Cash
      provided in our financing activities was $421,000. Our financing activities
      included proceeds from the issuance of common stock in connection with our
      employee stock purchase plan, partially offset by debt service
      payments.




30




Merriman
      Curhan Ford & Co., as a broker-dealer, is subject to Rule 15c3-1
      of the Securities Exchange Act of 1934, which specifies uniform minimum net
      capital requirements, as defined, for their registrants. As of December 31,
      2006, Merriman Curhan Ford & Co. had regulatory net capital of
      $4,593,000, which exceeded the required amount by $3,150,000.




We
      believe that our existing cash balances and investments will be sufficient
      to
      meet our liquidity and capital spending requirements, both for the next twelve
      months as well as for the long-term. However, we may require additional capital
      investment to fund our working capital if we incur future operating losses.
      We
      cannot be certain that additional debt or equity financing will be available
      when required or, if available, that we can secure it on terms satisfactory
      to
      us.




The
      following is a table summarizing our significant commitments as of
      December 31, 2006, consisting of debt payments related to convertible and
      non-convertible notes payable and capital leases and future minimum lease
      payments under all non-cancelable operating leases with initial or remaining
      terms in excess of one year.




**Notes**
              **Payable**
            
            **Operating**
              **Leases**
            
            **Capital**
              **Leases**2007
            
            $
            106,775
            
            $
            2,008,017
            
            $
            647,8582008
            
            
            243,990
            
            
            1,263,403
            
            
            493,0752009
            
            
            —
            
            
            832,568
            
            
            273,8342010
            
            
            —
            
            
            869,731
            
            
            —2011
            
            
            —
            
            
            709,898
            
            
            —Thereafter
            
            
            —
            
            
            —
            
            
            —Total
                commitments
            
            $
            350,765
            
            $
            5,683,617
            
            $
            1,414,767







**Off-Balance
      Sheet Arrangements**




We
      were
      not a party to any off-balance sheet arrangements during the three years ended
      December 31, 2006. In particular, we do not have any interest in so-called
      limited purpose entities, which include special purpose entities and structured
      finance entities.




**Newly
      Issued Accounting Standards**




In
      September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
      157,
“Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework
      for measuring fair value under generally accepted accounting principles, and
      expands disclosures about fair value measurements. SFAS 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. We are currently evaluating
      the
      impact the adoption of this statement could have on our financial condition,
      results of operations and cash flows.





In
      July
      2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income* Taxes,
      which supplements SFAS No. 109 by defining the confidence level that a
      tax position must meet in order to be recognized in the financial statements.
      Interpretation No. 48 requires that the tax effects of a position be
      recognized only if it is “more-likely- than-not” to be sustained based solely on
      its technical merits as of the reporting date. The more-likely-than-not
      threshold represents a positive assertion by management that a company is
      entitled to the economic benefits of a tax position. If a tax position is not
      considered more-likely-than-not to be sustained based solely on its technical
      merits, no benefits of the position are to be recognized. Moreover, the
      more-likely-than-not threshold must continue to be met in each reporting period
      to support continued recognition of a benefit. At adoption, companies must
      adjust their financial statement to reflect only those tax positions that are
      more-likely-than-not to be sustained as of the adoption date. Any necessary
      adjustment would be recorded directly to retained earnings in the period of
      adoption and reported as a change in accounting principle. This Interpretation
      is effective as of the beginning of the first fiscal year beginning after
      December 15, 2006. The Company will adopt Interpretation No. 48 on
      January 1, 2007 and is currently assessing the potential impact on our
      financial statements.




31




In
      February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid
      Financial Instruments” which amends SFAS 133, “Accounting for Derivative
      Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155
      simplifies the accounting for certain derivatives embedded in other financial
      instruments by allowing them to be accounted for as a whole if the holder elects
      to account for the whole instrument on a fair value basis. SFAS 155 also
      clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS
      155
      is effective for all financial instruments acquired, issued or subject to a
      remeasurement event occurring in fiscal years beginning after September 15,
      2006. We do not believe the adoption of this statement will have a material
      impact on our financial condition, results of operations or cash
      flows.







**Quarterly
      Financial Data**




The
      table
      below sets forth the operating results represented by certain items in our
      statements of operations for each of the eight quarters in the period ended
      December 31, 2006. This information is unaudited, but in our opinion
      reflects all adjustments (consisting only of normal recurring adjustments)
      that
      we consider necessary for a fair presentation of such information in accordance
      with generally accepted accounting principles. The results for any quarter
      are
      not necessarily indicative of results for any future period.




**200****6****1st**
            
            **2nd**
            
            **3rd**
            
            **4th**Revenue
            
            $
            11,553,908
            
            $
            14,871,260
            
            $
            7,426,490
            
            $
            17,966,980Operating
                expenses
            
            
            12,890,718
            
            
            15,542,660
            
            
            12,717,715
            
            
            17,164,837Operating
                income (loss)
            
            
            (1,336,810
            )
            
            (671,400
            )
            
            (5,291,225
            )
            
            802,143Net
                income (loss)
            
            
            (1,349,608
            )
            
            (1,059,935
            )
            
            (5,109,051
            )
            
            (701,821
            )Basic
                net income (loss) per common share
            
            $
            (0.14
            )
            $
            (0.11
            )
            $
            (0.50
            )
            $
            (0.07
            )Diluted
                net income (loss) per common share
            
            $
            (0.14
            )
            $
            (0.11
            )
            $
            (0.50
            )
            $
            (0.07
            )







**200****5****1st**
            
            **2nd**
            
            **3rd**
            
            **4th**Revenue
            
            $
            12,408,710
            
            $
            9,102,641
            
            $
            8,916,872
            
            $
            12,756,092Operating
                expenses
            
            
            11,534,288
            
            
            10,172,975
            
            
            10,432,324
            
            
            12,773,185Operating
                income (loss)
            
            
            874,422
            
            
            (1,070,334
            )
            
            (1,515,452
            )
            
            (17,093
            )Net
                income (loss)
            
            
            648,425
            
            
            (726,336
            )
            
            (1,492,744
            )
            
            56,212Basic
                net income (loss) per common share
            
            $
            0.07
            
            $
            (0.08
            )
            $
            (0.16
            )
            $
            0.01Diluted
                net income (loss) per common share
            
            $
            0.05
            
            $
            (0.08
            )
            $
            (0.16
            )
            $
            0.00




**ITEM 7A.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**




The
      following discussion about market risk disclosures involves forward-looking
      statements. Actual results could differ materially from those projected in
      the
      forward-looking statements. We may be exposed to market risks related to changes
      in equity prices, interest rates and foreign currency exchange rates. We do
      not
      use derivative financial instruments for speculative, trading or any other
      purpose.




32




***Equity
      Price Risk***




The
      potential for changes in the market value of our trading positions is referred
      to as “market risk.” Our trading positions result from proprietary trading
      activities. These trading positions in individual equities and equity indices
      may be either long or short at any given time. Equity price risks result from
      exposures to changes in prices and volatilities of individual equities and
      equity indices. We seek to manage this risk exposure through diversification
      and
      limiting the size of individual positions within the portfolio. The effect
      on
      earnings and cash flows of an immediate 10% increase or decrease in equity
      prices generally is not ascertainable and could be positive or negative,
      depending on the positions we hold at the time. We do not establish hedges
      in
      related securities or derivatives. From time to time, we also hold equity
      securities received as compensation for our services in investment banking
      transactions. These equity positions are always long. However, as the prices
      of
      individual equity securities do not necessarily move in tandem with the
      direction of the general equity market, the effect on earnings and cash flows
      of
      an immediate 10% increase or decrease in equity prices generally is not
      ascertainable.




***Interest
      Rate Risk***




Our
      exposure to market risk resulting from changes in interest rates relates
      primarily to our investment portfolio and long term debt obligations. Our
      interest income and cash flows may be impacted by changes in the general level
      of U.S. interest rates. We do not hedge this exposure because we believe that
      we
      are not subject to any material market risk exposure due to the short-term
      nature of our investments. We would not expect an immediate 10% increase or
      decrease in current interest rates to have a material effect on the fair market
      value of our investment portfolio.




Our
      long
      term debt obligations bear interest at a fixed rate. Accordingly, an immediate
      10% increase or decrease in current interest rates would not have an impact
      on
      our interest expense or cash flows. The fair market value of our long term
      fixed
      interest rate debt is subject to interest rate risk. Generally, the fair market
      value of fixed interest rate debt will increase as interest rates fall and
      decrease as interest rates rise. We would not expect an immediate 10% increase
      or decrease in current interest rates to have a material impact on the fair
      market value of our long term debt obligations.




***Foreign
      Currency Risk***




We
      do not
      have any foreign currency denominated assets or liabilities or purchase
      commitments and have not entered into any foreign currency contracts.
      Accordingly, we are not exposed to fluctuations in foreign currency exchange
      rates.




33




**I****TEM 8.****FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**




The
      following financial statements are included in this report:




·
            Report
                of Independent Registered Public Accounting
                Firm




·
            Consolidated
                Statements of Operations




·
            Consolidated
                Statements of Financial Condition




·
            Consolidated
                Statements of Stockholders’ Equity




·
            Consolidated
                Statements of Cash Flows




·
            Notes
                to Consolidated Financial
                Statements




Schedules
      other than those listed above are omitted because of the absence of conditions
      under which they are required or because the required information is presented
      in the financial statements or notes thereto.





34




**Report
      of Independent Registered Public Accounting Firm**




The
      Board
      of Directors and Stockholders of


MCF
      Corporation and subsidiaries




We
      have
      audited the accompanying consolidated statements of financial condition of
      MCF
      Corporation and subsidiaries (the “Company”) as of December 31, 2006 and
      2005, and the related consolidated statements of operations, stockholders’
equity, and cash flows for each of the three years in the period ended
      December 31, 2006. These financial statements are the responsibility of the
      Company’s management. Our responsibility is to express an opinion on these
      financial statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. 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 that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial condition of MCF Corporation
      and
      subsidiaries at December 31, 2006 and 2005, and the consolidated results of
      their operations and their cash flows for each of the three years in the period
      ended December 31, 2006, in conformity with U.S. generally accepted
      accounting principles.




As
        discussed in Note 2 to the consolidated financial statements, in 2006 the
        Company adopted Statement of Financial Accounting Standards No. 123 (Revised
        2004), “Share-Based Payment.”




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of the Company’s internal
      control over financial reporting as of December 31, 2006, based on criteria
      established in Internal Control-Integrated Framework issued by the Committee
      of
      Sponsoring Organizations of the Treadway Commission and our report dated
      February 12, 2007, expressed an unqualified opinion thereon.








/s/  E rnst &
      Y oung LLP




San
      Francisco, California


February 12,
      2007





35




**MCF
      CORPORATION**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




**Year****ended December 31,****200****6**
            
            **2005**
            
            **2004**Revenue:Commissions
            
            $
            30,105,085
            
            $
            26,992,427
            
            $
            21,826,628Principal
                transactions
            
            
            (171,055
            )
            
            1,366,938
            
            
            2,788,120Investment
                banking
            
            
            21,190,786
            
            
            14,816,814
            
            
            13,728,556Other
            
            
            693,822
            
            
            8,136
            
            
            25,006Total
                revenue
            
            
            51,818,638
            
            
            43,184,315
            
            
            38,368,310Operating
                expenses:Compensation
                and benefits
            
            
            42,840,431
            
            
            31,659,488
            
            
            26,765,265Brokerage
                and clearing fees
            
            
            2,614,513
            
            
            2,312,616
            
            
            2,383,831Professional
                services
            
            
            2,441,417
            
            
            1,987,317
            
            
            1,299,540Occupancy
                and equipment
            
            
            1,665,410
            
            
            1,522,351
            
            
            960,849Communications
                and technology
            
            
            2,969,872
            
            
            1,918,693
            
            
            1,404,702Depreciation
                and amortization
            
            
            645,129
            
            
            490,165
            
            
            162,318Travel
                and entertainment
            
            
            2,738,393
            
            
            1,723,290
            
            
            1,448,283Other
            
            
            2,400,765
            
            
            3,298,852
            
            
            1,770,136Total
                operating expenses
            
            
            58,315,930
            
            
            44,912,772
            
            
            36,194,924Operating
                income (loss)
            
            
            (6,497,292
            )
            
            (1,728,457
            )
            
            2,173,386Gain
                (loss) on retirement of convertible note payable
            
            
            (1,348,805
            )
            
            —
            
            
            —Interest
                income
            
            
            484,909
            
            
            446,273
            
            
            120,431Interest
                expense
            
            
            (535,014
            )
            
            (76,103
            )
            
            (169,787
            )Income
                (loss) from continuing operations before income taxes
            
            
            (7,896,202
            )
            
            (1,358,287
            )
            
            2,124,030Income
                tax expense
            
            
            —
            
            
            (142,425
            )
            
            (249,744
            )Income
                (loss) from continuing operations
            
            
            (7,896,202
            )
            
            (1,500,712
            )
            
            1,874,286Loss
                from discontinued operations
            
            
            (324,213
            )
            
            (13,731
            )
            
            —Net
                income (loss)
            
            $
            (8,220,415
            )
            $
            (1,514,443
            )
            $
            1,874,286Basic
                net income (loss) per share:Income
                (loss) from continuing operations
            
            $
            (0.79
            )
            $
            (0.16
            )
            $
            0.21Loss
                from discontinued operations
            
            $
            (0.03
            )
            $
            —
            
            $
            —Net
                income (loss)
            
            $
            (0.82
            )
            $
            (0.16
            )
            $
            0.21Diluted
                net income (loss) per share:Income
                (loss) from continuing operations
            
            $
            (0.79
            )
            $
            (0.16
            )
            $
            0.16Loss
                from discontinued operations
            
            $
            (0.03
            )
            $
            —
            
            $
            —Net
                income (loss)
            
            $
            (0.82
            )
            $
            (0.16
            )
            $
            0.16Weighted
                average number of common shares:Basic
            
            
            9,989,265
            
            
            9,500,748
            
            
            8,368,293Diluted
            
            
            9,989,265
            
            
            9,500,748
            
            
            11,167,875





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


36





**MCF
      CORPORATION**


**CONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITION**




**December****31,****200****6**
            
            **2005****ASSETS**Cash
                and cash equivalents
            
            $
            13,746,590
            
            $
            11,138,923Securities
                owned:Marketable,
                at fair value
            
            
            7,492,914
            
            
            8,627,543Not
                readily marketable, at estimated fair value
            
            
            1,489,142
            
            
            1,065,743Restricted
                cash
            
            
            629,427
            
            
            627,606Due
                from clearing broker
            
            
            551,831
            
            
            973,138Accounts
                receivable, net
            
            
            2,715,271
            
            
            2,073,195Equipment
                and fixtures, net
            
            
            1,586,630
            
            
            1,378,235Prepaid
                expenses and other assets
            
            
            2,286,408
            
            
            1,810,030Total
                assets
            
            $
            30,498,213
            
            $
            27,694,413**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Accounts
                payable
            
            $
            1,121,623
            
            $
            901,138Commissions
                and bonus payable
            
            
            7,711,805
            
            
            4,735,892Accrued
                expenses
            
            
            2,285,670
            
            
            2,201,499Due
                to clearing and other brokers
            
            
            11,114
            
            
            118,798Securities
                sold, not yet purchased
            
            
            1,534,953
            
            
            41,579Capital
                lease obligation
            
            
            1,292,378
            
            
            883,993Convertible
                notes payable, net
            
            
            187,079
            
            
            176,741Notes
                payable
            
            
            138,571
            
            
            231,772Total
                liabilities
            
            
            14,283,193
            
            
            9,291,412Commitments
                and contingenciesStockholders’
                equity:Convertible
                Preferred stock, Series A—$0.0001 par value; 2,000,000 shares
                authorized; 0 shares issued and outstanding as of December 31,
                2006 and 2005, respectively; aggregate liquidation preference of
                $0
            
            
            —
            
            
            —Convertible
                Preferred stock, Series B—$0.0001 par value; 12,500,000 shares
                authorized; 1,250,000 shares issued and 0 shares outstanding as of
                December 31, 2006 and 2005; aggregate liquidation preference of
                $0
            
            
            —
            
            
            —Convertible
                Preferred stock, Series C—$0.0001 par value; 14,200,000 shares
                authorized; 1,685,714 shares issued and 0 shares outstanding as of
                December 31, 2006 and 2005; aggregate liquidation preference of
                $0
            
            
            —
            
            
            —Common
                stock, $0.0001 par value; 300,000,000 shares authorized; 10,602,720
                and
                10,209,588 shares issued and outstanding as of December 31, 2006 and
                2005, respectively
            
            
            1,061
            
            
            1,021Additional
                paid-in capital
            
            
            114,616,848
            
            
            111,731,293Deferred
                compensation
            
            
            —
            
            
            (3,146,839
            )Accumulated
                deficit
            
            
            (98,402,889
            )
            
            (90,182,474
            )Total
                stockholders’ equity
            
            
            16,215,020
            
            
            18,403,001Total
                liabilities and stockholders’ equity
            
            $
            30,498,213
            
            $
            27,694,413





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





37




**MCF
      CORPORATION**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**




**Preferred****Stock**
            
            **Common Stock**
            
            **Treasury Stock**
            
            **Additional**
              **Paid-in**
            
            **Deferred**
            
            **Accumulated****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Compensation**
            
            **Deficit**
            
            **Total**Balance
                at December 31, 2003
            
            
            93,886
            
            $
            9
            
            
            7,993,096
            
            $
            800
            
            
            (11,429
            )
            $
            (51,950
            )
            $
            95,563,149
            
            $
            (1,244,490
            )
            $
            (89,006,308
            )
            $
            5,261,210Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,874,286
            
            
            1,874,286Issuance
                of common stock
            
            
            —
            
            
            —
            
            
            1,218,319
            
            
            122
            
            
            —
            
            
            —
            
            
            7,682,413
            
            
            —
            
            
            —
            
            
            7,682,535Issuance
                of restricted common stock
            
            
            —
            
            
            —
            
            
            200,873
            
            
            20
            
            
            —
            
            
            —
            
            
            2,875,191
            
            
            (2,875,191
            )
            
            —
            
            
            —Issuance
                of treasury stock
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            11,429
            
            
            51,950
            
            
            311,703
            
            
            —
            
            
            (230,853
            )
            
            132,800Issuance
                of stock warrants
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,222,250
            
            
            —
            
            
            (1,212,399
            )
            
            9,851Conversion
                of preferred stock to common stock
            
            
            (122,457
            )
            
            (12
            )
            
            122,457
            
            
            12
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Conversion
                of debt to common stock
            
            
            —
            
            
            —
            
            
            272,201
            
            
            27
            
            
            —
            
            
            —
            
            
            449,973
            
            
            —
            
            
            —
            
            
            450,000Preferred
                stock dividend
            
            
            28,571
            
            
            3
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            92,754
            
            
            —
            
            
            (92,757
            )
            
            —Options
                with intrinsic value to employees
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            160,084
            
            
            (139,250
            )
            
            —
            
            
            20,834Amortization
                of deferred compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,095,075
            
            
            —
            
            
            1,095,075Tax
                benefits from employee stock option plans
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            207,259
            
            
            —
            
            
            —
            
            
            207,259Balance
                at December 31, 2004
            
            
            —
            
            $
            —
            
            
            9,806,946
            
            $
            981
            
            
            —
            
            $
            —
            
            $
            108,564,776
            
            $
            (3,163,876
            )
            $
            (88,668,031
            )
            $
            16,733,850Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,514,443
            )
            
            (1,514,443
            )Issuance
                of common stock
            
            
            —
            
            
            —
            
            
            220,899
            
            
            22
            
            
            —
            
            
            —
            
            
            1,217,846
            
            
            —
            
            
            —
            
            
            1,217,846Issuance
                of restricted common stock
            
            
            —
            
            
            —
            
            
            181,743
            
            
            18
            
            
            —
            
            
            —
            
            
            1,954,274
            
            
            (1,954,292
            )
            
            —
            
            
            —Options
                with intrinsic value to employees
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (12,000
            )
            
            12,000
            
            
            —
            
            
            —Amortization
                of deferred compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,959,329
            
            
            —
            
            
            1,959,329Tax
                benefits from employee stock option plans
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            6,397
            
            
            —
            
            
            —
            
            
            6,397Balance
                at December 31, 2005
            
            
            —
            
            $
            —
            
            
            10,209,588
            
            $
            1,021
            
            
            —
            
            $
            —
            
            $
            111,731,293
            
            $
            (3,146,839
            )
            $
            (90,182,474
            )
            $
            18,403,001Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (8,220,415
            )
            
            (8,220,415
            )Issuance of
                common stock
            
            
            —
            
            
            —
            
            
            247,808
            
            
            25
            
            
            —
            
            
            —
            
            
            713,062
            
            
            —
            
            
            —
            
            
            713,087Issuance
                of restricted common stock
            
            
            —
            
            
            —
            
            
            52,465
            
            
            6
            
            
            —
            
            
            —
            
            
            (6
            )
            
            —
            
            
            —
            
            
            —Exercise of
                stock warrants
            
            
            —
            
            
            —
            
            
            92,859
            
            
            9
            
            
            —
            
            
            —
            
            
            191,991
            
            
            —
            
            
            —
            
            
            192,000Removal
                of opening deferred stock compensation balance upon adoption of SFAS
                123(R)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,146,839
            )
            
            3,146,839
            
            
            
            
            
            —Amortization
                of stock-based compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3,836,781
            
            
            —
            
            
            —
            
            
            3,836,781Issuance
                of stock warrants
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,290,566
            
            
            —
            
            
            —
            
            
            1,290,566Balance
                at December 31, 2006
            
            
            —
            
            $
            —
            
            
            10,602,720
            
            $
            1,061
            
            
            —
            
            $
            —
            
            $
            114,616,848
            
            $
            —
            
            $
            (98,402,889
            )
            $
            16,215,020





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




38




**MCF
        CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**


**Year ended December 31,****200****6**
            
            **2005**
            
            **2004**Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (8,220,415
            )
            $
            (1,514,443
            )
            $
            1,874,286Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating activities:Depreciation
                and amortization
            
            
            655,334
            
            
            493,672
            
            
            162,318Common
                stock issued for services
            
            
            —
            
            
            —
            
            
            215,800Stock-based
                compensation
            
            
            3,836,781
            
            
            1,959,329
            
            
            1,125,760Tax
                benefits from employee stock option plans
            
            
            —
            
            
            6,397
            
            
            207,259Amortization
                of discounts on convertible notes payable
            
            
            146,776
            
            
            10,335
            
            
            95,793Amortization
                of debt issuance costs
            
            
            35,757
            
            
            —
            
            
            23,340Amortization
                of intangible asset
            
            
            138,051
            
            
            34,366
            
            
            —Loss
                on retirement of convertible note payable
            
            
            1,348,805
            
            
            —
            
            
            —Write-off
                of receivable from common stock issued to Ascend
            
            
            —
            
            
            556,493
            
            
            —Loss
                on disposal of equipment and fixtures
            
            
            14,196
            
            
            —
            
            
            30,398Provision
                for doubtful accounts
            
            
            383,565
            
            
            —
            
            
            21,100Common
                stock received for services
            
            
            —
            
            
            —
            
            
            (461,933
            )Unrealized
                (gain) loss on securities owned
            
            
            2,172,407
            
            
            (1,491,688
            )
            
            29,571Changes
                in operating assets and liabilities:Marketable
                and non-marketable securities owned
            
            
            (203,536
            )
            
            (5,558,454
            )
            
            (923,230
            )Restricted
                cash
            
            
            (1,821
            )
            
            (2,606
            )
            
            (125,000
            )Due
                from clearing broker
            
            
            421,307
            
            
            (185,276
            )
            
            (12,165
            )Accounts
                receivable
            
            
            (789,908
            )
            
            (550,295
            )
            
            (1,102,257
            )Prepaid
                expenses and other assets
            
            
            (786,306
            )
            
            (474,907
            )
            
            (596,998
            )Accounts
                payable
            
            
            220,485
            
            
            468,387
            
            
            252,036Commissions
                and bonus payable
            
            
            2,975,913
            
            
            78,657
            
            
            1,834,047Accrued
                liabilities
            
            
            84,171
            
            
            956,932
            
            
            1,813,339Due
                to clearing and other brokers
            
            
            (107,684
            )
            
            19,593
            
            
            (55,790
            )Net
                cash provided by (used in) operating activities
            
            
            2,323,878
            
            
            (5,193,508
            )
            
            4,407,674Cash
                flows from investing activities:Purchase
                of equipment and fixtures
            
            
            (78,216
            )
            
            (203,665
            )
            
            (546,899
            )Acquisition
                of Catalyst
            
            
            (58,558
            )
            
            (353,882
            )
            
            —Investment
                in MCF Navigator fund
            
            
            (7,500,000
            )
            
            —
            
            
            —Redemption
                from MCF Navigator fund
            
            
            7,500,000
            
            
            —
            
            
            —Proceeds
                from sale of equipment and fixtures
            
            
            —
            
            
            —
            
            
            2,000Net
                cash used in investing activities
            
            
            (136,774
            )
            
            (557,547
            )
            
            (544,899
            )Cash
                flows from financing activities:Proceeds
                from the issuance of common stock
            
            
            603,070
            
            
            591,648
            
            
            6,579,377Proceeds
                from the exercise of stock options and warrants
            
            
            302,017
            
            
            126,220
            
            
            1,020,158Proceeds
                from convertible debenture and stock warrant
            
            
            7,500,000
            
            
            —
            
            
            —Repayment
                of convertible debenture
            
            
            (7,500,000
            )
            
            —
            
            
            —Debt
                service principal payments
            
            
            (484,524
            )
            
            (1,287,003
            )
            
            (146,155
            )Net
                cash provided by (used in) financing activities
            
            
            420,563
            
            
            (569,135
            )
            
            7,453,380Increase
                (decrease) in cash and cash equivalents
            
            
            2,607,667
            
            
            (6,320,190
            )
            
            11,316,155Cash
                and cash equivalents at beginning of year
            
            
            11,138,923
            
            
            17,459,113
            
            
            6,142,958Cash
                and cash equivalents at end of year
            
            $
            13,746,590
            
            $
            11,138,923
            
            $
            17,459,113





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




39




**MCF
        CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS—
        (Continued)**




**Year ended December 31,****2006**
            
            **2005**
            
            **2004**Supplementary
                disclosure of cash flow information:Cash
                paid during the year:Interest
            
            $
            323,345
            
            $
            99,442
            
            $
            101,613Income
                taxes
            
            $
            18,800
            
            $
            179,147
            
            $
            311,928Non-cash
                investing and financing activities:Conversion
                of notes payable to common stock
            
            $
            —
            
            $
            —
            
            $
            450,000Issuance
                of restricted stock
            
            $
            —
            
            $
            1,954,292
            
            $
            2,875,211Issuance
                of treasury stock
            
            $
            —
            
            $
            —
            
            $
            230,853Stock
                warrants issued to investors
            
            $
            —
            
            $
            —
            
            $
            1,212,399Issuance
                / cancellation of stock options with intrinsic value
            
            $
            —
            
            $
            12,000
            
            $
            139,250Preferred
                stock dividends
            
            $
            —
            
            $
            —
            
            $
            92,757Purchase
                of equipment and fixtures with capital lease
            
            $
            799,709
            
            $
            625,445
            
            $
            488,193Conversion
                of preferred stock to common stock
            
            $
            —
            
            $
            —
            
            $
            86Acquisition
                of Catalyst
            
            $
            —
            
            $
            74,940
            
            $
            —





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




40




**MCF
      CORPORATION**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**1.**  **Description
      of Business**




MCF
      Corporation is a financial services holding company that provides investment
      banking, equity research, institutional brokerage and asset management through
      its operating subsidiaries, Merriman Curhan Ford & Co. and MCF Asset
      Management, LLC. Merriman
      Curhan Ford & Co. is an investment bank and securities broker-dealer
      focused on fast growing companies and growth-oriented institutional investors. MCF
      Asset
      Management, LLC manages absolute return investment products for institutional
      and high-net worth clients. Merriman
      Curhan Ford & Co. is registered with the Securities and Exchange
      Commission as a broker-dealer and is a member of the National Association of
      Securities Dealers, Inc. and Securities Investor Protection
      Corporation.




MCF
      Corporation, also referred to as the Company, formerly Ratexchange Corporation,
      NetAmerica.com Corporation and Venture World, Ltd., is a Delaware corporation
      organized on May 6, 1987. In July 2000, the Company’s common stock was
      listed on the American Stock Exchange and currently trades under the symbol
      “MEM.” The Company’s corporate office is located in San Francisco,
      California.




Prior
      to
      2002, the Company was engaged in the creation of liquid marketplaces for
      bandwidth and other telecommunications products, as well as providing trading
      strategies in the futures and derivatives markets. This prior business
      experienced significant net losses that resulted in an accumulated deficit
      of
      $87,731,000 as of December 31, 2001.




In
      December 2001, the Company acquired Instream Securities, Inc. and
      later changed the name of the entity to RTX Securities Corporation, then to
      Merriman Curhan Ford & Co. The Company formed MCF Asset Management, LLC
      in January 2004 and MCF Wealth Management, LLC in January 2005 as
      wholly owned subsidiaries. MCF Wealth Management, LLC is accounted for as
      discontinued operations in these consolidated financial statements.




**2.**  **Summary
      of Significant Accounting Policies**




***Principles
      of Consolidation***




As
      of
      December 31, 2006, MCF Corporation wholly owned three U.S. subsidiaries
      that have been consolidated in the accompanying financial statements. The
      subsidiaries are Merriman Curhan Ford & Co., MCF Asset Management,
      LLC and MCF Wealth Management, LLC. All significant inter-company accounts
      and
      transactions have been eliminated.




***Cash
      and Cash Equivalents***




The
      Company considers all highly liquid investments purchased with original
      maturities of ninety days or less to be cash equivalents.




***Restricted
        Cash***


Restricted
      cash includes cash deposited with our
      clearing broker and cash collateral for a stand-by letter of credit with a
      commercial bank.




***Securities
      Owned***




“Securities
      owned” and “Securities sold, but not yet purchased” in the consolidated
      statements of financial condition consist of financial instruments carried
      at
      fair value or amounts that approximate fair value, with related unrealized
      gains
      or losses recognized in the results of operations. The fair value of a financial
      instrument is the amount at which the instrument could be exchanged in a current
      transaction between willing parties, other than in a forced or liquidation
      sale.




41
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




Fair
      values of the financial instruments are generally obtained from quoted market
      prices in active markets, broker or dealer price quotations, or alternative
      pricing sources with reasonable levels of price transparency. To the extent
      certain financial instruments trade infrequently or are non-marketable
      securities and, therefore, have little or no price transparency, the Company
      values these instruments based on management's estimates. The fair value of
      these securities is subject to a high degree of volatility and may be
      susceptible to significant fluctuation in the near term. Securities that contain
      resale restrictions are stated at a discount to the value of readily marketable
      securities. Stock warrants are carried at a discount to fair value as determined
      by using the Black-Scholes Option Pricing model due to illiquidity.




***Equipment
      and Fixtures***




Equipment
      and fixtures are reported at historical cost, net of accumulated depreciation
      and amortization. Depreciation and amortization are computed using the
      straight-line method over useful lives of three to five years. Leasehold
      improvements are amortized using the straight-line method over the lesser of
      the
      life of the lease or the service lives of the improvements.




***Long-Lived
      Assets***




The
      Company evaluates its long-lived assets for impairment whenever events or
      changes in circumstances indicate that the carrying amount of such assets may
      not be recoverable. Recoverability of assets to be held and used is measured
      by
      a comparison of the carrying amount of an asset to future net cash flows
      expected to be generated by the asset. When assets are considered to be
      impaired, the impairment to be recognized is measured as the amount by which
      the
      carrying amount of the assets exceeds the fair value of the assets. Assets
      to be
      disposed of are reported at the lower of the carrying amount or fair value
      less
      costs to sell.




***Discontinued
      Operations and Assets Held For Sale***





For
      those
      businesses where management has committed to a plan to divest, each business
      is
      valued at the lower of its carrying amount or estimated fair value less cost
      to
      sell. If the carrying amount of the business exceeds its estimated fair value,
      a
      loss is recognized. For businesses classified as discontinued operations,
      statement of operations results are reclassified from their historical
      presentation to discontinued operations in the consolidated statements of
      operations for all periods presented. The gains or losses associated with these
      divested businesses are recorded in income (loss) from discontinued operations
      in the consolidated statements of operations. Additionally, segment information
      does not include the results of businesses classified as discontinued
      operations.




***Commission*** **s
      and Principal Transactions Revenue**




Commissions
      revenue includes revenue resulting from executing stock exchange-listed
      securities, over-the counter securities and other transactions as agent for
      the
      Company's clients. Principal transactions consist of a portion of dealer spreads
      attributed to the Company's securities trading activities as principal in
      NASDAQ-listed and other securities, and include transactions derived from
      activities as a market-maker. Additionally, principal transactions include
      gains
      and losses resulting from market price fluctuations that occur while holding
      positions in trading security inventory.




Commissions
      revenue and related clearing expenses are recorded on a trade-date basis as
      security transactions occur. Principal transactions in regular-way trades are
      recorded on the trade date, as if they had settled. Profit and loss arising
      from
      all securities and commodities transactions entered into for the account and
      risk of the Company are recorded on a trade-date basis.


42
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




***Investment
      Banking Revenue***




Investment
      banking revenue includes underwriting and private placement agency fees earned
      through the Company's participation in public offerings and private placements
      of equity and convertible debt securities and fees earned as financial advisor
      in mergers and acquisitions and similar transactions. Underwriting revenue
      is
      earned in securities offerings in which the Company acts as an underwriter
      and
      includes management fees, selling concessions and underwriting fees. Management
      fees are recorded on the offering date, selling concessions on settlement date,
      and underwriting fees at the time the underwriting is completed and the related
      income is reasonably determinable. Syndicate expenses related to securities
      offerings in which the Company acts as underwriter or agent are deferred until
      the related revenue is recognized or we determine that it is more likely than
      not that the securities offerings will not ultimately be completed. Merger
      and
      acquisition fees and other advisory service revenue are generally earned and
      recognized only upon successful completion of the engagement. Underwriting
      revenue is presented net of related expenses. Unreimbursed expenses associated
      with private placement and advisory transactions are recorded as expenses as
      incurred.





As
      co-manager for registered equity underwriting transactions, management must
      estimate the Company's share of transaction related expenses incurred by the
      lead manager in order to recognize revenue. Transaction related expenses are
      deducted from the underwriting fee and therefore reduces the revenue that is
      recognized as co-manager. Such amounts are adjusted to reflect actual expenses
      in the period in which the Company receives the final settlement, typically
      90
      days following the closing of the transaction.




***Share*** **-*Based
      Compensation Expense***




On
      January 1, 2006, the Company adopted Statement of Financial Accounting
      Standards (SFAS) 123 (Revised 2004), “Share-Based Payment,” or SFAS 123(R),which
      requires the measurement and recognition of compensation expense, based on
      estimated fair values, for all share-based awards, made to employees and
      directors, including stock options, non-vested stock, and participation in
      the
      Company's employee stock purchase plan. In March 2005, the Securities and
      Exchange Commission issued Staff Accounting Bulletin (SAB) No. 107
      relating to SFAS 123(R). The Company has applied the provisions of SAB 107
      in
      its adoption of SFAS 123(R).





The
      Company adopted SFAS 123(R) using the modified prospective application
      transition method, as of January 1, 2006, the first day of the Company's
      fiscal year 2006. The Company's consolidated financial statements as of and
      for
      the year ended December 31, 2006 reflect the impact of SFAS 123(R). In
      accordance with the modified prospective application transition method, the
      Company's consolidated financial statements for prior periods have not been
      restated to reflect, and do not include, the impact of SFAS 123(R). Share-based
      compensation expense recognized under SFAS 123(R) for the year ended December
      31, 2006 was $3,837,000.




Prior
      to
      the adoption of SFAS 123(R), the Company accounted for share-based awards to
      employees and directors using the intrinsic value method in accordance with
      Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock
      Issued to Employees,” as allowed under SFAS 123, “Accounting for Stock-Based
      Compensation.” Share-based compensation expense of $1,959,000 for the year ended
      December 31, 2005 and $1,116,000 for the year ended December 31, 2004 was solely
      related to non-vested stock awards and stock options granted with intrinsic
      value that the Company had been recognizing in its consolidated statements
      of
      operations in accordance with the provisions set forth above. In accordance
      with
      the intrinsic value method, no share-based compensation expense was otherwise
      recognized in the Company's consolidated statements of operations because the
      exercise price of nearly all of the Company's stock options granted to employees
      and directors equaled the fair market value of the underlying stock at the
      grant
      date.


43
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




SFAS
      123(R) requires companies to estimate the fair value of share-based 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 in the
      Company's consolidated statements of operations over the requisite service
      periods. Share-based compensation expense recognized in the Company's
      consolidated statement of operations for the year ended December 31, 2006
      includes compensation expense for share-based awards granted (i) prior to,
      but not yet vested as of December 31, 2005, based on the grant date fair
      value estimated in accordance with the provisions of SFAS 123, and
      (ii) subsequent to December 31, 2005, based on the grant date fair
      value estimated in accordance with the provisions of SFAS 123(R). Compensation
      expense for all share-based awards subsequent to December 31, 2005 is
      recognized using the straight-line single-option method. Because share-based
      compensation expense is based on awards that are ultimately expected to vest,
      share-based compensation expense has been reduced to account for estimated
      forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
      grant and revised, if necessary, in subsequent periods if actual forfeitures
      differ from those estimates. In the Company's pro forma information required
      under SFAS 123 for periods prior to fiscal 2006, the Company accounted for
      forfeitures as they occurred.





To
      calculate option-based compensation under SFAS 123(R), the Company used the
      Black-Scholes option pricing model, which it had previously used for valuation
      of option-based awards for its pro forma information required under SFAS 123
      for
      periods prior to fiscal 2006. The Company's determination of fair value of
      option-based awards on the date of grant using the Black-Scholes model is
      affected by the Company's stock price as well as assumptions regarding a number
      of subjective variables. These variables include, but are not limited to the
      Company's expected stock price volatility over the term of the awards, and
      actual and projected employee stock option exercise behaviors.




No
      tax
      benefits were attributed to the share-based compensation expense because a
      valuation allowance was maintained for all net deferred tax assets.





***Income
      Taxes***




The
      Company uses the asset and liability method of accounting for income taxes.
      Deferred tax assets and liabilities are recognized for the estimated future
      tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. A valuation allowance
      is
      recorded to reduce deferred tax assets to an amount whose realization is more
      likely than not. The effect on deferred tax assets and liabilities of a change
      in tax rates is recognized in the consolidated statements of operations in
      the
      period that includes the enactment date.




***Earnings
      (Loss) Per Share***




Basic
      earnings (loss) per share is computed by dividing net income (loss), less
      dividends on preferred stock, by the weighted average number of common shares
      outstanding. Diluted earnings per share is calculated for the year ended
      December 31, 2004 by dividing net income less dividends on preferred stock,
      by the weighted average number of common shares used in the basic earnings
      per
      share calculation plus the number of common shares that would be issued assuming
      exercise or conversion of all potentially dilutive common shares outstanding.
      Diluted loss per share is unchanged from basic loss per share for the years
      ended December 31, 2006 and 2005, because the addition of common shares
      that would be issued assuming exercise or conversion would be
      anti-dilutive.


44
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




***Concentrations***




Substantially
      all of the Company’s cash and cash equivalents are held at three major U.S.
      financial institutions. The majority of the Company’s cash equivalents consist
      of short-term marketable securities. Deposits held with banks may exceed the
      amount of insurance provided on such deposits. Generally these deposits may
      be
      redeemed upon demand.




As
      of
      December 31, 2006, the Company owned 5,000,000 shares of Points International
      in
      its proprietary trading account with a fair market value of $3,200,000. The
      Company did not own any concentrated security positions as of December 31,
      2005.




During
      2006, no sales professional accounted for more than 10% of revenue, while one
      sales professional accounted for 12% of revenue in 2005 and 15% of revenue
      in
      2004. During 2006 and 2005, no single customer accounted for more than 10%
      of
      revenue while one customer accounted for 10% of revenue during
      2004.




***Fair
      Value of Financial Instruments***




The
      carrying amounts of the Company’s financial instruments, which include
      securities owned, cash deposited with the Company’s clearing organization,
      receivables, accounts payable, and other accrued expenses, approximate their
      fair values due to their short maturities. The fair value of the Company’s
      long-term notes payable is estimated based on the current rates offered to
      the
      Company for debt of the same remaining maturities.




***Segment
      Reporting***




The
      Company organizes its operations into three
      operating segments for the purpose of making operating decisions and assessing
      performance. These operating segments are organized along operating
      subsidiaries, Merriman Curhan Ford & Co., MCF Asset Management, LLC and
      MCF Wealth Management, LLC. Accordingly, the Company operated in three
      reportable operating segments in the United States during 2006 and 2005.
      However, only Merriman Curhan Ford & Co. produced financial results that
      were material to the Company. As of December 31, 2006, MCF Wealth Management,
      LLC has been classified as held for sale and the results of operations for
      this
      subsidiary have been treated as discontinued operations.




**U****se
      of Estimates**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates,
      judgments and assumptions that affect the reported amounts of assets,
      liabilities, revenue and expenses. Actual results could differ from those
      estimates.


45
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




***Newly
      Issued Accounting Standards***




In
      September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
      157,
“Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework
      for measuring fair value under generally accepted accounting principles, and
      expands disclosures about fair value measurements. SFAS 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The Company is currently
      evaluating the impact the adoption of this statement could have on its financial
      condition, results of operations and cash flows.





In
      July
      2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income* Taxes,
      which supplements SFAS No. 109 by defining the confidence level that a
      tax position must meet in order to be recognized in the financial statements.
      Interpretation No. 48 requires that the tax effects of a position be
      recognized only if it is “more-likely- than-not” to be sustained based solely on
      its technical merits as of the reporting date. The more-likely-than-not
      threshold represents a positive assertion by management that a company is
      entitled to the economic benefits of a tax position. If a tax position is not
      considered more-likely-than-not to be sustained based solely on its technical
      merits, no benefits of the position are to be recognized. Moreover, the
      more-likely-than-not threshold must continue to be met in each reporting period
      to support continued recognition of a benefit. At adoption, companies must
      adjust their financial statement to reflect only those tax positions that are
      more-likely-than-not to be sustained as of the adoption date. Any necessary
      adjustment would be recorded directly to retained earnings in the period of
      adoption and reported as a change in accounting principle. This Interpretation
      is effective as of the beginning of the first fiscal year beginning after
      December 15, 2006. The Company will adopt Interpretation No. 48 on
      January 1, 2007 and is currently assessing the potential impact on its
      financial statements.





In
      February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid
      Financial Instruments” which amends SFAS 133, “Accounting for Derivative
      Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155
      simplifies the accounting for certain derivatives embedded in other financial
      instruments by allowing them to be accounted for as a whole if the holder elects
      to account for the whole instrument on a fair value basis. SFAS 155 also
      clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS
      155
      is effective for all financial instruments acquired, issued or subject to a
      remeasurement event occurring in fiscal years beginning after September 15,
      2006. The Company does not believe the adoption of this statement will have
      a
      material impact on its financial condition, results of operations or cash
      flows.





**3.**  **Securities
      Owned**




The
      Company trades equity and debt securities for clients in a broker or dealer
      capacity. While trading activities are primarily generated by client order
      flow,
      the Company also takes selective proprietary positions based on expectations
      of
      future market movements and conditions. As of December 31, 2006 and 2005,
      fair value of marketable equity securities owned by the Company was
      approximately $7,493,000 and $8,628,000, respectively.




Securities
      owned that are not readily marketable consisted of notes receivable, convertible
      notes receivable, unregistered common stock and stock warrants. As of
      December 31, 2006 and 2005, the discounted fair value of the securities
      owned that are not readily marketable was approximately $1,118,000 and
      $1,066,000, respectively, based on management estimates.


46
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




**4.**  **Equipment
      and Fixtures**




Equipment
      and fixtures consisted of the following:




**December****31,****200****6**
            
            **2005**Computer
                equipment
            
            $
            723,751
            
            $
            597,470Furniture
                and equipment
            
            
            1,051,994
            
            
            729,675Software
            
            
            151,821
            
            
            151,821Leasehold
                improvements
            
            
            1,023,729
            
            
            621,2702,951,295
            
            
            2,100,236Less
                accumulated depreciation
            
            
            (1,364,665
            )
            
            (722,001
            )$
            1,586,630
            
            $
            1,378,235







Equipment
      and fixtures purchased with capital lease financing during 200 6
      and
      2005 were $800,000 and $625,000, respectively.




**5.**  **Notes
      Payable, Convertible Notes Payable and Lines of Credit**




Notes
      payable and convertible notes payable outstanding at December 31, 2006 and
      2005 consisted of the following amounts, presented net of certain
      discounts:




**December****31,****200****6**
            
            **2005**Convertible
                notes payable issued in 2003
            
            $
            187,079
            
            $
            176,741Note
                payable issued to Donald Sledge
            
            $
            138,571
            
            $
            231,772




Interest
      payable in connection with the notes described below is included with accrued
      liabilities balance in the statements of financial condition. As of
      December 31, 2006 and 2005, interest payable amounted to $29,000 and
      $2,000, respectively.




***Convertible*** ***Notes
      Payable Issued in 2003***




In
      April 2003, the Company completed a private placement financing that
      included convertible notes payable with aggregate principal of $1,000,000,
      due
      April 2008. The notes bear interest at 3% per annum payable quarterly on
      January 1, April 1, July 1 and October 1 beginning
      July 1, 2003. The notes can be converted to common stock at a rate of $1.40
      per share. In connection with the private placement, the Company issued warrants
      to purchase 178,300 shares of common stock with an exercise price of $2.10
      per
      share and a five-year term. The convertible notes were recorded in the
      statements of financial condition net of discounts resulting from the relative
      fair value of the stock warrants and beneficial conversion feature totaling
      $258,000. The discount is being amortized over the five-year term. In
      October 2003, notes payable with a face amount of $500,000 were converted
      under their original terms into 51,021 shares of common stock resulting in
      the
      accelerated amortization of discounts in the amount of $118,000. In
      December 2004, notes payable with a face amount of $300,000 were converted
      under their original terms into 30,613 shares of common stock resulting in
      the
      accelerated amortization of discounts in the amount of $50,000. Amortization
      of
      discounts during 2006 and 2005 was approximately $10,000. The remaining
      unamortized discount as of December 31, 2006 was $13,000.


47
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




***Note
      Payable Held By Donald Sledge***




During
      2001, the Company renegotiated the severance terms included in its employment
      agreement with Donald Sledge, the former Chairman and CEO of the Company. Upon
      his leaving the Company in May 2001, the Company issued to Mr. Sledge
      a 7% convertible note, in an aggregate principal amount of $400,000, due
      May 2003. Interest was payable at the maturity of the two-year term. In
      May 2003, the Company and Mr. Sledge agreed to convert the principal
      and interest due at maturity into a fully amortizing note payable over five
      years using an effective interest rate of 4.0%. Mr. Sledge is a member of
      the Company’s Board of Directors.




**Convertible****Note
      Payable Issued in 2006**




In
      March
      2006, the Company completed a $7.5 million private placement of a variable
      rate
      secured convertible debenture with a detachable stock warrant. The issue was
      placed with Midsummer Investment, Ltd (“Midsummer”). The Company invested the
      proceeds in one of the proprietary funds managed by MCF Asset Management, LLC,
      a
      wholly owned subsidiary. The debenture bears interest at a variable rate based
      on the annual investment performance of the investment in the proprietary funds
      managed by MCF Asset Management, LLC. The maturity date of the note was December
      31, 2010.




The
      debenture was convertible into the Company's common stock at a conversion price
      of $9.87 per share, subject to certain anti-dilutive adjustments. Midsummer
      could have elected to convert the debenture into common stock of the Company
      at
      the conversion price at any time following the closing date. The Company could
      have redeemed all or part of the debenture after three years at 110% of the
      principal amount being redeemed. The Company could have elected to force
      conversion of the debenture into common stock if the Company's common stock
      trades above $34.58 for 20 consecutive trading days. The debenture contained
      covenants that could have precluded the Company from issuing additional debt
      over a specified limit, entering into certain new liens on company assets,
      repurchasing stock or paying dividends when the debenture remains outstanding
      with balance of at least $2 million. The maturity date of the notes was December
      31, 2010. Stock warrants to purchase 267,858 shares of common stock at $9.87
      per
      share were also issued to the investor. The stock warrants have a six year
      term.




The
      $7,500,000 raised in the transaction described above was accounted for under
      generally accepted accounting principles, primarily APB 14, “Accounting for
      Convertible Debt and Debt Issued with Stock Purchase Warrants”, SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities”, EITF Issue 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
      Contingently Adjustable Conversion Ratios”, and EITF Issue 00-19, “Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock”. The Company accounted for this transaction as the issuance
      of convertible debt, an embedded derivative referred to as a participation
      interest obligation, and a detachable stock warrant.  The $7,500,000 was
      allocated to the derivative using its fair value with the balance allocated
      to
      the debt and the stock warrant based on their relative fair value as determined
      by management. During the third quarter of 2006, the Company obtained an
      appraisal from a third party to support the fair market values used to allocate
      the proceeds. Management's initial estimates were adjusted to the appraisal
      amounts.




The
      fair
      value of the stock warrant of $1,291,000 was recorded as a discount to the
      convertible debenture and an increase to additional paid-in capital. The
      fair value of the participation interest obligation of $2,276,000 was also
      treated as a discount to the convertible debenture and was based on a forecast
      of future cash flows to be paid to the lender discounted at a risk adjusted
      yield.  The discount to the convertible debenture of $3,567,000 was
      amortized to interest expense using the level yield method over the term of
      the
      debenture.


48
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




In
      December 2006, the Company repaid the $7.5 million variable rate secured
      convertible note. The proceeds to repay the $7.5 million convertible note were
      provided by redemption from the MCF Navigator fund. Midsummer retained the
      stock
      warrant to purchase 267,858 shares of common stock. The Company recorded a
      loss
      on the repayment of the convertible note in the amount of $1,349,000 which
      consisted of $1,154,000 for the write-off of the unamortized discount related
      to
      the stock warrant and $195,000 for the write-off the unamortized debt issuance
      costs.




***Line
      of Credit***




The
      Company has a line of credit with a commercial bank that provides borrowing
      availability up to $3,000,000. The line of credit is secured by the assets
      of
      the Company and is due upon demand. The interest rate on amounts borrowed is
      payable monthly at the prime interest rate. As of December 31, 2006, there
      was no borrowing under this line of credit.




**6.**  **Stockholders’
      Equity**




***Reverse
      Stock Split***




At
      the
      Company’s annual meeting on May 5, 2006, stockholders approved a proposal to
      authorize the Board of Directors, in its discretion, to affect a one-for-seven
      reverse stock split at anytime prior to the 2008 annual meeting, without further
      action by stockholders. On August 4, 2006, the Company’s Board of Directors
      approved a one-for-seven reverse stock split of the Company’s common
      stock. The reverse stock split became effective at 11:59
      pm,
      Eastern Time, on November 15, 2006. Pursuant to the reverse stock split, each
      seven shares of authorized and outstanding common stock was reclassified and
      combined into one share of new common stock.




The
      reverse stock split did not change the number of authorized shares or the par
      value per share of common stock or preferred stock designated by the Company’s
      Certificate of Incorporation. Currently, the Company has authorized 300,000,000
      shares of common stock and 27,450,000 shares of preferred stock. All references
      to share and per share data for all periods presented have been retroactively
      adjusted to give effect to the one-for-seven reverse stock split.




***Common
      Stock***




In
      May 2005, the Company entered into a stock purchase agreement with Ascend
      Services Ltd., or Ascend. The Company issued 154,107 shares of its common stock
      and Ascend issued an unsecured promissory note payable to the Company in the
      amount of $1.5 million. The shares were initially held in escrow. Upon Ascend
      achieving specified milestones related to its credit standing, the 154,107
      shares of common stock would be released from escrow in three installments
      of
      51,369 shares each and provided to Ascend. Upon satisfaction of the conditions
      specified in the escrow agreement and simultaneous with the release of the
      related stock certificates, the related amount of the promissory note became
      effective and started accruing interest. The promissory note accrued interest
      at
      10% per annum and matured on February 28, 2006.




Ascend
      was attempting to raise capital financing in order to enter the reinsurance
      business. In May 2005, the Company released the first installment of 51,369
      shares of common stock to Ascend while the related promissory note with a face
      value of $500,000 became effective. In December 2005, the Company learned
      that Ascend had not been able to execute on their business plan and would not
      have the financial resources to repay the Company’s $500,000 note receivable at
      maturity. As a result, the Company recorded a charge to other operating expense
      in 2005 to write-off the $500,000 note receivable balance. The remaining 102,738
      shares of common stock were returned to the Company from escrow in February
      2006. In April
      2006, the Company entered into a settlement agreement with Ascend. As a result,
      the Company reversed the $500,000 charge to write-off the note receivable
      balance upon the receipt of $500,000 in April 2006.


49
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




In
      August 2004, London Merchant Securities plc, or LMS, made a private
      investment of $6,000,000 in MCF Corporation. The Company issued 659,341 shares
      of common stock to LMS at $9.10 per share. The $9.10 value attributed to the
      659,341 shares of common stock issued to LMS was based upon a negotiated
      discount to the fair market value of MCF Corporation’s quoted stock price over a
      specified time period. The discount was allowed in order induce LMS to purchase
      the unregistered shares in view of their lack of liquidity. LMS was also issued
      warrants to purchase an additional 197,803 shares of common stock at a price
      of
      $10.36 per share. The value attributed to the stock warrant was $1,212,399.
      The
      stock warrants are immediately exercisable from the issue date and have a four
      year exercise period. The Company registered these shares with the Securities
      and Exchange Commission in October 2004.




During
      2004, investors of the Company’s convertible notes payable issued in 2001 and
      2003 converted notes payable into 57,916 and 214,286 shares of common stock,
      respectively. Investors also converted shares of Series A preferred stock
      into 102,743 shares of common stock. Additionally, the Company issued 19,715
      shares of its common stock to certain former holders of the Series A
      convertible preferred stock pursuant to anti-dilution provisions in the
      Certificate of Designation of the Series A preferred stock.




As
      of
      December 31, 2003, the Company held 11,429 shares of treasury stock with a
      basis of $363,661. During 2004, the 11,429 shares were issued out of treasury.
      The Company recorded a charge to accumulated deficit in the amount of $231,000
      for the difference between the fair value of the 11,429 shares on the date
      of
      issuance and the basis in the treasury stock.




**7.**  **Acquisition
      and Disposition of Catalyst**




In
      February 2005, the Company acquired Catalyst Financial Planning &
Investment Management, Inc., or Catalyst, a registered investment advisor. The
      Company paid to the sole shareholder of Catalyst, or Catalyst Shareholder,
      $330,000 as initial consideration at the closing and placed into escrow 79,314 shares
      of common stock to be issued over the three year period following the closing
      date. The issuance of these shares was conditioned upon the Catalyst Shareholder
      being a full-time employee at the anniversary dates. The Catalyst Shareholder
      was entitled to additional consideration that would be payable in either cash
      or
      common stock at the Catalyst Shareholder's option. The additional consideration
      would be based on a multiple of revenue growth at the end of the first three
      anniversary dates from the closing.




With
      the
      adoption of SFAS 123(R) in January 2006, the Company treated the 79,314 common
      shares as a non-vested stock grant that vests over three years, subject to
      performance conditions. The Company initially determined that the issuance
      of
      the common stock over the service period was probable and recorded an expense
      of
      $23,000 per month over the three year service period. At the first anniversary
      date in February 2006, the Company issued 26,438 shares of common stock from
      escrow and paid $59,000 to the Catalyst Shareholder for additional consideration
      that resulted from growth in the Catalyst revenue. The additional consideration
      was recorded as an increase in the intangible assets acquired.


50
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




In
      December 2006, the Company decided to sell Catalyst to an entity controlled
      by
      the Catalyst Shareholder. In January 2007, the Company sold Catalyst to the
      Mallory Acquisition Corp. for $282,000 and 79,314 shares of MCF Corporation
      common stock. An impairment loss was recognized in 2006 in the amount of
      $92,000, which is presented as “Other expenses” in the table below to reduce the
      carrying value of this business to its estimated fair value less costs to sell.
      During 2006, the Company recorded approximately $47,000 as stock-based
      compensation expense resulting from the 26,438 shares issued from escrow in
      February 2006.




As
      of
      December 31, 2006, Catalyst is being accounted for as held for sale in
      accordance with SFAS 144. As a result, the revenue and expenses of Catalyst
      and
      MCF Wealth Management, LLC for 2006 and 2005 have been reclassified and included
      in discontinued operations in the consolidated statements of operations.




The
      following revenue and expenses have been reclassified as discontinued operations
      for the years ended December 31, 2006 and 2005:




**200****6**
            
            **2005**Revenue
            
            $
            865,808
            
            $
            654,405Operating
                expenses:Compensation
                and benefits
            
            
            736,536
            
            
            462,720Professional
                services
            
            
            34,834
            
            
            10,722Occupancy
                and equipment
            
            
            121,794
            
            
            63,781Communications
                and technology
            
            
            15,410
            
            
            11,094Depreciation
                and amortization
            
            
            56,137
            
            
            37,873Travel
                and entertainment
            
            
            72,260
            
            
            35,104Other
                expenses
            
            
            156,563
            
            
            48,1661,193,534
            
            
            669,460Operating
                loss
            
            
            (327,726
            )
            
            (15,055
            )Interest
                income, net
            
            
            3,513
            
            
            1,324Net
                loss
            
            $
            (324,213
            )
            $
            (13,731
            )





The
      following assets and liabilities of operations held for sale have been included
      in the consolidated statements of financial condition as of December 31, 2006
      and 2005:




**December****31,****200****6**
            
            **2005**Assets:Cash
                and cash equivalents
            
            $
            68,503
            
            $
            164,118Accounts
                receivable
            
            
            11,155
            
            
            374Furniture
                and equipment
            
            
            34,234
            
            
            8,710Intangible
                assets, net
                of accumulated amortizationof $172,417
            
            
            314,963
            
            
            394,456Prepaid
                expenses and other assets
            
            
            24,024
            
            
            27,128$
            452,879
            
            $
            594,786Liabilities:Accounts
                payable
            
            
            —
            
            
            9,874Commissions
                and bonus payable
            
            
            8,368
            
            
            11,652Accrued
                liabilities
            
            
            87,176
            
            
            180,953Capital
                leases
            
            
            —
            
            
            1,273$
            95,544
            
            $
            203,752


51
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**


**8** **.**  **Share-Based
      Compensation Expense**




***Stock
      Options***




The
      1999
      Stock Option Plan, 2000 Stock Option and Incentive Plan, 2001 Stock Option
      and
      Incentive Plan, 2003 Stock Option and Incentive Plan, 2004 Non-Qualified Stock
      Option and Inducement Plan and 2006 Directors' Stock Option and Incentive Plan,
      collectively the Option Plans, permit the Company to grant employees, outside
      directors, and consultants incentive stock options, nonqualified stock options
      or stock purchase rights to purchase shares of the Company's common stock.
      The
      Option Plans do not permit the exercise of non-vested stock options, and
      therefore as of December 31, 2006 and 2005 there were no shares subject to
      repurchase.




As
      of
      December 31, 2006, there were 4,991,430 shares authorized for issuance under
      the
      Option Plans, and 612,858 shares authorized for issuance outside of the Option
      Plans. As of December 31, 2006, 370,004 shares were available for future option
      grants under the Option Plans. There were no shares available for future option
      grants outside of the Options Plans. Compensation expense for stock options
      during the year ended December 31, 2006 was $1,336,000.





The
      following table is a summary of the Company's stock option activity for the
      three years ended December 31, 2006:





**200****6**
            
            **2005**
            
            **2004****Shares**
            
            **Wtd-Avg**
              **Exercise**
              **Price**
            
            **Shares**
            
            **Wtd-Avg**
              **Exercise**
              **Price**
            
            **Shares**
            
            **Wtd-Avg**
              **Exercise**
              **Price**Outstanding
                at beginning of year
            
            
            3,324,358
            
            $
            6.24
            
            
            3,078,001
            
            $
            6.25
            
            
            3,135,225
            
            $
            6.15Granted
            
            
            398,538
            
            
            6.27
            
            
            460,538
            
            
            8.77
            
            
            265,366
            
            
            11.59Exercised
            
            
            (52,819
            )
            
            (2.08
            )
            
            (33,938
            )
            
            (2.77
            )
            
            (122,825
            )
            
            (3.64
            )Canceled
            
            
            (99,707
            )
            
            (10.38
            )
            
            (180,243
            )
            
            (13.55
            )
            
            (199,765
            )
            
            (13.39
            )Outstanding
                at end of year
            
            
            3,570,370
            
            $
            6.19
            
            
            3,324,358
            
            $
            6.24
            
            
            3,078,001
            
            $
            6.25Exercisable
                at end of year
            
            
            2,934,029
            
            $
            6.00
            
            
            2,677,958
            
            $
            6.02
            
            
            2,456,107
            
            $
            6.13





The
      total
      intrinsic value of options exercised during the year ended December 31, 2006
      was
      $296,000.





The
      following table summarizes information with respect to stock options outstanding
      at December 31, 2006, based on the Company’s closing stock price on December 29,
      2006 of $4.75 per share:






**Options
                Outstanding at December 31,
                2006**
            
            
            **Vested
                Options at December 31, 2006****Range
                of  Exercise Price**
            
            
            **Number**
            
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life
                Years)**
            
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            
            **Aggregate**
              **Intrinsic**
              **Value**
            
            
            **Number**
            
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            
            **Aggregate**
              **Intrinsic**
              **Value**$
                0.35 -- $ 3.50
            
            
            2,080,468
            
            
            6.09
            
            $
            2.95
            
            $
            3,750,252
            
            
            2,055,387
            
            $
            2.95
            
            $
            3,690,858$
                3.51 -- $ 7.00
            
            
            513,183
            
            
            7.19
            
            $
            4.52
            
            
            118,853
            
            
            284,101
            
            
            3.97
            
            
            222,082$
                7.01 -- $14.00
            
            
            681,051
            
            
            8.17
            
            $
            8.89
            
            
            --
            
            
            298,873
            
            
            9.51
            
            
            --$14.01
                -- $28.00
            
            
            256,381
            
            
            3.85
            
            $
            22.04
            
            
            --
            
            
            256,381
            
            
            22.04
            
            
            --$28.01
                -- $49.00
            
            
            39,287
            
            
            3.15
            
            $
            49.00
            
            
            --
            
            
            39,287
            
            
            49.00
            
            
            --3,570,370
            
            
            6.45
            
            $
            6.19
            
            $
            3,869,105
            
            
            2,934,029
            
            $
            6.00
            
            $
            3,912,940




52
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




As
      of
      December 31, 2006, total unrecognized compensation expense related to unvested
      stock options was $2,783,000. This amount is expected to be recognized as
      expense over a weighted-average period of 1.3 years.





***Non-Vested*** ***Stock***




At
      the
      date of grant, the recipients of non-vested stock have most of the rights of
      a
      stockholder other than voting rights, subject to certain restrictions on
      transferability and a risk of forfeiture. Non-vested shares typically vest
      over
      a two to four year period beginning on the date of grant. The fair value of
      non-vested stock is equal to the market value of the shares on the date of
      grant. The Company recognizes the compensation expense for non-vested stock
      on a
      straight-line basis over the requisite service period. Compensation expense
      for
      non-vested stock during the three years ended December 31, 2006 was $1,915,000,
      $, $1,885,000 and $1,023,000, respectively.





The
      following table is a summary of the Company's non-vested stock activity, based
      on the Company’s closing stock price on December 29, 2006 of $4.75 per
      share:




**Non-Vested**
              **Stock**
              **Outstanding**
            
            
            **Weighted**
              **Average**
              **Grant
                Date**
              **Fair
                Value**
            
            
            **Aggregate**
              **Intrinsic**
              **Value**Balance
                as of December 31, 2003
            
            
            335,679
            
            $
            3.68Granted
            
            
            229,840
            
            
            12.99Vested
            
            
            (45,692
            )
            
            (4.27
            )Canceled
            
            
            (28,934
            )
            
            (3.78
            )Balance
                as of December 31, 2004
            
            
            490,893
            
            $
            7.38
            
            $
            3,623,000Granted
            
            
            324,561
            
            
            10.38Vested
            
            
            (91,240
            )
            
            (5.74
            )Canceled
            
            
            (142,802
            )
            
            (9.91
            )Balance
                as of December 31, 2005
            
            
            581,412
            
            $
            7.84
            
            $
            4,558,000Granted
            
            
            90,003
            
            
            7.16Vested
            
            
            (327,900
            )
            
            (4.19
            )Canceled
            
            
            (37,506
            )
            
            (10.78
            )Balance
                as of December 31, 2006
            
            
            306,009
            
            $
            10.04
            
            $
            3,072,000




The
      total
      intrinsic value of non-vested stock which vested during the year ended December
      31, 2006 was $1,374,000.




As
      of December 31, 2006, total unrecognized compensation expense related to
      non-vested stock was $1,578,000. This expense is expected to be recognized
      over
      a weighted-average period of 1.00 years.




***Employee
      Stock Purchase Plan***




The
      Company offers an Employee Stock Purchase Plan, or ESPP, to its employees.
      As of
      December 31, 2006, 364,304 shares have been authorized by the stockholders
      of the Company for issuance under the ESPP, of which 319,447 have been issued.
      Compensation expense for ESPP during the year ended December 31, 2006 was
      $539,000.




53
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




Under
      the
      ESPP, eligible employees may enroll in a 24-month offer period during certain
      open enrollment periods. New offer periods begin February 15 and
      August 15 of each year. Each offer period consists of four, six-month
      purchase periods during which employee payroll deductions are accumulated.
      These
      deduction amounts, which are subject to certain limitations, are accumulated,
      and, at the end of each purchase period, are used to purchase shares of common
      stock. The purchase price of the shares is 15% less than the fair market value
      on either the first day of an offer period or the last day of a purchase period,
      whichever is lower. If the fair market value on the purchase date is less than
      the fair market value on the first day of an offer period, then participants
      automatically commence a new 24-month offer period. The ESPP has a ten-year
      term.




As
      of
      December 31, 2006, unrecognized compensation expense related to the ESPP
      was $173,000. This amount is expected to be recognized as expense over a
      weighted-average period of 0.77 year.




***Share-Based
      Compensation under SFAS 123(R) for 2006 and APB 25 for 2005 and
      2004***




On
      January 1, 2006, the Company adopted SFAS 123(R), which requires the
      measurement and recognition of compensation expense, based on estimated fair
      values, for all share-based payments awards made to the Company’s employees and
      directors including stock options, non-vested stock, and stock purchased under
      the Company’s ESPP.




Prior
      to
      the adoption of SFAS 123(R), the Company accounted for share-based awards to
      employees and directors using the intrinsic value method in accordance with
      APB
      25, as allowed under SFAS 123, “Accounting for Stock-Based Compensation.”
Share-based compensation expense of $1,959,000 for the year ended
      December 31, 2005 was solely related to share-based awards resulting from
      non-vested stock awards and stock options granted with intrinsic value that
      the
      Company had been recognizing in its consolidated statements of operations in
      accordance with the provisions set forth above. In accordance with the intrinsic
      value method, no share-based compensation expense was otherwise recognized
      in
      the Company’s consolidated statements of operations because the exercise price
      of nearly all of the Company’s stock options granted to employees and directors
      equaled the fair market value of the underlying stock at the grant
      date.




***Pro
      Forma Share-Based Compensation under SFAS 123 for Fiscal 2005 and
      2004***




If
      the
      Company had recognized compensation expense over the relevant service period
      under the fair value method consistent with the provisions of SFAS 123,
“Accounting for Stock Based Compensation” as amended by SFAS 148, “Accounting
      for Stock Based Compensation-Transition and Disclosure,” with respect to stock
      options granted for the two years ended December 31, 2005, net income
      (loss) would have changed, resulting in pro forma net income (loss) and pro
      forma net income (loss) per share as presented below:




54
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**







**2005**
            
            **2004**Net
                income (loss), as reported
            
            $
            (1,514,443
            )
            $
            1,874,286Add:
                Stock-based employee compensation expense included in the reported
                net
                income (loss)
            
            
            74,812
            
            
            93,078Less:
                Stock-based employee compensation expense determined under fair value
                method for all awards
            
            
            (1,897,647
            )
            
            (1,838,982
            )Pro
                forma net income (loss)
            
            $
            (3,337,278
            )
            $
            128,382Net
                income (loss) per share, as reported:Basic
            
            $
            (0.16
            )
            $
            0.22Diluted
            
            $
            (0.16
            )
            $
            0.17Net
                income (loss) per share, pro forma:Basic
            
            $
            (0.35
            )
            $
            0.02Diluted
            
            $
            (0.35
            )
            $
            0.01







The
      above
      pro forma disclosures are not necessarily representative of the effects on
      reported net income or loss for future years. The
      pro
      forma share based compensation expense for the twelve months ended December
      31,
      2005 has increased by $293,000 since it was initially disclosed in the Annual
      Report on Form 10-K for the year of 2005. The increase primarily relates to
      the
      accounting for the contingent shares issuable to the Catalyst Shareholder that
      is subject to performance conditions. The Company determined in 2005 that the
      issuance of the common stock over the service period is probable and should
      have
      disclosed $23,000 per month as pro forma expense from March to December
      2005.




***Fair
      Value and Assumptions Used to Calculate Fair Value under SFAS 123(R) and SFAS
      123***




The
      weighted average fair value of each stock option granted for 2006, 2005 and
      2004
      was $3.59, $5.55 and $6.58, respectively.




The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option pricing model with the following weighted average
      assumptions for 2005, 2004 and 2003:




**2006**
            
            **2005**
            
            **2004**Volatility
            
            
            81
            %
            
            94
            %
            
            100
            %Average
                expected term (years)
            
            
            4.4
            
            
            3.7
            
            
            2.0Risk-free
                interest
                rate
            
            
            4.75
            %
            
            3.85
            %
            
            2.40
            %Dividend
                yield
            
            
            —
            
            
            —
            
            
            —




*Assumptions
      for Option-Based Awards under SFAS 123(R)*




Consistent
      with SFAS 123(R) and SAB 107, the Company considered the historical volatility
      of its stock price in determining its expected volatility, and, finding this
      to
      be reliable, determined that the historical volatility would result in the
      best
      estimate of expected volatility. Because the Company does not have any traded
      options or other traded financial instruments such as convertible debt, implied
      volatilities are not available.




The
      expected life of employee stock options represents the weighted-average period
      the stock options are expected to remain outstanding. The Company calculated
      the
      expected term using the lattice model with specific assumptions about the
      suboptimal exercise behavior, post-vesting termination rates and other relevant
      factors.




55
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




The
      risk-free interest rate assumption is based upon observed interest rates
      appropriate for the term of the Company’s employee stock options.




The
      dividend yield assumption is based on the Company’s history and expectation of
      dividend payouts. The Company has not paid and currently do not plan to declare
      dividends on our common stock.




As
      share-based compensation expense recognized in the consolidated statement of
      operations for the year ended December 31, 2006 is based on awards
      ultimately expected to vest, it has been reduced for estimated forfeitures.
      Forfeitures were estimated based on the Company’s historical
      experience.




*Assumptions
      for Option-Based Awards under SFAS 123*




Prior
      to
      the first quarter of fiscal 2006, the Company considered the historical
      volatility of its stock price in determining its expected volatility. The
      risk-free interest rate was based upon assumption of interest rates appropriate
      for the term of the Company’s employee stock options. The dividend yield
      assumption was based on the Company’s history and expectation of dividend
      payouts. Forfeitures prior to the first quarter of fiscal 2006 were accounted
      for as they occurred in accordance with APB No. 25.




*Assumptions
      for Non-Vested Stock Awards under SFAS 123(R) and SFAS 123*




The
      fair
      value of each non-vested stock award is estimated on the date of grant using
      the
      intrinsic value method. The weighted average fair value of the non-vested stock
      granted under the Company’s stock option plans for 2006, 2005 and 2004 was
      $7.16, $10.38 and $13.00 per share, respectively.




*Assumptions
      for Employee Stock Purchase Plan Awards under SFAS 123(R)*




The
      fair
      value is determined as of the grant date, using the graded vesting approach.
      Under the graded vesting approach, the 24-month ESPP offer period, which
      consists of four, six-month purchase periods, is treated for valuation purposes
      as four separate option tranches with individual lives of six, 12, 18 and 24
      months, each commencing on the initial grant date. Each tranche is expensed
      straight-line over its individual life.





**9** **.**  **Employee
      Benefit Plans**




The
      Company has a 401(k) defined contribution plan. The 401(k) plan allows
      eligible employees to contribute up to 15% of their compensation, subject to
      a
      statutory prescribed annual limit. Employee contributions and earnings thereon
      vest immediately. Although the Company may make discretionary contributions
      to
      the 401(k) plan, none were made during 2006, 2005 and 2004.




**10** **.**  **Income
      Taxes**




Income
      tax expense consisted of the following for the three years ended
      December 31, 2006:




**200****6**
            
            **2005**
            
            **2004**Current:Federal
            
            $
            —
            
            $
            —
            
            $
            213,165State
            
            
            —
            
            
            142,425
            
            
            36,579Total
            
            $
            —
            
            $
            142,425
            
            $
            249,744


56
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




The
      following table reconciles the federal statutory rate to the effective tax
      rate
      of the provision for income taxes for the three years ended December 31,
      2006:




**200****6**
            
            **2005**
            
            **2004**Federal
                statutory income tax rate (benefit)
            
            
            (34
            %)
            
            
            (34
            %)
            
            
            34
            %State
                income taxes
            
            
            (5
            )
            
            
            3
            
            
            
            2Loss
                on retirement of convertible note payable
            
            
            5
            
            
            
            —
            
            
            
            —Permanent
                differences
            
            
            13
            
            
            
            10
            
            
            
            6Losses
                for which no benefit has been recognized
            
            
            21
            
            
            
            31
            
            
            
            (30
            )Effective
                tax rate
            
            
            —
            %
            
            
            10
            %
            
            
            12
            %







The
      tax
      effect of temporary differences that give rise to significant portions of the
      deferred tax assets as of December 31, 2006 and 2005 are presented as
      follows:




**December 31,****200****6**
            
            **2005****Deferred
                tax assets:**Net
                operating loss carryforwards
            
            $
            20,834,803
            
            $
            19,266,395Stock
                options and warrants for services
            
            
            12,771,213
            
            
            11,741,067Other
            
            
            26,370
            
            
            (20,759
            )Total
                deferred tax assets
            
            
            33,632,386
            
            
            30,986,703Valuation
                allowance
            
            
            (33,632,386
            )
            
            (30,986,703
            )Net
                deferred tax assets
            
            $
            —
            
            $
            —







The
      net
      change in the valuation allowance for the year ended December 31, 2006 was
      an increase of $2,646,000. The Company has established a valuation allowance
      against that portion of deferred tax assets where management was not able to
      determine that it is more likely than not that the asset will be
      realized.




As
      of
      December 31, 2006, the Company had federal and state operating loss
      carryforwards of approximately $56,279,000 and $31,660,000, respectively. If
      not
      earlier utilized, the federal net operating loss carryforward will expire
      between 2019 and 2026 and the state loss carryforward will expire between 2006
      and 2016.




Utilization
      of the net operating loss carry-forwards and credits is subject to an annual
      limitation due to the ownership change limitations provided by the Internal
      Revenue Code of 1986, as amended, and similar state provisions. The annual
      limitation will result in the expiration of a portion of net operating loss
      carryforwards before utilization.




In
      July
      2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* ,
      which
      supplements SFAS No. 109 by defining the confidence level that a tax
      position must meet in order to be recognized in the financial statements.
      Interpretation No. 48 requires that the tax effects of a position be
      recognized only if it is “more-likely- than-not” to be sustained based solely on
      its technical merits as of the reporting date. The more-likely-than-not
      threshold represents a positive assertion by management that a company is
      entitled to the economic benefits of a tax position. If a tax position is not
      considered more-likely-than-not to be sustained based solely on its technical
      merits, no benefits of the position are to be recognized. Moreover, the
      more-likely-than-not threshold must continue to be met in each reporting period
      to support continued recognition of a benefit. At adoption, companies must
      adjust their financial statement to reflect only those tax positions that are
      more-likely-than-not to be sustained as of the adoption date. Any necessary
      adjustment would be recorded directly to retained earnings in the period of
      adoption and reported as a change in accounting principle. The Company will
      adopt Interpretation No. 48 on January 1, 2007 and is currently
      assessing the potential impact on its financial statements.




57
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**






**11** **.**  **Earnings
      (Loss) per Share**




The
      following is a reconciliation of the basic and diluted net income (loss)
      available to common stockholders and the number of shares used in the basic
      and
      diluted net income (loss) per common share computations for the periods
      presented:




**200****6**
            
            **2005**
            
            **2004**Net
                income (loss)
            
            $
            (8,220,415
            )
            $
            (1,514,443
            )
            $
            1,874,286Preferred
                stock dividends
            
            
            —
            
            
            —
            
            
            (92,757
            )Net
                income (loss) available to common stockholders—basic and
                diluted
            
            $
            (8,220,415
            )
            $
            (1,514,443
            )
            $
            1,781,529Weighted-average
                number of common shares—basic
            
            
            9,989,265
            
            
            9,500,748
            
            
            8,368,293Assumed
                exercise or conversion of all potentially dilutive common shares
                outstanding
            
            
            —
            
            
            —
            
            
            2,799,582Weighted-average
                number of common shares—diluted
            
            
            9,989,265
            
            
            9,500,748
            
            
            11,167,875Basic
                net income (loss) per share:Income
                (loss) from continuing operations
            
            $
            (0.79
            )
            $
            (0.16
            )
            $
            0.21Loss
                from discontinued operations
            
            
            (0.03
            )
            
            —
            
            
            —Net
                income (loss)
            
            $
            (0.82
            )
            $
            (0.16
            )
            $
            0.21Diluted net
                income (loss) per share:Income
                  (loss) from continuing operations
            
            $
            (0.79
            )
            $
            (0.16
            )
            $
            0.16Loss
                from discontinued operations
            
            
            (0.03
            )
            
            —
            
            
            —Net
                income (loss)
            
            $
            (0.82
            )
            $
            (0.16
            )
            $
            0.16




Basic
      earnings (loss) per share is computed by dividing net income (loss), less
      dividends on preferred stock, by the weighted average number of common shares
      outstanding, excluding unvested restricted stock. Diluted earnings per share
      is
      calculated for 2004 by dividing net income, less dividends on preferred stock,
      by the weighted average number of common shares used in the basic earnings
      per
      share calculation plus the number of common shares that would be issued assuming
      exercise or conversion of all potentially dilutive common shares outstanding,
      including unvested restricted stock. Diluted loss per share is unchanged from
      basic loss per share for 2006 and 2005 because the addition of common shares
      that would be issued assuming exercise or conversion would be
      anti-dilutive.




Shares
      used in the diluted net income (loss) per share computation in the above table
      include the dilutive impact of the Company’s stock options and warrants. The
      impact of the Company’s stock options and warrants on shares used for the
      diluted earnings per share computation is calculated based on the average share
      price of the Company’s common stock for each period using the treasury stock
      method. Under the treasury stock method, the tax-effected proceeds that would
      be
      hypothetically received from the exercise of all stock options and warrants
      with
      exercise prices below the average share price of the Company’s common stock are
      assumed to be used to repurchase shares of the Company’s common stock. The
      dilutive impact of the Company’s stock options was calculated using an average
      price of the Company’s common stock of $6.41, $8.68 and $12.74 per share for
      2006, 2005 and 2004, respectively.




58
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




The
      Company excludes all potentially dilutive securities from its diluted net income
      (loss) per share computation when their effect would be anti-dilutive. The
      following common stock equivalents were excluded from the earnings per share
      computation, as their inclusion would have been
      anti-dilutive:




**200****6**
            
            **2005**
            
            **2004**Stock
                options and warrants excluded due to the exercise price exceeding
                the
                average fair value of the Company’s common stock during the
                period
            
            
            1,397,022
            
            
            1,150,239
            
            
            769,351Weighted
                average restricted stock, stock options and stock warrants, calculated
                using the treasury stock method, that were excluded due to the Company
                reporting a net loss during the period
            
            
            1,833,389
            
            
            2,450,587
            
            
            —Weighted
                average shares issuable upon conversion of the convertible notes
                payable
            
            
            704,960
            
            
            142,858
            
            
            360,572Weighted
                average shares issuable upon conversion of the convertible preferred
                stock
            
            
            —
            
            
            —
            
            
            25,582Weighted
                average shares contingently issuable
            
            
            73,402
            
            
            136,376
            
            
            —Total
                common stock equivalents excluded from diluted net income (loss)
                per
                share
            
            
            4,008,773
            
            
            3,880,060
            
            
            1,155,505







**12** **.**  **Commitments
      and Contingencies**




The
      following is a table summarizing significant commitments as of December 31,
      2006, consisting of debt service payments related to convertible and
      non-convertible notes payable and future minimum lease payments under all
      non-cancelable operating leases and capital leases with initial or remaining
      terms in excess of one year.




**Notes**
              **Payable**
            
            **Operating**
              **Leases**
            
            **Capital**
              **Leases**2007
            
            $
            106,775
            
            $
            2,008,017
            
            $
            647,8582008
            
            
            243,990
            
            
            1,263,403
            
            
            493,0752009
            
            
            —
            
            
            832,568
            
            
            273,8342010
            
            
            —
            
            
            869,731
            
            
            —2011
            
            
            —
            
            
            709,898
            
            
            —Thereafter
            
            
            —
            
            
            —
            
            
            —Total
                commitments
            
            $
            350,765
            
            $
            5,683,617
            
            $
            1,414,767







The
      Company leases its San Francisco corporate office under a noncancelable
      operating lease which expires in August 2011. Future annual minimum lease
      payments related to its various operating leases are included in the table
      above. Rent expense was approximately $1,043,000, $1,006,000 and $753,000 in
      2006, 2005 and 2004, respectively.




***Legal
      Proceedings***




**Thomas
      O’Shea v. Merriman Curhan Ford & Co.**




In
      June
      2006, Merriman Curhan Ford & Co. was served with a claim in NASD Arbitration
      by Mr. O’Shea. Mr. O’Shea is a former at-will employee of Merriman Curhan Ford
& Co. and worked in the investment banking department. Mr. O’Shea resigned
      from Merriman Curhan Ford & Co. in July 2005. Mr. O’Shea alleges breach of
      an implied employment contract, quantum meruits, and unjust enrichment based
      on
      his allegations that he was to be paid more for his work. The matter is in
      the
      discovery stage and an arbitration hearing is scheduled for June 2007. The
      Company believes that it has meritorious defenses and intends to contest these
      claims vigorously. However, in the event that the Company did not prevail,
      based
      upon the facts known to date, the Company does not believe that the outcome
      will
      have a material effect on its financial position, financial results or cash
      flows.




59
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




**Westerman
      v. Western Capital Financial Group — NASD Arbitration**




In
      May
      2005, Merriman Curhan Ford & Co. was served with a claim in NASD Arbitration
      by Ms. Westerman. The claim named Western Capital Financial Group as one of
      several defendants. Western Capital Financial Group is the predecessor name
      of
      Merriman Curhan Ford & Co., the California corporation. The Western Capital
      Financial Group name was effective from September June 26, 1986 to July 14,
      1998. On May 1, 2006, the Company reached settlement with Claimant who accepted
      $8,500 to resolve the dispute. Merriman Curhan Ford & Co. has been dismissed
      from the arbitration and the matter is resolved.




**In
      re Odimo Incorporated Securities Litigation**




Merriman
      Curhan Ford & Co. was a defendant in a purported class action suit brought
      in connection with a registered offering involving Odimo Incorporated in which
      Merriman Curhan Ford & Co. served as co-manager for the company. The
      complaint, filed in the 17th Judicial Circuit Court for Broward County in
      Florida on September 30, 2005, alleged violations of federal securities laws
      against Odimo and certain of its officers as well as the company’s underwriters,
      including Merriman Curhan Ford & Co., based on alleged misstatements and
      omissions in the registration statement. Recently, similar cases were
      consolidated and lead plaintiff’s counsel was assigned. Thereafter, an amended
      complaint was filed and the underwriters, including Merriman Curhan Ford &
Co., were not named as defendants. This matter is now resolved.




**Other
      Matters**




Additionally,
      from time to time, the Company is involved in ordinary routine litigation
      incidental to its business.




**13** **.**  **Financial
      Instruments, Off-Balance Sheet Arrangements and Credit
      Risk**




***Financial
      Instruments***




The
      Company’s broker-dealer entity trades securities that are primarily traded in
      United States markets. As of December 31, 2006 and 2005, the Company had
      not entered into any transactions involving financial instruments, such as
      financial futures, forward contracts, options, swaps or derivatives that would
      expose the Company to significant related off-balance-sheet risk.




In
      addition, the Company, from time to time, has sold securities it does not
      currently own in anticipation of a decline in the fair value of that security
      (securities sold, not yet purchased). Securities sold, not yet purchased
      represent obligations of the Company to deliver the specified security at the
      contracted price and thereby create a liability to purchase the security in
      the
      market at prevailing prices. These transactions result in off-balance sheet
      risk
      as the Company’s ultimate obligation to purchase such securities may exceed the
      amount recognized in the consolidated statements of financial
      condition.


60
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




Market
      risk is primarily caused by movements in market prices of the Company’s trading
      and investment account securities. The Company’s trading securities and
      investments are also subject to interest rate volatility and possible
      illiquidity in markets in which the Company trades or invests. The Company
      seeks
      to control market risk through monitoring procedures. The Company’s principal
      transactions are primarily long and short equity transactions.




***Off-Balance
      Sheet Arrangements***




The
      Company was not a party to any off-balance sheet arrangements during the three
      years ended December 31, 2006. In particular, the Company does not have any
      interest in so-called limited purpose entities, which include special purpose
      entities and structured finance entities.




***Credit
      Risk***




The
      Company’s broker-dealer subsidiary functions as an introducing broker that
      places and executes customer orders. The orders are then settled by an unrelated
      clearing organization that maintains custody of customers’ securities and
      provides financing to customers. Through indemnification provisions in
      agreements with clearing organizations, customer activities may expose the
      Company to off-balance-sheet credit risk. Financial instruments may have to
      be
      purchased or sold at prevailing market prices in the event a customer fails
      to
      settle a trade on its original terms or in the event cash and securities in
      customer margin accounts are not sufficient to fully cover customer obligations.
      The Company seeks to control the risks associated with customer activities
      through customer screening and selection procedures as well as through
      requirements on customers to maintain margin collateral in compliance with
      various regulations and clearing organization policies.




The
      Company is also exposed to credit risk as it relates to the collection of
      receivables from third parties, including lead managers in underwriting
      transactions and the Company’s corporate clients related to private placements
      of securities and financial advisory services.




**14** **.**  **Regulatory
      Requirements**




Merriman
      Curhan Ford & Co. is a broker-dealer subject to Rule 15c3-1 of the
      Securities and Exchange Commission, which specifies uniform minimum net capital
      requirements, as defined, for their registrants. As of December 31, 2006,
      Merriman Curhan Ford & Co. had regulatory net capital, as defined, of
      $4,593,000, which exceeded the amount required by $3,150,000. Merriman Curhan
      Ford & Co. is exempt from Rules 15c3-3 and 17a-13 under the
      Securities Exchange Act of 1934 because it does not carry customer accounts,
      nor
      does it hold customer securities or cash.




**15** **.**  **Related
      Party Transactions**




As
      described in Note 5, the Company issued a $400,000 convertible note payable
      during 2001 to the former Chairman and CEO of the Company in connection with
      severance terms included in his employment agreement. In May 2003, the
      Company and Mr. Sledge agreed to convert the principal and interest due at
      maturity into a five year fully amortizing note payable. As of December 31,
      2006, the remaining principal amount of the note payable was $139,000.
      Mr. Sledge currently serves as a member of the Company’s Board of
      Directors.




From
      time
      to time, officers, directors, employees and/or certain large stockholders of
      the
      Company may invest in private placements which the Company arranges and for
      which the Company charges investment banking fees.




61
  **MCF
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS −
CONTINUED**




**16.**  **Acquisition
      of MedPanel, Inc.**




On
      November 6, 2006, the Company signed a definitive agreement to acquire MedPanel,
      Inc., a privately-heldcompany
      based in Cambridge, Massachusetts. MedPanel, Inc. is an online medical market
      intelligence firm that serves life sciences companies and health care investors
      through its proprietary methodologies and vast network of leading physicians,
      medical researchers, allied health professionals and other important health
      care
      constituencies. Under the terms of the merger agreement, the Company will pay
      $6.5 million in common stock for MedPanel, Inc. Additionally, the selling
      stockholders will be entitled to additional consideration on the third
      anniversary from the closing which is based upon MedPanel achieving specific
      revenue and profitability milestones. The payment of the incentive consideration
      will be 50% in cash and 50% in the Company’s common stock and may not exceed
      $11,455,000. The Company will register the $6.5 million of common stock for
      resale with the Securities and Exchange Commission prior to the closing of
      the
      transaction. The consummation of the acquisition is subject to the effectiveness
      of the registration statement with the Securities and Exchange Commission.




62


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




The
      financial statements included in this report have been audited by
      Ernst & Young LLP, independent auditors, as stated in their audit
      report appearing herein.




During
      the year ended December 31, 2006 and through the date of this Annual Report
      on Form 10-K, there were no disagreements with Ernst & Young LLP
      on any matter of accounting principle or practice, financial statement
      disclosure, or auditing scope or procedure which, if not resolved to
      Ernst & Young LLP’s satisfaction, would have caused them to make
      reference to the subject matter in connection with their report on our
      consolidated financial statements; and there were no reportable events as set
      forth in applicable SEC regulations.




**ITEM 9A.****CONTROLS
      AND PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures—** We **** have
      established disclosure controls and procedures to ensure that material
      information relating to the Company, including its consolidated subsidiaries,
      is
      made known to the officers who certify the Company’s financial reports and to
      other members of senior management and the Board of Directors.




Based
      on
      their evaluation as of December 31, 2006, the principal executive officer
      and principal financial officer of the Company have concluded that the Company’s
      disclosure controls and procedures (as defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934) are
      effective.




**Management’s
      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). Under the supervision and with the participation of our
      management, including our principal executive officer and principal financial
      officer, we conducted an evaluation of the effectiveness of our internal control
      over financial reporting based on the framework in *Internal
      Control—Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission. Based
      on
      our evaluation under the framework in *Internal
      Control—Integrated Framework,* our
      management concluded that our internal control over financial reporting was
      effective as of December 31, 2006. Our management’s assessment of the
      effectiveness of our internal control over financial reporting as of
      December 31, 2006 has been audited by Ernst & Young LLP, an
      independent registered public accounting firm, as stated in their report which
      is included herein.




**Changes
      in internal controls—** No **** change
      in
      the Company’s internal control over financial reporting (as defined in
      Rules 13a-15(d) and 15d-15(d) of the Exchange Act) occurred
      during the quarter ended December 31, 2006, that materially affected, or is
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.




**ITEM 9B.****OTHER
      INFORMATION**




Not
      applicable.




63




**Report
      of Independent Registered Public Accounting Firm**




The
      Board
      of Directors and Stockholders of


MCF
      Corporation and subsidiaries




We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control Over Financial Reporting, that MCF Corporation and
      subsidiaries (the “Company”) maintained effective internal control over
      financial reporting as of December 31, 2006, based on criteria established
      in Internal Control—Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (the COSO criteria). The Company’s
      management is responsible for maintaining effective internal control over
      financial reporting and for its assessment of the effectiveness of internal
      control over financial reporting. Our responsibility is to express an opinion
      on
      management’s assessment and an opinion on the effectiveness of the Company’s
      internal control over financial reporting based on our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.




A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company;
      (2) 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
      of
      the company are being made only in accordance with authorizations of management
      and directors of the company; and (3) provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use,
      or
      disposition of the company’s 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, projections of any evaluation of
      effectiveness to future periods are 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.




In
      our
      opinion, management’s assessment that the Company maintained effective internal
      control over financial reporting as of December 31, 2006, is fairly stated,
      in all material respects, based on the COSO criteria. Also, in our opinion,
      the
      Company maintained, in all material respects, effective internal control over
      financial reporting as of December 31, 2006, based on **** the
      COSO
      criteria.




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated statements of financial
      condition of the Company as of December 31, 2006 and 2005, and the related
      consolidated statements of operations, stockholders’ equity, and cash flows for
      each of the three years in the period ended December 31, 2006 of the
      Company and our report dated February 12, 2007 expressed an unqualified
      opinion thereon.




/s/Ernst&
                YoungLLPSan
                Francisco, CaliforniaFebruary 12,
                2007






64




**PART III**




**ITEM
      10.****DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT**




The
      table
      below sets forth certain information concerning each of the Directors and
      executive officers of MCF Corporation:




**Name**
            
            
            **Age**
            
            **Position**D.
                Jonathan Merriman
            
            46
            
            Chairman
                of the Board of Directors and Chief Executive OfficerGregory
                S. Curhan
            
            45
            
            Executive
                Vice PresidentRobert
                E. Ford
            
            46
            
            President
                and Chief Operating OfficerJohn
                D. Hiestand
            
            38
            
            Chief
                Financial OfficerChristopher
                L. Aguilar
            
            44
            
            General
                CounselPatrick
                H. Arbor
            
            70
            
            DirectorAnthony
                B. Helfet
            
            61
            
            DirectorRaymond
                J. Minehan
            
            65
            
            DirectorScott
                Potter
            
            38
            
            DirectorDennis
                G. Schmal
            
            59
            
            DirectorDonald
                H. Sledge
            
            66
            
            DirectorRonald
                E. Spears
            
            58
            
            DirectorSteven
                W. Town
            
            46
            
            Director







*D.
      Jonathan Merriman* has
      served as our Chairman and Chief Executive Officer from February 2002.
      Prior to that period, Mr. Merriman was President and CEO of Ratexchange
      Corporation, the predecessor company to MCF Corporation. Mr. Merriman and
      his team engineered the transition of Ratexchange, a software trading platform
      company, into a full-service institutional investment bank, MCF Corporation.
      From June 1998 to October 2000, Mr. Merriman was Managing
      Director and Head of the Equity Capital Markets Group and member of the Board
      of
      Directors at First Security Van Kasper. In this capacity, he oversaw the
      Research, Institutional Sales, Equity Trading, Syndicate and Derivatives Trading
      departments. From June 1997 to June 1998, Mr. Merriman served as
      Managing Director and Head of Capital Markets at The Seidler Companies in Los
      Angeles, where he also served on the firm’s Board of Directors. Before Seidler,
      Mr. Merriman was Director of Equities for Dabney/Resnick/Imperial, LLC. In
      1989, Mr. Merriman co-founded the hedge fund company Curhan, Merriman
      Capital Management, Inc., which managed money for high net worth
      individuals and corporations. Before Curhan, Merriman Capital
      Management, Inc., he worked in the Risk Arbitrage Department at Bear
      Stearns & Co. as a trader. Prior to Bear Stearns, Mr. Merriman
      worked at Merrill Lynch as a financial analyst and as an institutional equity
      salesman. Mr. Merriman received his Bachelor of Arts in Psychology from
      Dartmouth College and completed coursework at New York University’s Graduate
      School of Business. Mr. Merriman has served on the Boards of several
      organizations and currently holds seats on the Board of Directors of MCF
      Corporation, Leading Brands, Inc. and Points International Ltd.




*Gregory
      S. Curhan* has
      served as our Executive Vice President from January 2002 to present and
      served as Chief Financial Officer from January 2002 to January 2004.
      Previously, he served as Chief Financial Officer of WorldRes.com from
      May 1999 through June 2001. Prior to joining WorldRes.com,
      Mr. Curhan served as Director of Global Technology Research Marketing and
      Managing Director Specialty Technology Institutional Equity Sales at Merrill
      Lynch & Co. from May 1998 to May 1999. Prior to joining
      Merrill Lynch, Mr. Curhan was a partner in the investment banking firm of
      Volpe Brown Whelan & Co., serving in various capacities including
      Internet research analyst and Director of Equities from May 1993 to
      May 1998. Mr. Curhan was a founder and principal of the investment
      advisor Curhan, Merriman Capital Management from July 1988 through
      December 1992. Prior to founding Curhan, Merriman, Mr. Curhan was a
      Vice President institutional equity sales for Montgomery Securities from
      June 1985 through June 1988. From August 1983 to May 1985,
      Mr. Curhan was a financial analyst in the investment banking group at
      Merrill Lynch. Mr. Curhan earned his Bachelor of Arts degree from Dartmouth
      College.




65




*Robert
      E. Ford* had
      served as President and Chief Operating Officer for MCF Corporation since
      February 2001. He brings 20 years of executive and operations experience to
      the Company. Prior to joining MCF Corporation from February 2000 to
      February 2001, Mr. Ford was a co-Founder and CEO of
      Metacat, Inc., a content management ASP that specialized in enabling
      supplier catalogs for Global 2000 private exchanges and eMarketplaces. From
      June 1996 to December 1999, he was President/COO and on the founding
      team of JobDirect.com, a leading resume and job matching service for university
      students, which was acquired by Korn Ferry International. Previously,
      Mr. Ford co-founded and managed an education content company from
      September 1994 to 1996. Prior to that, from May 1992 to
      August 1994, he headed up a turnaround and merger as General Manager of a
      65 year-old manufacturing and distribution company. Mr. Ford started his
      career as VP of Business Development at Lazar Enterprises, a
      technology-consulting firm he helped operate from June 1989 to
      February 1992. He earned his Masters in International Business and Law from
      the Fletcher School of Law and Diplomacy in 1989 at Tufts University and a
      BA
      with high distinction from Dartmouth College in 1982.




*John
      D. Hiestand* joined
      MCF Corporation as the Controller in January 2002 and became Chief
      Financial Officer in January 2004. From December 2000 to
      November 2001, he served as the Controller of the Metro-Switching Division
      at CIENA Corporation. Mr. Hiestand had come to CIENA through the merger
      with Cyras Systems, Inc., where he served as the Controller from
      March 2000 to December 2000. Prior to joining Cyras
      Systems, Inc., Mr. Hiestand served as a Senior Manager in the audit
      practice at KPMG LLP in San Francisco. Mr. Hiestand received a Bachelor of
      Arts in Business from California Polytechnic State University at San Luis Obispo
      in 1991, and holds the Certified Public Accountant (CPA) and Chartered Financial
      Analyst (CFA) designations.




*Christopher
      L. Aguilar* has
      served as General Counsel of MCF Corporation from March 2000 to present and
      serves as General Counsel and Chief Compliance Officer of Merriman Curhan
      Ford & Co. He brings 15 years of legal and regulatory experience to the
      Company. From August 1995 to March 2000, Mr. Aguilar was a
      partner at Bradley, Curley & Asiano, a San Francisco law firm, where he
      represented the interests of public and private corporations, small businesses
      and individuals in commercial litigation. Mr. Aguilar has also worked for
      the San Francisco City Attorney and Alameda County District Attorney’s offices.
      Mr. Aguilar received his juris doctorate degree from the University of
      California, Hastings College of the Law. He also attended Oxford University
      as
      an undergraduate and received his Bachelor of Arts degree from the Integral
      Program at St. Mary’s College of California where he was included in Who’s Who
      among American Colleges and Universities. Mr. Aguilar is presently an
      adjunct professor at University of California, Hastings College of the
      Law.




*Patrick
      H. Arbor* has
      served as a member of our Board of Director since February 2001 and has served
      as a member of the audit committee since April 2001. Mr. Arbor is currently
      Chairman of United Financial Holdings Inc., a bank holding company. Mr. Arbor
      has been a principal of the trading firm of Shatkin-Arbor & Co. from 1997 to
      the present time. He is a longtime member of the Chicago Board of Trade (CBOT),
      the world’s oldest derivatives exchange, serving as the organization’s Chairman
      from 1993 to 1999. During that period, Mr. Arbor also served on the Board of
      Directors of the National Futures Association. Prior to that, he served as
      Vice
      Chairman of the CBOT for three years and ten years as a Director. Mr. Arbor’s
      other exchange memberships include the Chicago Board Options Exchange, the
      Mid-America Commodity Exchange and the Chicago Stock Exchange. Mr. Arbor
      received his undergraduate degree in business and economics from Loyola
      University.




*Anthony
      B. Helfet,* a
      retired investment banker, has been a director since February 2004.
      Mr. Helfet was a Special Advisor to UBS Warburg from September 2001
      through December 2001. From 1991 to August 31, 2001, Mr. Helfet
      was a Managing Director of Dillon, Read & Co. Inc. and its successor
      organization, UBS Warburg. Mr. Helfet was also a Managing Director of the
      Northwest Region of Merrill Lynch Capital Markets from 1979 to 1989.
      Mr. Helfet received his A.B. degree from Columbia College in 1966 and his
      M.B.A. from the graduate school of business at Columbia University in 1972.
      From
      1967 until 1970, Mr. Helfet served as an infantry officer in the United
      States Marine Corps and served in Vietnam in 1968 and 1969. Mr. Helfet
      serves on the Board of Directors of Layne Christensen Company and Alliance
      Imaging Inc.




66




*Raymond
      J. Minehan* has
      served as a member of our Board of Directors and as a member of our audit
      committee and compensation committee since August 2003. Since May 2005, Mr.
      Minehan has served as Chief Financial Officer for the Conservation and
      Liquidation Office of the State of California. From February 2002 to May 2005,
      Mr. Minehan was retired. From February 2001 to February 2002, Mr. Minehan served
      as the Chief Financial Officer at Memestreams, Inc., a startup company that
      was
      developing information management software. From January 1997 to August 2000,
      he
      served as the Chief Administrative Officer at Sutro & Co. where he was
      responsible for all administrative functions including finance, management
      information systems, telecommunications, operations, human resources and
      facilities. From 1989 to 1997, he served as chief financial officer at Hambrecht
      & Quist, Inc. From 1972 to 1989, Mr. Minehan served as a partner with Arthur
      Andersen LLP. Mr. Minehan served in the United States Air Force as a navigator
      assigned to the Strategic Air Command as B-52 navigator/electronic warfare
      officer. He attained the rank of Captain. Mr. Minehan received his Bachelor
      of
      Arts degree in Finance from Golden Gate University.




*Scott
      Potter* became
      a
      Director of MCF Corporation in August 2004. From February 2005 until the
      present, he has served as a Managing General Partner of San Francisco Equity
      Partners (SFEP), a private equity firm focused on expansion stage companies
      within the information technology, media, consumer, and service industries.
      Prior to founding SFEP in February 2005, Mr. Potter served as Director of
      LMS Capital, the venture capital arm  of London Merchant Securities plc
      (LON:LMSO) from January 2003 to February 2005, where Mr. Potter oversaw LMS’
North American Private Equity portfolio. Prior to joining LMS, Mr. Potter held
      the position of Senior Vice President, Field Operations at Inktomi Corporation
      from August 2002 to January 2003 where he had responsibility for Inktomi’s sales
      force, business development, consulting services, and field offices. From
      January 2000 to August 2002, Mr. Potter served as President and CEO of Quiver,
      Inc., an enterprise software company funded by some of the world’s leading
      Venture Capital firms. Under Mr. Potter’s leadership, Quiver became a leading
      company in the Information Management space, and ultimately was acquired by
      Inktomi in August of 2002. Prior to his tenure at Quiver, Mr. Potter was
      Executive Vice President in charge of business development and corporate
      development at Worldres, Inc., an online travel technology company. Mr. Potter’s
      career began as an attorney for one of Silicon Valley’s leading law firms,
      Venture Law Group. A frequent speaker at technology industry conferences and
      investor forums, Mr. Potter holds a BA in Industrial Psychology from the
      University of California at Berkeley and a JD Degree from UC Berkeley’s Boalt
      Hall School of Law. Mr. Potter currently serves as Chairman of The Guild, Inc.
      and serves on the board of directors of Method Products, Modviz, Penguin
      Computing, and Rave Motion Pictures.




*Dennis
      G. Schmal* has
      served as a member of our Board of Directors and as a member of our audit
      committee since August 2003. From February 1972 to April 1999,
      Mr. Schmal served as a partner in the audit practice at Arthur Andersen
      LLP. Mr. Schmal now performs a variety of consulting services for a number
      of companies. As a senior business advisor with special focus in finance, he
      has
      extensive knowledge of financial reporting and holds the CPA designation.
      Besides serving on the boards of two private companies, Mr. Schmal also
      serves on the Board of Directors for Varian Semiconductor Equipment Associates
      , Inc. (VSEA), a public company. Mr. Schmal attended California State
      University, Fresno where he received a Bachelor of Science in Business
      Administration- Finance and Accounting Option.




67




*Donald
      H. Sledge* has
      served as a member of our Board of Directors from September 1999 to present
      and Chairman of our Board of Directors from February 2000 to
      June 2001. He has served as a member of the compensation committee from
      April 2001 to present. He also served as Chief Executive Officer from
      February 2000 to October 2000. From September 1999 to
      February of 2000 he served as President, Chief Executive Officer and
      Chairman of our subsidiary Ratexchange I, Inc. From October 2000 to
      October 2003, Mr. Sledge was a general partner in Fremont
      Communications, a venture capital fund, based in San Francisco. From
      January 1996 to September 1999, Mr. Sledge was Vice Chairman and
      Chief Executive Officer of TeleHub Communications Corporation, a next generation
      ATM-based telecommunications company. From 1994 to 1995, Mr. Sledge served
      as President and Chief Operating Officer of WCT, a $160-million long distance
      telephone company that was one of Fortune Magazine’s 25 fastest growing public
      companies before it was acquired by Frontier Corporation. From 1993 to 1994,
      Mr. Sledge was head of operations for New T&T, a Hong Kong-based
      start-up. He was Chairman and Chief Executive Officer of New Zealand
      Telecom International from 1991 to 1993 and a member of the executive board
      of
      TCNZ, Mr.. Sledge held various other senior positions with Telecom New
      Zealand from 1988 until 1993 as was instrumental in leading the IPO of the
      company. Mr. Sledge also served four years as president and Chief Executive
      Officer of Pacific Telesis International. Mr. Sledge is also an owner and
      Board Member of DataProse, a company providing direct mail and billing statement
      solutions. In addition, Mr.. Sledge serves on the Board of MobilePro
      (OTCBB:MOBL) and the Board of CasaByte, a private company providing quality
      of
      service testing for cellular networks. Mr. Sledge holds a Masters of
      Business Administration and Bachelor of Arts degree in industrial management
      from Texas Technological University.




*Ronald
      E. Spears* has
      served as a member of our Board of Directors from March 2000 to present and
      served as a member of the Audit Committee from April 2001 to
      August 2003. Since March 2002, Mr. Spears has served as
      President of AT&T’s Signature Client Group, the sales organization that
      serves AT&T’s largest 325 Global accounts. From October 1990 until
      joining AT&T in 2002, Mr. Spears served in a number of early stage
      ventures primarily involved in the development and sale of technology solutions
      to large corporate enterprises . During this time, he served as
      Chief Operating Officer of e.Spire Communications, an East Coast CLEC; Chief
      Executive Officer of CMGI Solutions, an Internet Professional Services firm;
      and
      Chief Executive Officer of Vaultus, a wireless software company. In these roles,
      he led several successful equity and debt offerings for these ventures.
      Mr. Spears also served in various capacities at MCI
      Communications from 1979 to 1990; his last position was President of MCI’s
      Midwest Division from 1984 to 1990. A pioneer of the competitive long distance
      industry, Mr. Spears began his career in telecommunications as
      a manager at AT&T Long Lines in 1978, following eight years as an
      officer in the United States Army. He is a graduate of the United States
      Military Academy at West Point, and also holds a Master’s Degree in Public
      Service from Western Kentucky University.




*Steven
      W. Town* has
      served as a member of our Board of Directors from October 2000 to present
      and has served as a member of the compensation committee since April 2001.
      Mr. Town has served as Co-Chief Executive Officer of the Amerex Natural
      Gas, Amerex Power and Amerex Bandwidth, Ltd. Mr. Town began his commodities
      career in 1987 in the retail futures industry prior to joining the Amerex Group
      of Companies. He began the Amerex futures and forwards brokerage group in
      natural gas in 1990, in Washington D.C., and moved this unit of Amerex to
      Houston in 1992. During Mr. Town’s tenure as Co-Chief Executive Officer,
      the Amerex companies have become the leading brokerage organizations in their
      respective industries. Amerex currently provides energy, power and bandwidth
      brokerage services to many of the energy companies. Mr. Town is a graduate
      of Oklahoma State University.




The
      Company has a standing audit committee whose members are Dennis G. Schmal,
      Raymond J. Minehan and Patrick H. Arbor.




There
      is
      no family relationship among any of the foregoing officers or between any of
      the
      foregoing executive officers and any Director of the Company.




The
      information set forth under the caption “Section 16(a) Beneficial
      Ownership Reporting Compliance” is incorporated by reference to the Company’s
      definitive 2007 Proxy Statement.




68




**Audit
      Committee Financial Expert**




The
      board
      of directors has determined that Dennis G. Schmal and Raymond J. Minehan are
      “audit committee financial experts” and “independent” as defined under
      applicable SEC and American Stock Exchange rules. The board’s affirmative
      determination for Dennis G. Schmal was based, among other things, upon his
      27 years at Arthur Andersen LLP, most of those years as a partner in the
      audit practice. The board’s affirmative determination for Raymond J. Minehan was
      based, among other things, upon his extensive experience as chief administrative
      officer of Sutro & Co. and, prior to that, as chief financial officer
      of Hambrecht & Quist, Inc. and, prior to that, as audit partner of
      Arthur Andersen LLP.




**Financial
      Code of Ethics**




The
      Company has adopted its “Finance Code of Professional Conduct”, a code of ethics
      that applies to our Chief Executive Officer, Chief Financial Officer and other
      finance organization employees. The finance code of ethics is publicly available
      on our website at www.merrimanco.com. If we make any substantive amendments
      to
      the finance code of ethics or grant any waiver, including any implicit waiver,
      from a provision of the code to our Chief Executive Officer or Chief Financial
      Officer, we will disclose the nature of such amendment or waiver on that website
      or in a report on Form 8-K.




**ITEM 11.****EXECUTIVE COMPENSATION**




The
      information is incorporated by reference to the Company’s definitive 2007 Proxy
      Statement.




**ITEM 12.****SECURITY OWNERSHIP
      OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**




The
      information is incorporated by reference to the Company’s definitive 2007 Proxy
      Statement.




**ITEM 13.****CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**




The
      information is incorporated by reference to the Company’s definitive 2007 Proxy
      Statement.




**ITEM 14.****PRINCIPAL ACCOUNTING FEES AND SERVICES**




The
      information is incorporated by reference to the Company’s definitive 2007 Proxy
      Statement.







69




**PART IV**




**ITEM 15.****EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES**




(a)
            1.
            The
                information required by this item is included in Item 8 of Part II of
                this Annual Report on
                Form 10-K.




2.
            Financial
                Statement Schedules




The
      required schedules are omitted because of the absence of conditions under which
      they are required or because the required information is presented in the
      financial statements or notes thereto.




3.
            Exhibits




The
      exhibits listed in the accompanying index to exhibits are filed or incorporated
      by reference as part of this Annual Report on Form 10-K.







70




**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange
      Act of 1934, the registrant has duly caused this report to be signed on its
      behalf by the undersigned, thereunto duly authorized.




**MCF
                Corporation**By:
            /s/D.
                Jonathan Merriman**D.
                Jonathan Merriman,**
              ***Chairman
                of the Board and***
              ***Chief Executive Officer***March
                23, 2007







Pursuant
      to the requirements of the Securities and 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**
            
            
            
            **Date**/s/D.
                Jonathan Merriman
            
            Chairman
                of the Board and
            
            March
                  23, 2007**D.
                Jonathan Merriman**
            
            Chief
                Executive Officer/s/John
                D. Hiestand
            
            Chief
                Financial Officer and
            
            March
                  23, 2007**John
                D. Hiestand**
            
            Principal
                Accounting Officer/s/Patrick
                H. Arbor
            
            Director
            
            March
                  23, 2007**Patrick
                H. Arbor**/s/
                AnthonyB.
                Helfet
            
            Director
            
            March
                  23, 2007**Anthony****B.****Helfet**/s/Raymond
                J. Minehan
            
            Director
            
            March
                  23, 2007**Raymond
                J. Minehan**/s/Scott
                Potter
            
            Director
            
            March
                  23, 2007**Scott
                Potter**/s/Steven
                W. Town
            
            Director
            
            March
                  23, 2007**Steven
                W. Town**







71




**EXHIBIT
      INDEX**




**Exhibit**
              **No.**
            
            **Description**3.1
            
            Certificate
                of Incorporation, as amended (incorporated herein by reference to
                Exhibit 3.1 to MCF’s Registration Statement on Form S-1 (Reg.
                No. 333-37004)).3.3
            
            Amended
                and Restated Bylaws, as amended. (incorporated by reference to
                Exhibit 10.3 to MCF’s Registration Statement on Form S-1 (Reg.
                No. 333-53316)).4.1
            
            Form of
                Convertible Subordinated Note related to MCF private financing, dated
                November 26, 2001 (incorporated by reference to Exhibit 4.1 to
                MCF’s Form 10-K for the year ended December 31,
                2001).4.2
            
            Form of
                Class A Redeemable Warrant to Purchase Common Stock of MCF related to
                MCF Corporation private financing, dated November 26, 2001
                (incorporated by reference to Exhibit 4.2 to MCF’s Form 10-K for
                the year ended December 31, 2001).10.13+
            
            Employment
                Agreement between MCF and D. Jonathan Merriman dated October 5, 2000
                (incorporated herein by reference to Exhibit 10.15 to MCF’s
                Registration Statement on Form S-1 (Reg.
                No. 333-53316)).10.15+
            
            1999
                Stock Option Plan (incorporated herein by reference to Exhibit 4.1 to
                MCF’s Registration Statement on Form S-8 (Reg.
                No.333-43776)).10.16+
            
            Form of
                Non-Qualified, Non-Plan Stock Option Agreement dated February 24,
                2000 between MCF and Phillip Rice, Nick Cioll, Paul Wescott, Ross
                Mayfield, Russ Matulich, Terry Ginn, Donald Sledge, Christopher Vizas,
                Douglas Cole, Ronald Spears and Jonathan Merriman (incorporated by
                reference to Exhibit 4.2 to MCF’s Registration Statement on Forms S-8
                (Reg. No. 333-43776)).10.17+
            
            Schedule
                of non-plan option grants made under Non-Qualified, Non-Plan Stock
                Option
                Agreements to directors and executive officers (incorporated herein
                by
                reference to Exhibit 10.19 to MCF’s Registration Statement on
                Form S-1 (Reg. No. 333-53316)).10.18+
            
            2000
                Stock Option and Incentive Plan, as amended (incorporated herein
                by
                reference to Exhibit 10.20 to MCF’s Registration Statement on
                Form S-1 (Reg. No. 333-53316)).10.23
            
            Master
                Equipment Lease Agreement dated March 16, 2000 (incorporated by
                reference to Exhibit 10.6 to MCF’s Registration Statement on
                Form S-1 (Reg. No. 333-37004)).10.29
            
            Agreement
                between MCF and BL Partners related to RMG Partners Corporation,
                dated
                April 8, 2001 (incorporated by reference to Exhibit 10.1 to
                MCF’s Form 10-Q for the quarter ended June 30,
                2001).10.30+
            
            Offer
                of Employment Agreement between MCF Corporation and Robert E. Ford,
                dated
                February 19, 2001, is Exhibit 10.2 to Form 10-Q for the
                quarter ended June 30, 2001, and is hereby incorporated by
                reference.10.31
            
            Ratexchange
                Placement Agreement with Murphy & Durieu, dated November 28,
                2001, for private financing transaction (incorporated by reference
                to
                Exhibit 10.31 to MCF’s Form 10-K for the year ended
                December 31, 2001).




72




**Exhibit**
              **No.**
            
            **Description**10.32
            
            Form of
                Placement Agent Warrant to Murphy & Durieu, dated
                November 28, 2001 (incorporated by reference to Exhibit 10.32 to
                MCF’s Form 10-K for the year ended December 31,
                2001).10.33
            
            Convertible
                Promissory Note held by Forsythe/McArthur Associates, Inc., dated
                September 1, 2001, related to restructure of Master Equipment Lease
                Agreement that is Exhibit 10.23 to Form 10K for the year ended
                December 31, 2000 (incorporated by reference to Exhibit 10.33 to
                MCF’s Form 10-K for the year ended December 31,
                2001).10.34+
            
            Employment
                Agreement between MCF and Gregory S. Curhan, dated January 9, 2002
                (incorporated by reference to Exhibit 10.34 to MCF’s Form 10-K
                for the year ended December 31, 2001).10.35+
            
            Employment
                Agreement between MCF Corporation and Robert E. Ford, dated
                January 1, 2002 (incorporated by reference to Exhibit 10.35 to
                MCF’s Form 10-K for the year ended December 31,
                2001).10.37
            
            Stock
                Purchase Agreement by and among MCF and InstreamSecurities, Inc,
                (formerly
                known as Spider Securities, Inc.) and Independent Advantage
                Financial & Insurance Services, Inc., dated December 7,
                2001 (incorporated by reference to Exhibit 10.37 to MCF’s
                Form 10-K for the year ended December 31,
                2001).10.38
            
            Agreement
                to Restructure Convertible Promissory Note held by Forsythe McArthur
                Associates, dated November 20, 2002 (incorporated by reference to
                Exhibit 10.38 to MCF’s Form 10-K for the year ended
                December 31, 2001).10.39
            
            Securities
                Exchange Agreement in connection with MCF Corporation dated June 22,
                2003 (incorporated by reference to Exhibit 99.1 to MCF’s
                Form 8-K filed on July 3, 2003).10.40
            
            April
                  3, 2003 Series B Convertible Preferred Transaction: Form of Subscription
                  Agreement and Investment Letter, Class B Warrant to purchase common
                  stock,
                  Certificate of Designation of Series B Convertible Preferred Stock
                  and
                  Registration Rights Agreement (incorporated by reference to Exhibit
                  10.40
                  to MCF’s Form 10-K for the year ended December 31,
                  2003).10.41
            
            April
                  24, 2003 Series C Convertible Preferred Transaction: Form of Subscription
                  Agreement and Investment Letter, Class B Warrant to purchase common
                  stock
                  and Registration Rights Agreement (incorporated by reference to
                  Exhibit
                  10.41 to MCF’s Form 10-K for the year ended December 31,
                  2003).10.42
            
            April
                3, 2003, 3% Convertible Subordinated Note Transaction with Highfields
                entities: Form of Securities Purchase Agreement, Registration Rights
                Agreement, Class C Warrant to purchase common stock and 3% Convertible
                Subordinated Note (incorporated by reference to Exhibit 10.42 to
                MCF’s
                Form 10-K for the year ended December 31, 2003).10.43
            
            Stock
                Purchase Agreement by and between MCF Corporation and Ascend Services
                Ltd., dated April 29, 2005; together with the following documents
                which form exhibits thereto: Escrow Agreement and Registration Rights
                Agreement (incorporated by reference to the registrant’s Report on
                Form 10-Q for the quarter ended March 31,
                2005).10.44
            
            Promissory
                Note issued by Ascend Services Ltd dated April 29, 2005 (incorporated
                by reference to the registrant’s Report on Form 10-Q for the quarter
                ended March 31, 2005).10.45
            
            Employment
                Agreement between MCF Corporation and Gregory S. Curhan, dated
                January 1, 2005 (incorporated by reference to the registrant’s Report
                on Form 10-Q for the quarter ended June 30,
                2005).10.46
            
            Employment
                Agreement between MCF Corporation and Robert E. Ford, dated
                January 1, 2005. (incorporated by reference to the registrant’s
                Report on Form 10-Q for the quarter ended June 30,
                2005).21.1
            
            List
                of Subsidiaries of MCF.23.1
            
            Consent
                of Independent Registered Public Accounting Firm.31.1
            
            Certification
                of Principal Executive Officer Pursuant To Section 302 of The
                Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of Principal Financial Officer Pursuant To Section 302 of The
                Sarbanes-Oxley Act of 2002.32.1
            
            Certification
                of Principal Executive Officer and Principal Financial Officer Pursuant
                to
                18 U.S.C. Section 1350.





+  Represents
      management contract or compensatory plan or arrangement.






73